Climate and financial reporting

Investors require more clarity on the financial impact of climate-related matters on companies

Since its publication in 2017, the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) has been a significant driver of improved reporting of climate-related information in the mainstream report. This has been complimented by the introduction of related legislation and regulations in other jurisdictions such as the Non-Financial Reporting Directive (NFRD) in Europe that came into effect in 2018. Although the TCFD recommendations have broad support across jurisdictions and industries, there remains a long way to go on in relation to good practice narrative reporting by companies (see the CDSB’s 2020 Falling Short Report). This remains a key focus of the TCFD, the CDSB and related organisations.  

However, beyond narrative reporting of climate-related matters by companies, investors are increasingly demanding better information on the potential and actual financial impacts of climate-related matters on businesses, covering both climate risks and opportunities This was a key theme from the TCFD’s 2019 Status report, which noted that without such information, users of annual reporting may not have the information they need to make informed decisions. It is expected this will remain an area of focus by the TCFD in coming years.

This is also a position that is increasingly relayed by investors themselves. In particular, when it comes to climate-related reporting there seems to be a disconnect between what is reported in the ‘front half’ of mainstream reports (the narrative reporting) and what is found in the ‘back half’ (the financial reporting). For example, climate-related risks identified or assumptions used for scenario analysis are not necessarily reflected in the financial reporting, where it might be expected.

The accounting standards

Until very recently there had been a reluctance by the accounting standard setters to develop guidance or similar as to how climate or wider environmental (and social) matters might be integrated into financial reporting. This, nonetheless, has been an area that the CDSB has explored previously. In 2018 we published a paper, Uncharted waters, which explored how financial accounting standards could aid companies in responding to the various aspects of TCFD recommendations. The focus now required is what TCFD means for financial reporting per the accounting standards and more broadly, how climate-matters impact financial reporting.

However, in November 2019, the International Accounting Standards Board (IASB) published a paper, IFRS Standards and climate-related disclosures, explaining how companies might need to consider climate-related matters in the context of their financial statements, rather than solely as matter for narrative reporting. This position builds on the IFRS practice statement on materiality, which notes that qualitative external factors such as the industry in which a company operates and investor expectations may make such risks material and warrant disclosures in the financial statements, regardless of their quantitative impact. Given the investor position on the importance of climate-related matters on their decision making, the IASB paper makes a clear case of the inclusion of climate matters within financial reporting.

The role of the CDSB

Although the materiality practice statement and November 2019 paper are not new standards, the IASB have clearly set their position on the inclusion of climate-related information within financial reporting. It is most unlikely that a company would wish to challenge the IASB’s interpretation of its own standards. Building on the IASB paper, investor initiatives are also underway to clarify their expectation that companies need to better reflect climate-related matters in their accounting.

The IASB paper also lists the IFRS accounting standards where climate-related matters might be taken into consideration, including IAS 1 presentation of financial statements, IAS 36 impairment of assets, IFRS  13 and Fair Value Measurement, and IAS 37 Provisions, Contingent Liabilities and Contingent Assets . From the position of a preparer, although suggestions are made as to the standards where climate should be integrated, there is not sufficient guidance or any examples as to what this might look like in practice when financial statements are produced.

The CDSB has therefore set up a sub-group to its Technical Working Group to advance the integration of climate-related matters into financial reporting. The Climate Accounting Standards Group will initially be developing practice guidance and examples to support preparers who are starting out in integrating climate-related matters within the financial statements. Development of capacity building resources for preparers is something the CDSB is well versed in having produced both an implementation guidance and a good practice examples guide for preparers of TCFD reporting in collaboration with SASB last year. Although the focus of the group will be in relation to climate-related matters in the first instance, over time this may be expanded to cover broader environmental and natural capital matters.

What’s next?

Beyond TCFD and narrative reporting, preparers should now be aware of the expectations set by investors when it comes to inclusion of climate-related matters within financial reporting and the IASB paper clarifies what is possible within the scope of the IFRS accounting standards as they are written. Building on the IASB, CDSB and its Climate Accounting Standards Group will be publishing practice guidance later this year to support preparers in taking the initial steps in reflecting climate-related matters when preparing financial reports.