Corporates Must Account for Climate Risk – Railpen

New research identifies examples of good and bad practice in 2020 financial reports. 

Corporates need to better account for climate-related risks in their financial statements to help investors understand their cost exposure in clear monetary terms, according to Caroline Escott, Senior Investment Manager at RPMI Railpen.

Speaking at a webinar hosted by Carbon Tracker and the Association of Chartered Certified Accountants, Escott said climate accounting will be a key engagement and voting theme for Railpen next year. If a corporate isn’t including climate costs in its 2021 financial statements, the £30 billion AUM pension scheme will want to know why.

“As a company, you cannot say you’re taking climate risk seriously if your audit doesn’t reflect climate change within your planning and execution,” she said.

Escott said Railpen currently asks carbon-intensive companies to clearly disclose their exposure to climate risk in the auditor’s report with evidence supporting their findings.

This is in line with guidance published last year by global accounting and audit standard-setters the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB).

“We have been engaging with direct holdings on this as well,” she noted.

The IFRS Foundation, which oversees the IASB, is in the process of establishing a separate Sustainability Standards Board to develop global standards for reporting firms’ ESG risks, starting with a prototype standard for climate risks.

Calls for consistency 

Despite existing guidance, the level of detail provided by corporates on climate risks within their financial statements remains inconsistent across geographies and industries, according to Barbara Davidson, Senior Analyst at Carbon Tracker.

Carbon Tracker analysed the 2020 financial reports of 36 of Europe’s largest carbon-intensive companies – the same companies called out by the global investors led by the Institutional Investors Group on Climate (IIGCC) for not accounting for climate costs in their financial statements. Another 20 carbon-intensive companies based in the US were assessed by Carbon Tracker.

An in-depth report on these findings is due to be published in summer 2021.

According to initial findings, European companies are better prioritising climate accounting, while none of the US companies reviewed by Carbon Tracker referenced climate-related risks in their financial statements in 2020.

Davidson used American oil major Chevron as an example of poor climate accounting, While France’s Total exemplified good practice.

Chevron’s discussed possible decarbonisation risks, climate change regulations and increased societal expectations, “but they’re not telling a consistent climate change story in their actual financial statements,” Davidson said.

In the firm’s audit, conducted by PwC, accounting for climate was described as minimal.

“They don’t mention how price assumptions could be affected by transition risks. They don’t mention whether they have considered other issues, such as increasing carbon costs and their future cash flows. They don’t disclose any quantitative information on climate,” she added.

Total also outlined its climate targets within its annual report, including price scenarios and physical climate risk factors that may affect them.

“The difference is that Total’s financial statements tell a relatively consistent story,” Davidson said.

While not perfect, according to Davidson, Total had made an effort to disclose its oil price assumptions, applying impairment testing across short-, medium- and long-term scenarios, ultimately calculating that Total faces impairments of around US$9 billion in 2020.

“We plan to discuss relevant audit and accounting requirements with investors and regulators in order to emphasise the importance of including these issues in their enforcement reviews. We’ll keep in contact with auditors and discuss potential additional work that can be done,” she said.

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