The IASB recently announced that it has “decided to explore targeted actions to improve the reporting of climate-related and other uncertainties in the financial statements.”

It summarized:

• The possible actions include development of educational materials, illustrative examples and targeted amendments to IFRS Accounting Standards to improve application of existing requirements.
• Given the pace of change in this area, the IASB will also continue to monitor developments to determine whether to take further action.
• In progressing this work, IASB technical staff will continue to work closely with ISSB technical staff to facilitate connections in the boards’ work.

A staff paper set out some of the issues underlying this initiative:

• The findings in our work, including feedback from many stakeholders we spoke to, indicated that information about the effects of climate-related risks in the financial statements is a topical matter and that:
• users do not always receive sufficient qualitative and quantitative information about the effects of climate-related risks on the carrying amounts of assets and liabilities reported in the financial statements. For example:
  • some stakeholders reported concerns about insufficient disclosure on whether and how climate-related risks are factored into significant judgments and assumptions made in preparing financial statements;
  • some users were surprised that climate-related risks and commitments have not resulted in write-downs of assets or in the recognition of liabilities; and
  • some users mentioned the lack of disaggregated information on assumptions and methodologies used.
• information in the financial statements on the effects of climate-related risks appears to be disconnected from or inconsistent with information provided elsewhere. For example, our work indicates that although climate-related risks are discussed at length in other general purpose financial reports, there is sometimes little or no discussion of the effects of these risks in the financial statements.
• Many regulators we spoke to said that they have observed improvements in the quality of information disclosed over the last few years. However, achieving consistency between information in the financial statements and information provided elsewhere (for example, in sustainability-related financial disclosures) is still an enforcement priority.
• Conversely, some stakeholders expressed different views:
  • some users said that it is probably unnecessary to require entities to include information about climate-related risks in the financial statements. They noted that such information is already available in other general purpose financial reports. In addition, they expressed the view that the quality of this information will improve with the application of sustainability-related financial disclosure requirements, such as those issued by the ISSB.
  • a few national standard-setters said stakeholders in their jurisdictions had not raised specific concerns about information on climate-related risks in the financial statements.

The staff paper notes that the greater attention to climate-related disclosures outside the financial statements may, somewhat paradoxically, increase the awareness of their relative absence within the statements (even as that absence may become relatively less important in the overall scheme of things). It’s become more common recently to argue that IFRS already requires this information in various standards, whether or not it’s specified; a turning point in this regard was IFRS Standards and climate-related disclosures, a 2019 brief from IASB member Nick Anderson. This stated:

• Climate-related risks and other emerging risks are predominantly discussed outside the financial statements. However, as set out in (the Practice Statement) Making Materiality Judgements, qualitative external factors, such as the industry in which the company operates, and investor expectations may make some risks ‘material’ and may warrant disclosures in financial statements, regardless of their numerical impact. Given investor statements on the importance of climate-related risks to their decision-making, the implication of the materiality definition and the Practice Statement is that companies may need to consider such risks in the context of their financial statements rather than solely as a matter of corporate-social-responsibility reporting.

Anderson argued, among other things, that a company may need to disclose information about climate-related risks even if the company did not recognize any material impairment or other impact in the financial statements, or, in the extreme, even if a company was not exposed to these risks, but investors would reasonably expect that it was. Since then, for one reference point, ESMA provided an example of an issuer’s financial statement disclosures being judged insufficient to meet the requirements of IAS 1 on significant accounting policies, judgements and sources of estimation uncertainty, based on the issuer’s high exposure to climate change. However persuasive these arguments may be though, it’s unlikely that ESMA would have published such an item even five years ago (I mean, it didn’t!). And you might argue that given all the trivial disclosure requirements that IFRS does specify, if it intended to cover something this big, it could/should easily have said so (this always leads me to analogize with the role of a nation’s supreme court, and the relative weighting its members may choose to place on a statute’s “original intent.”) Anyway, that probably adds up to sufficient reason for the IASB to spend a little time (although not too much) trying to clarify this area…

The opinions expressed are solely those of the author.