Companies Told How to Get Climate Reporting on Balance Sheets

Multinational companies are set to receive more guidance on including information about climate-related vulnerabilities on their balance sheets.

The International Accounting Standards Board wants to encourage companies to incorporate climate threats into the numbers in their financial statements as well as the commentary section of their filings. The standard-setter on Monday will finalize plans to publish several examples of how companies should already be doing this under existing rules.

The global board is reacting to investor feedback that problems flagged in the narrative management commentary section of companies’ annual reports are not also reflected in financial statements.

This gap can be addressed within existing accounting rules, IASB has decided. Companies are already required to report all material risks in their financial statements, including those related to climate change.

The approach of providing examples allows IASB to move quickly, rather than spending up to a decade writing new rules. Climate change is causing increasing problems, with 2024 the warmest year on record. UK reinsurance broker Gallagher Re said in a January report that economic losses from climate change-related events, largely flooding, came to $417 billion in 2024, 15% more than the 10-year average.

“Investors have clearly communicated that they factor climate-related risks into their decision-making process,” IASB Chair Andreas Barckow said last July when the board published its approach to improving climate reporting.

Information Gap

The accounting board’s vote on providing reporting examples comes as companies globally will soon be forced to report in greater detail on sustainability issues such as climate change.

The accounting board’s sister body—the International Sustainability Standards Board—issued climate reporting rules in June 2023 that took effect last year. More than 30 jurisdictions including China and the UK are working toward adoption and 14 countries have committed to fully using them.

However, these climate reports are separate from the financial accounts, which is where IASB is focused.

Sustainability reporting requires detailed disclosures of things like pollution caused by supplier companies and the governance mechanisms in place to avoid problems from pollution. This can mean estimating a firm’s future performance and some of the things reported, such as governance structures, don’t have a financial cost.

Financial accounts, in contrast, provide a snapshot of a firm’s situation at a certain date and of its performance over the previous year. This more backward-looking approach means that future climate risks can often be ignored in the financials because there was no damage to record over the previous year.

As a result, many companies seem to ignore climate risks in their financial reporting, even though they have flagged problems elsewhere in the annual report.

Reporting Models

IASB last July developed eight examples to show companies how they should report climate risks under the current accounting rules, centering on how to decide whether events or risks are important enough to report on, and how to disclose them if so.

Two of the examples revolve around materiality decisions, with one showing a situation where something is material and another showing a circumstance that doesn’t need to be reported. Another three show how to report any assumptions that have been made over reaching these decisions, for example over the extent of climate change and its impact on the company.

The remaining examples cover credit risk disclosure, decommissioning facilities like power plants, and restoration costs and detail disclosure.

The board will decide Monday whether to publish the examples as illustrations of how to use existing accounting rules, with a staff recommendation to scrap one of the eight covering an area outside of climate.

If the other seven examples are given the go ahead they should be published by September or October.

The planned examples will encourage companies to explain more clearly the link between their financial and separate sustainability statements, but they might have little impact on financial results themselves, Richard Murphy, emeritus accounting professor at Sheffield University, said by text earlier this week.

“The IASB continues to miss the point,” Murphy said.