Carbon Tracker publishes a report on a study of climate risks in financial reporting

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20 Sep, 2021

Carbon Tracker has published a report on a study performed in collaboration with the Climate Accounting Project examining climate risks in financial reporting.

The study includes the analysis of the 2020 annual report and accounts of 107 companies, including 94 that are part of the Climate Action 100+ focus companies. The study covered a range of sectors, including Oil and Gas, Transportation, Utilities, Cement, Consumer Goods and Services, and Other industrials (including mining, chemicals and steel).  The objective of the study was to examine whether the 107 publicly-listed companies (and their auditors) had considered material climate-related risks in their financial reports.  The report also assessed whether investor concerns about Paris-alignment of assumptions and estimates have been addressed.

The key conclusions of the study are:

  • over 70% of some of the world’s biggest corporate emitters failed to disclose the effects of climate risk in their 2020 financial statements or any indication as to why such matters might not be significant to their businesses; and
  • 80% of their auditors showed no evidence of assessing climate risk when reporting.

The study highlights that there is inconsistency in annual reports between the disclosures in the front-half narrative and the back-half financial statements.  72% of companies showed no evidence of follow-through from other discussions of climate risks or emissions targets to their treatment in the financial statements, or explained any differences.

Companies in UK/Europe led in the transparency of consideration of climate in the financial statements. Furthermore, compared to other sectors profiled, energy companies provided the most evidence of, and transparency around, consideration of climate-related matters in their financial statements.

The report underlines that companies, and their auditors, continue to be in the spotlight on climate-related reporting, which is also an area of focus for investors and regulators.

In order to address problems highlighted in the report, researchers recommend the following changes : 

  • Companies disclose climate-related forward-looking estimates and assumptions, such as remaining useful lives and projected carbon or commodity prices, to show how they are taking climate-related risks (and their own climate targets) into account. This also gives investors a starting point for their analyses;
  • Auditors ensure that the financial statements are consistent with other company disclosures about climate-related matters, that climate-impacted assumptions and estimates are adequately scrutinized in the audits and transparently disclosed in company reports, and that investor demands for downside sensitivities are satisfied;
  • Regulators should, as part of their supervisory/enforcement reviews, identify inconsistencies and audit failures, and ensure that they are addressed; and
  • Investors should engage with companies on these issues and consider them in voting and investment decisions.

A press release and the full report is available on the Carbon Tracker website.

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