Companies are setting their own targets for emissions reduction in the battle against climate change. They are also working to mitigate the risks that climate change presents to the business.

A recent webinar, chaired by ACCA head of corporate reporting Richard Martin, explored how entities are reflecting these risks in their annual reports and accounts.

Room for improvement

Research led by one of the speakers in the webinar, Diogenis Baboukardos – assistant professor at Essex Business School – has found that companies in the extractive industries are improving their disclosures around climate-related risk, although there is plenty more to be done.

The research, which was supported by ACCA and the University of Glasgow’s Adam Smith Observatory of Corporate Reporting Practices, compared the 2019 and 2020 annual reports of 56 large polluters in the extractive industries. These companies all applied IFRS Standards

Greater consistency is needed between the front and back ends of annual reports, and investors want to understand assumptions

Half of the companies in the study engaged with disclosures about their climate change-related risks in the front end of their 2020 annual reports, up from 39% in 2019. There was also a marginal increase in the number that engaged with climate-related disclosures in the back, including in relation to their accounting policies, impairment testing, non-current assets, provisions and audit reports.

Increasingly, climate change is also being recognised as a key audit matter by the auditors of companies in the extractive industry. In 2019, the auditors of eight companies believed that climate change was a key audit matter. That figure jumped to 13 in 2020.

Companies in Europe and South Africa were most likely to engage with disclosures about their climate-related risks. Yet very few companies fully integrated climate information with financial information in their reports. When it came to impairment testing, less than a third (17) provided some assumptions in relation to climate change in their 2020 annual report.

Proactivity reluctance

The research findings also indicated a reluctance among companies to be proactive in their response to climate change.

‘Quite a large number of companies simply state in their financial statements that they will not really need to take any action today because they follow the regulation of their respective jurisdiction,’ Baboukardos said.

A separate study, conducted by the Carbon Tracker Initiative and the Climate Accounting Project, examined whether 107 publicly listed carbon-intensive companies – and their auditors – considered climate-related risks in their financial reporting.

Companies are confused by the proliferation of metrics and standards for climate-related risk reporting

This study, which included companies based in the US, produced similar findings to the research by Essex Business School. It also revealed that energy companies scored better than transportation businesses in terms of transparency of reporting, provision of information and even consideration of climate.

On the subject of audit reports, another speaker on the webinar, Barbara Davidson, senior analyst with the Carbon Tracker Initiative, highlighted that significant differences existed between jurisdictions.

‘Where we looked at the key or critical audit matters – and whether there was consideration of climate-related risks such as energy transition or commodity prices mentioned in the audit matters, the EU and UK companies’ auditors scored the best,’ she said. ‘The US lagged behind.’

The way forward

Giving his own views, Nick Anderson, a member of the International Accounting Standards Board (IASB), said that while companies were starting to turn the corner with regard to reporting on their climate-related risks, it was only ‘very slowly’. But he acknowledged: ‘These things do take time.’

The IASB itself is focused on asking whether its existing requirements are clear enough, and whether there’s more it can do. Anderson called for greater consistency between the front and back ends of annual reports, and said that investors want to understand companies’ assumptions, particularly in relation to impairment testing.

Dr Alan Teixeira, Deloitte's global director of IFRS research, said companies were confused by the proliferation of metrics and standards that exist for climate-related risk reporting today. ‘There are so many different standards out there,’ he said. ‘People are turning and looking for a few signposts, and they want them quite quickly to be able to get some sort of consistency in their reporting.’

An important development in this regard is the IFRS Foundation’s proposal for an International Sustainability Standards Board, which would be a sister board to the IASB and set IFRS sustainability standards. If this proposal comes to fruition, its first standard will be on climate, Anderson explained.

Increasing pressure

As international momentum builds in the battle against global warming, companies are likely to come under increasing pressure to improve how they report their climate-related risks. This should start to accelerate the rate of change.

‘Governments are thinking extensively about how to tackle climate change and achieve the net zero emissions that they are setting themselves as targets,’ Martin noted.

‘It’s not just governments; it’s society as a whole. What is clear is that there will be enormous changes to our way of life and how we do things in the future.’

Further information

Watch the full discussion on YouTube

Find more resources at ACCA’s hub, ‘Rethinking sustainable business’