Few companies report critical climate-related risks in their financial statements and there are often considerable inconsistencies in the disclosures they do report. According to research conducted by the Carbon Tracker Initiative and the Climate Accounting Project: “Flying Blind: The glaring absence of climate risks in financial reporting” which carried out a review of 107 publicly listed companies in carbon intensive sectors.
The report authors found that more than 70% of surveyed companies did not indicate whether they had considered climate when preparing their 2020 financial statements. Discussions of climate-related risks and net zero emission plans in the commentary in the front half of annual accounts were often not reflected in financial statements. Moreover, the report comes despite the recent clarifications from three of the four global accounting and auditing standard-setters that climate change issues should be considered in the preparation and audit of financial statements.
Only 25% of the companies provided disclosure of at least some of the quantitative assumptions and estimates that they used in preparing the financial statements; most companies do not tell a consistent story across their reporting and for 72% of the companies, the treatment of climate matters within their financial statements appeared to be inconsistent with their disclosures of climate-related risks (and commitments, when relevant) in their other reporting. This included instances where the company conceded that climate-related risks were financially material.
“We found that over 70% of some of world’s biggest corporate emitters failed to disclose the effects of climate risk in 2020 financial statements. At the same time, 80% of their auditors showed no evidence of assessing climate risk when reporting,” said report authors Barbara Davidson, Senior Analyst, Regulatory & Accounting at Carbon Tracker and Rob Schuwerk, Executive Director at Carbon Tracker.
The majority of the 107 companies fall into the so-called Climate Action 100+ group of companies, identified by investors as key to driving the global net-zero emissions transition. In total, CA100+ companies account for over 80% of corporate industrial greenhouse gas emissions. The report builds upon ongoing investor efforts to prompt corporate climate risk disclosure and embed consideration of climate within financial reporting, enabling investors to make informed decisions including addressing the need for decarbonisation.
Auditors under fire
One of the key findings includes “little evidence” that auditors consider the effects of material climate-related financial risks or companies’ announced climate strategies. Even with considerable observable inconsistencies across company reporting, auditors rarely comment on any differences.
The report concludes that companies, auditors, regulators and investors all have important roles to play in improving the content and quality of financial reporting of climate matters. In order to do so, companies need to improve their climate governance by establishing appropriate oversight, internal control and risk management systems, and ensuring that such issues are part of audit plans and clearly indicate whether and how they have incorporated material climate-related risks and/or
commitments into their financial statements. They also need to disclose climate-related estimates and assumptions and describe how they are taking climate related risks (and their own targets) into account.
Auditors must provide better transparency around whether and how they addressed climate-related matters in their audits. The research suggests they provide evidence of the work they did to address climate-related issues, including how they scrutinised and used professional scepticism in evaluating management’s inputs and ensure that company financial statements are not inconsistent with other company disclosures which may extend beyond annual filings.