Friday, October 22, 2021

There are widespread lapses in climate risk reporting in company accounts

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Companies frequently omit information about critical climate-related risks from their financial statements, and there are often “significant” inconsistencies in disclosures reported elsewhere by the same organization, according to new independent research.

A review of 107 global companies in carbon-intensive sectors, including energy, cement and transportation, found that more than 70 percent did not indicate whether they had considered the weather when preparing their 2020 financial statements.

Discussions of climate-related risks and net zero emission plans in the commentary to the first half of the annual accounts were often not reflected in the financial statements, according to research by the Carbon Tracker Initiative and the Climate Accounting Project.

The auditors rarely noted these discrepancies, even in cases of “considerable observable inconsistencies,” he added.

The review “left us wondering if these considerable risks are really being accounted for. That’s very important, ”said Barbara Davidson, lead author of the report. “There is very little transparency.”

The risk was that investors “cannot make effective decisions about capital allocation,” as companies may be overstating assets or underestimating liabilities, said Morgan Slebos, director of sustainable markets for the UN Principles for Responsible Investment. , which is part of the influential group of investors. Climate action 100+.

BMW, for example, did not explain in its 2020 financial statements whether weather-related issues, such as the phase-out of the internal combustion engine, affected the declared value of certain assets – for example, the large fleet of polluting vehicles it rents. . out of.

Aerospace group Airbus did not state whether it had considered the effects of its emission reduction targets on its 2020 inventory write-offs. It was also unclear how plans to introduce sustainable aviation fuel requirements could affect the life 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 incorporated into finances where relevant.” Your 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 first half of its 2020 annual report, but used a higher oil price during its impairment tests. .

PwC audited the accounts of Repsol and BMW. He said he was raising the issue of climate-related risks with the organizations he audits.

Future commodity prices included by oil and gas companies were sometimes “considerably” higher than those described in the International Energy Agency’s net zero roadmap through 2050, according to the report.

Companies are under increasing pressure to outline credible plans for decarbonization and explain how they intend to achieve them. Last year a investor group With $ 100 billion in assets under management, it approved guidance from the International Accounting Standards Board that such material weather-related matters had to be incorporated into IFRS financial reporting.

That could include assessing what impact the move away from fossil fuel energy might have on future commodity prices and asset valuations, as well as the assumptions behind the calculations. Enforcement of such standards rests with national regulators.

The investigation found that many of the financial statements that claimed to have considered climate-related matters had not explained what assumptions were used.

For nearly three-quarters of the companies reviewed, the consideration of weather issues in the financial statements “appeared to be inconsistent” with disclosures made by the organization elsewhere, even when the company said weather risks were financially significant.

While the companies’ commitments on climate were welcomed, “we need to be able to see the impact on finances themselves,” said Ben Pincombe, PRI director of administration, climate change.

The auditors also treated weather-related information differently. BP auditor Deloitte said the company’s commodity price assumptions were “broadly in line with a range of transition pathways consistent with the goals of the Paris climate change agreement.”

But rival Shell auditor EY said that “it is not within our professional purview, responsibility or experience to disclose in our audit opinion what we would consider reasonable. [Paris-alignment] assumptions “.

The report said that companies had to “dramatically improve their reporting,” while auditors should “significantly improve their game.”

Similar research conducted last year by the UK’s Financial Reporting Council, which regulates auditors, accountants and actuaries, found that many auditors “had not considered climate change when identifying and assessing the risks of material misstatement in financial statements. “.

While the FRC’s actions have focused on improving weather reporting, over time “we will have to consider stricter regulatory interventions,” said Mark Babington, executive director of regulatory standards.

What the standard makers say

  • IASB (most global companies): “Companies should consider climate-related matters when 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 direct or indirect material effect. in the financial statements and notes “.

  • IAASB (auditors): “If climate change affects the entity, the auditor should consider whether the financial statements reflect this appropriately in accordance with the applicable financial reporting framework (that is, in the context of the risks of material misstatement related to with the 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 four major accounting firms in addition to Grant Thornton and BDO, has endorsed the IASB and IAASB guidance, saying that companies are “committed to doing our part.”

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