Environmental and corporate governance campaigners have welcomed the release last week by the International Accounting Standards Board (IASB) of a briefing note addressing the topic of climate change.
The 12-page document, authored by board member Nick Anderson, addresses the relevance of International Financial Reporting Standards (IFRS) to climate-change issues.
Anderson wrote: “While climate-change risks and other emerging risks are not covered explicitly by IFRS Standards, the Standards do address issues that relate to them.”
Daniel Wiseman, a lawyer with campaigners ClientEarth, said the group welcomed the move.
“Because of investors’ clear demands, it is now beyond doubt that the financial impacts of climate change will be material for the vast majority of large companies,” he said.
“Directors, accountants and auditors who fail to realise this are now at serious risk of breaching the law,” he continued.
“This update from the IASB sends a clear signal that companies and their auditors must urgently review how climate change risks and impacts will affect disclosures in financial accounts.”
Meanwhile, Natasha Landell-Mills, head of stewardship at Sarasin and Partners, said the IASB “should be commended” for the move.
She said: “This is a vital step in ensuring financial flows are aligned with the Paris Agreement’s goals of keeping global warming well below 2°C, with an aim of 1.5°C.”
She added that directors must regard whether investors ”could reasonably expect that emerging risks, including climate-related risks, could affect the amounts and disclosures reported in the financial statements”.
In the UK, the Financial Reporting Council has warned both companies and auditors that it intends to:
- scrutinise how companies are complying with statutory disclosure requirements in the strategic report and also whether they are accounting in the financial statements for the implications of climate change; and
- consider whether auditors have placed sufficient emphasis in their examination of a company’s main risk disclosures such as climate change and its financial implications.
The IASB hopes its briefing document on environmental reporting will assist companies to make materiality judgements when they are drawing up their IFRS financial statements.
In summary, the document:
- provides an overview of materiality;
- presents a four-step framework for assessing materiality; and
- provides more detailed guidance on assessing materiality in circumstances where the exercise of judgement could be challenging.
The IASB also issued its IFRS Practice Statement 2: Making Materiality Judgements (Practice Statement) on 14 September this year.
In an introduction to the statement, the IASB noted, however, that it is both “non-mandatory” and that it does not “change or introduce any requirements in IFRS Standards”.
In addition, the board added that “companies are not required to comply with it to state compliance with IFRS Standards”.
Within the European Union, listed entities are required to prepare their financial statements in accordance with IFRS.
However, the EU’s endorsement mechanism does not apply to non-authoritative material such as the Basis for Conclusions that accompanies each individual IFRS, nor to non-mandatory guidance such as a so-called practice statement.
Separately, asset manager Sarasin has revealed it plans to contact individual company audit committee chairs and lead audit partners setting out how the firm expects firms to address climate-change reporting in their 2019 annual reports and accounts.
Earlier this year, Sarasin contacted each of the big four audit giants urging them to “test critical accounting judgments against credible economic scenarios that are consistent with the Paris Climate Agreement [of 2016]”.
The letter added that auditors must “challenge overly aggressive assumptions by management, and also to make sure that climate-change related factors are addressed appropriately in the risk and viability sections of the strategic report”.