Climate Risks and Disclosures in Financial Statements

This document discusses the importance of disclosing climate risks in financial statements and the impact of climate-related risks and opportunities on business operations. It explains the different types of climate risks, such as transition risks and physical risks, and the financial impacts on income statements, cash flow statements, and balance sheets. The document also explores the principles developed by TCFD for effective disclosures in financial statements. Practical assessments of disclosures made in the annual reports of two companies, Commonwealth Bank of Australia and Origin Energy, are provided as examples.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advance Financial Accounting
Name of the Student:
Name of the University:
Authors Note:

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Executive summary:
Business and other organizations are an integral part of the society and environment. Businesses
and organizations established for non-business purposes use resources available in the society
and environment to achieve their objectives. Often the activities and operations of business
organizations significantly influence the environment and climate. For example a manufacturing
company releasing toxic waste from manufacturing process to the environment will have
significant effects on the environment and increases the risk to the climate. Over the years the
importance for business organizations to be responsible towards their activities and operations
have increased by multiple folds and rightly so as the climate change has become a serious issue
in all across the globe now. A detailed discussion below on the climate risks of business
operations and the importance of making disclosure of climate risk related data of business in
financial statements of business organizations is clear from the document.

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Contents
Executive summary:........................................................................................................................1
Introduction:....................................................................................................................................3
Explanation of climate related risks:...............................................................................................3
Climate related risks are different from other emerging risks:........................................................5
Identification and explanation of climate related opportunities:.....................................................5
Identification and explanation of financial impacts on climate related risks and opportunities:....6
Disclosures that organizations should made in the financial statements in relation to following
items:................................................................................................................................................7
Principles developed by TCFD for effective disclosures in financial statements:..........................8
Practical assessment of disclosures made in annual reports of two companies:...........................10
Conclusion:....................................................................................................................................14
References:....................................................................................................................................15

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Introduction:
Times have changed rather dramatically as far as the climate risk and its importance are
concerned for business organizations and their operations. Once not given much hid to the issue
of climate risk, business organizations are now under compulsion to report climate related
changes, impact of their operations on climate, activities and operations under taken by business
organizations to reduce the harmful effects on the climate and environment as a whole. A
detailed discussion on the issue of climate risks along with discloser requirements in the financial
statements of business entities are enumerated in this document.
Explanation of climate related risks:
Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Board
in Australia (AUASB) have clearly outlined the disclosure requirements of climate related risks
and the importance to consider materiality of disclosing information about climate related risks
in financial statements. Taking into consideration the guidelines and recommendations of AASB
and AUASB an in-depth analysis of various climate risks and the importance of proper
disclosure of same in the financial statements of business entities operating in the country is
enumerated below.
Climate related risks are still predominantly discussed by business entities outside the length and
breadth of financial statements. Despite the huge potential threat posed by the changes in climate
and atmosphere that is to a large extent is due to the ever increasing pressure on the environment
and climate by the activities of business operations. AASB practice statement 2 however, has
outlined the importance of disclosure of climate related material risks due to business operations
in the financial statements. Taking into consideration the guidelines issued by the AASB and

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AUASB on climate related risks and disclosure requirements the following terms are explained
in brief (Eccles and Krzus, 2017).
Transition risks:
Impact on physical climate continuously confronts the investors and other stakeholders of
business organizations to make abrupt changes in the business activities and assets. Disruptions
are experienced in business activities due to the changes in physical climate. In addition to the
above risks the investors are faced with the prospect of transition risk in the form of low-carbon
and climate resilient future. Transition risks have different angle to it, i.e. entities make changes
in climate and energy policies, using technologies to lower the carbon consumption and
greenhouse gas emission to deal with the liabilities in climate change related issues. The
transition risks affect the business activities of an organization significantly. However, the extent
of impact on business operations are dependent on the ability of an organization to use
technology and make appropriate policy to deal with the transition risks.
Physical risks:
Physical risks in climate change is a much bigger and sensitive issue with ever increasing
acknowledgement by business entities that there is significant influence on the climate due to
irresponsible business operations and lack of policy directional activities by the business
organizations.
Physical risks in climate change is the risk of irresponsible business operations on the society
and environment as a whole resulting in severe weather such as flooding, draught, heat wave,
extreme winter, storms and others. Number of recent extreme weather conditions around the
globe have been identified as the direct consequence of climate changes resulting from

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irresponsible business operations of by entities and corporates across the globe (Giannarakis,
Zafeiriou and Sariannidis, 2017).
The disastrous effects of physical risk have been seen in the case heat wave in China, the
extreme winter in the US and other parts of the world at a time when there was no reason for
such extreme weathers to take place. It is important to understand the brutal consequences of
physical risks of climate change to take appropriate actions to reduce the pollution in the
environment due to the operations of business and non-business entities.
Climate related risks are different from other emerging risks:
Climate related risks are completely different from any other emerging risks in business
operations due to the very nature of climate risks. The very nature of climate risks threaten to
destroy the mankind an environment where as no such possibilities exist in any other types of
risks. The impact of climate risks is on the entire mankind, society and environment whereas
other emerging risks within a business organisation are mainly associated with the particular
business entity and its operations. The sheer magnitude of disastrous eventualities possessed by
adverse changes in climate conditions has deathly consequences for the mankind whereas other
emerging issues mainly impact the profitability and survival of an organisation at the most. Thus,
the difference between climate risks and other emerging risks are quite significant and
contrasting in nature (Haque and Deegan, 2010).
Identification and explanation of climate related opportunities:
Resource efficiency: Efficient use of resources is an effective way to reduce the harmful impact
of business operations on climate change. This will not only help to reduce the adverse impact of

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business operations on climate change but also help an organization to reduce its operational
costs and improve its efficiency in general.
Energy source: Energy source is a very important source of one of the most important and scarce
resources in business operations. Identifying and finding better energy sources to use in business
operations to reduce the impact on climate changes will help an organization to find new sources
of energy for its future requirements.
Product and services: The quality of product and services of business organizations will improve
significantly with efficient use of resources and use of clean energy from new sources. Thus, the
steps to be taken to reduce or eliminate the negative impact on climate from business operations
will eventually help a business organization to achieve its business objectives (Kuregyan, 2017).
Markets: Markets will be expanded significantly as the new and better quality of products with
improved business operations will attract new customers. Market expansion will be possible with
the use of standard policy on climate change and new technology.
Resilience: The improved technology will influence the business operations to make an
organization more resilient. Each and every single steps identified and explained here will
ultimately contribute to the operational efficiency of an organization. Thus, the organization
eventually will be benefitted immensely from the above processes and procedures.
Identification and explanation of financial impacts on climate related risks and
opportunities:
Statement of profit and loss / income statement:

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The profit and loss shown in income statement shall be affected with climate risks and
opportunities. The expenditures incurred to improve the quality of operations to reduce the
harmful impact on the climate will reduce the net profit earned from business operations as
reported in the income statement.
Cash flow statement:
The cash flow statement will indicate the cash payment made to acquire different technology and
devices to improve the quality of business operations to reduce the negative impact of business
operations on the climate (Linnenluecke, Birt and Griffiths, 2015).
Balance sheet:
The Balance sheet will show the new assets or technology acquired by an organization to deal
with the issue of climate changes. The value of such assets and technology shall be shown in the
Balance sheet.
Disclosures that organizations should made in the financial statements in relation to
following items:
Governance:
The steps taken by an organisation to improve its business operations to reduce the harmful
effects on the environment and society. The steps taken by the governing body of an organisation
to improve the quality of business operations. The cost of these initiatives taken by the
government and the expected financial benefits from these steps in the future shall be quantified
wherever possible (Shiri, 2012).
Strategy:

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The short term and long term strategy of the management to deal with the issue of climate
change. The expected cost of implementing these strategies along with expected future benefits
shall be disclosed in the financial statements in the form of notes.
Risk management:
The risk management steps taken by the management in the last year and the effects of such
steps on the operational efficiency of a business. Financial implications shall be outlined in the
financial statements.
Metrics and targets:
The future targets and the metrics to be used to achieve these targets shall be disclosed in the
financial statements of an organisation.
Principles developed by TCFD for effective disclosures in financial statements:
Task Force on Climate Related Financial Disclosures (TCFD) have recommended certain
principles to be used and implemented by business entities to improve the disclosure of items
affecting climate risks in financial statements.
The recommendations for effective disclosure in financial statements have been segregated into
four adoptable segments, these are governance, strategy, management of risk and metrics and
targets. Entities must make specific disclosures in the financial statements and annual financial
fillings to provide the stakeholders with useful information to take decisions affecting their
interests. The recommendations for financial and nonfinancial sector groups can be further
understood with following supplemental guidance (SIMNETT, 2007).

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According to the recommendations of TCFD all financial and nonfinancial sector groups shall
make disclosure of climate related issues in the mainstream annual financial reports. Each and
every material information shall be disclosed in the financial reports with necessary details.
Chief financial officer and audit committee of an organization shall review all disclosures in
relation to climate related matters in the financial reports. In case any particular disclosure has
not been made the reason for the omission of such disclosure shall be provided by the
management. The principles developed TCFD is mainly to ensure that proper impact of steps and
initiatives taken by an organization to deal with climate changes are fully disclosed in the
financial statements of business entities. The following diagram shall be helpful in understanding
the detailed process of financial reporting in respect of issues related climate risks.

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Thus, the financial reports shall disclose the revenues and expenditures properly in the income
statement along with necessary disclosures in cash flow statement and balance sheet to disclose
the actual impact of climate risks issues in financial statements of an organization (Topal, 2019).
Practical assessment of disclosures made in annual reports of two companies:
Commonwealth Bank of Australia and Origin Energy are two Australia companies chosen to
complete this part of the document. Commonwealth Bank of Australia is a banking company
operating mainly in Australia and New Zealand. Origin Energy on the other hand is a public
listed energy company in Australia. The two companies are vastly different from each other with
on operating in banking industry in Australia, i.e. Commonwealth Bank of Australia and the
other is operating in Energy Sector, i.e. Origin Energy Limited. Hence, the requirements to
comply with the climate and environment are also quite different for the two companies.
Accordingly, at the time of assessment of annual reports of both the companies necessary
adjustments shall be made to discuss the implications of disclosures made in the Financial
statements of these companies. Discussion regarding the disclosures of climate related matters in
the annual reports of both the companies is provided below.

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In page 48 of Annual report 2018 of Commonwealth Bank of Australia the financial disclosures
related to climate matters are made. Both risks and opportunities are presented to the bank by the
changes in climate. The ban has strictly followed the principles developed by the Task Force on
Climate Related Financial Disclosures (TCFD) in 2018.
Governance:
In order to properly govern the bank, management has properly studied the impact of changes in
climate on the bank and its operations. The governance strategy of bank includes increasing
resilience of the bank to risks posed by changes in climate. The ban has specifically mentioned
the importance of taking advantage of opportunities presented due to the changes in climate.
Transition to low carbon economy is the way to move forward and the bank has taken initiatives
in this regard (Bui and Fowler, 2017).
Strategy:
The strategy of the bank to deal with the risk of climate changes include supporting the
objectives of Paris climate agreement. Analysis of business lending transition risks, Australian
share fund transition risks, retail and physical risks is essential to the overall strategy of the bank
to deal with the issue of climate changes. Thus, the main strategy of the bank is to comply with
the Paris Climate Agreement to deal with extreme climate change that is taking place due to the
ever increasing business operations.
Management of risk:
In order to manage the risks associated with the changes in climate the bank has elevated the
climate as strategic risk to give strategic importance to this issue. The bank has used fresh

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assessment process to update business lending. The bank has also established energy value chain
analysis to make optimum use of energy to contribute to the conservation of energy.
Metrics and targets:
The bank has made specific targets to reduce emissions with scope 1 and scope 2 as two
alternative options. Assessment of emissions of the bank in its lending portfolio to take necessary
actions in this regard to ensure that the emission is within the target. In addition the ban has also
funded projects with low carbon emission to inspire business organizations to come up with low
carbon projects in the future. The extract from the annual report 2018 of the bank is attached
here containing the governance, strategy, risk management and metrics and governance of the
bank is concerned in respect of climate risk related matters (Commbank.com.au, 2019).

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Origin Energy is an energy company and for obvious reasons the requirements of an energy
company to comply with various standards in relation to climate risks matters while conducting
business operations is much stricter than a banking company.
Governance:
Quite surprisingly despite being an energy producer in the country, Origin Energy has not made
a separate report on the issue of climate changes as prepared by Commonwealth Bank of
Australia. Considering the huge significance of correct and proper practices in business

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operations of an energy producer in the country the attitude of the company towards climate
change report needs to be enhanced immediately.
The responsibility to govern the activities of the company to make sure that the harmful effects
of business operations are minimum to the climate and the environment is on the shoulders of the
management. The management has specifically decided to produce clean and clear energy to
improve the climate by reducing the pollutions in the atmosphere.
Strategy:
The strategy is to reduce the emissions as much as possible to improve the quality of air in the
surroundings where the operations are conducted. The company has also accepted the
recommendations of TCFD.
Management of risk:
The company has specifically decided to invest in new and advanced technologies to improve the
quality of energy production operations. The risks to the climate posed by the operations of the
bank will be greatly reduced with the use of advanced technology that allows production of
energy by minimum impact on the environment and the climate.
Metrics and targets:
The key targets of the company includes completely getting out of coal by the end of year 2032.
Reducing the emission by 50% on or before 2032. Increasing renewable capacity by 25% on or
before the year 2020. The following extract from annual report of the company shall further
highlight the targets and metrics of the company in this regard (Originenergy.com.au, 2019).

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Conclusion:
Discussion here has certainly showed the importance and significance of climate changes for
business organizations. It is important that business organizations take immediate steps to
improve the quality of business operations to reduce the harmful effects of different operations
on the climate and environment at large. The concept of sustainable development is also pretty
much in alignment with the quality of business operations. Businesses shall follow the guidelines
of TCFD to disclose matters related to climate change in the financial statements to attract the
attention of the stakeholders to the issue.

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References:
Bui, B. and Fowler, C. (2017). Strategic Responses to Changing Climate Change Policies: The
Role Played by Carbon Accounting. Australian Accounting Review, 2(3), p.25.
Commbank.com.au. (2019). [online] Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf [Accessed 26 May 2019].
Eccles, R. and Krzus, M. (2017). An Analysis of Oil & Gas Company Disclosures from the
Perspective of the Task Force on Climate-Related Financial Disclosures. SSRN Electronic
Journal, 2(4), pp.12-38.
Giannarakis, G., Zafeiriou, E. and Sariannidis, N. (2017). The Impact of Carbon Performance on
Climate Change Disclosure. Business Strategy and the Environment, 26(8), pp.1078-1094.
Haque, S. and Deegan, C. (2010). Corporate Climate Change-Related Governance Practices and
Related Disclosures: Evidence from Australia. Australian Accounting Review, 20(4), pp.317-333.
Kuregyan, A. (2017). THE ISSUES OF THE FACTORS IMPACT ON THE BUSINESS
CLIMATE. EUROPEAN RESEARCH, 33(37), pp.10-18.
Linnenluecke, M., Birt, J. and Griffiths, A. (2015). The role of accounting in supporting
adaptation to climate change. Accounting & Finance, 55(3), pp.607-625.
Originenergy.com.au. (2019). [online] Available at:
https://www.originenergy.com.au/content/dam/origin/about/investors-media/documents/
Origin_2018_Annual_Report.pdf [Accessed 26 May 2019].

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Shiri, S. (2012). Impact of Globalisation-Integration And Transformation of HR as A Strategic
Partner in Business Operations. Global Journal For Research Analysis, 3(7), pp.193-195.
SIMNETT, R. (2007). A Critique of the International Auditing and Assurance Standards
Board. Australian Accounting Review, 17(42), pp.28-36.
Topal, A. (2019). Climate changes yet business as usual: a parable of sustainable rural cities in
Chiapas, Mexico. Climate and Development, 1(2), pp.1-8.