Markets failing to account for future impact of carbon budget constraints

Financial reporting used by extractive companies does not present the full picture needed by investors

Assets at risk of impairment need to be identified by relating expected revenues to carbon emissions levels

Current financial reporting standards, stock market listing requirements, industry reporting frameworks and non-financial reporting guidelines do not alert investors to the risks of reserves associated with climate change finds a new report ‘Carbon Avoidance? Accounting for the Emissions in Hidden Reserves’, from ACCA (the Association of Chartered Certified Accountants) and the Carbon Tracker Initiative.

Focussing on the fossil fuel and extractive industries, the report challenges the way in which fossil fuel reserves are accounted for and reported as they do not factor in the risk that some current reserves may not be combusted. It explores global reporting practices on fossil fuel reserves and the nature of any information gaps, as well as considering what steps are necessary to integrate emerging and future climate risks into disclosure.

The reporting survey indicated that the issue of unburnable carbon is not being addressed, and the current strategies laid out in annual reports talk of growth that is incompatible with emissions limits. The report recommends disclosure could be improved if companies were required to:

  • Convert reserves into potential carbon dioxide emissions
  • Produce a sensitivity analysis of reserves levels in different price/demand scenarios
  • Publish valuations of reserves using a range of disclosed price/demand scenarios
  • Discuss the implications of this data when explaining their capital expenditure strategy and risks to the business model

The report says there is a need for capital markets to become more ‘climate literate’, and counsels that investors need more complete, forward looking and integrated information on GHG emissions.

A key message in the report is that capital markets have huge importance for the global economy and if they are to function effectively, they need to integrate material short-term and long-term climate-change risks into their reporting. Carbon Avoidance? captures how the financial reporting standards and listings rules often reference industry standards for reporting coal, oil and gas reserves. These standard setters already work together, but need to introduce the climate risk agenda, rather than carbon being an isolated issue.

James Leaton at Carbon Tracker Initiative, comments: “Accounting standards require reasonable assumptions to be applied. Given that fossil fuel reserves already exceed the global carbon budget, it seems reasonable to start assuming not all of them will be burnt.”

Richard Martin, head of corporate reporting at ACCA, adds: “Standard setters, stock exchanges and other reporting frameworks need to review their disclosure requirements in response to the inevitable change in the world’s energy mix. Currently they do not give investors the economic viability of reserves in a carbon constricted economy.”

Role of the accountancy profession
Warren Allen, IFAC President, writes in the report’s foreword that the accountancy profession has a crucial role to play in helping achieve sound and useful business reporting that is comparable across borders.

Mr Allen says: “Higher-quality business reporting and disclosure are needed to better reflect the climate change uncertainties facing companies. This information is required by both companies and their investors in order to take appropriate action. To understand the potential environmental impact of carbon stocks, companies need to measure uncalculated stores of GHG emissions within their fossil fuel reserves and account for them accordingly.”

Richard Martin continues: “Through their reach and influence, accountants could provide the ultimate mechanism for creating the missing links in the corporate reporting chain. Working alongside other professionals they have an excellent opportunity to stimulate change.”

James Leaton adds: “By bringing the reserves reporting and financial reporting standards up to date, accountants can help prevent a carbon bubble appearing by ensuring the markets are not just using numbers based on unlimited carbon emissions.”


Notes to Editors
1. ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants, supporting 162,000 members and 428,000 students throughout their careers, and providing services through a network of over 89 offices and centres.
2. Carbon Tracker is a non-profit organisation working to align the capital markets with the climate change policy agenda. It is applying its thinking on carbon budgets and stranded assets across geographies and assets classes to inform investor thinking and the regulation of capital markets. It is funded by a number of US and UK charitable foundations.
3. The following recommendations are made to each of the four facets of the reporting framework, and the companies that apply the standards:

Financial Reporting Standard Setting Bodies

  • Issue guidance to interpret existing standards (eg IAS36 impairment of assets; valuation of reserves) so that preparers of reports and accounts consider the need to include information on the carbon viability of reserves.
  • Consider how the use of fair value accounting could reflect the potential impact on the value placed on reserves.

Stock Market Regulators and Listing Authorities

  • Integrate climate risk into processes considering systemic risks.
  • Require information in annual reports and listing prospectuses on the emissions potential of reserves, and the emissions trajectory assumptions of corporate strategy.
  • Require sensitivity analysis of how reduced demand and price could affect the fossil fuel reserves of a company.

Reserves Reporting Standard Setters

  • Integrate consideration of how emissions regulation and market dynamics could affect demand and price into the methodology for classifying reserves and producing a Competent Persons review.

Other Influential Reporting Guidelines

  • Develop technical guidance on reporting the greenhouse emissions potential of reserves to provide a forward-looking indicator, ensuring compatibility with financial reporting standards.
  • CDSB and SASB should ensure their approaches capture this material issue.
  • Ensure the IIRC brings together climate risks with how reserves are reported in integrated reporting.


  • Companies need to start disclosing the following information in their annual reports:
  • Reserves and resources converted into potential carbon dioxide emissions
  • Sensitivity analysis of reserves levels in different price/ demand scenarios
  • Valuations of reserves using a range of disclosed price/ demand scenarios
  • Discussion of the implications of this data in the explanation of capital expenditure strategy and risks to the business model.