Climate Risk Assessments Missing from 98% of Company Financial Reports

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Everybody talks about the weather, but nobody does anything about it. If Mark Twain were commenting on today’s world, he might say, “Everybody talks about climate change, but 98% of the time, nobody intends to do anything about it.” He’d probably say it better.

In any event, that may be the nutshell version of a new report published Thursday by Carbon Tracker, an independent financial think tank that analyzes the effect of the energy transition on capital markets. For its second annual report on the absence of climate risk assessments in financial reporting, Carbon Tracker reviewed the audited financial statements of 134 “highly carbon-exposed companies” and found that 98% of those companies failed to offer enough information to show how the companies consider the financial impact of “material climate matters.”

It gets worse. Despite making commitments to achieving net-zero carbon emissions by 2050, not a single company used assumptions and estimates in their financial reporting that aligned with those commitments.

Carbon Tracker has developed its own climate accounting and auditing assessment methodology consisting of seven metrics, five of which are standard auditing requirements. The other two are specific to achieving net-zero emissions by 2050.

Using that scale, only eight of 134 companies received even partial positive scores. Of those eight companies, five were energy or utilities companies: BP, Eni, Equinor, National Grid and Shell. The other three were Glencore, Rio Tinto and Rolls-Royce.

No U.S.-based company was among the eight. That also gets worse: “Notably, none of the auditors of the 46 US companies provided evidence that they comprehensively considered the impacts of climate matters in such audits.” The U.S. companies included in the audit included such notables as Berkshire Hathaway, Boeing, Chevron, Exxon Mobil, General Electric and Walmart.

Some recent history of American companies’ efforts to mitigate the impact of climate change may be useful here. In 2019, the Business Roundtable declared that stakeholders, not just shareholders, were affected by companies’ actions. The next year, the Roundtable issued a second statement, declaring that the United States needed to adopt a “more comprehensive, coordinated and market-based approach to reduce [greenhouse gas (GHG)] emissions.” The Roundtable sought certainty: give us a market-based national policy on GHG emissions and then back off and let the market work its magic.

In June of this year, the U.S. Securities and Exchange Commission issued proposed rules that would require companies to report climate-related information in their federal filings. The Roundtable called some key provisions “unworkable,” imposing “requirements that could not be satisfied in the manner and timeframe proposed, and may not result in decision-useful information for investors.” The Roundtable also complained about the amount of information that the proposed rule would require and said the information “would not be comparable, reliable or meaningful, much less material, for investors.” The new rules also would subject companies to “significant liability for disclosures that inherently involve a high degree of uncertainty.”

Concluding its review, Carbon Tracker offered recommendations for companies, auditors, regulators, policymakers and investors that markets need in order to provide information “about the financial impacts of climate on carbon-exposed companies to facilitate an efficient and effective transition to a low carbon global economy, or to understand the impacts of not transitioning.”

Carbon Tracker’s review calls for more activist roles for company audit committees and independent auditing firms. The lack of climate-related information in a company’s financial statements would improve if a board’s audit committee insisted. Similarly, auditing firms need to insist on more comprehensive risk assessments.

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