Financial Reporting 2020 – An ‘Exceptional’ Year | Financial Reporting Brief November 2020


Climate Change – Reporting Must Meet Challenges (1)

Financial Reporting Brief: September 2021

Planet Earth is dangerously close to runaway global warming – and humans are unequivocally to blame. Major climate disruption is inevitable and irreversible in many instances. These are some of the conclusions drawn from the report of the United Nations Intergovernmental Panel on Climate Change, which was recently published.

Every day we are starkly reminded of this – be it wildfires in Mediterranean regions or the West coast of America, floods in Germany and adjoining countries and a multitude of other calamitous weather events. Ireland is not escaping, with high winds and torrential downpours frequently experienced – and perhaps even more alarming are reports from coastal regions of slow but inexorable erosion.

Each of us share the responsibility of taking measures to prevent or minimise further damage being done to our planet and ecosystems and to maintain a habitable environment for future generations. The planet will continue to exist in our universe, but will life be as we know it?

The United Nations Paris Agreement in 2015 was momentous in committing signatories to limiting global warming to 2°C above pre-industrialised levels, and preferably 1.5°C. The IPCC’s report makes plain that our goal should be to keep temperature rises as small as possible. Relative to a 2°C increase, limiting temperature rises to 1.5°C would reduce the risks of food and water shortages, improve prospects for endangered species and protect human health from air pollution, malnutrition and extreme heat. We must aim for that goal.

One of the headline figures in the IPCC report is that average global temperatures in 2011 to 2020 were 1.1°C higher compared with 1850 to 1900. Though this may seem like a small increase on any individual day, the increments matter in the long term. With every additional fraction of a degree increase in global warming, changes in extreme events such as heatwaves, floods and droughts become larger.

The Net Zero 2050 initiative of the European Climate Foundation shows that for long-term strategic planning, many of the decisions and actions needed to get us on track must be taken imminently. The Irish government is taking action on foot of this.

Corporate reporting must play its part in providing reliable and transparent information to investment and commercial partners to make appropriate, informed decisions that will be ‘drivers’ of the green economy. While sustainability reporting is at the top of the agenda for development of standards, those in charge of governance must take responsibility for promoting high standards of corporate reporting with immediate effect.

In this first part of a two-part article, Financial Reporting Brief considers the Irish legislative base and improvements that can be made to financial reporting now in advance of major developments in sustainability reporting. In October, the Financial Reporting Brief shall consider some of those key developments taking place.


Legislative Base

The President has signed the Climate Action and Low Carbon Development (Amendment) Act 2021 into law and it awaits commencement by Ministerial Order. Once commenced, the proper implementation of the Act will strengthen the framework for governance of climate action by the State in order to realise our national, EU and international climate goals and obligations. The National Climate Objective is defined as:

‘The State shall, so as to reduce the extent of further global warming, pursue and achieve, by no later than the end of the year 2050, the transition to a climate resilient, diversity rich, environmentally sustainable and climate neutral economy.’

The Act establishes a clear relationship, and requires consistency, between the National Climate Objective and the policy instruments, which are:

  • A series of successive carbon reduction budgets;
  • Annual revisions to the Climate Action Plan;
  • National Long-Term Climate Action Strategy to be renewed every five years; and
  • National Adaptation Framework to be renewed every five years.

The legislation signals clearly that continued climate action is a fixture in the Irish policy landscape and that we are all required to play our part.


Importance of Reporting

The role of corporate reporting in raising awareness and keeping the marketplace informed should not be understated. Substantial developments are in the pipeline, with particular regard to sustainability reporting. Many reports and other publications released in the past year or more clearly indicate that efforts currently being made by the majority of corporates fall well short of the quality and transparency which is demanded by investors and others.

While for some companies the challenge may be further out on the horizon, climate change must be integrated into decision making now if it is to be tackled in an orderly way and enable robust and meaningful corporate reporting.

An example of the many reports published is the report of the UK Financial Reporting Council (FRC) based on its thematic review of climate change reporting, with some of the main comments being as follows:

  • The evidence is limited of climate considerations influencing business models and company strategy;
  • Some companies have set strategic goals such as ‘net zero’, but it is unclear from their reporting how progress towards these goals will be achieved, monitored or assured;
  • An increasing number of companies provide narrative reporting on climate-related issues. While minimum legal requirements are often met, users are calling for additional disclosure to inform their decision making;
  • Consideration and disclosure of climate change matters in financial statements lags behind narrative reporting. The review identified areas of potential non-compliance with IFRS;
  • Investors support the TCFD Framework, but also expect to see enhanced disclosures regarding the financial implications of climate change.

The report emphasises that it will increase the focus on climate change considerations in its ongoing Corporate Reporting Review and Audit Quality Review monitoring work where relevant, together with its annual reviews monitoring compliance with the Corporate Governance Code and the Stewardship Code.

The FRC firmly holds the view that, to move forward, a reporting framework is needed and it may be expected that it will be an area of primary consideration in responding to its Discussion Paper, published by the FRC in October 2020 – ‘A Matter of Principles – Future of Corporate Reporting’.


Need for Improved Disclosure

The concerns expressed that financial statements disclosures and related considerations are lagging behind should not be ignored by corporate reporters.

The IASB publication ‘In Brief: IFRS Standards and Climate-related Disclosures’ highlights the following as areas where climate change may give rise to significant considerations and disclosures:

  • Asset impairment, including goodwill, and effects on impairment calculations because of increased costs or reduced demand;
  • Changes to recognition and useful lives of assets – with impact on depreciation or amortisation of assets;
  • Changes in the fair value of assets;
  • Changes in provisions and contingent liabilities arising from fines and penalties or in provisions for onerous contracts because of increased costs, including decommissioning, or reduced demand;
  • Changes in expected credit losses for loans and other financial assets;
  • Disclosure of market risks over financial assets.

The requirements of IAS 1 ‘Presentation of Financial Statements’ are also significant considerations, particularly:

  • Significant judgements that management has made in the process of applying an entity’s accounting policies to significant amounts in the financial statements;
  • Assumptions management has made about the future, and other major sources of estimation uncertainty, that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year;
  • Additional disclosures when compliance with specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and performance.

Climate change has wide-ranging consequences for corporate reporting, and the above are some of the many areas in the financial statements that may be impacted.


Investors Demand More

Investor groups are loudly calling for better information with regard to sustainability, including the rampaging impact of climate change. One of the most powerful calls made has been that of the Institutional Investors Group on Climate Change (IIGCC) – a pan-European group representing assets worth over €33 trillion. In their November 2020 report they set out investor expectations that directors deliver Paris-aligned accounts that properly reflect the impact of getting to zero emissions by 2050 for assets, liabilities, profits and losses.

Specifically, the IIGCC calls for the annual report and accounts to include:

  • An affirmation that the goals of the UN Paris Agreement 2015 on climate change have been considered in drawing up the accounts;
  • An explanation of how critical assumptions and estimates are Paris-aligned, or why they are not;
  • Results of sensitivity analysis linked to variations in these judgements or estimates;
  • Implications for dividend paying capacity of Paris-alignment;
  • Confirmation of consistency between narrative reporting on climate risks or an explanation for any divergence.



Meeting the IIGCC expectations should be well within the capability of all entities that report. Doing so would be significantly helpful to all investors and other stakeholders. There is a need for focus by companies and their directors on the longer-term strategy which will need to include thorough consideration of sustainability risks and opportunities, including but not limited to climate change.

There are many Deloitte publications that provide a deep insight into developments in sustainability reporting and its many challenges, including climate change. These include:

A Closer Look — Investor demand for corporate reporting in line with the Paris Agreement on climate change

Purpose-driven Business Reporting in Focus

Our climate change website is here.

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