Climate change presents an emerging, but also rapidly evolving challenge for the global community of accounting practitioners, academics and standard setters and the Market is increasingly concerned about the physical, liability and transition risks arising from climate change. To mitigate such risks, through the provision of relevant information to the market, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) published recommendations for climate-related disclosures by companies in 2017.
Research undertaken by a team from the University of Sydney examined the challenges corporate entities face in seeking to measure and disclose their climate-related financial risks, as well as the challenges investors face in analysing such risks.
The findings indicate that demand for climate-related financial disclosures is escalating rapidly. The ability for preparers of financial reports to provide such information in a manner that is decision-useful is, however, limited by three fundamental problems, including:
a) The lack of specification and guidance available;
b) The nature of the measurements required, which are often complex and require significant scientific expertise; and
c) The desire for investors to see, in the market, forward-looking information pertaining to organisational strategy, stress-tested against a variety of climate change ‘scenarios’. This latter information is inevitably uncertain, as well as being possibly commercially sensitive in nature.