Climate Risk Disclosure: Importance and Implications

This article discusses the importance and implications of climate risk disclosure in accounting and business. It highlights that climate risk is no longer a sustainability issue and must meet the definition of materiality to require disclosure. The article explores the guidance provided by the Australian Accounting Standards Board and the Auditing and Assurance Standards Board, emphasizing the need for companies to disclose assumptions and explain the true extent of any impact. It also discusses the role of investors in decision-making and the measurement of emerging risks.

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Business Accounting
Climate risk disclosure can no longer be
avoided
Vesna Poljak Markets Editor
Mar 12, 2019 — 11.30pm
Climate risk is no longer a sustainability issue and only has to meet the definition of
"materiality" to require disclosure in what is believed to be a leading initiative as far
as global audit and accounting standards go, originated by Australia's key bodies.
The Australian Accounting Standards Board (AASB) and the Auditing and
Assurance Standards Board (AUASB) are stepping up the profile of their jointly
authored guidance around emerging risks, issued in December, which is not
mandatory but would represent best practice in applying the mandatory definition
of materiality.
It is timed with the forthcoming annual financial statements being prepared for
companies with June 30 balance dates in mind.

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"What we are saying is you should disclose what assumptions you have used," says Kris Peach, chairman of
the AASB. Jessica Shapiro
The effect, if applied faithfully, is to limit the ability of entities to be evasive around
risks mostly – but not restricted to – climate. It also puts the onus on companies to
explain the true extent of any impact, as opposed to having investors, creditors or
other intrigued parties rely and act on their own speculation.
Measuring 'emerging risks'
"It's been very important that we help companies, and particularly directors and
CEOs, start to think about the impact of climate risk and other emerging risks in
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their financial statements. That's the real purpose for us – you need to have a very
broad conversation when you're starting to think about these risks," Kris Peach,
chairman of AASB, said. "[Investors are] actively telling entities that these types of
disclosures are impacting their decisions."
Even if there is no financial impact to quantify, simply the fact that investors might
have an expectation that climate matters will significantly impact a company is
enough to either compel disclosure, or articulate why there is no such actual
impact despite a market expectation.
A climate risk can be the potential for natural disaster, or the consequence of how
technology, markets, the law or policy responds to climate-related matters. The
guidance can be used to frame any relevant risk.
"This is highlighting that sometimes not being exposed to a risk, or not having an
impact on your financial statements, is actually material. What we are saying is you
should disclose what assumptions you have used," Ms Peach said.
Several key aspects of financial statements will be enriched including those
relating to fair value, impairments, provisions for restoration, and significant
estimates and judgments.
'Disclose assumptions'
Ms Peach disagrees that it would raise the risk of impairment by forcing entities to
recognise emerging risks. The guidance is crafted with the intention of promoting
disclosure of the relevant assumptions.
The leading bodies found that climate is often covered in annual reports, but not
where it matters. Only 8 per cent of ASX 100 companies made their disclosures
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within the financial statements. That is relevant because the content of ancillary
reports, such as sustainability reporting, is not audited.
"If it's in the financial statements, it's going to be audited; if it's outside, the auditor
has a look at it to see if it's consistent but it's not actually audited so it doesn't have
the same credibility," Ms Peach explained.
The Australian bodies are the first to link the mandatory definition of materiality,
which is based on international standards, and the interpretation of materiality as
outlined in practice statement 2.
Practice statement 2 instructs on how to arrive at materiality judgments, and states
that they need to be assessed on whether the information could reasonably be
expected to influence the decisions of primary users such as investors.
The guidance was emboldened by positions published by organisations such as the
Principles for Responsible Investors, and statements made by the passive
managers targeting environmental, social and governance issues. Super fund
behaviour and activists who pushed unsuccessfully for pro-climate resolutions at
Whitehaven Coal were also cited as sources.
License article
TOPICS Accounting
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Vesna Poljak is The Australian Financial Review's Markets Editor. She writes
about markets, investing and the economy from Sydney. Connect with Vesna on
Twitter. Email Vesna at [e-mail]
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