Climate Impact On Financial Statements 63597d4144428

Companies Score Poorly in Climate-Related Audits

Oct. 26, 2022
Study finds multinational corporations and their auditors fail to consider the impacts of climate-related issues on company financial statements.
BP, Shell, Eni and Equinor are four of only eight multinational companies who achieved any score at all in a new report that looks at how climate-related matters are treated in financial statements.
Carbon Tracker Initiative, a London-based climate-change think tank, published the October 6 report, “Still flying blind — the absence of climate risk in financial reporting.” It surveyed financial statements of 134 multinational companies that together are responsible for up to 80% of industrial greenhouse gas (GHG) emissions.
All 134 are focus companies for the investor-led Climate Action 100+, https://www.climateaction100.org, an initiative formed in 2017 with the aim of ensuring the world’s largest corporate GHG emitters take necessary action on climate change.
The report’s authors used Climate Action’s climate accounting and audit assessment (CAAA) methodology to carry out their survey. This in turn sought evidence that seven specific metrics had been assessed, both when companies made financial statements, and when their auditors published their own reports.
These metrics include an analysis of whether financial statements disclosed the quantitative climate-related assumptions and estimates used, and if they aligned with achieving net-zero GHG emissions by 2050.
Audit reports also were scrutinized to see if client companies’ assumptions and estimates met the GHG goal, and if they provide a sensitivity analysis on the potential implications.
Once these metrics had been applied, BP, Shell, Eni and Equinor — together with mining and commodity group Glencore, electric and gas utility National Grid, metals and mining group Rio Tinto Group, and power systems specialist Rolls-Royce Holdings — achieved “partial” scores because they provided all the information required by the CAAA methodology for at least one of the seven metrics used to assess them.
“Even after adjusting for changes in the methodology since last year and despite some improvements in disclosure, no CA100+ focus company provided all the information required by the relevant standards or requested by investors. This is despite most companies having operations across a range of high-emitting sectors including oil and gas, mining, transportation and industrials,” said Barbara Davidson, lead author of the report and Carbon Tracker’s head of accounting, audit and disclosure.
“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,” she added.
As part of their study, the researchers also reviewed any available audit committee or equivalent reports, finding that they, too, often do not mention climate risks. Even when they do, most audit committees fail to consider the impacts of climate-related issues on company financial statements. This, the researchers say, suggests that audit committees are not providing sufficient oversight on these matters.
The researchers also assessed the related external audit reports of the 134 companies. Here again they found that, overall, external auditors do not appear to comprehensively consider the impacts of material climate-related matters in their risk assessments and audit testing. In fact, 96% of audit reports reviewed did not indicate whether and how they considered, for example, the impact of emissions reduction targets, changes to regulations, or declining demand for company products when auditing these companies.
One auditor was singled out for providing comprehensive consideration of climate change and highlighting inconsistencies in its client’s reporting: Deloitte, for its audit report on BP’s 2021 financial statements. Five others partially met the requirements under the report’s methodology, including Ernst & Young’s audit of Shell.
The report makes three recommendations to improve the content and quality of financial reporting on climate matters.
First, auditors are urged to provide full transparency around whether and how they addressed material climate-related matters in their audits — as required by existing standards and as now expected under auditor commitments on climate.
Second, market regulators are told to look for reporting inconsistencies, identify audit failures, and take prompt action to enforce financial reporting and audit standards.
The final recommendation urges governments and policymakers to “prioritize climate accounting matters and ensure that information in the financial statements is consistent with other sustainability information that companies report.”
About the Author

Seán Ottewell | Editor-at-Large

Seán Crevan Ottewell is Chemical Processing's Editor-at-Large. Seán earned his bachelor's of science degree in biochemistry at the University of Warwick and his master's in radiation biochemistry at the University of London. He served as Science Officer with the UK Department of Environment’s Chernobyl Monitoring Unit’s Food Science Radiation Unit, London. His editorial background includes assistant editor, news editor and then editor of The Chemical Engineer, the Institution of Chemical Engineers’ twice monthly technical journal. Prior to joining Chemical Processing in 2012 he was editor of European Chemical Engineer, European Process Engineer, International Power Engineer, and European Laboratory Scientist, with Setform Limited, London.

He is based in East Mayo, Republic of Ireland, where he and his wife Suzi (a maths, biology and chemistry teacher) host guests from all over the world at their holiday cottage in East Mayo

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