Below is a summary of a panel discussion, which drew on the results from CTI’s Still Flying Blind report. The opinions set out reflect the different perspectives voiced in that discussion. The event was moderated by Barbara Davidson, Head of Accounting, Audit and Disclosure at Carbon Tracker. Our panellists were: Mardi McBrien, Director Strategic Affairs at The IFRS Foundation; Dr Ben Meng, Executive Vice President and Chairman of Asia Pacific at Franklin Templeton, Gilly Lord, Global Leader of Public Policy & Regulation at PwC and Alessandro d’Eri, Senior Policy Officer, the European Securities and Markets Authority (ESMA). The event also included opening and closing remarks from stewardship expert, Natasha Landell-Mills from Sarasin and Partners and Senior Investor Network Director, and Reverend Kirsten Snow Spalding from Ceres.
8th November 2022 – Sharm El Sheikh
As plenary sessions broke out across COP27 and the private sector prepared itself for finance day, a clear tone had already been set by UN Secretary-General António Guterres: collaborate or face climate catastrophe. With this urgent drive for systems-wide connectivity at its heart, we brought together the investor, auditor, standard setter and regulator to take a 360° look at the current state of global climate accounting. Using CTI’s latest report, Still Flying Blind, based upon data from Climate Action 100+’s Net Zero Benchmark, our panellists looked at why so few highly emitting companies consider the impacts of material climate-related matters in preparing their financial statements.
Below is a summary of the event with some resounding agreement from our panellists over the following points. Firstly, it is essential that corporate accounts “tell the truth” about a company’s carbon intensity. Secondly, today’s financial reporting does not adequately reflect the scale of the climate challenge or its material impacts on companies’ financial accounts. And finally, to help mitigate climate change, capital must be shifted rapidly away from carbon-intensive activities, with capital accounting driving capital allocation.
“Get the numbers right, and the solutions can follow.”
~ Summarised and quoted from Natasha Landell-Mills’ opening remarks.
The ‘Still Flying Blind’ Report: Context, Findings and Recommendations
Following on from their 2021 report, Flying Blind: The glaring absence of climate risks in financial reporting, the 2022 CTI report seeks to maintain pressure on companies and their auditors to provide credible climate accounting.
And for good reason. Out of 134 Climate Action 100+ focus companies studied, only 8 met some of CTI’s criteria for adequate climate accounting, and none of the companies met all. Although around 50% of the companies had net zero commitments, only 3 companies exhibited sensitivities (financial modelling that accounts for fluctuations and variables) to these commitments within their financial reports.
Clearly a great deal more transparency is needed. Currently, climate-related figures missing from financial reporting may, at best, display inconsistency, but at worst signal financial misstatements and problems in governance.
Here are the facts at hand: The transformation required to reach global climate goals will be consequential to all businesses. Institutional investors with over $100trill AUM (Assets Under Management) have said they need accurate, credible data to make informed investment decisions. To ignore climate risk within financial accounting, or to provide financial narratives without considering the net zero pathways committed to, tells an inconsistent story, preventing the investor from gauging the true value of a company.
~ Summarised from Barbara Davidson’s introduction to the report.
The Investor’s perspective
Inconsistency was a key concern from the investor perspective.
Although there are different types of investors, climate-related impacts and risks are crucial to all capital allocation and decision-making. Investors have a fiduciary duty to make responsible, risk-based decisions. They need to be well-equipped and informed to fulfil that duty.
“Information is their oxygen.”
The problem, from the investor’s perspective, is the lack of a clear climate standard. Although momentum is building for the likes of TCFD (Taskforce for Climate related Financial Disclosure), the sense is that they are far from having all the tools they need. For example, how do they collectively understand what the future price of commodities is? Of carbon? And how do they compare or evaluate asset life?
Investors are calling out for consistency and for information. Information asymmetry, whereby the company knows more than the investors do, leads to unnecessary cost, to risk and to distrust.
~ Summarised and quoted from Dr. Ben Meng
The Auditor’s perspective
Auditors can use their position to drive the consistency and transparency that investors are calling for.
The auditor’s chief concern is the financial report itself, rather than any other publicly available information. Although awareness and understanding of material climate risk is increasing rapidly in the auditing sector, for now, they argue the need for stronger frameworks to increasingly help them drive progress.
The frameworks currently provided by the standard setters such as IASB (International Accounting Standards Board) and ISSB (International Sustainability Standards Board) do help a great deal in supporting these efforts. These standards can, at times, be very prescriptive, and auditing teams must be regularly up-skilled on the specific methodologies prescribed.
Ideally, auditors need to get to the point where reporting and auditing is not just considered to be a bureaucratic hurdle in the net zero transition but an active enabler of progress.
~ Summarised from Gilly Lord
The Standards’ setter perspective
ISSB is now 1 year old. Its aim is to create a global baseline for standards with connectivity and consistency across the globe.
This connectivity, they maintain, is crucial in allowing corporates to tell one consistent story across the board, using the sister standards of ISSB and IASB in tandem. These initiatives work hard internally to avoid silos and have connectivity teams working together to make sure they are driving the connection between sustainability and financial disclosure.
The goal, they say, is not to “reinvent the wheel”. The ambition is to build an integrated reporting framework which will assist systems-wide connectivity.
The ISSB’s final disclosure standards will be published in Q1 2023.
~ Summarised and quoted from Mardi McBrien
The Regulator’s perspective
ESMA launched a set of supervisory priorities on climate-related matters in 2021. Prior to that, awareness was building, with mounting interest from the companies themselves to include climate risk in their financial reports. However, at that point, commitments were mostly aspirational in nature rather than tangible action plans.
With this in mind, ESMA added a focus on climate risk in financial reporting. Primarily, because they wanted to give investors the right information to effectively scrutinize a company’s practices.
Two specific priorities emerged from this. Firstly, enforcing consistency between the front end and back end of the financial report. Even when a standard does not explicitly ask for climate-related disclosures, if the information is material, it must be included. Secondly, the mapping of climate risk within financial statements so that investors know where to look.
ESMA’s new strategy will launch in 2023, building on the findings from these priorities. They also plan to work with the European Commission on an approach to greenwashing and what that might mean for financial reporting.
~ Summarised from Allesandro d’Eri
Interoperability (the ability for all parties to work together) is the key to fighting climate change. In order to work together though, we need the right data. This is not only crucial to combat climate change, but to help ensure a Just Transition, to enable responsible stewardship of our supply chains, and to take care of our people and our natural resources.
Financial information needs to be published in a consistent, understandable, and credible way for investors to make informed decisions. Auditors must drive transparency. Regulators need to push for stronger enforceability, incorporating more of these issues in their oversights. Government and policymakers must educate, guide and force companies to change.
But most of all, companies must take immediate responsibility for their own climate-related accounts. We cannot afford for the heaviest emitters to wait for new standards or rules. Climate change will not wait, and neither can we.
~ Summarised from Reverend Kirsten Snow Spalding’s closing remarks.