One hundred and forty companies with some of the world’s highest emissions are collectively failing to explain how the climate crisis affects their existing business, with major auditors found to be equally ineffective.
A new report, published by Carbon Tracker, finds that 140 companies with some of the world’s highest emissions are collectively failing to explain how the climate crisis affects their existing business.
Investors are increasingly concerned about the financial impact of climate change and the energy transition, while market regulators and standard setters have been clear that companies should reflect the impacts in their accounts.
But companies and their auditors are leaving investors in the dark with only 40% providing some information in financial statements and audit reports, barely up on 35% a year ago.
Barbara Davidson, Head of Accounting, Audit & Disclosure and report author, said: “These companies have significant exposure to climate and transition risks and most have emissions reduction targets. Such matters can materially impact their businesses, balance sheets and cash flows. Investors and regulators urgently need information about how companies are reflecting this in their financial statements today.
“If management and investors are basing their decisions on incomplete or incorrect information, such as potentially overstated assets and profits and understated liabilities, then investors, including pension funds and retail shareholders, risk significant financial loss in the face of a disorderly energy transition.”
Carbon Tracker’s third annual report in the series, explores whether companies and their auditors disclose how they are considering climate change in their financial statements and audits.
It looked at 140 companies which, as part of the world’s largest corporate greenhouse gas emitters, are a focus for the Climate Action 100+ investor initiative. All are subject to similar accounting and auditing requirements, and most are audited by one of the big four audit firms: Deloitte, EY (Ernst & Young), KPMG and PwC (PricewaterhouseCoopers).
It analyses their financial statements and related audit reports for their 2022 financial years, using the Climate Accounting and Auditing Assessment methodology, which includes metrics grounded in the existing relevant accounting and auditing standards. The report finds that:
Only 37% of companies’ financial statements provide investors with some information on how they incorporate climate-related financial risks. Investors in the remaining 63% cannot tell whether balance sheets reflect climate impacts and so “lack a window into management’s views of the energy transition”.
The report found that 81% of companies continue to omit the most basic and accessible data: the relevant quantitative assumptions and estimates [inputs] used in financial reporting. This is despite companies identifying these inputs as significant to the preparation of the financial statements and subject to considerable judgement and estimation uncertainty.
The report highlights that investors need to understand if companies could face significant losses in the face of such risks – including whether assets will generate the returns originally expected, if liabilities will come due sooner than anticipated, and if new ones will arise.
The report will be followed by three further notes focusing on companies, auditors and regulators.
Read the full report here.
