ACCA Richard Martin explains the association’s research into the annual reports of oil, gas and mining companies – and the fact that they could do better.
Accountants, along with colleagues in other teams such as investor relations, corporate communications, marketing and policy, play a key role in creating annual reports.
These documents explain the performance of a company to its shareholders and other stakeholders – detailing key results for the strategic year including externally audited financial statements.
They can be complex and challenging documents to pull together from a preparer’s point of view because they must include information demanded by regulators – such as financial reporting under financial rules and standards.
Increasingly, organisations are also being asked to define and disclose their risks in their annual reports.
One such risk is the impact of climate change on a business’s short, medium and long-term operations. At the Rio 2012 Earth Summit, investors called for the integration of material sustainability issues within companies’ annual reports. More recently, large investors called for mandatory inclusion of such information in companies’ accounts and the Bank of England expects climate change risk related financial disclosures to become mandatory soon.
In our recent detailed analysis with the University of Glasgow Adam Smith Business School of mining, oil and gas companies’ annual reports, we found the need for more clarity and depth in their climate change related disclosures.
For this report, called ‘Climate Change Risk-related disclosures in Extractive Industries’ we looked at 60 companies’ 2019 annual reports, including BP, Tata Steel and ArcelorMittal. It’s a study that sheds light on the current climate change-related reporting practices of these companies. And what we’ve found is that many companies do not sufficiently engage with disclosures about their climate change-related risks.
Our findings reveal that these companies provide, on average, overly generic disclosures and they hold back on discussing how climate change risks affect their operations. Only a small number of companies acknowledge the central role of climate change on their current and future activities.
Our research also shows that these companies rarely provide an in-depth discussion in their reports about the climate change risks that they are facing or the impact of climate change risks on their operations.
With COP26 planned to take place in Glasgow in November, this analysis comes as a wakeup call for the industry, and those who invest in it – what we need to see is an urgent improvement in climate change-related disclosures.
These are companies with huge operations in oil, gas and mining, and they contribute significantly to global greenhouse gas (GHG) emissions. Climate change can no longer be seen as a side effect of their operations but as a central issue for their business model and a core business risk.
Key findings in our report ‘Climate change risk related disclosures in extractive industries’ reveal:
• 60% (36) identify addressing climate change risk as an integral part of their business model.
• Only four companies (7% of the sample) provide performance indicators where financial and climate change-related information is integrated.
• Only 10% (6) disclose that they incorporate climate change risks in their estimations of future cash flows, as part of their impairment testing calculations.
• None of the sample companies identify climate change risk as an important factor in determining their assets’ useful lives.
Our analysis raises questions over the consistency, relevance and decision-usefulness of these companies’ financial reporting. In the management report – the ‘front end’ of the annual report – though most make reference to the issue, not all by any means provide adequate information about how climate change risk may impact their reserves, the results of different climate change scenarios or how their business model is adjusting to these immense risks.
There is a fundamental issue here about transparency, and the fact that their large reserves may be rendered ‘stranded’ if governments decide to ban oil exploration, as Denmark announced recently.
So what should the future look like? What we want to see are sustainability reporting standards that aim not only to provide decision-useful information to investors, but importantly, should also drive changes in corporate behaviour in support of positive social and environmental outcomes.
Accountants have a huge role to play here because it is a profession so fundamental to ensuring that corporate reporting is accurate, regardless of whether the disclosures are mandatory or optional. It is an exciting time to be an accountant, to be part of this change to create value and corporate transparency.
• Richard Martin is ACCA’s head of corporate reporting.