Major accounting bodies are grappling with how best to deal with corporate climate risk disclosures. While there appears to be a significant shift towards encouraging climate risk to be reported on as part of companies’ financial reporting processes, for now standards boards appear reluctant to make reporting mandatory.
Hans Hoogervorst, chair of the International Accounting Standards Board (IASB), said that while the organisation sees climate reporting as important, it does not currently think that enforcing mandatory rules is the right approach.
Hoogervorst said that existing rules governing reporting need to be consolidated and reporting requirements need to be standardised before rules could be implemented effectively. Instead, Hoogervorst called for international standards to be agreed that focus on the impact of sustainability issues on future profit.
IASB standards are used in 144 countries around the world, so Hoogervorst’s statements will be seen as a strong indicator of the current state of play when it comes to reporting climate change risks as part of financial reporting processes.
Change is coming
Despite IASB’s reluctance to pursue a rules-based approach at this stage, there are clear signals from elsewhere that standards boards are taking climate-related disclosure seriously. Late last year, for example, the Australian Accounting Standards Board (AASB) published a practice statement called ‘Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB Practice Statement 2”.
The publication argues that climate-related risks and other emerging risks are currently discussed separately from companies’ financial statements, if at all. The paper says that this must change as physical climate impacts and investor expectations make such risks ‘material’, therefore warranting disclosures when preparing financial statements.
It also notes investor statements on the importance of climate-related risks to their decision making so that entities can no longer treat climate-related risks as merely a matter of corporate social responsibility and should consider them also in the context of their financial statement. The paper notes that while rules are currently not mandatory “entities in Australia are already being subject to law suits regarding lack of disclosure”.
The AASB provides a series of recommendations for entities preparing financial statements and for auditors of financial statements. Entities preparing financial statements in accordance with Australian Accounting Standards should consider:
- Whether investors could reasonably expect that emerging risks, including climate-related risks could affect the amounts and disclosures reported in the financial statements and have indicated the importance of such information to their decision making; and
- What disclosures about the impact of climate-related risks are material to the financial statements, as summarised in the decision tree below:
Auditors of the financial statements should consider:
- Climate-related risk and other emerging risks as part of their risk assessment. If there is an assessed risk of material misstatement in the financial statements, the auditor should respond appropriately to the risks of material misstatement;
- Whether climate-related risk and other emerging risks are relevant for accounting estimates including assumptions used to arrive at a fair value estimate and potential impairment.