Justin Bazalgette, Senior Engager for Equity Ownership Services at Federated Hermes Limited, explains investors are demanding greater transparency on how climate commitments shape corporate financial statements. With new global reporting standards raising the bar, companies and auditors face mounting pressure to show how climate risks are factored into valuations – or risk losing investor trust.
In recent years, the conversation around climate change has shifted from aspirational commitments to tangible action and investors are increasingly scrutinising how these commitments are reflected in corporate financial statements. Despite widespread pledges to achieve net-zero emissions, many companies where climate is a material consideration (ie, the top carbon emitting companies identified by Climate Action 100+ (CA100+)) fail to demonstrate how these goals influence their accounting assumptions. This lack of clarity leaves investors questioning whether climate risks are adequately factored into valuations and long-term strategies.
Auditors, too, have come under pressure. While some provide limited commentary on climate-related risks in their audit reports, the majority stop short of offering detailed insights into how these risks were assessed during audits. This gap in transparency, relating to one of the most material issues of our time, creates uncertainty for investors who rely on clear and independently audited financial statements to make informed decisions.
Global standards raise expectations
The urgency for change is underscored by recent developments in global reporting standards. The International Accounting Standards Board (IASB) has now issued its final illustrative examples clarifying how climate-related risks should be addressed under IFRS® Accounting Standards. The examples include how companies should disclose material uncertainties – such as key assumptions, estimation risks, and asset exposures – without changing existing IFRS Accounting Standards. For investors, this means more transparent, consistent, and granular information on long-term risks like climate impacts, improving comparability and risk assessment.
These examples were initially issued in draft form in July 2025 to give companies and auditors ample time to incorporate changes in their 2025 financial year disclosures, particularly as there is no change in the principles which underly the examples. Meanwhile, new frameworks such as IFRS Sustainability Disclosure Standards and the EU Corporate Sustainability Reporting Directive are raising expectations for improved climate-related disclosures. Yet regional disparities persist; while the UK and EU are leading the charge with mature Task Force on Climate-related Financial Disclosures reporting and more full disclosures in the financial statements, progress in the United States and Japan remains slow. In Germany and France, auditor commentary continues to lag behind investor expectations.
Early signs of progress
Encouragingly, some companies are beginning to set a precedent. Energy giants Shell and BP, along with mining leaders Rio Tinto and CRH, have started linking climate assumptions to their financial statements which aligns well with the illustrative examples from IASB. In several cases, particularly in the UK, auditors have provided additional transparency, signaling a shift toward more robust disclosure practices. Shareholder engagement is also gaining momentum. Earlier this year, Japanese megabanks faced shareholder proposals at their AGMs demanding disclosure of financial risk audits tied to climate exposure, highlighting growing investor impatience with opaque reporting.
The path forward for investors and auditors
For investors, the path forward is clear: engagement must intensify. Boards and audit committees should be pressed to explain how climate commitments and energy transition strategies are incorporated into financial statements. Auditors should be challenged to provide detailed commentary on their assessment of how companies have handled climate-related risks in the financial statements where these are considered material. These conversations should reference IASB guidance and set expectations relating to further disclosures being discussed under different reporting jurisdictions, ensuring companies align with emerging standards.
The stakes could not be higher. Transparent, climate-aligned financial reporting is essential for informed capital allocation and risk management. In 2026, investors interested in long-term sustainable financial returns are expecting CA100+ companies and their auditors to deliver clarity, accountability, and consistency in their disclosures. There is also an expectation that regulators will follow up to ensure that company disclosures meet the required level relating to uncertainties as outlined in the IASB illustrative examples. Anything less risks undermining trust in corporate reporting and jeopardising the transition to a sustainable economy.
Justin Bazalgette, Senior Engager for Equity Ownership Services, Federated Hermes Limited
