Carbon Tracker: companies ‘still flying blind’ on net-zero

New research by think tank Carbon Tracker has found that, despite setting ambitious net-zero targets, a large majority of carbon-intensive companies have not accounted for their financial impact.

The research examined 134 companies with expansive emission footprints, including those from the fossil fuel, mining, manufacturing and automotive sectors. These firms have been the targets of focused engagement by investors. They fall under the “Climate Action 100+ focus company” umbrella: a group that collectively accounts for 80% of global industrial greenhouse gas (GHG) emissions.

Still flying blind: the absence of climate risk in financial reporting, is a follow-up to a 2021 report, but Carbon Tracker identifies little progress in climate disclosures despite the growth in net-zero pledges. “Most companies still do not appear to be including the financial impacts of such commitments, or indeed climate change risks, in their financial statements,” it states.

Carbon Tracker evaluated the financial statements released by the targeted firms and looked for evidence consistent with expectations set out in the Climate Action 100+ Climate Accounting and Audit Assessment (CAAA) methodology. This considers seven metrics, ranging from how “material climate-related matters are incorporated” to the extent to which the financial statements “use or disclose a sensitivity to, assumptions and estimates that are aligned with achieving net-zero GHG emissions by 2050 (or sooner)”.

Accounting for ambition

The findings suggest that the information contained in the financial statements falls far short of the CAAA metric requirements. None of the companies satisfied all the metrics.

According to the report: “Ninety-eight percent of companies did not provide sufficient information to demonstrate how their financial statements include consideration of the financial impacts of material climate matters. Additionally, 99% did not disclose the quantitative climate-related assumptions and estimates that they used to prepare the financial statements, despite most auditors identifying the same types of inputs as subject to significant judgement and estimation uncertainty.”

Barbara Davidson, Carbon Tracker’s head of accounting, audit and disclosure, said: “When companies don’t take climate-related matters into account, their financial statements may include overstated assets, understated liabilities and overstated profits.”.

Of the companies that were analysed, just eight received a “partial” score, indicating that they had provided information consistent with at least one CAAA metric. These firms are: Rolls-Royce, Shell, Rio Tinto Group, National Grid, Glencore, Eni SpA, Equinor and BP.

According to Carbon Tracker, these eight serve as “proof of concept”: it is possible to sufficiently account for and disclose climate-related risks.

Role for auditors?

In addition to highlighting shortfalls in the information companies chose to incorporate in their statements, Carbon Tracker argued that auditors share the responsibility to induce change. Carbon Tracker’s interpretation of the findings is that the data “suggests that auditors are still not comprehensively considering the impacts of these matters in their audits, notably in their risk assessments and testing”.

According to the research, auditors have commitments to assess company alignments with net zero as part of the “Net Zero Financial Service Providers Alliance”, an industry coalition launched in 2021.

The findings are relevant and critically valuable to investors pursuing engagement with emissions-intensive firms. A key recommendation from the report is that investors should use its findings to refine their engagement and stewardship capacities. Carbon Tracker recommends that investors “engage with companies and establish expectations of disclosures around climate-related matters for FY2022/23 financial statements and the 2023 proxy season”.