Directors and auditors will be held accountable by investors if carbon-intensive companies do not deliver in five key areas.
Global investors managing US$9 trillion in assets under management (AUM) have issued a warning to 36 of Europe’s most carbon-intensive corporates, demanding climate-risk disclosures be included in all financial reporting. The 36 investor signatories included Northern Trust, the UK’s Local Authority Pension Fund Forum and the Church of England Pensions Board. Recipients included Deutsche Lufthansa, ESF and Shell.
The public letter was delivered via the Institutional Investors Group on Climate Change (IIGCC) and included its ‘Investor Expectations for Paris-aligned Accounts’ report, which highlighted five key changes investors expect companies to consider when reflecting the full scope of climate risks in their financial statements.
Going forward, directors need to confirm goals outlined in the Paris Agreement have been considered within their annual reports and accounts. All “critical accounting judgements” should therefore be consistent with achieving net zero carbon transmissions by 2050.
If directors choose not to use Paris-aligned assumptions within financial estimates, they should provide “results of sensitivity analysis linked to variations in these judgements or estimates,” the report said. This means companies need to disclose to investors why and how Paris-aligned assumptions would impact the reported financial statements.
Investors further called for transparency around dividend resilience, and the “implications for dividend paying capacity” arising from transitioning to Paris-alignment. The report noted “this is particularly important where companies have not [previously] used Paris-aligned assumptions in their core accounts”.
Members of company audit committees need to provide explanations for any divergence from reporting on climate risks alongside accounting assumptions, and should detail all steps taken to ensure material climate risks are properly considered across all accounts.
Failure to implement these terms will result in three potential courses of investor action: divestment (shareholders may sell their shares in companies that fail to provide reliable Paris-aligned accounts); engagement (investors may directly confront boards and audit committees failing to deliver); or voting (shareholders may deselect leadership, taking a more active role in job appointment decisions).
Having accounts properly reflect the impact of getting to net zero emissions by 2050 – the assets, liabilities, profits and losses – will ascertain that “management, investors and creditors have the information they require to deploy capital in a way that is consistent with the Paris Agreement,” the report added.
Action from the IIGCC follows an increase in the number of organisations following the reporting recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Formed by the Financial Stability Board (FSB) in 2015, nearly 60% of the world’s 100 largest public companies now support or report in line with TCFD recommendations. The UK Joint Government-Regulator TCFD Taskforce has gone a step further, implementing a roadmap guide for mandatory climate-related financial disclosures across seven financial categories, starting from 2021.
The public letter from IIGCC members reflects the industry-wide pressures for increased climate-related transparency that is coming directly from the investors.
“Companies can no longer afford to ignore what climate change means for their business. Investors need financial impacts of getting onto a net zero pathway to be booked and acted. Climate change is material and the importance of alignment with the Paris Agreement is beyond doubt. What investors now need is visibility from companies in their accounts. They are making this clear today and expect companies to report in line with existing global accounting standards,” IIGCC CEO Stephanie Pfeifer said.
The IIGCC is a European membership body for investor collaboration on climate change, with more than 250 members with over €33 trillion AUM across 15 countries.