The world of climate signaling is giving the financial crisis a run for its money in acronyms.
Coming together in the effort of standardize how the world should define and monitor the sustainability of companies is a collection of stakeholders including the CDSB, the TCFD, the IIRC and the SASB (the last two of which are now known as VRF). Others such as GRI and CDP are also involved.
You don’t need to know what all these guys are up for, or what they’ve done so far. Everyone care to have a consistent relationship regarding environmental, social and governance (ESG) issues and working with the IFRS Foundation to establish an International Council on Sustainability Standards, or the ISSB. It will be the one that sets the sustainability standards alongside its accounting equivalent, the IASB.
That a project aimed at clarity manages to be quite confusing in its genesis is less than ideal. But having a set of robust standards for tracking corporate emissions, water use or other social or environmental factors is important, since the world of ESG data and sustainable investment is a bit messy.
A separate, but related, question is the extent to which consideration of climate change is already factored into today’s accounts, particularly financial statements. The bottom line: it should be, but for the most part it’s not.
The international accounting body has gone out of its way to clarify this point. Yes, the International Financial Reporting Standards, or IFRS, do not explicitly mention climate-related issues. But the regulators he said last November that climate issues should be reflected in the financial statements where this information can reasonably be expected to influence the decisions taken by the users of the accounts.
One area of focus is the expected future cash flows when testing an asset for devaluation, and the judgments and uncertainties surrounding that calculation. Others include the valuation and risk surrounding financial instruments, the value of inventories, or residual value or the useful life of the asset. The requirements for disclosing any other material information cover, well, almost everything else.
This does not happen. “There is no clear evidence that companies consider their strategic goals or climate risks in the preparation of their financial accounts,” Barbara Davidson tells Carbon Tracker. He led an analysis of the accounts focused on Climate Action 100+ companies, the largest issuers worldwide, with a report to come in August. Even groups that provide climate targets and talk about transition tend to have a financial report that reflects “business as usual,” she says (although British companies do better with the U.S. growing rearview).
This isn’t just an issue for fossil fuel companies like BP and Shell, which have both announced asset cancellations as the prospect of lower oil demand filters through to the numbers. The analysis for Unilever, which with a selection of others has already published, cites “some concerns” about accounting judgments and consistency with other reports, and “significant concerns” in other areas such as the visibility of climate hypotheses, and the consideration of climate factors in the audit. And Unilever is, rightly given their recent plans around climate and transition, considered something of a leader in the ESG game.
A recurring complaint from investors is that statements made in so-called first-party reports, such as strategic review or management commentary, tend to disagree with the back half where the numbers are. (And a consistency check between the two is a job of the reviewers).
In other words, the story that has been revolved around the commitment to net zero in glossy print pages is not reflected in the numbers, footnotes and other winning disclosures.
The weather should, of course, already be a focus for the audit. But it’s remarkable, says Paul Lee, chief executive of investment adviser Redington and a contributor to the analysis, how few audit reports mention the use of experts in climate or carbon markets, even when the audit firms trumpet their credentials to verify sustainability information more generally.
Yes, the world needs better, more consistent standards in terms of sustainability. But this is no reason to luxuriate in the status quo while those are developing. The impact of climate change should already be evident in the company’s accounts.