29 November 2023

ICGN: Reflecting climate-related matters in financial statements Viewpoint

It focuses on climate change and explores whether climate-related matters are adequately reported, specifically in financial statements. among sustainability issues, climate change is a material topic for companies in nearly all economic sectors, and on which reporting is relatively more advanced.

In June 2023, the International Sustainability Standards Board (ISSB), published its inaugural sustainability reporting standards, marking an important step towards comparable and reliable corporate sustainability reporting. A key aspect of high-quality reporting is ensuring consistency between information disclosed in financial statements and information communicated in other parts of the annual report or in a separate sustainability report. Ensuring connectivity and consistency of information is high on standard-setters’ agendas.
This Viewpoint focuses on climate change and explores whether climate-related matters are adequately reported, specifically in financial statements. Among the broad range of sustainability issues, climate change is a material topic for companies in nearly all economic sectors, and on which reporting is relatively more advanced. For several years, investors have encouraged companies to account for material climate-related risks and decarbonisation commitments in their financial statements. To help companies and auditors, standard-setters have clarified how climate-related matters may impact key accounting assumptions under existing standards. Yet, despite some companies paving the way for more “climate conscious” accounting, progress remains overall relatively limited. This Viewpoint discusses why accounting for climate change matters to investors, identifies potential obstacles impeding progress, and makes suggestions for constructive dialogue between investors and companies on this matter.
2. Investors expect climate-conscious accounting and auditing
The number of large publicly listed companies with net zero emissions targets aligned with the Paris Agreement has more than doubled in three years, from 417 in 2020 to 929 in 2023.1 While investors have welcomed these commitments, many are also concerned that long-term net-zero targets, and shorter term milestones,are not always adequately reflected in a company’s financial statements. A lack of reference to net zero targets suggests that either 1) it may not be a genuine commitment, which would raise concerns over greenwashing or 2) the accounts may not reflect the true financial position of the entity.
Investors have also long called for the anticipated impacts from government policies to accelerate decarbonisation (transition risks) or the physical impacts from climate change (physical risks) to be adequately accounted for.2 For instance, if a government announces a ban on the sale of petrol and diesel cars, investors would expect a company to update its cash flow projection for assets that can only be used to make those types of cars, to reflect lower projected cash inflows from those assets....

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