The International Accounting Standards Board (IASB) has launched a new initiative to determine how companies can improve their disclosure of climate-related financial risks.
- In response to investors’ feedback, the IASB has launched a new project to improve the quality of information contained within climate-related financial disclosures.
- Without clear and comparable data, investors may struggle to align their decisions with climate-related goals.
- Collaboration between different standards bodies will simplify the process of climate-related disclosure.
The IASB was established in April 2001, replacing the International Accounting Standards Committee as the independent group of experts responsible for developing and publishing the International Financial Reporting Standards (IFRS). Overseen by the IFRS Foundation, its work involves the preparation, drafting, approval and issuance of globally applicable accounting expectations.
Its latest project comes in response to a recent Agenda Consultation, which revealed that investors remain dissatisfied with the available information regarding climate-related financial risks. Their feedback indicated that climate-related issues are often perceived as distant long-term risks that are not appropriately considered in corporate financial statements, leaving them struggling to assess the effects such risks could have on the carrying amounts of assets and liabilities reported.
In an attempt to address these concerns, the IASB will explore how corporate financial statements can deliver more insightful information on climate-related risks. It will work closely with its sister group, the International Sustainability Standards Board (ISSB), to ensure that any proposals made as a result of the project are complementary to the requirements of forthcoming standards for the disclosure of corporate sustainability.
“The IASB introduced educational materials to help companies consider climate-related risks when preparing their financial statements. Feedback from our Agenda Consultation indicates a desire for us to go further. Therefore, we are initiating this project, informed by the ongoing work of our colleagues on the ISSB,” said Andreas Barckow, chair of the IASB.
Investors are frustrated by poor-quality disclosures
As global temperatures continue to rise, companies from around the world are being made increasingly vulnerable to a wide range of climate-related risks. From physical damage and disruption to the introduction of strict regulatory measures, the financial implications of climate change are becoming harder and harder to ignore.
With climate change now being recognised as a financially material risk, investors have started to demand clear and comparable data on the risk exposure of different opportunities. Their calls are growing stronger by the day, with estimates suggesting that the average institutional investor is now spending around $1.3 million per year on the collection, analysis and reporting of climate-related insights.
When companies fail to provide the necessary quality of data, investors may struggle to accurately account for their risk exposure and allocate capital accordingly. This has implications spanning beyond the financial wellbeing of individuals and institutions, as it means that vital opportunities for investing towards a sustainable future may be indistinguishable from those that will further accelerate the climate crisis.
Currently, however, climate-related disclosure is falling short of resolving these issues. Despite an increase in the number of companies that are now disclosing their climate-related financial risks, the quality of information they provide has barely improved.
Indeed, research from EY Assurance suggests that the quality of climate risk disclosure improved by just 2% between 2021 and 2022, with the vast majority of companies unable to deliver an accurate calculation of their exposure. These concerns were echoed by the Taskforce on Climate-related Financial Disclosure (TCFD) in October 2022 with the warning that the lack of “decision-useful” disclosure was hindering efforts to assess the climate risks of investment decisions.
Among the reasons for these failings is the difficulty in agreeing on an effective framework for the management and measurement of climate-related risks. With so many factors at play, from geographical location to the industrial sector, standardisation remains a significant challenge.
How is the IASB responding to investors’ concerns?
The IFRS Accounting Standards already establish the need for companies to reflect climate-related matters within their financial statements if they are likely to have material implications. Despite the available guidance, however, recent feedback from investors suggests that the information being provided is not living up to expectations.
In response to investors’ concerns, the IASB has launched what it describes as a ‘maintenance project’. Rather than attempt to create a new standard or introduce strict instructions that undermine its principles-based approach, the project’s outcomes will be limited to minor amendments, limited guidance or the publication of additional educational materials and illustrative examples.
Specific outcomes will be determined according to the findings of initial research and outreach exploring the nature and causes of stakeholder concerns. With a better understanding of what is driving investors’ dissatisfaction, the IASB will take an informed decision on future steps.
At the heart of the project is its engagement with the ISSB, which was established by the IFRS Foundation in 2021 with the task of developing a global baseline of sustainability disclosure standards that would help capital market participants to make more informed decisions. To date, the ISSB has created two initial standards that will come into force at the beginning of 2024.
These standards will serve as a stable set of ready-made decisions that can inform the IASB’s upcoming project, with experts from the ISSB providing further support. Depending on the IASB’s decisions as to the scope of its work, it may consider adopting a number of the ISSB’s methodologies, such as its framework for climate scenario analysis or its inclusion of opportunities in addition to risks.
Collaborative efforts are driving the standardisation of climate disclosure
The IASB’s collaboration with its sister board highlights the IFRS Foundation’s focus on connectivity. Given that the Standards of each board are closely interconnected, with each providing relevant information that can inform investment decisions, it is crucial that they align to provide a holistic company overview.
By ensuring that each set of standards uses the same language and is based on the same assumptions, the IFRS Foundation believes that investors will be able to identify the linkages between sustainability-related risks and opportunities and the information relayed in financial statements. The compatibility of its standards will also make it easier for companies to prepare both sets of documents while accurately reflecting the relationships between the two.
This connectivity has already been a focus of the ISSB, as it has developed its standards based on the recommendations of the TCFD and the Sustainability Accounting Standards Board. It has also cooperated with the European Commission and the European Financial Reporting Advisory Group in an effort to maximise the interoperability of standards between different jurisdictions.
With the projected scale of its influence, both through the recognition of international investors and the potential for incorporation into national legal requirements, the ISSB’s alignment with various standards bodies could drive significant progress towards the standardisation of climate-related disclosure.
This would have multiple benefits, as it would empower investors to align their decisions with climate-related goals and hold corporations to account for their activities. Companies may also benefit through the improved ease of complying with different expectations, as it could improve their understanding of climate-related risks and encourage their preparation for future scenarios. They would then be able to demonstrate their progress, strengthening their competitive advantage and potentially gaining access to lower costs of capital.