Report: Big corporate emitters failing to disclose climate risks

Nearly 63% investors are unable to discern whether balance sheets accurately reflect climate impacts.

This is according to Carbon Tracker’s third annual report, assessing how companies and their auditors address climate change in financial statements and audits for the 2022 financial year.

These companies, subject to similar accounting and auditing requirements, are predominantly audited by one of the big four firms: Deloitte, EY, KPMG or PwC.

According to the report, only 37% of companies’ financial statements provide investors insights into their integration of climate-related financial risks, leaving investors in the remaining 63% unable to discern whether balance sheets accurately reflect climate impacts.

Moreover, 81% of the companies analysed fail to disclose the relevant quantitative assumptions and estimates used in financial reporting, while 70% of companies financial statements remain inconsistent with their climate narratives, raising concerns about potential errors, poor governance and greenwashing.

Among the companies offering minimal or negligible information are Berkshire Hathaway, ExxonMobil, Procter & Gamble and Walmart in the US; Toyota, Hitachi and Honda in Japan; Reliance Industries and Coal India in India; Bayer and Thyssenkrupp in Germany; Danone in France; and Saudi Aramco in Saudi Arabia.

Just last month, ExxonMobil sued two of its investors that proposed a non-binding resolution urging the oil and gas giant to reduce its greenhouse gas emissions (GHG) and include Scope 3 in its emissions measurements.

Report author Barbara Davidson said: “These companies have significant exposure to climate and transition risks and most have emissions reduction targets. Such matters can materially impact their businesses, balance sheets and cash flows.”

The report highlights that the big four audit firms, as members of the Net-Zero Financial Service Providers Alliance, have pledged to achieve net-zero emissions by 2050. Additionally, more than 100 of the 140 companies included in the report have established net-zero targets.

Nevertheless, auditors lag behind companies, with a significant 80% of audit reports providing little or no information about their assessment of climate impact.

Furthermore, the report highlights regional disparities, with European and UK-based companies generally providing more climate-related information compared to those in the US and Asia-Pacific regions.

Report recommendations

In response to these findings, the report offers several recommendations, including urging investment and stewardship teams to use the report’s findings to understand governance implications and prioritise engagement questions for upcoming annual general meetings.

Market regulators are urged to investigate potential deficiencies in financial reporting and audits, informed by the assessment results.

The report suggests policymakers and standard-setters to identify gaps in policies and application based on the report’s findings.

Auditors are called upon to ensure consideration of climate matters in audits and improve transparency.

Ultimately, the report emphasises the importance of companies ensuring appropriate governance processes are in place to address the impacts of risks and targets in their financial statements, improving communication with investors, and better informing investment decisions.

In related news, the Institutional Investors Group on Climate Change (IIGCC), which accounts for more than 400 financial members worth more than $65trn in assets under management, released its Net Zero Voting Guidance last month. This guidance will focus on shaping voting policies and practices across the financial sector in alignment with the net-zero transition.