By Prue Moodie

In December 2018, Australia’s Accounting Standards and Auditing and Assurance Standards (AASB/AUASB) boards issued a joint bulletin about disclosure of climate risk.

It was a world first. No other country had issued financial statement guidance that related specifically to climate risk. (An updated guidance was released in April 2019.)

The guidance, Climate-related and Other Emerging Risks Disclosures: Assessing financial statement materiality using AASB/IASB Practice Statement 2, said that if a company believed investors thought climate risk of any kind was a material issue for the company, it should include a climate-specific note in its financial statements.

Or, to put it another way, companies should no longer treat climate-related risks solely as a corporate social responsibility issue but as a financial one.

“I think the AASB/AUASB guidance is important because it tells the accounting community that climate risk is important,” says company director John Stanhope FCA, a non-executive director of AGL, an Australian energy producer and retailer.

“The truth of the matter is that climate change impacts financial outcomes.”

Picture: John Stanhope FCA,

“The truth of the matter is that climate change impacts financial outcomes.”

How it complements TCFD reporting

The guidance was released about 18 months after the Task Force on Climate-related Financial Disclosures (TCFD) – established by the G20 Financial Stability Board – recommended a reporting framework for companies in sectors most likely to be affected by climate-related risk.

TCFD reports, however, remain squarely in the non-financial reporting category. They are voluntary, they are not assured to the same rigour as financial statements, and they are often not signed off by the board.

The AASB/AUASB guidance complements the TCFD’s recommendations by putting climate risk into the financial reports.

Many hope that TCFD reports, particularly in combination with financial statement disclosures, will push companies and investors into more environmentally-friendly decisions.

The effects of the AASB guidance on climate risk

The AASB/AUASB guidance has at least two important impacts. The first is in the area of accounting skills. Accountants in the finance team are not usually asked to calculate impairment of assets very far into the future.

But the effects of both direct climate effects and regulatory risk could take place many decades from now, requiring accountants to make longer range asset impairment calculations than they are used to.

The second impact is that if a company reports on climate change in its financial statements, the information in the TCFD is likely to get more rigorous scrutiny than otherwise.

“AGL did not include climate guidance in its financial statements this year, but did in its annual report,” says Stanhope. “But if it included the information in financial statements in future, the finance team would get the information from the TCFD.

The transition risk of climate change measures

The hardest hitting tool in the TCFD framework is the need for companies to describe how their operations would be affected by transition risk.

Unlike physical risk, where the higher the temperature modelled, the worse the weather risks, under transition risk scenarios the lower the temperature rise the worse the regulatory risk. That’s because lower temperature scenarios imply stronger government policy constraining greenhouse gases.

AGL’s 2020 TCFD report, Pathways to 2050, modelled four scenarios, among them a 1.5 degree Celsius rise in global temperatures. The Paris Agreement goal is for a long-term temperature rise of well below 2 degrees Celsius (compared to pre-industrial levels).

AGL’s 1.5-degree scenario would require such strict government carbon reduction measures, says Stanhope, that it would involve AGL decommissioning the Loy Yang power station in the Latrobe Valley, south-east of Melbourne, in 2035 compared to its business-as-usual closure date of 2048.

“That would significantly reduce the power available in Victoria,” says Stanhope. “So we’re unlikely to do that unless the speed of renewables and battery storage uptake were to accelerate. But that’s why the TCFD needs to be done every year – assumptions change.”

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