20 November 2020

IIGCC: Investor Expectations for Paris-aligned Accounts

Company leaders without correct cost and return information are equiv- alent to pilots without a properly functioning altimeter. In extreme cases, companies on the wrong flight path
– like planes – can crash. In the case of climate change, the consequences of misdirected capital
are not only harmful for shareholders, but also potentially disastrous for the planet.
Take a coal power company. Does the company presume asset lives that take us beyond 2050 and thus
bake in dangerous levels of emissions? Have they taken account of escalating carbon taxes, or the
falling costs of competing renewable energy? Might there be impairments in certain fossil
fuel-dependent assets? What about end-of-life clean up liabilities; will these need to be brought
forward thereby wiping out capital previously reported?

At present there is little evidence that companies are taking decarbonisation or the physical
impacts from climate change into account as they draw up their finan- cial statements. This is true
even where their strategic report or management discussion detail climate risks as recommended by
the Task Force on Climate-related Financial Disclosures (TCFD). Apart from a few notable
exceptions, auditors are likewise currently silent on whether financial statements are
‘climate-proof’.

Yet there is no need for such inaccurate financial state- ments. A recent paper by the
International Accounting Standards Board – effectively the global accounting standard setter– sets
out how material climate factors must be considered when drawing up accounts1. Reg- ulators such as
the UK’s Financial Reporting Council (FRC) are also reminding directors and auditors that they must
ensure material climate factors are properly reflected in financial statements2.

Fulfilling existing requirements is just a first step, however. This paper sets out in unequivocal
terms investor expectations that directors and auditors deliver Paris-aligned accounts – accounts
that prop- erly reflect the impact of getting to net zero emissions by 2050 for assets,
liabilities, profits and losses. Only then will management, investors and creditors have the
information they require to deploy capital in a way that is consistent with the Paris Agreement.

Overview

IIGC