Date posted: 17/11/2020

Accountants no longer can afford to ignore climate risk

Significant developments bring climate risk further into the domain of accountants

In brief

  • Global developments cement climate risk in the domain of accountants
  • Third TCFD status report shows more disclosure needed of financial impact of climate change
  • IAASB guidance on considerations of climate-related risks in an audit of financial statements

Recent global and local developments have further cemented climate risk into the domain of accountants.

The release in June 2017 of the Taskforce on Climate-related Disclosure (TCFD) recommendations represented the first step when they indicated the disclosures should be within an organisation's financial filings. The TCFD have just released their third status report which shows an increase in TCFD aligned disclosures but also highlights the need for further progress.

In particular, the report notes, the disclosure of the potential financial impact of climate change on an organisation's business model and strategies remains low.

Financial reporting developments

The AASB/AuASB guidance, released in December 2018, took the TCFD recommendations  a step further as it clarified how climate risk disclosures should be considered in the context of financial statements.

The key message was that investor statements have indicated the importance of climate-related risks to their decision making. The IASB's Nick Anderson published a statement in November 2019, inspired by the AASB's statement. This statement is currently receiving increased interest in the Northern hemisphere in the lead up to the December 2020 reporting season as investors call on entities to show key assumptions that have been made with regard to climate-related risks in the financial statements.

In a recent webinar Accounting for Climate with the IASB's Sue Lloyd for New York Climate week, Mark Carney, COP26 Finance Adviser and UN Special Envoy, describes the concept of dynamic materiality – where the scale of investor focus on these issues, and a broader stakeholder focus on them, changes over time.

'This is the really the foundation of all the other work that allows professionals across the broader ecosystem take climate into account, just in the way they take other risks into account, in making those crucial investment decisions."

The Climate Disclosure Standards Board is also helping to advance the integration of climate-related matters into financial reporting. They have set up a technical working sub-group to develop guidance for preparers on considering and incorporating climate-related matters into financial reporting.  

Audit developments

 In response to investors and other stakeholders highlighting the importance of climate change to their decision making and its potential to impact most, if not all entities, directly or indirectly, the International Auditing and Assurance Standards Board (IAASB) have issued a Staff Audit Practice Alert, The Consideration of Climate-Related Risks in an Audit of Financial Statement.

The Alert is to assist auditors to understand how the International Standards on Auditing (ISA) relate to auditors' considerations of climate-related risks in an audit of financial statements.

The IAASB notes, that "while the phrase 'climate change' does not feature in the ISAs, the auditor's responsibilities under the ISAs encapsulate the consideration of events or conditions relevant to the susceptibility to misstatement of amounts and disclosures in an entity's financial statements, which would include climate-change risk."

Investor developments

Closer to home, Australian and New Zealand investors are increasingly mainstreaming their climate change responses by applying dedicated strategies and targets to portfolio-wide and specific asset classes over and above responsible investment offerings according to a survey undertaken by the Investor Group on Climate Change (IGCC).

The IGCC 2020 Net Zero Investment Survey canvassed the views investors representing $1.5 trillion in assets under management about their current and future appetite for climate change-aligned investments. It is the fourth survey of its kind undertaken by the Investor Group on Climate Change (IGCC).

Despite the survey being carried out in August, over 70 per cent of respondents said the market and political disruption associated with the COVID-19 pandemic had failed to slow their organisation's pursuit of climate change investment.

In July 2020 The United Nations Sustainable Stock Exchanges (SSE) initiative launched a new workstream to support exchanges in providing guidance to issuers on climate disclosure. The goal is to assist stock exchanges in developing best practice reporting guidance for issuers to ensure globally consistent disclosures incorporating the recommendations from the FSB Task Force on Climate-Related Financial Disclosures (TCFD).

In a world first, the New Zealand Government have announced their intention to mandate climate-related financial disclosures for a number of significant entities in September. The External Reporting Board (XRB) will develop the disclosure requirements in alignment with the TCFD recommendations. Earlier this month, the UK have pledged to become the first G20 country to make TCFD recommendations mandatory for all businesses by 2025.

What does this mean?

Fundamentally this means that preparers and assurers of financial statements in Australia and New Zealand need to consider climate-related risks in the context of financial statement preparation and assurance. Climate risk principally comes in two forms: transitional risk and physical risk.

Accountants will need to become familiar with climate related risks and understand the impacts of climate change on an organisation's business model, operations and strategy.

IFRS statement

Guidance from the International Accounting Standards Board (IASB)

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IAASB statement

Staff Audit Practice Alert, The Consideration of Climate-Related Risks in an Audit of Financial Statement

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TCFD report

The latest TCFD status report describes the progress companies are making in implementing the TCFD recommendations.

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