Sarasin & Partners and Federated Hermes are among those calling on companies to be more honest about the impact climate change could have on their future dividend payments.
A new paper from the Institutional Investor Group on Climate Change (IIGCC) lays out a set of “clear expectations” for firms and auditors on how to integrate material climate factors into financial reports.
Companies should demonstrate they’ve considered such factors, it stated, including by providing scenario analysis and considering how potential shareholder dividends could be affected.
“Investors have an interest in both capital strength and dividend-paying capacity of companies,” noted the report.
“They therefore expect companies to disclose how climate-related assumptions and scenarios used in preparing the financial statements have been considered when assessing dividend capacity, and to explain whether alternative plausible pathways could materially affect this assessment.”
The paper said audit committees should ensure these assessments are scrutinised and challenged where necessary.
Auditors themselves should verify that climate risks have been included in documentation, and assess how compatible a company’s narrative climate disclosures are with its financial assumptions.
IIGCC has called for “confirmation that the auditor has considered climate-related factors in conducting its audit, with a description of which climate impacts are most material to their audit, and the steps taken to derive comfort that these factors have been adequately considered in the financial statements”.
The report is an update of a 2020 IIGCC document, created in partnership with Sarasin. Fellow asset managers and proxy advisors EOS at Federated Hermes, Trusteam Finance and Degroof Petercam Asset Management provided input.
“With regulators around the world adopting disclosure requirements linked to the International Sustainability Standards Board sustainability reporting standards, the lack of corresponding financial statement disclosures will become increasingly evident,” IIGCC argued.
“Where companies detail material transition and physical climate risks in their narrative reporting, investors will want to know how they have factored this into their financial reporting, as appropriate. The considerations made in preparing financial statements need to be consistent with other company reporting.”
The updated paper follows the publication of new guidance from the International Accounting Standards Board (IASB) last month, which contained tens of illustrative examples of how climate change should be considered “when reporting the effects of uncertainties in [companies’] financial statements”.
IASB said the document was not a mandatory update to its rules, but “companies would be expected to implement any change in their reporting on a timely basis”.
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