Climate change update
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New independent research shows that companies often omit information about key climate-related risks in their financial statements, and that disclosures reported elsewhere by the same organization often have “considerable” inconsistencies.
A review of 107 global companies in carbon-intensive industries such as energy, cement, and transportation found that more than 70% of companies did not state whether they took climate factors into account when preparing their 2020 financial statements.
According to research conducted by the Carbon Tracking Initiative and the Climate Accounting Project, discussions on climate-related risks and net-zero emission plans in the comments in the current half of the annual accounts are often not reflected in the financial statements.
It added that auditors rarely noticed these differences, even in the case of “considerable observable inconsistencies.”
The review “makes us wonder whether these considerable risks are actually taken into account. This is a big deal,” said Barbara Davidson, the lead author of the report. “Transparency is very low.”
The risk is that investors “cannot make effective capital allocation decisions” because companies may overestimate assets or underestimate liabilities. The United Nations Principles for Responsible Investment and Sustainable Markets Director Morgan Slibos said the principle is influential. Part of the investor group Climate Action 100+.
For example, BMW did not explain in its 2020 financial statements whether or how climate-related issues (such as the phasing out of internal combustion engines) affect the price of certain assets, such as the large number of polluting vehicles it leases.
The aerospace group Airbus did not specify whether it had considered the impact of its emission reduction targets in its 2020 inventory write-down. It is also unclear how the plan to introduce sustainable aviation fuel requirements may affect the useful life of existing aircraft.
In response to the report, Airbus stated that it is committed to reporting “reliable” financial accounts and “will proactively assess risks and embed them in financial reports when relevant.” Its accounts are audited by Ernst & Young.
At the same time, Spanish energy company Repsol mentioned an oil price of US$50 per barrel in its net zero plan for the first half of its 2020 annual report, but used a higher oil price in its impairment test.
PricewaterhouseCoopers audited the accounts of Repsol and BMW. It stated that it is raising climate-related risks to the organizations it audits.
The report found that future commodity prices included by oil and gas companies are sometimes “significantly” higher than the prices outlined in the IEA’s net-zero roadmap to 2050.
Companies are facing increasing pressure to develop reliable decarbonization plans and explain how they intend to implement these plans.Last year Investor group Endorsed with $100 trillion in assets under management Guidance from The International Accounting Standards Board stated that significant climate-related matters must be included in IFRS financial reports.
This may include assessing how the shift from fossil fuel-derived energy sources may affect future commodity prices and asset valuations, as well as the assumptions behind the calculations. The implementation of such standards is the responsibility of national regulatory agencies.
The study found that many financial statements claiming to take climate-related matters into account did not explain the assumptions used.
In nearly three-quarters of the companies reviewed, the consideration of climate issues in their financial statements “seems to be inconsistent with such disclosures made by the organization elsewhere”—including when the company stated that climate risks are financially relevant. When it is of great significance.
Ben Pincombe, head of climate change management at PRI, said that while the company’s commitment to climate is welcome, “we need to be able to see the impact on the finances themselves.”
Auditors also treat climate-related information in different ways. BP’s auditor Deloitte stated that the company’s commodity price assumptions “approximately conform to a series of transition paths that are consistent with the goals of the Paris climate change agreement”.
However, Ernst & Young, the auditor of the competitor Shell, said, “It is not our professional authority, responsibility or expertise to disclose in our audit opinions what we believe is reasonable. [Paris-alignment] Assumption”.
The report stated that companies must “significantly improve reports” and auditors should “significantly improve their standards.”
A similar study conducted last year by the UK Financial Reporting Council, which oversees auditors, accountants and actuaries, found that many auditors “do not consider climate change when identifying and assessing the risk of material misstatement of financial statements.”
Mark Babington, executive director of regulatory standards, said that although FRC’s actions have been focused on improving climate reporting, over time, “we will have to consider more stringent regulatory interventions.” .
What the standard setters say
International Accounting Standards Board (Most global companies): “When climate-related matters have a significant impact on the financial statements as a whole, companies must consider climate-related matters when applying IFRS.”
Financial Accounting Standards Committee (US company): “When applying financial accounting standards, an entity may consider the impact of certain major ESG issues, similar to how the entity considers other changes and changes in the business and operating environment that have a significant direct or indirect impact on its financial statements. notes.”
International Accounting Standards Board (Auditor): “If climate change affects an entity, the auditor needs to consider whether the financial statements appropriately reflect this in accordance with the applicable financial reporting framework (ie, in the context of the risk of material misstatement related to amounts and disclosures, it may Affected depending on the facts and circumstances of the entity).”
Global Public Policy Committee, In addition to Grant Thornton and BDO, it also brings together the four major accounting firms, Endorsed The IASB and IAASB guidelines state that these companies are “committed to playing our role.”