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Think-tank Carbon Tracker Initiative issued their report Flying Blind: The Glaring Absence of Climate Risk in Financial Reporting analyzing the 2020 financial disclosures from 107 companies that Carbon Tracker identified as being “highly carbon exposed.” It is an interesting study that picks apart company disclosures, ending in a very short set of recommendations for various parties. Major findings of this analysis include:

  • Only 30% considered climate matters when preparing their 2020 financial statements, despite the fact that institutional investors identified companies in the other 70% as highly carbon exposed.
  • Only 25% of the companies provided disclosure of at least some of the quantitative assumptions and estimates used in preparing the financial statements.
  • For 72% of the companies, the treatment of climate matters within financial statements appeared to be inconsistent with disclosures of climate-related risks (and commitments, when relevant) in other reports they issued. 
  • Companies do not appear to use Paris-aligned assumptions and estimates.
  • 80% of auditors provided no indication of whether or how they had considered material climate-related matters, such as the impact of emissions reduction targets, changes to regulations, or declining demand for company products, in their audits.
  • Even with considerable observable inconsistencies across company reporting (“other information” and financial statements), auditors rarely comment on any differences.

It is important to understand the accounting and disclosure standards that form the basis of these findings. Since there is no singular standard that applies universally across all jurisdictions, any analysis must reflect mandates and limitations applicable in each jurisdiction in which companies report. A complicating factor is that 37% of the companies reviewed are US/Canadian, with the remainder being out of Asia, EU/UK and Emerging Markets ex-Asia. Comparisons of financial statement accounting across these multiple jurisdictions may be more complicated than the report implies.

Financial audit standards and scopes are (usually) expressly limited to financial accounting statements. Even the Critical Audit Matter (CAM) standard in the US – intended as a way for auditors communicate issues that are especially challenging, subjective, or require complex auditor judgment – are limited to matters involving financial accounting. At the same time, there are instances where auditors are to consider other information, but the impact and relevance of that information on the audit is left to the auditor’s professional judgement.

While it is tempting draw generalized conclusions about financial accounting and disclosures of climate matters, and associated audits of those reports, it may not be appropriate yet.

Recommendations in the report for reporting companies are consistent with those from last week’s guest contributors J.T. Ho and Ashley Walter concerning the new SEC template comment letter on US climate disclosures.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile