Rise in disclosure of climate-related risk

The use of sticks or carrots is frequently debated when considering how to best get the necessary movement in carbon emissions reductions. While use of both the carrot and the stick – incentives, legislation, regulations, taxation, subsidies, insurance premiums (and potential withdrawal) – is generally effective, sometimes the stick is necessary and beneficial.

Reporting of climate-related financial impacts in financial statements is on the rise according to a recent study by the Chartered Accountants Australia and New Zealand (CAANZ), the University of Melbourne and the University of Queensland. The financial statements from 200 ASX and 50 NZX companies plus 10 companies across 11 industry sectors from the rest of the world (excluding the US) with balance dates between 31 December 2022 and 30 September 2023 were analysed. Overall, they found that 35% of companies are disclosing climate-related risks in their financial statements, up from 18% two years ago.

In New Zealand, mandatory disclosures for climate-reporting entities (CREs) commenced for reporting periods on or after 1 January 2023, meaning that the first mandatory reports are anticipated in the second quarter of 2024. Despite this, New Zealand companies have already seen an increase in reporting to 40%, up from 22% in 2022 and 16% in 2021, rising at a significantly higher rate than their Australian or global counterparts.

In Australia, consultation on the Treasury Laws Amendment Bill 2024: Climate related financial disclosure (draft bill) closed 9 February 2024. The proposal is to phase in the introduction of mandatory climate-related financial disclosures based on the organisational size or level of emissions, with the first annual reporting period starting on or after 1 July 2024 for Group 1. Nonetheless, they also saw increases in reporting from 23% in 2021 to 34% in 2023.

In New Zealand, the biggest movement was seen in real estate, communications services, financials and utilities sectors, whereas in Australia the utilities, energy and consumer staples sectors had the highest levels of reporting. Conversely, none of the 10 largest global IT companies mentioned climate-related risks in their financial statements.

While the International Financial Reporting Standards (IFRS) do not explicitly require reporting on climate-related matters, nonetheless, companies must consider any matters when the effect is material for investors. The main area of reporting related to the impairment of non-current assets (those assets that are not readily converted to cash such as property, plant and equipment) including disclosure of exposure to climate-related risks. Of note, this year’s analysis also looked at executive remuneration and any reported links to improving climate performance, however, only one international company explicitly mentioned this in its financial statements.

Key findings:

• Companies are increasingly recognising the financial impacts of climate-related risks
• Impairment of non-current assets is the biggest financial impact of climate-related risks
• Climate-sensitive sectors are more likely to disclose the financial impacts of climate-related risks