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Investors Still in the Dark on Climate Risks to Firms’ Finances

Audit firms must do “a better job” or risk penalties, warns Carbon Tracker.

Investors continue to suffer from poor-quality climate-related information in company reports and other statements, particularly from firms with the highest CO2 emissions.

That’s the finding of a major new report by Carbon Tracker, the independent think tank that researches the effects of climate change on financial markets.

It surveyed 134 companies with high levels of CO2 emissions. One finding was that “98% of these companies did not provide sufficient information to demonstrate how their financial statements include consideration of the financial impacts of material climate matters”.

Overall, there was “little evidence that they had considered the impacts of material climate-related matters in preparing their financial statements”.

“Start penalising auditors”

Carbon Tracker surveyed companies from the fossil fuel, mining, manufacturing, automotive and technology sectors that are targeted for engagement by the investor-led Climate Action 100+ initiative.

None of the companies met all the Climate Action 100+ Climate Accounting and Audit Assessment (CAAA) methodology metric requirements, which includes analysis of company financial statements. Only eight, or 6%, received ‘partial’ scores by providing all the information required by the CAAA methodology for at least one of the seven metrics used to assess them.

The Carbon Tracker report noted: “In general, companies failed to disclose the relevant quantitative climate-related assumptions and estimates used to prepare the financial statements, even when they indicated that climate risks may impact these assumptions.”

For ESG-aware investors, this paucity of solid information leads to questions over whether they should they wait for information flows to improve, pinning hope on further action from regulators or legislators, or divest their holdings to avoid uncertainty over the climate risks in their portfolios.

“They should certainly not just sit and hope,” said the report’s co-author Barbara Davidson, Carbon Tracker’s Head of Accounting, Audit and Disclosure. “Everyone has responsibilities here.

“Ultimately that would be the board, but auditors ought to be doing a better job. Regulators are starting to display better oversight of these issues, and it seems likely that they are going to have to start penalising auditors.”

Both the International Accounting Standards Board and the International Auditing and Assurance Standards Board require consideration of material climate risk in audits, but firms have been slow to apply guidance to financial statements.

She added: “Investors may choose not to divest. They have to make that decision themselves. In some cases, they have stayed invested and asked companies for more information. For example, they may request assurance that the company won’t end up with stranded assets.”

Potential evidence of greenwashing

The Carbon Tracker report highlighted the fact that discussions about and disclosures of climate risks differed across jurisdictions even when the statements were being drawn up by members of the same global firm network. “Notably, none of the auditors of the 46 US companies [in the report] provided evidence that they considered the impact of climate matters in such audits,” it added.

Davidson commented: “We don’t think the differences are warranted from one jurisdiction to the next, and it is shocking that US companies are not providing more information, and neither are their auditors.”

According to the report, companies failed to present consistent climate-change narratives. “All 134 companies had some level of inconsistency. While many recognised that climate-related risks are material and indicated that they are taking steps to set and meet emissions targets, they failed to reveal the relevance in the financial statements.

“These differences could be evidence of greenwashing.”

How balance sheets could change

Auditors were criticised for failing properly to consider the impact of climate-related factors, in their risk assessments and audit testing, with 96% of audit reports falling into this category. However, some audit firms were more thorough than their peers. “Overall, Deloitte provided the most comprehensive information compared with the other firms whose reports were subject to our review,” said Carbon Tracker.

This research follows up on a 2021 report ‘Flying Blind: The glaring absence of climate risks in financial reporting’, and is entitled ‘Still Flying Blind’. Davidson agreed that it was shocking that there had been so little improvement, but added that the methodology was “slightly stricter” than previously.

She added: “You can see an increase in ambitions from companies, in their goals and targets for net zero by 2050 or sooner, but we are not seeing that reflected in financial statements.

“Investors need to know how company balance sheets could change if we really are on a path to net zero. This report is about the issues of transparency and information.”

The research was performed in collaboration with the Climate Accounting and Audit Project.

Researchers evaluated companies’ financial statements and audit reports, followed the new CAAA methodology and looked for evidence that seven key metrics had been assessed.

The also looked for other climate-related information in filings published before or around the same time as the audited financial statements, including management reports, risks factors, sustainability, climate or TCFD reports, websites, CDP reports, and proxy statements.

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