A growing chorus of big investors, including Calpers, Schroders and DWS, are piling pressure on companies and auditors to include material climate risks in accounts, after a similar move by oil company BP this summer.
Investors are worried that financial statements do not reflect the longer-term outlook for many businesses, with few companies properly incorporating climate change risk despite many groups proclaiming support for the Paris Agreement to tackle global warming.
Anne Simpson, interim managing investment director for board governance and sustainability at Calpers, the US’s largest public sector pension plan, said it “should be mandatory” that auditors and companies report on climate risk.
She added that if climate change risks were included in accounts, some companies would be forced to write down valuations of assets and projects, akin to BP’s decision in June.
After investor pressure, BP said it would slash up to $17.5bn off the value of its oil and gas assets on the expectation of lower long-term oil prices linked to the coronavirus pandemic hastening the shift away from fossil fuels. European rivals, including Total and Royal Dutch Shell, have also cut oil price forecasts linked to the energy transition.
Ms Simpson said many companies in recent years had set targets to significantly reduce carbon emissions. “Once companies set a target, if all of this is in a separate report and it is not connected to the financial [accounts], you have a disconnect on capital allocation. One of the consequences of putting these targets in place is companies will have to rethink capital expenditure,” she said.
She said ad hoc reporting on climate risks was often “not overseen by auditors, not standardised, not verified or produced in a timely manner, [and that] is not good for investors”.
Peter Harrison, chief executive of Schroders, said there was a need for a “fundamental rethink of what companies are reporting” to investors, adding that it was vital that accountancy standards took into consideration material climate risks. “What gets measured gets managed,” he said.
The Institutional Investors Group on Climate Change is developing a set of expectations on accounting practices for directors and auditors that align with the Paris Agreement.
In recent years, a cohort of investors, including Sarasin & Partners and a group of UK pension funds, have pushed European oil companies and their auditors to include climate risks in their accounts. The campaign was expanded to other sectors this year.
Natasha Landell-Mills, head of stewardship at Sarasin, who has led investor efforts on this issue, said that under accounting standards such as IFRS — the International Financial Reporting Standards — if directors believe that “a piece of information would have a bearing on investor decision making” then it becomes material and should be included in the accounts.
Michael Lewis, head of environmental, social and governance thematic research at DWS, said that only 58 per cent of companies globally disclose their carbon emissions.
“This is why governments should mandate the incorporation of climate and ESG issues into audited, annual reports,” he said.
Last year, a paper from the Institute of Chartered Accountants in England and Wales and IFRS said that while climate change is not explicitly mentioned in the accountancy standards, they do address issues that relate to climate-change risks.
The UK’s Financial Reporting Council said this year that it would undertake “a major review” of the way UK businesses disclose climate risks in their reports and accounts.