Business Management, Risk Management

Putting climate-change risk on the balance sheet

Chartered accountants are on notice to identify and measure business risks related to climate change.

By Karen McWilliams FCA

As the drive for more useful climate-related information advances, it is becoming increasingly important for chartered accountants, in business and practice, to understand what disclosures are required.

In September 2018, the Task Force on Climate-related Financial Disclosures (TCFD) released its 2018 Status Report, which reviewed the disclosure practices of nearly 1800 companies for the 2017 fiscal year.

It found relatively few companies disclosed the impact of climate change in their financial filings, or detailed the resilience of business strategies under different climate-related scenarios. Such disclosures were more often found in sustainability reports.

The TCFD was established by the Financial Stability Board (FSB) in December 2015, to develop a consistent framework for the climate-related financial risk disclosures companies use when providing information to investors, lenders, insurers, and other stakeholders.

Around the world, there are now 513 organisations that support for the TCFD recommendations, including Chartered Accountants ANZ and others in our region.

In the UK, law firm ClientEarth reported four companies – EasyJet, Balfour Beatty, EnQuest and Bodycote – to the Financial Reporting Council (FRC) for failing to address climate-change risks in reports to shareholders, in potential breach of UK reporting laws. ClientEarth also wrote to the companies’ auditors – PwC, KPMG, EY, and Deloitte respectively – asking how they address climate change-related issues in their audits.

ASIC urges climate risk disclosure

Also in September 2018, the Australian Securities and Investments Commission (ASIC) released its Climate Risk Disclosure by Australia’s Listed Companies report.It found that, in some cases, the climate-risk disclosures from companies were far too general to be of practical use for investors, and that fragmented climate-risk disclosure practices made comparisons difficult.

ASIC recommends that listed companies:

  • consider climate risk
  • develop and maintain strong and effective corporate governance to identify, assess and manage risk
  • comply with the law where it requires disclosure of material risks
  • disclose useful information to investors, using the TCFD framework.

The Australian Accounting Standards Board (AASB) and the Australian Auditing and Assurance Standards Board (AUASB) are planning a joint publication outlining how entities should consider the specific guidance in AASB Practice Statement 2: Making Materiality Judgements in determining whether climate-risk related information is material, and should be included in financial statements.

NZ on track for lower emissions

Transitioning New Zealand to a low emissions economy took another step in July, when 60 of New Zealand’s chief executives formed the Climate Leaders Coalition. Together, the enterprises run by Coalition members produce more than half of New Zealand’s emissions. The members believe that together they can make the low emission move a positive one for businesses and the nation’s economy. In particular, they committed to measuring and publicly reporting on their emissions.

When the Sustainable Business Council (SBC) reviewed its 91 member organisations, it found that while reporting on emissions measurement and reduction measures is more visible, there is still little disclosure of risk from climate change.

At the time of writing, the draft of the Zero Carbon Bill had not been released, but the New Zealand Productivity Commission’s final report on the transition to a low-carbon economy suggested the government should endorse TCFD recommendations as one avenue for disclosing climate risk.

The Commission also recommended that mandatory (on a comply or explain basis) climate-related financial disclosures should be implemented by way of a standard under section 17(2)(iii) of the Financial Reporting Act 2013. These disclosures should be audited and accessible to the general public.

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Karen McWilliams FCA is the business reform leader at CharteredAccountants ANZ. She identifies and advocates on areas of emerging business policy and regulation relevant to chartered accountants.

This article was originally published in the December 2018 issue of Acuity.