Last month, the IIGCC, a coalition of institutional investors in US and Europe representing $9 trillion in assets, asked the audit committee chairs of 36 large carbon-intensive companies in energy, materials, and transportation to take steps to align their financial accounts with the Paris agreement. The full letter, its recipients, and signatories of the IIGCC’s website can be viewed here.
The letter comes on the heels of earlier developments this year in which energy giant BP reduced the value of its assets by $17.5 billion in light of the Paris agreement. While the campaign for Paris-aligned financial statements builds on previous initiatives such as the Taskforce on Climate-Related Financial Disclosures (TCFD), the IIGCC’s request goes a step further by asking corporations to incorporate ‘material and foreseeable’ impacts of climate risks on a company’s future cash flows. Specifically, the letter asks that companies to affirm that forward-looking statements reflect climate-related risks and the Paris agreement’s goals, how accounting judgements have been tested against achieving a net zero economy by 2050, implications for dividends, and confirmation of consistency between financial statements and disclosure narratives.
The implications of this campaign are not going to be limited to the letter’s recipients. Take the case of the Carbon Disclosure Project (CDP) – it started in 2003 with an investor campaign to get large global companies to publicly disclose their greenhouse gas emissions. In its first year, 228 large corporations agreed to partake in the transparency initiative. Presently, there are over 8500 companies that have disclosed through the CDP alone, while an untold number of organizations in the public and private sector are now disclosing their organization’s greenhouse gases through various accounting methods and disclosure channels.
By analogy, it won’t be surprising to see that other large corporations will soon be expected to align their financial statements with the Paris accord. The financial industry, which often follows the lead of institutional investors, will increasingly request companies to be more climate transparent about their financial statements and reward those that comply by providing better access to capital.
Moreover, participating corporations are going to start asking their suppliers to provide them with climate-relevant information about their operations in order to develop such forward-looking statements (e.g. by asking for the supplier’s exposure to regulations, floods, fires, and droughts). More substantially, corporations that align their forward-looking statements with the Paris agreement are more likely to shift to suppliers that can help improve their forward-looking statements (e.g. by manufacturing electric versus gas cars or purchasing low-carbon fuels).
Judging by the titles of the letter’s recipients (chairs of auditing committees), the work of financial alignment will fall largely on the shoulders of accounting and auditing professionals (traditionally such initiatives would be assigned to sustainability professionals). While aligning forward-looking statements with the realities of climate change can seem overwhelming, the good news is there already exists an infrastructure of well-established tools and frameworks that can help with this task.
At a very basic level, future revenues and costs will depend on the emissions embedded in the company’s operations, projects, and products. Accountants and auditors can incorporate greenhouse gas emissions data in their financial statements by examining how different carbon pricing scenarios could affect their costs and revenues. More broadly, the TCFD provides a useful framework1 for understanding the financial impact of climate risks and opportunities. For more sector-specific guidance, SASB provides a materiality map to determine how climate change can affect company finances.
Of course, understanding how climate change affects company finances is unique for each company. To learn more about how assess the financial impact of climate change for your company, you can visit our CPA training course on the topic of sustainable finance and climate risks.
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