CFA Institute’s Matt Orsagh, CFA, CIPM spoke with Barbara Davidson, head of accounting, audit and disclosure at Carbon Tracker. In this podcast, Ms. Davidson talks about how bad the level of climate disclosures is for carbon intensive companies, especially in the US.
Companies need to be more transparent in their climate disclosures – this is what investors representing over a hundred trillion in assets under management telegraphed when they published an open letter in 2020 asking companies and auditors to consider material climate-related risks in financial statements.
But how bad exactly is the level at which companies disclose climate-related risks in their financial statements? Barbara Davidson, head of accounting, audit and disclosure at Carbon Tracker, says it is “very disappointing”.
Davidson and her team at Carbon Tracker looked at the 2020 financial statements of 107 global companies that operate in carbon intensive sectors. “We were looking at companies such as Chevron, Exxon, BP, BMW, Volkswagen, Rio Tinto, Air France, and American Airlines. These are companies we know will be affected by the energy transition,” Davidson notes.
Their team found that 72% provided no evidence of consideration to climate-related risks and that only 25% of these companies disclosed the quantitative climate-related assumptions and estimates that they used. According to Davidson, “Investors have no way of understanding a company’s resilience or lack thereof to the energy transition or climate risk without this information. Investors can’t make their own adjustments because they don’t know what the company has used.”
Davidson adds that they also found inconsistency in the companies’ climate stories, with some having emission reduction targets for the next 10 years but were continuing to use carbon intensive assets.
The problem also extends to the audit reports. Davidson says that 80% of the audit reports they studied provided no evidence of consideration of the effects of climate on these carbon intensive companies. Further, for companies that are dual listed in their local markets and in the US markets, it was found that climate-related issues referenced in the audit report for the local market were taken out in the US audit reports.
“This is the same auditor, the same company, the same financial statements, the same lead partner. There was no reason under the auditing standards in the US that they would have to remove these references. But effectively, that means that investors in the US are getting less information in those markets, and that was a concerning difference.”