Climate-related Risks in the Financial Statements

Date recorded:

Project commencement (Agenda Paper 14)

The purpose of this meeting was for the IASB to start the Climate-related Risks in the Financial Statements project and discuss the initial work the staff will undertake. The IASB was not asked to make any decisions.

A recap of the origins of the project

Over the past few years, the IASB has been hearing from users of financial statements that:

  • Climate-related risks are often perceived as remote, long-term risks and may not be appropriately considered in the financial statements
  • Users need better qualitative and quantitative information about the effect of climate-related risks on the carrying amounts of assets and liabilities reported in the financial statements

In response to the feedback on the Agenda Consultation, the IASB added to its maintenance project pipeline a narrow-scope Climate-related risks in the Financial Statements project that will:

  • Research the causes of stakeholders’ concerns about inconsistent application and insufficient information
  • Research whether the IFRS Foundation’s educational material is helping, and whether the International Sustainability Standards Board’s (ISSB) future IFRS Sustainability Disclosure Standard on climate-related disclosures would help to address these concerns
  • Consider whether and, if so, what narrow-scope actions might be needed

Since the ISSB published its Exposure Drafts, stakeholders have been asking for greater clarity about how sustainability-related risks and opportunities disclosed in applying IFRS Sustainability Disclosure Standards would connect with and interact with the financial statements.

Purpose of the project

The purpose of this project is to explore whether and, if so, how financial statements can better communicate information about climate-related risks.

The outcomes of this project will depend on the underlying causes of user concerns. Examples might be:

  • Unclear requirements in Accounting Standards
  • Lack of compliance
  • Insufficient disclosure of the effects of climate-related risks
  • User information needs beyond the objective of financial statements

Initial work

In commencing the project, the staff will hold discussions with the IASB’s consultative bodies and other external stakeholder groups and organisations to explore:

  • The nature of perceived shortcomings with financial statements in communicating information about climate-related risks
  • Requirements in Accounting Standards that might not be sufficiently clear about whether and how the effects of climate-related risks should be considered when preparing an entity’s financial statements—even when considered in conjunction with the educational material
  • Reasons for entities arguably not considering (or not adequately considering) the effects of climate-related risks when applying the requirements
  • Possible courses of action available to the IASB together with the pros and cons of each course of action

IASB discussion

Approval was expressed amongst IASB members over the direction of the project as well as the drafting and approach of the paper. Several members commented on the scope of the paper, emphasising in particular that this project was narrow in scope and would not fundamentally change the standards. They also warned that the staff must avoid ‘scope creep’.

One IASB member stated, and others agreed, that the purpose of the project is to identify the cause of the issues identified with regards to climate risk reporting. It was noted that the underlying issues with regards to climate risk reporting were not obvious and the cause may not just impact climate related risks.

Members also wished to make clear that the project being undertaking was not promising action to be taken by the IASB. Instead, the project purpose is to understand the issues surrounding climate-related risk reporting in order for the IASB to decide whether and what changes should be made.

One member added that the standards should also be relevant to all environmental, social and governance (ESG) risks that might arise in the future in order to avoid needing to make further adjustments as other risks arise and become material to users.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.