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Counting the cost of the climate crisis

EOS Insight
23 May 2023 |
As global temperatures climb, the associated impacts from the climate crisis will become increasingly difficult – and more costly – to manage. How are companies accounting for this risk in their balance sheets? Justin Bazalgette explains why it is important for investors to have confidence in the bottom line.
Counting the cost of the climate crisis

Investor groups and standard-setters have called on companies to follow best practice guidelines and fully reflect climate-related risks in their financial statements. That means companies should disclose how climate change and decarbonisation commitments are being captured in their accounting assumptions and judgements. Are their accounts aligned with a 1.5°C world, as set out in the Paris Agreement? Will the company be materially impacted by climate change risks?

The aim is to challenge the disconnect between a company making bold net-zero pledges and the business-as-usual reporting still found in some company accounts. Here, the assumptions made around climate may not be transparent and it will not be clear what climate scenario has been used, how it has been assessed in the accounts, and what impact it had on the assumptions made to finalise the accounts.

Why are some companies reluctant to disclose this information? The main argument used by companies is that the information is not materially impacting their accounts. But if they do not provide transparency on the assumptions made to arrive at this conclusion, investors are left with high levels of uncertainty. The challenge from investors and regulators is that the judgement should be made on what is material to stakeholders. This is particularly pertinent for the biggest carbon emitters, which have to take the most action to meet their net-zero pledges.

Investors need this information to assess the economic resilience of a business to climate change and the energy transition. Without it they have less chance of understanding whether management is properly preparing the company for this transition. This impacts the quality of their investment decision-making and increases the risk that capital will be misallocated, with poorer outcomes for underlying beneficiaries.

Read the full article in our Q1 2023 Public Engagement Report.

Counting the cost of the climate crisis

Counting the cost of the climate crisis

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