The International Accounting Standards Board (IASB) has received broadly supportive feedback in response to its proposal to develop illustrative examples to improve reporting of so-called climate-related and other uncertainties in the financial statements.
Staff member Karen Robson said: “Most respondents generally agree that providing examples would help improve the reporting of the effects of climate-related and other uncertainties in the financial statements.”
However, the board also acknowledged during the 19 February non-decision-making session it still has work to do to finalise its proposals – particularly in relation to the first two of the series of eight examples.
Board chair Andreas Barckow said: “I think, what I’m hearing is obviously [there is] less concern about finalising those examples in contrast to having more work to do on examples 1 and 2. And that isn’t really surprising, right?”
The IASB published its exposure draft setting out its proposals for dealing with climate-related and other uncertainties in July 2024. The board has received a total of 129 comment letters in response.
The board has long argued that its standards are adequate for reporting on climate change, even though they do not explicitly address it.
Examples to address uncertainty
The exposure draft proposed eight examples to demonstrate how an entity applies the requirements in International Financial Reporting Standards (IFRS) to communicate the effects of these uncertainties.
The issue of climate-related reporting – and its under-reporting – is a hot-button topic for investors.
A comment letter from Sarasin & Partners noted that a Carbon Tracker review of 140 major carbon-emitting companies’ 2022 financial statements has revealed a significant lack of transparency regarding climate-related financial impacts, with 60% of companies failing to provide meaningful information on climate risk in their financials or audits, while 81% omitted basic quantitative assumptions.
Additionally, 80% of auditors showed little to no evidence of considering climate factors, and no company presented a fully consistent climate narrative across its reporting.
Inconsistent reporting
Furthermore, despite over 100 companies having net zero targets, net zero aligned sensitivities were rarely provided, highlighting a disconnect between stated goals and financial reporting.
Sarasin added that while some oil and gas majors like Shell, BP, Total, and Eni have made impairment adjustments following investor engagement, these examples remain exceptions, hinting that climate consequences largely remain hidden in financial disclosures.
The concerns raised by both Sarasin and other investors highlight the project’s additional aim of improving how companies can better connect information about climate-related uncertainties with information provided in reports such as sustainability disclosures.
Connectivity
In the wake of the IASB’s third agenda consultation, connectivity emerged as a key theme, prompting discussion on bridging the gap between financial statements and sustainability disclosures to provide a more holistic and consistent view of a company’s performance and prospects.
The board also received support from the CFA Institute for its approach to the examples.
In an 8 November comment letter, they wrote: “We agree that examples would help in embedding reporting discipline and practice when strict IFRS compliance may be insufficient to convey material information on risks and uncertainties to investors.”
However, the comment letter also touched on whether it was wise to expand the scope of the examples to cover uncertainties beyond climate change.
Reputational risks
But despite the challenges ahead in finalising the project, the sustainability board’s vice-chair, Sue Lloyd, warned of the risk of failing to finalise the examples and urged the IASB to find a way to retain the examples.
She noted that “this is already a requirement in the standards”, and expressed concern that withdrawing the examples after public consultation could send a negative message, implying that the board does not stand behind its application.
Lloyd cautioned that “if things go out for comment and then they’re withdrawn, that could be a signal that […] this isn’t what we think would happen when the standards are applied”.
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