Accounting rulemaker says climate risk should be more prominent

The International Accounting Standards Board is urging companies to disclose climate-related risks in their balance sheets and income statements, representing a key shift from existing norms.

IASB, which develops accounting standards followed in more than 160 countries, said on Wednesday that it’s launching a market consultation with a view to having financial statements reflect the impact and uncertainties related to climate change. 

The decision comes amid signs of investor confusion about the lack of uniformity in climate disclosures as extreme weather patterns increasingly leave their mark. For some sectors such as insurance, climate risk is already shaping reporting. But for others such as Big Tech, key information on issues such as water scarcity and access to reliable power supplies can be hard for investors to find and decipher.

“Investors have told us that the information they receive in financial statements about climate-related risks is insufficient and inconsistent with what companies are reporting elsewhere,” said Nick Anderson, an IASB member. The board’s latest guidance is intended to strengthen the link between what companies say they’re doing in separate sustainability reports and their financial statements, he said.

The guidelines ask companies to report on climate uncertainties that affect assets, liabilities, equity, income or expenses, in effect showing the impact on financial performance. IASB won’t mandate such disclosures or how to present them. 

Regulators from Europe to Australia are stepping up climate disclosure requirements for companies and funds, as investors look for quantitative progress on decarbonization targets before allocating capital.

About 93% of European financial institutions now evaluate climate change-related risks in their portfolios, CDP data found. A recent Invesco survey of sovereign wealth funds and central banks with roughly $22 trillion of combined assets found that a majority are already scrutinizing physical climate risks to their investments and looking at asset-level data. 

While sustainability reports are getting lengthier because of more reporting requirements, “the question as an investor is how much of that disclosure is material to your ability to make a decision on the value generation of a company,” David Smith, a portfolio manager at Abrdn Plc, said during a panel discussion at the Bloomberg Sustainable Business Summit in Singapore. 

For example, disclosures don’t typically add insight to a board’s thinking on capital allocation, he said. There’s a case to be made to “integrate that a little bit better into the way that the company is communicating with investors,” he said.

The IASB consultation, which is seeking feedback on how best to present climate-risk data in the context of financial reporting, will be open until Nov. 28.