15 Aug 2020 Investors demand corporate financial statements to incorporate climate change risks
Investors fear that firms’ financial statements do not represent the real long-term outlook for many businesses as only a minority of them accurately incorporate climate change risks. The oil and gas company BP has cut $17.5 billion off the value of its assets, reflecting the material impacts of climate change and COVID19 which have fastened the transition towards greener energy solutions.
A growing number of investors, among which we find Calpers, Schroders, DWS and Sarasin & Partners, have been pressuring firms and auditors to include material climate change risks into financial statements. Investors fear that companies accounting reports do not represent the real long-term outlook for many businesses as only a minority of corporations accurately incorporate such risks, despite the broad proclaimed support of firms to the Paris Agreement to tackle global warming.
Many big investors have been increasingly worried about companies in energy-intensive industries, stressing that many of them minimize the material impact that climate change has on asset values. Prompted by such pressure, last June the British oil and gas company BP decided to cut $17.5 billion off the value of its assets, reflecting declining long-term oil price expectations as the advent of Covid-19 has fastened the transition towards greener energy solutions.
The International Accounting Standards Board (IASB) has published in November 2019 a report addressing the material risks that climate change poses on assets and liabilities – thus also on future profits and dividends – giving also directions on how to deal with depreciation and stranded assets.
Currently, many standards and initiatives exist in this area. According to Hans Hoogervorst, chair of the IASB, this is far from efficient as it leads to spreading confusion. He also argues that despite many companies now put their sustainability reporting at the beginning of their annual reports, the risk of greenwashing is real.
In line with the growing investors’ concerns on companies actual observation of sustainability requirements and risk management practices, the Financial Reporting Council (FRC) – the accounting watchdog that sets reporting standards for all listed corporations in the UK – launched last February a review to verify if firms are properly disclosing to investors their financial exposure to climate change risks. In doing so, the FRC will also examine if firms are following the recommendations set by the Taskforce on Climate-related Financial Disclosures (TCFD) which was created in 2015 specifically for highlighting this kind of financial exposure.
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