Big CO2 emitters leave climate risks out of financial reports

Even those that have net-zero targets often fail to call climate risks financially material

The companies contributing most to global warming often acknowledge the climate risks they face – but virtually none meaningfully incorporate that into their financial statements.

Think tank Carbon Tracker concluded that after analyzing the statements and auditing notes from 134 companies included in Climate Action 100+. Companies in that list are considered the biggest carbon emitters, with the total 166 businesses accounting for an estimated 80% of the world’s corporate industrial greenhouse gas emissions.

“Companies did not present consistent climate narratives,” authors Barbara Davidson and Rob Schuwerk wrote. “Their financial statements failed to fully reflect climate considerations included in the companies’ other reporting.”

Although many of the companies publicly recognized the risks of climate change in some way and have set emissions targets, the failure to identify those risks as financially material is “evidence of greenwashing,” according to the paper.

Of the businesses included in the report, nearly half are in the energy sector, and more than a quarter are in industrials. Fifty one of the 134 companies are based in the US or Canada, while 47 are in Europe, 28 are in Asia and eight are in emerging markets.

Financial statements

Only 2% of companies provide enough information in their financial statements to acknowledge the material impacts of climate change, according to Carbon Tracker’s report. That is despite massive growth in the number of net zero pledges made by public companies, which often include that information in places other than their financial statements.

“This raised questions about the quality of the financial statements and governance over their preparation, including the accompanying note disclosures,” the report read. “In general, companies failed to disclose the relevant quantitative climate-related assumptions and estimates used to prepare the financial statements, even when they indicated that climate risks may impact these assumptions.”

That also led to questions about the validity of many companies’ emissions targets, especially the interim ones, Davidson said in an interview. One company, BP, did address such inconsistencies between net zero goals and the product amounts included in its financial statement, she noted, which led to more scrutiny of that company in general.

Auditing the auditors

Third-party auditing firms did not address inconsistencies of climate risks identified by companies but not included in financial statements, Carbon Tracker found.

Only 4% of auditors “sufficiently addressed” how they considered climate risk.

“We observed differences in discussions of climate matters between audit reports of the same global firm networks,” the report read. “Notably, none of the auditors of the 46 US companies provided evidence that they considered the impacts of climate matters in such audits.”

Only three companies provided information in their statements that acknowledged net zero goals. But even among them, none did so with a goal of 1.5C or less by 2050 or earlier, even though many companies have made pledges to meet that deadline, according to the report.

However, one business, mining company Glencore, “indicated a nearly full write-down of thermal-coal-related assets when using net zero assumptions.”

One issue that raised a red flag is foreign companies filing incomplete information on US financial statements, Davidson said. Auditors that acknowledged the gaps in climate risks on foreign financial statements often left that information off of the same companies’ US filings, she said.

“We think that is concerning.”

What’s next

The report outlined several recommendations, urging companies to disclose material climate-risk information in their financial statements or indicate why they do not do so. The authors also said that auditors should be clear about how they address climate info, particularly as many are signatories to the Net Zero Financial Service Providers Alliance.

The report also asks regulators to look at whether and how this information is disclosed, looking for inconsistencies.

In the US that could be addressed very soon, and companies might have no options but to put climate risk data in their financial statements. That is among requirements in the Securities and Exchange Commission’s Enhancement and Standardization of Climate-Related Disclosures for Investors rule proposal made earlier this year.

And significantly, that rule would mandate that companies identify and report their greenhouse gas emissions, including those for Scope 3, or the emissions associated with their value chains.

However, the SEC rule will not fix everything, Davidson said, as there is already widespread noncompliance with existing US accounting rules on the topic.

“That still has to be addressed. There are existing requirements that we don’t think are being met,” she said. The SEC’s rule “might enable investors to ask more questions,” however.

Recent change

One of the major companies included in Carbon Tracker’s report, Shell, is on track to reduce its greenhouse gas emissions by 5% by 2030. That is a significant change from the 4% increase that was previously projected, according to a report by the Global Climate Insights research institute.

“The forecasted emissions reduction of 5% by 2030 is far from being Paris-aligned. The IPCC calls for immediate and deep emissions reductions to achieve the Paris Climate Agreement,” shareholder engagement activist Follow This said in a reaction to the report. “The net absolute emission reduction will be reached through CO2 removal plans with Nature Based Solution … and not by a transition from fossil fuels to renewables. Shell’s gross absolute emissions without carbon offsets will still increase because of increased fossil fuel sales.”