Climate change risk needs more focus in company accounts, says Irish watchdog

Climate change risk to business needs to be given more consideration in companies’ full-year accounts, the Irish accounting watchdog has said. It has pressed companies and auditors to focus more on the area amid rising concern internationally that groups are not properly assessing the financial impact of climate change and net-zero emissions plans.

The Irish Auditing and Accounting Supervisory Authority (IAASA) highlighted climate change in its latest annual "observations" paper, issued last week, on significant topics that managers, directors and audit committees should focus on when working on end-of-year financial statements.

The paper also highlighted issues such as Covid-19 and Brexit, which also received prominence in last year’s missive.

"Users of financial reports are demanding more and more entity-specific climate impact information. Business models and investment decisions will likely change as a result of emissions targets," IAASA said.

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“Government measures such as levies on polluters and outright bans on activities may be an increasingly frequent feature of business. Certain industries may face partial or complete restrictions on activities due to Government actions or consumer demands. Climate change uncertainty may impact on the recognition, measurement and disclosure of assets and liabilities in issuers’ financial statements.”

Assets

The paper said that climate change impacts should be considered when assessing the useful lives of long-term property, plant and equipment assets and estimating their values. Companies should also carefully consider “regulatory requirements to remediate environmental damage, contracts that may become onerous or restructurings to redesign products or services to achieve climate-related targets”.

If a company overstates the value of assets or understates liabilities, it affects the ability of investors or lenders to make informed decisions about whether to deal with the group.

"On the back of guidance such as this, [companies] should quickly be coming to the realisation that climate considerations will pervade many areas of their businesses, and indeed their financial statements," said Glenn Gillard, a partner in Deloitte Ireland's financial services audit group.

“A wait-and-see approach is no longer an option... Businesses need to consider how climate considerations can be addressed now in their financial statements, not least because, in addition to supervisory and regulatory bodies, investors are demanding this information too.”

Dee Moran, professional accountancy leader at Chartered Accountants Ireland, noted that while listed companies have had a requirement to report on climate risks for some time, it is becoming an area of increasing importance for other companies.

Companies internationally are under growing pressure to outline credible plans for decarbonisation and to explain how they plan to achieve them, with the EU aiming to achieve carbon neutrality by 2050.

Effects

A review of 107 global companies by Carbon Tracker Initiative and the Climate Accounting Project, published earlier this month, showed 70 per cent of some of world’s biggest corporate emitters failed to disclose the effects of climate risk in 2020 financial statements.

In addition, 80 of the auditors showed no evidence of assessing climate risk when assessing the companies’ accounts.

Focus on climate issues is ramping up on the global political agenda ahead of the COP26 climate change conference in November, which aims to deal with a number of contentious issues relating to the 2015 Paris Agreement to keep temperature increases between 1.5 degrees and 2 degrees Celsius.

Meanwhile, a European Central Bank (ECB) stress test of the economic risks of climate change has found that Irish firms are among the least exposed in the euro zone to high physical risks, including flooding, sea level rises and wildfires.

However, they fare in the middle of the pack among euro zone companies in terms of so-called transition risks – the cost of policies aimed at reducing carbon dioxide emissions.

A chart in the report, published last week, points to about 3 per cent of Irish companies being exposed to high physical climate risks, among the lowest in the single currency area. About a third of Irish firms are exposed to high transition risks, according to the chart.