Investors are publicly stating that climate-related risks are influencing their investment decisions, yet these risks are not being adequately addressed in annual reports. It’s time for entities to consider climate-related risk disclosures in the context of their financial reporting.
Businesses tend to fully address emerging technology risks such as data breach and cyber-security in their financial reports. However, far less consideration is given to climate-related risks, even when an industry is vulnerable to significant impact from climate change.
Entities in Australia are already being subject to law suits regarding lack of disclosure, so businesses need to be aware of their climate risk disclosure obligations.
Australian bank taken to court for inadequate disclosure of climate risk
In August 2017, advocacy group Environmental Justice Australia filed a legal claim against Commonwealth Bank of Australia (CBA). The case argued that climate-related risks create material financial risks to the bank, its business and customers. It claimed that the bank breached the Corporations Act 2001 by failing to give a true and fair view of its financial position and performance. Subsequently, when CBA included several pages of discussions in their annual report the case was withdrawn.
AASB Bulletin on climate-related and other emerging risks
With the increase in environmental awareness, the Australian Accounting Standards Board and Auditing & Assurance Standards Board issued a bulletin on climate-related and other emerging risks disclosures.
The bulletin, Assessing financial statement materiality using AASB Practice Statement 2, guides directors, preparers and auditors when preparing and auditing financial statements for their next half and full year ends. Even though following the guidance is not mandatory, it represents the International Accounting Standards Board’s best practice interpretation relating to materiality.
Potential financial damage from climate risks
The potential financial implications arising from climate-related and other emerging risks include:
- Asset impairment
- Changes in the useful lives of assets
- Changes in the fair valuation of assets due to climate-related and emerging risks
- Increased costs and/or reduced demand for products and services affecting impairment calculations and/or requiring recognition of provisions for onerous contracts
- Potential provisions and contingent liabilities arising from fines and penalties
- Changes in expected credit losses for loans and other financial assets
What does AASB Practice Statement 2 mean for your business?
Entities can no longer treat climate-related risks as merely a matter of corporate social responsibility and should consider them also in the context of their financial statements. This is essentially the impact of the materiality definition and AASB Practice Statement 2 Making Materiality Judgements.
Using the decision tree below, entities preparing financial statements in accordance with Australian Accounting Standards should consider including relevant disclosures after determining whether climate risks are likely to influence investor’s decisions.
Decision tree for assessing the need for climate risk disclosures
We encourage preparers of financial statements to become better informed when considering the impact of climate-related risks. If you require further clarification or additional guidance regarding climate risk disclosures, please contact your local Accru Felsers audit & assurance advisor.