CRUF Briefing: Missing-out climate risk 


Sue Harding


Why aren’t companies and auditors communicating on climate in the financial statements and the audit report — and what can be done?

The accounting and audit standards are already clear: there is no special exception to be made for climate risk or the transition to a low-carbon economy – these are to be considered and transparency provided in reporting on how such matters were considered. In 2020, the international standard-setters for financial statement reporting (IASB) and for audit (IAASB) both produced guidance documents that confirmed that while their requirements do not mention the term ‘climate’, it is already addressed (just as any other risk). 

Yet four reporting seasons on from this, and as climate is increasingly being integrated into investor decisions, more and more investors are coming to believe that there are gaps in the accounts of many companies. The need for information on climate has become ever more pressing as year-on-year, materiality is only increasing. This is as a result of more information becoming available on climate-related risk both generally and at company level, more companies committing to emissions reduction targets such as achieving Net Zero by 2050, and investors are increasingly emphasising the need for such information. 

However, it does not appear to investors that the evidence of increasing materiality is being responded to in the reporting of the financial statements by companies, or by the auditors in their report. For example, evidence from Carbon Tracker’s most recent report Flying Blind: In a holding pattern, shows that even for some of the most climate-exposed companies globally, only 40% of 2022 year-end reports provided any meaningful disclosure on such matters. Additionally, 63% of the financial statements and 80% of the audit reports reviewed were assessed as having provided no substantive disclosure. 

This matters to investors and analysts as climate risk is increasingly accepted as representing financial risk to companies, investment risk to its shareholders, and credit risk to its lenders. It can also represent financial statement risk – the risk that the financial statements are misstated, in other words they give an overly flattering view of the company’s profitability and financial strength, and/or miss-out disclosures needed to give an understanding of the financial statements. Missing-out information in the accounts can also give rise to inconsistencies (or at minimum the appearance of inconsistencies) across the annual report – potentially indicating greenwashing, misstated sustainability or financial statement information, or even fraud. All of these are of concern to investors. 

The Briefing outlines two key ways in which improvements should come: 

  • As a global network of investors and analysts engaged in debates about corporate reporting, accounting, auditing, governance and regulatory issues, CRUF has long held as its guiding principle that ‘corporate reports should provide information that is clear, understandable, consistent and relevant’. These all resonate when contemplating the needs for transparency on climate risk in the financial statements and the audit report that are explored in the briefing. There are opportunities for companies and auditors to make improvements simply by regarding their reporting as communication, and by considering meaningful changes early in the planning process for year-end 2024 reports.

  • Considering the material information to be disclosed is a critical element of any principle-based system of reporting. While company external reporting is prepared by insiders – in this case company boards and executives responsible for the financial statements – it is made for the purpose of providing adequate information to outsiders i.e. investors, with various minimum requirements applying under the relevant standards. A similar situation arises for auditors that have intimate knowledge of the audit process and must communicate various aspects of this via their audit report. At the end of developing a set of what should be a compliant set of financial statement numbers, it could be tempting to assume that the draft notes to the financial statements and the draft audit report are also sufficient, or to add an assertion that climate is ‘not material’ or simply that it has been addressed. But the accounting and audit standards require more than this, as does good communication. 

  • In fact, being steeped in the process of preparing and auditing the financial statements may even handicap good communication of conclusions by the company and auditor, to those that have not been privy to the details. As a result, points that are actually critical to providing an understanding of the resulting financial statements and audit may seem to be obvious, and as a result be omitted from reporting. It may be helpful as part of the review process to have the draft reporting scrutinised while adopting the mindset of an outsider/investor. 
  • With the International Accounting Standards Board (IASB) concluding that its standards are generally sufficient to require accounting and disclosure that considers climate, it is increasingly clear that the lack of information provided in the financial statements by many climate-exposed companies is a matter of how the standards are – or rather are not – being applied. A similar situation exists for audit reports, where auditors might be expected to address climate in their risk assessment, Key Audit Matters, and their review of ‘other information’ in the annual report for consistency. 
  • Principle-based standards require judgements to be made, but those judgements may need to be challenged. Compliance must now be questioned – it does not seem reasonable to investors that when faced with very high climate-related exposure, so many say so little.
  • The initial questions for regulators may differ depending on jurisdiction, steps already taken, the mix of sectors in the economy and of course the regulator’s range of coverage: accounts, audit, governance, and other factors. But the starting point is simply: how are they ensuring that climate risk is given appropriate emphasis in the financial statements and the audit report, reflecting the existing requirements? 

The evidence is clear that climate is being missed-out. That could have consequences in terms of poorer decisions by investors and companies; more importantly, it could have far greater consequences for systemic financial risk, and for the planet we all share. 

This briefing was developed by participants in the CRUF ESG sub-group. It includes a summary of selected references for further information on this topic and an assessment of:

1. The problem – and why it is of concern to investors. 

2. The current situation – requirements in practise.

3. Ways forward: encouraging communication, and a call to regulators for 2024.

Disclaimer: The views expressed in this blog are those of the author(s) and do not necessarily represent the views of all CRUF participants. To read more about the CRUF’s views on this and other topics, please visit the “Our Views” section of the CRUF website. 

Sue Harding is an independent company reporting and governance analyst with over 35 years of experience ranging from equity research and credit rating analysis, developing and interpreting IFRS and US GAAP requirements, and advising companies on effective reporting to the capital markets. In addition to being a long-term participant in CRUF, she is a member of the Climate Accounting and Audit Project, a group of accounting and finance experts which is working with investors to ensure the requirements of the IASB and IAASB (in particular their guidance on climate risk) are followed. Sue originally qualified as a US Certified Public Accountant and is based in London. 

Charles Henderson, Chair CRUF ESG, CRUF UK participant. 

Paul Lee, CRUF UK participant, CRUF ESG participant.


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