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21RU-002 Climate-related risks in financial statements

21RU-002 Climate-related risks in financial statements

There is a clear expectation that entities should be considering climate-related risks when preparing their Annual Report, both the directors’ report and the financial statements. Entities need to consider how these risks impact their future financial performance, and where material, include appropriate disclosures on their impacts on the recognition and measurement of assets and liabilities in the financial statements.

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Entities are turning their attention to climate change and associated risks impacting their future performance and how best this can be managed and communicated.

The demand for high quality information continues to grow as business models are increasingly exposed to climate-related risks.

Stakeholders want to understand how climate-related risks impact the entity and its environment, including the business model, strategy and the judgements and assumptions used to make estimates. This information is necessary to assess how entities are managing these issues and the impact these risks have on an entity’s long-term prospects.

There is a clear expectation that entities should be considering climate risk when preparing their Annual Reports, in both the directors’ report and the financial statements. The Taskforce on Climate related Financial Disclosure (TCFD) has identified 22 sectors that are most likely to be impacted by climate-related risks.

As reported in KPMG’s Towards net zero: How the top Australian companies report on climate risk and decarbonisation (PDF 336KB), 78 percent of the ASX100 clearly acknowledge climate change as a financial risk to business. However, only 32 percent of the ASX100 include TCFD or climate risk disclosures in their annual financial or integrated report or published a standalone climate report.

Key financial regulators and standard setters have also all issued guidance emphasising the importance of considering climate change – not just as a matter of corporate sustainability disclosed outside of annual reports but as a matter that should be considered in the preparation of annual reports.

Even if entities determine that based on their operations, climate-related risks do not currently have a material quantitative impact on the recognition and measurement of assets and liabilities recognised in financial statements, there is an increasing focus and expectation from regulators and investors on more information being provided in the financial statements on this topic. As a result, it is important, particularly for entities operating in sectors that are more significantly impacted by climate, to consider the disclosures made in the notes to their financial statements and whether climate-related risk discussions should be featured. For some entities this will manifest itself in disclosures relating to ‘significant judgements’ as well as ‘sources of estimation uncertainty’ affecting specific assets or liabilities.

Some of the key areas in the financial statements potentially impacted by climate-related risks include:

  • impairment of non-financial assets
  • provisions
  • expected credit losses
  • asset useful lives
  • determination of asset fair values
  • financial risk management disclosures
  • judgements and estimation uncertainty disclosures.

Refer to the attached Reporting Update to find out more.

If you have any questions, please reach out to your usual KPMG contact.

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