A detailed analysis of mining, oil and gas companies by the Association of Chartered Certified Accountants (ACCA) and the University of Glasgow Adam Smith Business School reveals the need for more clarity and depth in climate change-related disclosures.
The scrutiny of 60 companies’ 2019 annual reports indicates that many companies do not sufficiently engage with disclosures about their climate change-related risks. With COP26 taking place in Glasgow in November, this analysis comes as a wake-up call, with the report authors saying there is a more urgent need for improving climate change-related disclosures.
Richard Martin, head of corporate reporting at ACCA, says: “Our study sheds light on the current climate change-related reporting practices of these companies, revealing that they provide, on average, overly generic disclosures and they refrain from discussing how climate change risks affect their operations. Only a small number of companies acknowledge the central role of climate change on their current and future activities.”
Diogenis Baboukardos at the University of Essex and the lead researcher in this project adds: “Considering that companies in the extractive industries contribute significantly to the global greenhouse gas (GHG) emissions, climate change can no longer be seen as a side effect of their operations, but as a central issue for their business model and a core business risk.”
Key findings in climate change risk-related disclosures in extractive industries reveal:
• Fewer than a quarter (14 companies) provide scenario analysis that considers/discusses climate change risks.
• 60 per cemt (36) identify addressing climate change risk as an integral part of their business model.
• Just 15 companies (25 per cemt of the sample) consider international initiatives for climate change (eg the Paris Agreement) in the discussion of their business model.
• Only four companies (seven per cent of the sample) provide performance indicators where financial and climate change-related information is integrated.
• Only 10 per cent (6) disclose that they incorporate climate change risks in their estimations of future cash flows, as part of their impairment testing calculations.
• None of the sample companies identify climate change risk as an important factor in determining their assets’ useful lives.
• In only 15 per cent of the sample companies’ audit reports (9) is climate change risk identified as a key audit matter.
Richard Martin concludes: “Our analysis raises questions over the consistency, relevance and decision-usefulness of these companies’ financial reporting. In the management report – the ‘front end’ of the annual report – though most make reference to the issue, not all by any means provide adequate information about how climate change risk may impact their reserves, the results of different climate change scenarios or how their business model is adjusting to these immense risks.”
Shelly-Ann Mohammed, head of ACCA Caribbean, adds: “This report is insightful for the industry across the Caribbean, where Trinidad & Tobago is the largest producer of oil and gas. Investors and the wider public need to see the big picture when it comes to climate change-related risks, and annual reports are a source of finding that information – so good climate-related reporting practices in both the front and back ends of the annual reports is essential.”
Notes: Climate change risk-related disclosures in extractive industries can be found online here. Contributors were Diogenis Baboukardos, University of Essex; Dionysia Dionysiou, University of Stirling; Richard Slack, Durham University; Ioannis Tsalavoutas, University of Glasgow and Fanis Tsoligkas, University of Bath. This report is accompanied by another called The capitalisation of intangibles debate: accounting for exploration and evaluation expenditure in extractive activities here.