This publication comprises a collection of questions, issues and examples that we believe are relevant for entities thinking about the ways in which climate risk can affect their financial statements.
Over 3,300 participants were surveyed.
Climate risk dominates the current ESG headlines. US registrants are waiting to see what disclosures the SEC will propose. Multinationals with operations in the European Union are analyzing the implications of the proposed Corporate Sustainability Reporting Directive. The international community awaits the formation of the International Sustainability Standards Board.
This comes against the backdrop of increasing questions about the role of the financial statements in highlighting the effects of climate risk, and in particular companies’ efforts to reduce emissions or to operate in a low-carbon world. Some commentators believe the financial statements should include explicit disclosures related to climate risk – based on their view that such disclosure would be consistent with the principles of GAAP.
The reality is more complex.
Liabilities are not recognized, assets are not written down, estimates are not adjusted, until the criteria in the relevant standards are met. And although a company’s financial statement disclosures may sometimes go beyond the strict requirements of the standards, typically they do not venture into what-if scenario analysis.
This does not mean that climate risk is irrelevant to the financial statements – it is very relevant. But context is everything. An intention to be net-zero by 2050 is not the same as an action plan to reduce emissions by 2030 that is already underway. As intentions change to strategies and then to actions, the potential effects on the financial statements increase.
So the message in this publication is to prepare your organization. Ask yourself the questions that we pose, create your own checklist, and monitor your environment and circumstances.
Today climate risk may have no effect on your financial statements, but tomorrow or one day soon, that may change.