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Companies frequently omit information about critical climate-related risks from their financial statements and there are often “considerable” inconsistencies in disclosures reported elsewhere by the same organisation, according to new independent research.
A review of 107 global companies in carbon-intensive sectors, including energy, cement and transport, found that more than 70 per cent 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, according to research conducted by the Carbon Tracker Initiative and the Climate Accounting Project.
Auditors rarely noted these discrepancies, even in cases of “considerable observable inconsistencies,” it added.
The review “left us wondering whether these considerable risks are actually being accounted for. That’s a big deal,” said Barbara Davidson, the report’s lead author. “There’s very little transparency.”
The risk was that investors “can’t make effective capital allocations decisions”, since companies may be overstating assets or understating liabilities, said Morgan Slebos, director of sustainable markets at the UN’s Principles for Responsible Investment, which is part of the influential investor group Climate Action 100+.
BMW, for example, did not explain in its 2020 financial statements whether or how climate-related issues, such as the phaseout of the internal combustion engine, affected the stated value of certain assets, for example, the large fleet of polluting vehicles it leases out.
Aerospace group Airbus did not state whether it had considered the effects of its emissions reduction targets in its 2020 inventory writedowns. It was also unclear how plans to introduce sustainable aviation fuel requirements might affect the useful lives of existing aircraft.
In response to the report, Airbus said it was committed to reporting “reliable” financial accounts and that risks were “proactively assessed and embedded in financials when relevant”. Its accounts are audited by EY.
Spanish energy company Repsol, meanwhile, referenced an oil price of $50 a barrel in its net zero plan in the front half of its 2020 annual report but used a higher oil price during its impairment testing.
PwC audited both the Repsol and BMW accounts. It said it was raising the issue of climate-related risks with the organisations it audits.
The future commodity prices included by oil and gas companies were sometimes “considerably” higher than those outlined by the International Energy Agency’s net zero road map to 2050, the report found.
Companies are under rising pressure to outline credible plans for decarbonisation and to explain how they intend to achieve them. Last year a group of investors with $100tn in assets under management endorsed guidance from the International Accounting Standards Board that said material climate-related matters had to be incorporated in IFRS financial reporting.
That could include assessing what impact the shift away from energy derived from fossil fuels might have on future commodity prices and the valuation of assets, as well as the assumptions behind the calculations. The enforcement of such standards falls to national regulators.
The research found that many of the financial statements that claimed to have taken climate-related matters into account had not explained what assumptions were used.
For nearly three-quarters of the companies reviewed, the consideration of climate issues within financial statements “appeared to be inconsistent” with such disclosures made by the organisation elsewhere — including when the company said climate risks were financially material.
While company commitments on climate were welcome, “we need to be able to see the impact on the financials themselves”, said Ben Pincombe, head of stewardship, climate change, at the PRI.
Auditors also treated climate-related information differently. BP’s auditor, Deloitte, said the company’s commodity price assumptions were “broadly in line with a range of transition paths consistent with the goals of the Paris climate change agreement”.
But rival Shell’s auditor, EY, said “it is not within our professional remit, responsibility or expertise to disclose in our audit opinion what we would consider to be reasonable [Paris-alignment] assumptions”.
The report said companies had to “drastically improve their reporting”, while auditors should “significantly up their game”.
Similar research conducted last year by the UK’s Financial Reporting Council, which regulates auditors, accountants and actuaries, found many auditors “had not considered climate change when identifying and assessing the risks of material misstatement to the financial statements”.
Although the FRC’s actions have been focused on improved climate reporting, over time “we will have to look at considering harder regulatory interventions”, said Mark Babington, executive director of regulatory standards.
What the standard-setters say
IASB (most global companies): “Companies must consider climate-related matters in applying IFRS Standards when the effect of those matters is material in the context of the financial statements taken as a whole.”
FASB (US companies): “When applying financial accounting standards, an entity may consider the effects of certain material ESG matters, similar to how an entity considers other changes in its business and operating environment that have a material direct or indirect effect on the financial statements and notes.”
IAASB (auditors): “If climate change impacts the entity, the auditor needs to consider whether the financial statements appropriately reflect this in accordance with the applicable financial reporting framework (ie, in the context of risks of material misstatement related to amounts and disclosures that may be affected depending on the fact and circumstances of the entity).”
The Global Public Policy Committee, which brings together the Big Four accounting firms in addition to Grant Thornton and BDO, has endorsed the IASB and IAASB guidance, saying the companies are “committed to playing our part”.
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