Examining Annual Report for Climate Change Risk

This report examines the annual report of a company to assess its current environmental and climate change risk. It discusses the voluntary reporting framework and integrated reporting as tools to address the limitations of the annual report. It also highlights the difference between integrated reporting and GRI sustainability reporting. The report concludes by discussing the benefits and limitations of integrated reporting and its significance to different stakeholder groups.

Financial Accounting Theory
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Contents
Introduction.................................................................................................................................................3
1: Examining of Annual Report of Company, i.e., director’s report and the operating financial review for
assessing its current environmental and climate change risk......................................................................3
2: Voluntary Reporting Framework and its Usefulness in overcoming the limitations of the annual report
of the company...........................................................................................................................................5
3: Integrated Reporting and its use in addressing the limitations of the annual report of the company....6
4: Difference of Integrated Reporting from GRI Sustainability Reporting....................................................7
5: Benefits and Limitations (Or Costs and Benefits) of Integrated Reporting..............................................8
6: Significance of integrated report to different stakeholder groups..........................................................9
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11
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Introduction
The increasing environmental and climate risks faced associated with business activities
and operations are causing the need for them to provide proper disclosures regarding the
measures adopted by them for overcoming these challenges. The risk disclosures provided by the
companies in relation to their climate and environmental risks enables investors to make
informed decisions by promoting transparency in the business operations. The Australian
Securities and Investment Commissions (ASIC) have asked the companies to provide disclosures
in relation to managing their climate and environmental challenges. This is required to promote
integrity and fairness in the operational activities of business and maintaining the interests of the
end-users (Steyn, 2014). This report has been developed from the perspective of an intern of an
international accounting firm in Melbourne for providing opinions to the Chief Executive Officer
of an Australian listed company regarding the reporting measures to be adopted for addressing
the environmental or climate change risk.
The report in particular contains the section including the examination of the director’s
report and the operating financial review to meet the environmental and climate change risk. The
voluntary reporting framework selected for addressing the disclosures limitations of the annual
report of the company, explanation of integrated reporting and its difference from the GRI
(Global Reporting Initiative) sustainability reporting. This is followed by explaining the
advantages and disadvantages associated with integrated reporting and its significance to various
stakeholder groups of listed companies. The company selected for the overall analysis purpose is
BHP Billiton, an Anglo-Australia multinational mining company that is headquartered within
Australia. It is an ASX listed company that is involved in exploration, development, and
production and processing of minerals, gas and oil.
1: Examining of Annual Report of Company, i.e., director’s report and the
operating financial review for assessing its current environmental and
climate change risk
BHP Billiton is involved in mining operations and as such its operational activities is
associated with higher environmental risks. This is because mining operations is associated with
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discharge of many types of poisonous gases and harmful pollutants that can lead to negatively
impacting the climate. As such, BHP as analyzed from its director’s report and operating
financial review has placed importance on continually monitoring and analyzing the future
impacts of climate-related risks and opportunities. It has identified climate risks as one of the
principal risk that can have an impact on its sustainability growth and development. The mining
operations of the company are associated with emission of greenhouse gases that can have large
impact on changing the climate. This includes causing acute or chronic changes in the condition
of weather that have a long-term impact on its assets, productivity and performance. Also, the
climate changes caused by the business operations can lead to influencing the rainfall patterns,
shortage of water supply, rise in sea levels, increased intensity of storm and higher temperatures.
These all climatic changes can have a material impact on the financial performance of the
company in the long-term. The company for mitigating the environmental or climate-related
challenges is placing large emphasis on complying with the significant national policies
developed in this respect. This has been carried out for developing adequate strategies for
reducing the emission of greenhouse gases through fostering the development of an operational,
community and ecosystem resilience to the physical impacts of climate change (BHP Billiton:
Annual Report, 2018).
The corporate governance statement of the company has also emphasized on overcoming
the issues related to climate change as a major governance and strategic issue for the company.
The board members of the company are engaged in governing the climate related issues through
developing and implementing a climate change strategy. The strategy of the company is
developed in respect of gaining full support of its stakeholders. The company is regularly
reviewing its approach to climate change and fostering its investment in low emissions
technologies and meeting the changing stakeholder expectations. It is also actively involved in
aligning its climate related disclosures as per the Climate-related Financial Disclosures (TCFD)
for improving the transparency in its operational activities. Also, the company is actively
working towards the development a five-year greenhouse gas emissions reduction target through
investing in low emission technology. This mainly focus on reducing the operational emissions
in the coming five-year and continuing to grow its business(BHP Billiton: Annual Report,
2018). As per this target, the reduction in the greenhouse gas emission that has been achieved by
the company during the last-five years can be depicted below:
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(Source: https://www.bhp.com/investor-centre/-/media/documents/investors/annual-reports/
2018/bhpsustainabilityreport2018.pdf)
2: Voluntary Reporting Framework and its Usefulness in overcoming the
limitations of the annual report of the company
The Climate Disclosure Standards Board (CDSB) a non-profit organization that is
actively working for providing materialistic information to its investors by giving disclosures
relating to climate changes and environmental challenges faced by businesses. It is a voluntary
reporting framework that has been developed for aligning the information related to climate
issues into the mainstream corporate reports for equating the natural capital with financial
capital. It has provided a framework to the companies for reporting environmental information
for facilitating the investors to take accurate decisions by examining both financial and non-
financial information. This helps in achieving efficient allocation of resources by providing an
enhanced understanding of the corporate performance to the investors (Climate Disclosure
Standards Board, 2019).
The company as such can effectively address the limitations associated with its climate-
related financial disclosures in its annual report and corporate governance statement though
adopting the CDSB voluntary reporting framework. The annual report of the company has not
adequately disclosed the information to its different stakeholders such as investors, analysts,
regulators, customers and suppliers. The adoption of this voluntary framework will help in
addressing these significant limitations of its annual report by informing the investors regarding
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the environmental opportunities and risks faced and its effect on the future cash flow. The
information provided by the company in relation to compliance with environmental rules and
regulations will help in addressing the needs of regulators by informing them in regards to the
use of natural resources and associated sustainability risks. Thus, it can be said that the adoption
of this framework will enable the company in providing comprehensive information that consist
of reporting on its climate changes, environment and natural capital related performance in
addition with the financial results and performance (Cohen, 2012).
3: Integrated Reporting and its use in addressing the limitations of the
annual report of the company
The International Integrated Reporting Council (IIRC) was established in the year 2010
for the purpose of developing a globally accepted framework to facilitate communication of
businesses regarding the strategy, governance, performance and future growth prospects in an
integrated reporting for its end-users. The council ahs established and developed integrated
reporting as the basis for adopting fundamental changes in the manner in which organizations
disseminate information related to their financial and non-financial issues. This type of reporting
aims to incorporate everything in a single report right from risk management, financial issues
and other formation related to its social, economic and environmental performance. The
development of a single report enables the stakeholders of a company to take more informed
decisions by developing an insight into its overall performance through examining the integrated
report. The report in addition with the financial issues also highlights the clear depiction of the
problems faced by a company in context of its environmental and climate changes (Global
Reporting Initiative, 2015).
The limitations of the annual report that can be addressed by the integrated reporting are
providing detailed disclosure regarding the non-financial information to the stakeholders that is
not adequately provided by the annual report. It also fails to address the sustainability
perspective of the company performance that can be addressed by the use of developing the
integrated report. The corporate governance statement of the company also does not depict the
activities that are undertaken by the company in response to promoting ethical relationship with
its stakeholders such as customers, employees and suppliers. It also does not provide information
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relating to the measures adopted by it for maximizing the growth and welfare of the employees
and the communities in which it operates. The information such as impact of behavior of a
company towards its customers and its compliance with the rules and regulation related to
environment protection are also not covered in the governance statement that is provided by the
integrated reporting (Integrated Reporting, 2017).
4: Difference of Integrated Reporting from GRI Sustainability Reporting
The Global Reporting Initiative (GRI) and International Integrated Reporting Council
(IIRC) are working together as strategic partners for evolution of corporate reporting by
improving the effectiveness and efficiency of the companies reporting practices. They are
working together for improving the quality of non-financial information disclosed by businesses
and enhancing the role of sustainability reporting in the business reports. GRI framework is
developed for ensuring the inclusion of sustainability metrics within the integrated reports on the
basis of IIRC council for ensuring value creation to the stakeholders (Global Reporting Initiative,
2015).
However, there also exists significant difference between the two concepts as GRI
sustainability reporting aims at communicating the approach adopted by a company in managing
its environmental and social issues. It emphasizes mainly on the ways a company must adopt for
managing its environmental and social performance and disclosing the materialistic information
related to its environmental and social issues. The GRI reporting framework is developed for
providing guidance to businesses in relation to the measures that must be adopted by them for
comparing their performance against the key materiality risks related to social and environmental
issues. It has identified the business risks and opportunities that should be emphasized by a
company for promoting its sustainability performance and ensuring detailed disclosures
regarding its environmental and social issues within its reporting practices (Adams, Fries and
Simnett, 2011).
On the other hand, integrated reporting emphasizes on communicating the long-term
value creation of a company to its stakeholders by adopting an integrated approach. The concept
of integrated reporting has emphasizes on collaborating the financial performance and
sustainability performance in a single report rather than disclosing the separately with developing
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of different reports. The integer reporting besides only communicating the information related to
the performance of a company in different aspects such as financial, employee, environmental
and social also demonstrates their integration into its long-term strategic goals and objectives.
This form of reporting emphasizes on developing a single report that includes different reporting
strands such as corporate governance statement, operating and financial review, financial
statements and sustainability reporting (Cohen, 2012). Thus, sustainability reporting relates only
to a single aspect of an integrated report. The GRI sustainability reporting framework is
developed mainly for supporting the integrated reporting practices adopted by companies and
encouraging them to develop a shared vision that emphasizes on disclosing financial as well as
sustainability information to be used for its different stakeholders.
5: Benefits and Limitations (Or Costs and Benefits) of Integrated
Reporting
Advantages
The major benefit of adopting integrated reporting approach by businesses is that it leads
in positively influencing the corporate performance by identifying the areas requiring
improvement and thus developing effective strategies for overcoming them by the board and
management. It demands the companies to implement a more integrated approach for taking
decisions. It helps companies to create improved value for its shareholders by aligning its
business strategies with the internal as well as external resources (Churet and Eccles, 2014). The
holistic information provided by integrated reports enables a company to improve its corporate
reputation in the mind of the stakeholders and thus achieving the interest and faith of the
investors for continuing their investment within the company to ensure its sustainable growth
(Harrison, Bosse and Phillips, 2010). This can also be state don the basis of legitimacy theory
that has stated that an organization that is able to legitimize its operational activities can improve
its brand reputation in the mind of its stakeholder groups by ensuring that it has carried out its
operations in a sustainable manner. As per the theory, the use of integrated reporting framework
as voluntary social and environmental disclosures will help the organizations in fulfilling their
social contract and thus legitimizing their operations and improving the long-term performance
(Eccles and Saltzman, 2011).
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Disadvantages
The integrated reports development requires companies to incur high costs in comparison
to reporting their performance with the use of traditional format. This can be stated as the major
disadvantage that is associated with using the integrated reporting framework by business for
reporting their performance. Also, it is time-consuming as it requires presenting detailed and
complex information in relation to the overall business activities. In this context, it has also been
stated by positive accounting theory that business managers tend to adopt the accounting policies
that shift the reported profits from current to future period in condition of incurring higher
political costs. Thus, business managers do not largely adopt the use of integrated reporting as it
can result in enhancing their income and thus impacting their political supervision (Peters and
Romi, 2013).
6: Significance of integrated report to different stakeholder groups
Integrated reports provides detailed information for addressing the needs of various
groups of stakeholders such as investors, lenders, customers, employees, suppliers, governmental
and non-governmental organizations. The stakeholder groups such as retail or institutional
investors and lenders requires maintaining integrity in financial reporting for ensuring that the
financial information provided to them is faithful and accurate for taking relevant investment
decisions (Tantalo and Priem, 2014). The integrated reports also leads in enhancing the value
creation of business that prove to be beneficial for the investors and lenders by enhancing the
return generated for them. This can be adequately explained by the use of agency theory as
integrated reports helps in resolving the agency issues by enhancing transparency in the business
operations. This enables in ensuring to the shareholders that the business managers are carrying
out their responsibilities in an ethical manner and thereby minimizing the agency costs and
maximizing the business performance (Cheng, 2014).
On the other hand, the stakeholder groups such as environmental lobby groups,
customers, national or international community’s require information regarding the approaches
adopted by a company for addressing its social, economic and environmental risks. The
development of integrated report as per the legitimacy theory helps in legitimizing the business
operations towards these stakeholder groups and achieving their interest towards the business
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operations. Also, as per the stakeholder theory the development of integrated report also ensures
that a company is able to meet the various needs and interests of its different stakeholder groups
by providing them detailed information regarding its social, economic and environmental
challenges (Hoque, 2017).
Conclusion
The report has inferred that businesses need to place high importance on managing their
climate or environmental risks and challenges for ensuring their sustainable performance. BHP
Billiton is taking active approaches for mitigating its social and environmental risks and is
recommended to adopt the use of GRI and integrated reporting framework for improving the
quality of its reporting practices.
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References
Adams, S., J., Fries, and Simnett, R. 2011. The journey toward Integrated Reporting.
Accountants Digest 558, pp. 1-41.
BHP Billiton. 2018. Annual Report. [Online]. Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf [Accessed on: 5 May 2019].
Cheng, M. 2014. The international integrated reporting framework: Key issues and future
research opportunities. Journal of International Financial Management and Accounting, 25(1),
pp. 90-119.
Churet, C. and Eccles, R.G. 2014. Integrated reporting, quality of management and financial
performance. Journal of Applied Corporate Finance, 26(1), pp.56-64.
Climate Disclosure Standards Board. 2019. About CDSB. [Online]. Available at:
https://www.cdsb.net/ [Accessed on: 5 May 2019].
Cohen, J. 2012. Corporate reporting on nonfinancial leading indicators of economic performance
and sustainability. Accounting Horizons 26 (1), pp. 65-90.
Eccles, R.G. and Saltzman, D. 2011. Achieving sustainability through integrated reporting.
Stanford Social Innovation Review, 9(3), pp.56-61.
Global Reporting Initiative. 2015. Sustainability Reporting Guidelines. [Online]. Available at:
https://www.globalreporting.org/resourcelibrary/grig4-part1-reporting-principles-and-standard-
disclosures.pdf [Accessed on: 5 May 2019].
Harrison, J.S., Bosse, D.A. and Phillips, R.A. 2010. Managing for stakeholders, stakeholder
utility functions and competitive advantage. Strategic Management Journal, 31, pp.58-74.
Hoque, M. 2017. Why Company Should Adopt Integrated Reporting? International Journal of
Economics and Financial Issues, 7(1), pp.241-248.
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Integrated Reporting. 2017. Global Reporting Initiative.
https://integratedreporting.org/profile/global-reporting-initiative/ [Accessed on: 5 May 2019].
Peters, G.F. and Romi, A.M. 2013. Discretionary compliance with mandatory environmental
disclosures: Evidence from SEC filings. Journal of Accounting and Public Policy 32, pp.213-
236.
Steyn, M. 2014. Organisational benefits and implementation challenges of mandatory integrated
reporting: Perspectives of senior executives at South African listed companies. Sustainability
Accounting, Management and Policy Journal, 5(4), pp.476-503.
Tantalo, C. and Priem, R.L. 2014. Value creation through stakeholder synergy. Strategic
Management Journal.
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