Carbon Tracker reviewed 2021 financial results of 134 of the world’s largest polluters. It found that most failed to disclose climate risk data in a way that adequately quantified the associated liabilities. This was reflected in the fact that there was little evidence that auditors had considered the potential impact such risk on the balance sheet.
- Carbon Tracker assessed results of 134 companies considered key to decarbonise the world.
- It means investors are deprived of information on the financial consequences of climate risk and the energy transition.
- Transparency on the cost of climate risk is key to make the right investments for the future.
Researchers at Carbon Tracker raised questions about whether company executives are placing enough attention on the financial consequences of climate-related issues, while auditors are not challenging them to do so.
Climate pledges and risk need to be quantified for the market to function
An increasing number of companies set net-zero pledges or climate risk assessments, but these are not analysed from a financial perspective.
This means investors and markets are being left in the dark, making it difficult to price risks and allocate capital accordingly.
Barbara Davidson, Carbon Tracker’s head of accounting, audit and disclosure and lead author said: “Many asset and liability values rely on forward-looking assumptions. When companies don’t take climate-related matters into account, their financial statements may include overstated assets, understated liabilities and overstated profits.”
Understanding the role of the auditors
The real question is whether or not a company is actually assessing liabilities if you are not considering climate change? One of the growing concerns in the market is that auditors are only asked to verify what has been disclosed.
If companies fail to disclose climate risk in their financial reports, then that seems to be a direct failure in the communication of risk. There is a history of auditor oversight in a number of different industries from energy to property, vouching for flawed financial statements, often due to a strict interpretation and communication around the rules of reporting. Failure to understand liabilities however could result in cascading economic failure.
A spokesperson for KPMG said that the accountancy firm recognises that “some investors want broader information than current standards require”.
They added: “With the release of draft global sustainability standards and reporting frameworks, we have engaged with standard-setters to encourage them to address the current information gap. We urge other stakeholders to do the same.
“We strongly support the International Sustainability Standards Board (ISSB) as it develops global corporate reporting standards, which are an essential part of the system change required to address the needs of global capital markets and broader society.”
Carbon Tracker: key findings of the report
The report selected 134 companies part of the Climate Action100+ focus universe, which are deemed key to “driving the global net zero emissions transition”.
It was compiled in partnership with the Climate Accounting and Audit Project, which is sponsored by the UN-backed network of investors Principles for Responsible Investment.
Most of the companies assessed did not disclose quantitative climate-related assumptions, even when they indicated they might be impacted by climate risk. For example, Mercedes-Benz (FRA:MBG) and Nissan (TYO:7201) did not provide enough quantitative data on how their assumptions will be impacted by the energy transition.
In Mercedes case, the company is planning to switch to only electric cars, while Nissan said that EVs will account for over half of its product mix by 2030. However, they did not provide time frames for a long term shift, estimates of the remaining useful lives of their plants and equipment and whether they can be used for production of the new models. Both carmakers were contacted for comment but declined.
The report also found inconsistencies in the climate narratives of the companies. This is where companies that had previously stated a commitment to action on climate risk, but failed to align them to their financial statements. Such failure means that relevant information is not communicated, which could result in accusations of greenwash.
Why pricing climate risk is important
International climate agreements, domestic regulation, changing investor and consumer expectations raised questions about carbon pricing, legal liabilities, stranded assets and more. The impact of the net zero transition is expected to or is already having a significant impact, fundamentally changing the operational business environment in many industries.
For instance, Glencore indicated in its 2021 results that the implement of a net zero strategy will lead to an almost complete write-down of its thermal coal production assets.
Rob Schuwerk, Carbon Tracker’s US executive director and report co-author, said: “Glencore’s financial statements are particularly illuminating… How many more company balance sheets carry similar risks?”
When a mining company is the one that is at least communicating the potential impact of climate risk, it is disturbing that few others share the same concerns.