In September last year, independent think tank Carbon Tracker, which examines the impact of the energy transition on financial markets, published the sobering report Flying Blind: The Glaring Absence of Climate Risks in Financial Reporting.
As the title suggests, that analysis of 107 publicly listed, carbon-intensive corporates – in industries ranging from oil and gas and transportation to cement and consumer goods – found little evidence that they were incorporating material climate-related matters into their financial statements.
Questions around whether the picture has improved since then are immediately answered by the title of Carbon Tracker’s latest publication Still Flying Blind, issued in October. For this sequel report, the think tank analysed 134 corporates listed in the Climate Action 100+ scheme, which are cited as key to “driving the global net zero emissions transition” and contribute around 80% of global industrial greenhouse gas emissions.
Across seven metrics in the Climate Action 100+ methodology, Carbon Tracker discovered some serious concerns. For example, the companies assessed had uniformly failed to:
- disclose relevant quantitative, climate-related assumptions and estimates they had used to prepare their financial statements – even when indicating that climate risks may impact those assumptions;
- present consistent climate narratives in their financial statements, which failed to reflect climate considerations that the companies had included in their other reporting, and
- use assumptions and estimates or provide sensitivity aligned with achieving net zero by 2050 or earlier, despite a significant majority having targets or ambitions to reach that goal.
The research also found that 96% of audit reports examined in the study failed to sufficiently address how they had considered climate impacts.
For Carbon Tracker Head of Accounting, Audit and Disclosure Barbara Davidson – who co-authored the report with Executive Director Rob Schuwerk – this is bad for investors and companies alike.
“Investors have indicated that this data is material to their decision-making,” she says. “It could affect their ability to meet their own net zero targets. It could affect their capital allocation plans, including whether they are happy to maintain investment in a particular company. And it could shape their engagement and voting decisions.”
On the corporate side, Davidson explains, climate risk reporting should help to inform management and stakeholders how well the company is performing in the face of risks such as emissions reduction regulations or declining demand for its products – plus the extent to which climate risks will impact its own carbon targets, its ongoing strategy and what ‘business as usual’ looks like. All those factors can impact its cost of capital.
“The reason we looked for these types of disclosures,” Davidson says, “is because without them, there’s no way for investors to know whether companies are doing what they should be doing – including exercising appropriate governance over these issues and considering the relevant financial impacts.”
Other climate-sensitive factors that companies should typically consider in their financial statements include remaining lives of assets, future production of specific products, future sales and future commodity prices. “All those matter,” Davidson notes, “alongside the potential for onerous contracts. Has the company entered into any long-term agreements to sell products at a price that it’s now unlikely to be able to obtain?”
She also points out: “There’s a lot of sales financing out there – for example, car companies have very significant finance receivables, which are by far their most significant balance-sheet assets. So, for any company in the sector, the question is: have you considered what would happen if the collateral of that asset declines and the borrower defaults? If that factor is not material to your company, then that in itself is material information to your investor.”
The Climate Action 100+ scoring rule is binary: if companies didn’t provide all the types of data Carbon Tracker looks for, they don’t score a Yes. Eight companies – BP, Eni, Equinor, Glencore, National Grid, Rio Tinto, Rolls-Royce and Shell – achieved a partial score.
Among that pack was a particularly eye-catching standout. “Glencore may not have delivered on all the information expected,” Davidson explains, “but its net zero sensitivity for its material mining assets was on point. It had clearly considered the question, ‘How would achieving net zero by 2050 impact our financials today?’ The conclusion was that the company’s thermal coal assets would be impaired by 90%. But Glencore also included a more extreme scenario, ‘What if the world stopped using all fossil fuels today?’ The answer: it would have to write off all of its thermal coal assets. That’s highly significant information.”
BP, Davidson notes, laid out all the long-term oil and gas prices that it uses to carry out its impairment tests, showing that they would decline in the light of the energy transition.
And while Shell scored a No because there were certain areas that Carbon Tracker thought the company needed to improve on, it did provide a substantial amount of information overall. “That helped us to understand what it’s doing,” Davidson says, “and gave us some insights into management’s views on these matters.”
How can companies improve going forward? “Provide more information,” Davidson says. “Companies need to increase the transparency around how they’ve considered a particular climate matter and, if they haven’t done so, explain why. If they say it’s not material, how did they determine that? What are the impacts of achieving their commitments and targets – especially for the remaining useful lives of relevant assets, or remaining units of production? Companies don’t seem to want to go there.”
Davidson stresses: “Companies must provide their estimates and assumptions. They must be open about the quantitative information they have used – because even if they don’t talk directly about climate matters, it’s easy to see from that data whether or not they’ve actually considered them.
“Provide information about achieving net emissions targets. If they are relying on carbon capture or offsets, what are the projected costs involved? Where are you getting the relevant estimates? Plus, how – and to what extent – are you achieving interim reductions? It’s not reasonable to focus only on 2050: we need to know what’s happening between now and then to ensure appropriate reductions will occur.”
At the crux of all this, she says, Carbon Tracker considers reticence across those areas to be an indication of poor corporate governance.
“That means ensuring the audit committee (or equivalent) is closely involved,” she adds, “and explaining how it has considered those matters in its assessment of your financial reporting. How has the committee discussed this data with your auditors? Challenge your auditors on whether they have taken the committee’s thoughts into consideration. Make sure your sustainability and financial reporting functions are talking to each other. And above all, make sure your board is on top of these issues and providing the necessary oversight.”
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