Analysis of companies in countries representing 90% of global capitalisation reveals stark jurisdictional differences in the way companies and auditors evidence consideration of climate-related risk in financial statements – leaving investors exposed.

LONDON, 3 March – Carbon Tracker’s latest research highlights significant jurisdictional disparities in the extent to which companies and auditors inform investors about whether they are reflecting the impacts of climate-related financial risk and the energy transition in their reporting.

Covering 97 companies across five key markets—Australia, the European Union (EU), Japan, the United Kingdom (UK), and the United States (US)—the report underscores the crucial role of regulators in driving high-quality financial statements – and audit reports – that investors, regulators and policymakers can rely on for decision making. The report, Flying Blind: Accounting and Audit Regulation – Regulatory activity and its role in exiting the holding pattern finds:

  • Evidence of, and transparency around, consideration of climate-related matters in financial statements and audit reports vary significantly across jurisdictions. This is despite the similarities in existing reporting requirements.
  • The EU and UK lead in transparency and disclosure quality, while Japan and the US lag. Australia sits in between. The relative positioning of these jurisdictions (refer Fig 2, p6) reflects the extent of regulatory activity and reinforces the link between reviews or enforcement and better practice.
  • Disclosure in audit reports across jurisdictions often lag those in financial statements, even in the EU which is a leader in company reporting and regulatory activity.
  • Regulators play a key role in monitoring and enforcing existing financial reporting and auditing standards that require companies and their auditors to assess the financial impacts of climate risk and the energy transition on financial statements. In some jurisdictions, their activities are falling short.

Sepi Roshan, Senior Analyst, with the Accounting, Audit and Disclosure team said:

“Our latest research reinforces the urgent need for regulators worldwide to step up, enforce existing reporting standards, and ensure that companies and auditors evidence their consideration of financial impacts of climate change and the energy transition. The global financial system must transition from “flying blind” to full transparency and accountability around reporting of financial risk.

The Flying Blind series has consistently highlighted the need for greater reporting transparency in financial statements and audit reports.  Without decisive regulatory action, investors, policymakers and indeed, regulators themselves, will remain in a ‘holding pattern’, in the face of significant undisclosed financial risks and impacts of climate change and the energy transition on companies. Regulatory activity focused on enforcing existing reporting requirements can help exit this lingering holding pattern and provide the transparency all efficient markets need.”

Examination of how regulatory activity may be influencing the quality and transparency of climate-related considerations by companies and their auditors for fiscal year 2022/23 (FY2022),[1] reveals stark contrasts in how regulators appear to prioritise reporting of climate-related risk in their activities.  The EU and UK lead in transparency and disclosure quality, while Japan and the US lag. Australia falls in between, with mixed results. Audit reports often fall short of financial statements in quality, even in the EU, raising concerns about auditors’ attention to potential misstatements and greenwashing. If nothing changes, investors and lenders should consider applying different risk premia reflecting the varying degrees of transparency and uncertainty.

Barbara Davidson, Head of the Accounting, Audit and Disclosure team said:

“Auditors and financial reporting are key pillars of the financial ecosystem and for market efficiency. Although we have seen a relative increase in relevant disclosures over time, investors still lack the requisite transparency to make essential decisions – particularly in the face of growing climate-related risks. It is therefore crucial that financial regulators ensure that audit reports and financial statements meet the highest standards.”

The report is the latest in Carbon Tracker’s Flying Blind series, which focuses on the extent to which companies disclose their consideration of climate-related risks within financial statements, and auditors in their audit reports. It highlights jurisdictional differences in regulatory activity and apparent enforcement of existing standards that require consideration of the material financial impacts of climate and transition risks. It provides insights into how regulators can safeguard transparency in financial reporting, promote market integrity and financial stability. Without transparency:

  • regulators may become limited in their abilities to pick up signals and warnings that can increase market instability and systemic risk. The market may experience a potential ‘climate Minsky moment’ which is a downward correction of asset prices/values resulting from re-evaluation of climate-related risks.
  • policymakers may miss information about material financial impacts of climate-related matters and ways to facilitate an orderly transition (i.e., by introducing and gradually tightening policies for reducing emissions and directing economic activity towards lower emissions activities). This last point feeds into the how the EU can remain a green finance leader.
  • investors are limited in their ability to use financial statements for decision making.

Richard Folland, Head of Policy and Government Affairs said:

“To protect and reinforce their international climate leadership credentials, UK and EU governments must maintain the ongoing political support, resourcing and autonomy for robust regulation and enforcement to allow for transparent and efficient markets.

Regulators do not operate in a vacuum and require political backing to resist any opposition to enforcing existing requirements that support investor decision making.”

Implications for Investors and Market Stability

With global investors increasingly exposed to financial risks related to climate change and the energy transition, inconsistent supervision, monitoring and enforcement of existing reporting standards can undermine investor confidence and market stability. If regulatory gaps persist, investors and lenders may be forced to apply different risk premia, including adjusting the cost of capital to reflect varying degrees of financial statement transparency and uncertainty.

Carbon Tracker urges regulators, auditors and policymakers to take the following steps:

  • Prioritise supervision/monitoring of climate-related risk in financial reporting and audit to ensure evidence of, and transparency around, consideration of such matters in financial statements and audit reports.
  • For lagging jurisdictions like Japan and the US, prioritisation and enforcement of existing financial reporting and auditing standards is particularly pertinent for enhancing reporting quality and transparency.
  • Greater collaboration among global bodies to create regulatory consistency.
  • Improve auditor accountability by ensuring audit reports evidence consideration of climate-related risks in audits as required today.
  • Without decisive regulatory action, investors, regulators, and policymakers will remain in a “holding pattern,” unable to make informed decisions and exposed to undisclosed or underestimated financial risks.

Read the full report: https://carbontracker.org/reports/flying-blind-accounting-and-audit-regulation/

About the Flying Blind reports

This is the third year of the Flying Blind report series. Over the three years, the basis for our work has not changed as climate-related matters should be considered today. Accounting and auditing standards that direct the preparation of financial statements and audit reports, respectively, are deemed sufficiently similar across the jurisdictions in which assessed companies are headquartered. Yet, we have noted persistent geographical variations in the quality of disclosures, most notably between Europe/UK and the US.

Unlike previous Flying Blind reports, this report does not provide an in-depth analysis of what has (or has not) been disclosed by companies and auditors.  It builds on our previous work and examines the activities of financial reporting and audit regulators who ensure compliance with existing reporting requirements through their monitoring, oversight and enforcement activities. They can be seen as arbiters of how existing reporting standards must be applied in today’s context. Regulation is a key part of maintaining information symmetry and the proper functioning of, and trust in, markets.

In 2024, we looked at the scores for these 97 companies, by jurisdiction, to determine progress from FY2022 reporting.  At that time, only 90 of these companies had been assessed for FY2023 reporting, and the overall results had not significantly changed.

 

——————

For more information and to arrange interviews please contact: 

Conor Quinn                conor.quinn@greenhouse.agency                              +44 7444 696 214

Joel Benjamin               jbenjamin@carbontracker.org                                  +44 7429637423

About Carbon Tracker

The Carbon Tracker Initiative is a not-for-profit financial think tank that seeks to promote a climate-secure global energy market by aligning capital markets with climate reality. Our research to date on the carbon bubble, unburnable carbon and stranded assets has begun a new debate on how to align the financial system with the energy transition to a low carbon future. www.carbontracker.org

[1] In 2024, we looked at the scores for these 97 companies, by jurisdiction, to determine progress from FY2022 reporting.  At that time, only 90 of these companies had been assessed for FY2023 reporting, and the overall results had not significantly changed.  These companies are a subset of the Climate Action 100+ focus company population, and as such are a key part of addressing climate change and the energy transition.