Liz Fisher, journalist

As its title suggests, a new report, Flying blind: The glaring absence of climate risks in financial reporting, starkly lays out the pressing need for companies to rapidly improve their climate-related reporting.

The study of 107 publicly listed carbon-intensive firms and their auditors looked at material climate-related risks in financial reporting, ‘particularly in the light of 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’. It found a shocking lack of information.

The vast majority of companies did not translate climate matters into financial impact

The report, the result of a collaboration between the Carbon Tracker Initiative and the Climate Accounting Project, found little evidence that companies incorporate material climate-related matters into their financial statements. In fact, 72% of the companies studied did not indicate that they had considered climate matters when preparing their 2020 financial statements, despite the fact that most are included in the Climate Action 100+ investor focus list.

Lack of oversight

‘Overall,’ says the report, ‘these findings suggest a lack of oversight over climate matters, especially those changes which might impact financial results.’

Most climate-related assumptions and estimates were not visible in the financial statements – only a quarter of the companies provided disclosure of at least some of the quantitative assumptions and estimates that they used. For the remainder, the treatment of climate matters in their financial statements was often inconsistent with their disclosures of climate-related risks elsewhere.

The vast majority of companies did not translate climate matters into financial impact – such as disclosing the remaining useful lives of emissions-producing assets, the estimated cost of meeting emissions reduction targets, or the commodity or carbon prices used in impairment testing.

Inconsistent approach

Inconsistency in reporting climate matters is a strong theme throughout the Flying blind report. In almost three-quarters of companies surveyed, disclosures in the annual report were inconsistent with statements made elsewhere – although the authors note that companies using IFRS Standards (68 of the 107 in the sample) were more consistent across their reporting than those applying US GAAP.

‘Overall,’ says the report, ‘this may suggest that companies are not considering the implications of climate commitments and constraints on financial reporting and results, even when they discuss these issues in other reporting.’

The report also looked at auditing of climate-related matters and the results were equally damning. Only 20% of the auditors of the companies in the study provided any evidence that they had considered climate as part of the audit (and all of these were performed under ISAs rather than the Public Company Accounting Oversight Board). Eight of these were European companies that were also listed in the US – and the auditors of three of them removed all references to climate change in the US audit reports.

‘Accounts, like the shadows on Plato’s cave, are failing to reflect the true material, climate-related risks’

The report also found that even when there were ‘considerably observable inconsistencies’ across company reporting, auditors rarely commented on any differences. ‘For 59% of the audits, we had significant concerns that the financial statements were inconsistent with “other information” that was the subject of the auditor’s consistency check,’ says the report. This suggests that the auditor consistency check does not appear to be highlighting differences in treatment of climate matters.

Finally, the study found that while some of the companies used inputs from published climate scenarios, none used assumptions and estimates that aligned to the Paris Agreement or provided sensitivities to it.

Significant concerns

When the results of the six questions that the study asked are summarised, it shows that the authors had significant concerns about the vast majority of reporting in the 107 companies surveyed – with none considered to be showing good practice (see graphic).

The report makes a number of recommendations:

  • Companies should increase both the consideration of and transparency around the incorporation of climate matters in their financial statements
  • Auditors must provide better transparency around whether and how they addressed climate-related matters in their audits
  • Regulators should identify whether companies have incorporated material climate-related matters in their financial statements, look for inconsistencies and identify audit failures.

It adds that investors could use the results of the study to inform their voting decisions. It recommends the following actions:

  • Engage with companies and establish expectations of climate-related matters for the 2021 accounts
  • Help ensure proper governance of these issues through communication with the audit committee or others in charge of oversight.
  • Communicate their expectations to auditors, either directly or via proxy voting.
Reflect the risks

The report’s authors argue that the implications of its findings are profound: ‘The apparent lack of consideration of material, climate-related matters in the financials raises the prospect that those accounts, like the shadows on Plato’s cave, are failing to reflect the true material, climate-related risks.

‘Accounting and auditing standards are established in order to give investors the information they need…to compare companies, allocate capital and undertake stewardship. Failure to meet these standards suggests that investors will lack the necessary information to carry out those tasks.’

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