Urgent action required on climate change impact reports

By Ruth Prickett, 15 April 2024

Large polluters are failing to account for climate change impact and adaptation, but policymakers need to harmonise disclosure requirements to drive coherent action.

Despite pressure from regulators and stakeholders to disclose information about the financial impact of climate change and climate change adaptation, only 40% of the largest polluting firms are providing this in their financial statements and accounts, according to a report by financial think tank Carbon Tracker.[1] The number is a small increase from the 35% who disclosed this information in last year’s study.

The researchers compared the financial statements and related audit reports of 140 companies with some of the world’s highest emissions for fiscal year 2022.

Barbara Davidson, Head of Accounting, Audit, and Disclosure at Carbon Tracker and author of the report, said all the companies studied have ‘significant exposure to climate and transition risks’ and more than 100 have committed to reducing emissions. Failing to report the potential costs of transition and the risks of climate change could lead to serious overvaluations and make them high-risk investments.

‘Such matters can materially impact their businesses, balance sheets, and cash flows. Investors and regulators urgently need information about how companies are reflecting this in their financial statements today,’ she said in a press release.[2] ‘If management and investors are basing their decisions on incomplete or incorrect information, such as potentially overstated assets and profits and understated liabilities, then investors, including pension funds and retail shareholders, risk significant financial loss in the face of a disorderly energy transition.’

Regulatory expectations

Regulators around the world are increasing their demands for information on climate and energy transition in financial statements. The report categorises the key risks as transition risks (e.g., disruptive technology, policy action and regulation, and changes to consumer behaviour); physical risks (e.g., extreme weather events, insurance costs, and mitigating the effects of weather and temperature); and related company targets and strategy (e.g., the cost of reducing emissions and retiring carbon-intensive assets).

Martina Macpherson, Head of Environmental, Social, and Governance (ESG) product strategy and management for the financial information business unit at Swiss stock exchange SIX, agreed that issuers, investors, and regulators want to see more climate data transparency across all sectors and regions. She explained that current emissions and transition-reporting frameworks and disclosure initiatives are often ‘one step removed from real economy considerations, overambitious, and not actionable.’

‘We’re seeing lots of commitments to multiple frameworks, but sometimes organisations cannot transition these into actions,’ she said.

Macpherson continued: ‘Isolating specific sectors or regions as root causes for a lack of consistent disclosures is too limiting, because stewardship challenges on net zero and climate change transition trajectories are happening across the value chain.

‘We need to take a step back; identify the core issues that are preventing action at sector, corporate, and sovereign policy levels; and focus on harmonising disclosure and reporting efforts that are achievable and actionable over time.’

Macpherson added she is optimistic the ambition to achieve this exists, noting the impact of the European Union’s Corporate Sustainability Reporting Directive [3] and U.S. Securities and Exchange Commission’s climate-related disclosure rule [4] to drive better investment decisions.

‘Climate change disclosure is the most common policy area for ESG regulatory regimes worldwide, so this is a good starting point,’ she said. ‘But we need to look beyond ‘tick-box’ disclosures and drive sentiments from commitments to stewardship and science-based actions. This point remains challenging.’