Global regulator pushes for financial reports to include climate risk

The International Accounting Standards Board (IASB) has called for companies to include climate-related risks in their balance sheets and income statements, marking a significant departure from current practices. Bloomberg Africa reports that the IASB, which sets accounting standards for over 160 countries, announced a market consultation to ensure financial statements reflect the impact and uncertainties associated with climate change.

In 2023, the IASB introduced IFRS S1, which outlines general requirements for sustainability-related financial disclosures, and IFRS S2, focusing on climate-related disclosures. These standards stipulate that if a company’s future assumptions present a substantial risk of causing significant adjustments to asset and liability values in the coming year, IAS 1 requires disclosure of these assumptions along with the affected assets and liabilities. This includes disclosing assumptions related to climate issues if they create uncertainties that affect estimates like future cash flows for asset impairment or decommissioning costs. Companies need to present this information clearly to help investors understand management’s future projections. The level of detail in the disclosure may vary, but it should cover the nature of the assumptions, how carrying amounts are influenced by different methods and estimates, and the reasons for any sensitivity.

In a related development, a European Union report by the European System of Financial Supervision, published in April 2024, highlights that inadequate integration of climate-related risks into market prices can result in asset overvaluation or liability undervaluation. This impacts both financial institutions (through their financial assets) and non-financial corporations (particularly those with tangible assets valued at fair market prices, such as investment properties). Ideally, market prices should gradually incorporate climate-related factors as the transition to a low-carbon economy progresses and as uncertainties about climate change’s physical impacts decrease. However, sudden adjustments are also possible, such as due to a disorderly transition or abrupt climate impacts. Including climate-related risks in asset market prices requires more than accounting changes and should involve appropriate policy measures.