For someone who has been warning about the importance of accounting for environmental and social factors for some time, I am embarrassed to admit that I missed an insightful report on the subject. In September, think tanks Carbon Tracker and Climate Accounting Project released a study showing how little even the largest and most exposed companies in the world include climate considerations in their financial statements.
‘Flying blind: The glaring absence of climate risks in financial reporting’ makes for staggering reading. For anyone else who didn’t discover the report at the time, here are the key findings: “there is little evidence that companies incorporate material climate-related matters into their financial statements” and “most climate-related assumptions and estimates are not visible in the financial statements”. Or, in numbers: more than 70% of the 107 publicly-listed carbon-intensive companies examined by the research failed to disclose such risks in their 2020 financial statements. As did 80% of those companies’ auditors, which did not appear to consider the effects of material climate-related financial risks and only rarely commented on inconsistencies — even when they were “considerable” — between what companies share as part of their “other information” disclosures and the financial statement.
The study primarily reviewed companies that are the focus of Climate Action 100+, an initiative supported by investors managing $60tn in assets and which aims to put pressure on the world’s largest corporate greenhouse gas emitters to take necessary action on climate change. It looked at companies based in Europe, including in the UK, the US and Canada, but also included Asian and emerging market names.
The research authors asked six main questions: Did the company consider the effects of climate-related matters in preparing its financial statements? Did it disclose quantitative climate-related estimates and assumptions? Were the company’s financial disclosures consistent with its discussions of climate matters in its other reporting? Did the company’s auditor appear to consider climate matters in its audit? Did the auditor’s consistency check indicate discrepancies in company reporting related to climate matters? And did the company and its auditor respond to specific investor requests to align assumptions and estimates with the goals of the Paris Agreement or disclose its impact? The authors’ rating of the answers, as illustrated in the chart, is alarming.
Oil and gas companies fare better — perhaps not surprisingly given their more obvious role in climate change and exposure to measures to combat it. Though, even if providing greater disclosures and transparency of climate-related matters, they did not always align assumptions with the preferred outcomes of the Paris Agreement. As we enter 2022, clearly, there is still much work to do.
