Time for a climate change in corporate reporting
Summer heatwaves, forest fires, striking schoolchildren: everyone is talking about climate change. However, this issue still receives too little attention in corporate reporting, particularly in Switzerland. Things will have to change.
First published in Handelszeitung on 8 October 2019
Climate change is likely to drive profound changes in our lives, even if we manage to slow it down. In Switzerland, the average temperature is already almost two degrees higher than since the beginning of records over 150 years ago. Climate change does not only affect people’s life in Switzerland, it also generates risks and opportunities for Swiss companies at various levels.
Gradual climatic changes, such as slowly but steadily rising sea levels, must be taken into account in a company’s risk management strategy, just as much as acute events, such as flooding or major rock falls. All of these events can have a significant impact on business activities: supply chains can suddenly be disrupted, agricultural areas lose profitability, customer needs change fundamentally, or property and infrastructure all at once become unusable – we just need to think about ski lifts at lower altitudes, parched arable lands, Rhine waterway that is no longer navigable or plastic straws.
Climate change can also bring opportunities
Climate change can also offer companies new business opportunities. There are direct opportunities, such as the identification of new areas for cultivating crops or new ways to extend the summer tourism season, an increased need for water storage, the development of clothing adapted to the heat or the greater use of insulation in buildings. Indirect opportunities arise through the development and application of climate-neutral technologies or the need to satisfy changing consumer needs.
Risks and opportunities associated with the politically driven transition to a carbon-neutral economy should also be considered. Businesses can gain financial or operational advantage by responding rapidly to new policy incentives or by anticipating changing regulatory conditions.
Various bodies worldwide are looking at how climate-related risks and opportunities, as well as financial investments, should be integrated into corporate reporting. In 2015, at the request of the Financial Stability Board (FSB), which includes the authorities and central banks of major financial places (including Switzerland) and relevant international organisations, a task force for climate-related financial information was established. The task force has drawn up recommendations for the standardised disclosure of climate-related information, defining four core areas:
- Governance: Disclosure of the organisation’s governance around climate-related risks and opportunities.
- Strategy: Disclosure of the actual and potential impacts of climate-related risks and opportunities on the organisation's business, strategy, and financial planning.
- Risk management: Details of how a company identifies, assesses and manages climate-related risks.
- Metrics and targets: Disclosure of the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
This should help investors and other financial statements users to understand how companies assess climate-related risks and opportunities. In addition, in June 2019, the European Commission published new guidelines for reporting climate-related information, building on the objectives of the task force. The guidelines are intended for use by large listed companies, banks and insurance companies in the EU with more than 500 employees and must be followed starting from the 2019 financial year.
Switzerland is lagging behind
In our opinion, the financial statements published by Swiss companies fail to disclose enough climate-related financial information, with some exceptions in the insurance and banking sectors. There is clearly a need for greater clarity about the potential financial impact of climate change on individual businesses. It would be a welcome development if companies became aware of this necessity and published this information on their own. Achieving this will require the active involvement of Senior Management. In addition, all stakeholders must assess the relevance and usefulness of the information provided and, if necessary, require further and more insightful information to be presented.
As financial statements are audited, audit firms like Deloitte play a key role in enhancing credibility of information. Some climate-related information included in the audited annual accounts is already under examination. International accounting standards require, among other things, the recognition of contingent liabilities and impairments of assets arising from climate-related changes. For example, assets may be impacted if government regulations prevent or restrict economic activity. Changes in climate-driven consumer preferences can also lead to impairment with a potential impact on cost of capital, insurance and cash flow projections.
Urgent need for transparency
Deloitte has launched a joint initiative with the Institute of Chartered Accountants (ICAEW). This initiative aims to help companies, financial experts and users of financial statements to learn more about tackling climate change. A key feature of this online programme is the presentation of ideas for disclosing climate-related information, as well as translating climate change effects into tangible measurements in the financial statements.
In Switzerland, companies need to take the initiative and improve their corporate reporting to adequately address their financial and non-financial risks and opportunities created by climate change. Stakeholders are increasingly demanding more transparency in this area and pressure is mounting on the government and international accounting standard setters to mandate enhanced reporting requirements. A swift and coordinated action based on international standards would be very welcome.