Major investor groups representing more than US$103 trillion in assets have urged companies and auditors to fully reflect the effects of climate change in their results, in an open letter calling for reforms on accounting standards.
The coalition, including the UN-backed Principles for Responsible Investment (PRI) has urged for companies to comply with new guidance from the International Accounting Standards Board (IASB), which has outlined how to reflect climate-related risks in financial reports.
Auditors have been asked to only sign off on financial statements that are consistent with the IASB standards, with regulators also calling on to enforce and encourage the change.
The investors have insisted companies will need to consider material climate change effects in calculating profits and assets, and drawing up their accounts. The groups have also asked companies to make assumptions compatible with the Paris Agreement.
PRI chief executive Fiona Reynolds said the world cannot afford business as usual, but too many companies are pricing their assets with assumptions that don’t account for climate change risks.
“In order for us to invest properly for the long-term, a sustainable future needs to be factored in when calculating any company’s profits and assets,” Ms Reynolds said.
“This is what the IASB statement demands – and so do investors.”
BP recently declared a US$16.8 billion loss after it evaluated the values of its assets in line with climate and other considerations. The company also began a review of its capital expenditure.
The investors have noted that realistic climate assumptions will have major impacts on companies that previously understated the effect of climate change – particularly for those operating in oil and gas, utilities and transportation.
Analysis has predicted companies across those sectors will face potential write-offs of similar magnitude to BP.
The letter was also signed by the UN Environmental Program Finance Initiatives, the UN-convened Net-Zero Asset Owner Alliance Initiative, the Institutional Investors Group on Climate Change (IIGCC), the Australian and New Zealand-based Investor Group on Climate Change (IGCC), the Asia Investor Group on Climate Change and the Pensions and Lifetime Savings Association.
UN special envoy and COP26 finance adviser Mark Carney said markets will need information to operate effectively and “what gets measured gets managed”.
“Investors need to understand how extreme weather events and climate policies to achieve net zero affect business models and what could be the associated financial impact,” Mr Carney said.
“This requires an improvement in the quantity, quality and comparability of reporting, which, as the IASB has made clear, should be included in the core financial reports issued by companies.
“As it is increasingly clear that climate change will prompt reassessments of the values of virtually every financial asset, investors have a right to know which companies will be the leaders and the laggards in the climate transition.”
Emma Herd, chief executive of the Aussie and Kiwi-based IGCC said local investors could stand to benefit.
“Australian and New Zealand investors are already using climate disclosure in their core strategies from engagement to ESG integration, but to date the coverage and quality of disclosure have mostly fallen short of investor needs,” Ms Herd said.
“Companies need to utilise the best guidance and tools to produce the most robust climate disclosure that is consistent with the Paris Agreement goals or risk being discounted in portfolio decisions.”
Earlier this week, New Zealand signalled it could be the first country to require major companies to assess and report on their climate risks, with plans to roll out rules based on the Task Force on Climate-related Financial Disclosures (TCFD) framework.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].