IFRS: Climate-related disclosures

Guest post by Paul Lee

November's newsletter from the global accounting regulator, the International Accounting Standards Board (IASB) is big news, and is a big step towards accounting that is consistent with the Paris Agreement.

The paper by Nick Anderson, IASB board member and former fund manager and head of research at Henderson, notes that materiality assessments may require greater disclosure of climate-related factors in financial accounting. The wording is careful, but the implications are clear:

“Given investor statements on the importance of climate-related risks to their decision making, the implication of the materiality definition and the Practice Statement is that companies may need to consider such risks in the context of their financial statements rather than solely as a matter of corporate-social-responsibility reporting.”

In other words the document says:

1. climate matters to investors;
2. what matters to investors is what makes things material enough to be reflected in financial reporting; and
3. it is not enough to just respond to this need in narrative reporting or ESG reporting, these material factors should be reflected in the financials themselves.

In contrast to other initiatives, this ought to lead to companies’ IFRS accounts including the implications of climate factors in the financial numbers themselves — and it is those numbers that drive investment decision-making and executive pay. If the numbers change, corporate thinking will change too.

This is not before time. It was just this week that UNEP produced its latest Emissions Gap report, including this chart, which shows how big the gap is between countries’ promises to reform our carbon economy and what is needed to achieve rises of 2 degrees above pre-industrial, let alone the 1.5 degrees that the Paris Agreement set as our collective ambition. There is much that must change:

This IASB statement is a big help towards that change. But because it is only published as a restatement of existing rules there’s a danger it may not get the attention it deserves. And because it emphasises the role of investors in determining materiality, it will fall to us as the investment community to continue loudly to make the case that these things matter, and matter enough to be integrated into the financials. 

We need to be noisy in our support for this paper and its implications.

Maybe then we will get the financial reporting that we — and the planet — deserve.

IFRS Standards and climate-related disclosures

Paul Lee is an independent consultant currently providing secretariat services for the Brydon Review into the quality and effectiveness of audit.