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Climate change disclosures: Can accountants save the world?

20 May, 2021

Naomi Rigby

ESG Assurance, PwC United Kingdom


At the United Nations Conference on Sustainable Development in Rio in 2012 and later during my time at the World Business Council for Sustainable Development (WBCSD), Peter Bakker, President and CEO of the WBCSD, told me that “accountants will save the world”.

Of course as a chartered accountant, I had a vested interest in believing that this was the case. But nearly 10 years on, I believe it’s more true than ever. Accounting and climate change are now spoken of in the same breath. Multiple parties will need to work together to achieve real change but the conditions are there for accountants to make a difference.

There’s no International Financial Reporting Standard (IFRS) for climate change; nothing to point to in the accounting manual to say ‘this is how you account for climate change’. But climate risk is pervasive. It doesn’t need its own accounting standard. When you boil it down, reflecting climate risk in financial statements is little different to any other risk. If assets are affected, then it’s IAS 16 or IAS 36 for impairment. If provisions are affected, then it’s IAS 37 and so on.

A narrow view of the financial statements and a fixation on a 12 month going concern assessment can detract from the many parts of the financial statements that look out well beyond this, over the same time period that climate risk is also going to have an impact. For example, property, plant and equipment typically have useful economic lives spanning decades, and other valuations are underpinned by discounted cash flow models with significant assumptions about the future taken all the way into perpetuity. 

No doubt buoyed along by the timely release of the Financial Reporting Council’s thematic review on climate change, there seems to have been a step change in the most recent reporting cycle. It's clear that climate risk has risen up the corporate agenda and the accounting implications are being more seriously considered. In PwC's 24th Annual CEO Survey, published earlier this year, some 70% of CEOs were concerned about climate change, up from 44% in 2019.  I’m seeing, for example, more detailed discussions held on asset impairment, borne out of thorough reflection on climate risk when preparing discounted cash flow models.

It's clear that climate risk has risen up the corporate agenda and the accounting implications are being more seriously considered.

Put simply, climate change can increase costs and/or reduce revenue. So when looking at cash flows into the future, these climate impacts need to be factored in. This might include:

  • increased costs from raw material price increases, for example if the climate is affecting crop yields
  • cost of energy efficiency compliance
  • cost of carbon offset purchases to reach Net Zero commitments
  • cost of carbon taxing
  • reduced revenue from changing consumer demands, or
  • reduced revenue from the outright ban of a key ingredient used in production and/or a finished good in its end market.

This isn’t theoretical; many of these changes are happening now and others are coming very quickly. One example of climate risk is the proposed UK ban on gas boilers in new homes from 2025. This is what the Task Force on Climate-related Financial Disclosures (TCFD) refers to as a transition risk. These risks can be game-changing and crystalise quickly. The impact is not isolated to the manufacturers. In this example, it flows through the value chain to those supplying widgets into the boilers and out to the house builders requiring an alternative heat source for their developments.

TCFD reporting, already mandatory in the UK for premium listed issuers, will now require the annual report to include significant disclosures on these climate risks and future scenarios. They must be properly assessed against, and aligned to, the ‘back half’ financial statements.

Lifting the lid on the underlying scenario analysis models used to prepare TCFD disclosures is essential. They frequently include significant assumptions, some of the same assumptions that are used in the financial statements to underpin balance sheet items, from growth rate to discount rate. They of course need to be the same. But are they always?

So was Peter Bakker right? Accountants have an important role in accurately quantifying the financial impact of the physical and transitional climate risks identified. Transparency over the impact of climate change on business, and businesses' impact on the climate, is a crucial component in tackling this most important of all issues: the future of the planet.

Real change requires all parties to work together. Companies must critically assess how their business models and strategies will be affected, pulling multiple parts of the business together on a timely basis including finance, operations and sustainability, while seeking specialist support with complex scenario modelling where required, and auditors must look into and challenge these assessments.

We’re not there yet, but the wheels are in motion, and accountants are standing ready.

Naomi Rigby

ESG Assurance, PwC United Kingdom


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