The continued absence of climate and transition risks in financial reporting

Climate and energy transition risks, and company strategies to address them, can significantly impact a company’s business, profitability, and balance sheet – today.

This is the third year of our Flying Blind report series. These reports analyse whether companies and their auditors are assessing the financial impacts of climate and energy transition matters and reflecting these impacts in financial statements today. This year’s report will be published in four parts. The first, this Overview, discusses the overall results of our assessments and common themes [1]. Management, investors, market regulators, policymakers and standard-setters can reference and use this report in the face of growing risks and company strategies.

The basis for this work has not changed; accounting and auditing standard-setters are clear that climate and energy transition risks should be considered today.  Additionally:

• The physical impacts of climate change are becoming more frequent and more severe.
• Innovation has driven down the cost of new technologies, threatening legacy industries with substitution. Climate-related policy action and regulations have accelerated this.
• Demand for many products is changing, and not all companies appear to be responding strategically.
• Companies are announcing climate targets and actions to reduce their greenhouse gas emissions footprints to attract and retain investors.
• COP 28 made clear the urgent need to accelerate climate action/move away from fossil fuels, and the insufficient activity to date.

Investors need to understand if companies could face significant losses in the face of such risks – including whether assets will generate the returns originally expected, if liabilities will come due sooner than anticipated, and if new ones will arise.

If balance sheets do not reflect the impacts of these and other matters today, management may not be monitoring the real costs of continued investment in or dependence on fossil fuels. Investors are also left in the dark in the face of severe climate and economic risks.

FB 3.0 builds on the two previous reports [2]. The Climate Accounting and Audit Assessment methodology, which is part of the Climate Action 100+ Net Zero Company Benchmark, is used for the assessments [3]. FB 3.0 posits reasons for the main findings including why progress appears to be slow. It suggests what market actors should be doing to improve transparency over the impacts of climate and transition matters, to reduce investor risk while achieving global climate-related goals.

[1]Subsequent Notes -targeted specifically at Auditors, Companies and Regulators, will published in the coming months. Collectively, these form Flying Blind 3 (FB 3.0).

[2]: Flying Blind: The glaring absence of climate risks in financial reporting (FB1.0) and Still Flying Blind: The absence of climate risk in financial reporting (FB2.0)

[3]: Investors use the Net Zero Company Benchmark to assess companies’ net zero transition; the Climate Accounting and Audit Assessment is part of this benchmark. See methodology here.