Clarifying and disclosing the financial impact of global warming on corporate accounts could be on track to become a climate change law. Investors managing more than $2.5 trillion signed a letter to UK climate czar Alok Sharma, pushing governments to force companies and auditors to file financial accounts aligned with the world’s net zero emissions target.
Investors demand governments to make corporations disclose the impact of climate change on financial accounts to make clear the consequences of the pathway towards the net zero economy. They also require auditors to call out when companies have failed to do so.
According to investors, the failure of companies to disclose the full climate change risk on current and future financial performance would result in misdirection of capital, losses and could threaten or slow down the transition towards a clean energy economy.
“Most (companies) continue to use assumptions that presume little or no decarbonization, and thus report financial results predicated on governments failing to implement their stated commitments and, in some cases, legal targets,” according to the investors’ letter.
It also points out that waiting for companies to respond to investor pressure could take years to deliver the numbers required to invest in a way aligned with the Paris Agreement goals.
A recent study also shows that more than 70% of the world’s heaviest-emitting companies did not show off the full risks in their 2020 disclosures. Furthermore, 80% of audits show no evidence of risk assessment. BP is one of the companies as an example that wrote off billions of dollars last year as a result of lowering long-term oil price assumptions.
Climate Change Law Necessity
The letter also stated that without proper climate accounting, the money needed to fund the transition to a green economy could end up in the wrong place.
Another example of pressure on governments is the recent statement from 587 investors representing over $46 trillion in assets calling on governments around the world to increase targets and accelerate climate change actions.
The global energy transition affects financial accounts tremendously, therefore climate change investment risk should undergo full disclosure. A stricter climate change policy on financial accounting is needed so misinformation and misdirection of capital are avoided.