Climate Risks Need to Be Reported in Financial Statements

Corporate executives and financial professionals should begin quantifying climate risks and reporting them in their financial statements, according to sustainability expert, Dr. Bob Willard.

“Canadian business leaders need to recognize and anticipate the emerging financial impacts of climate change,” Willard told the business executives in attendance at a recent seminar hosted by 360 Energy and CPA Canada. “Companies face real risks which they need to quantify and report.”

Extreme storm events have been linked to a rise in air, sea and land temperatures. The risk is that such events may become more frequent, interrupting supply chains, damaging capital assets and disrupting operations. The rising cost of insurance has financial cost implications.

Other risks attributable to a warming climate can include volatile price swings to commodity input costs. Lower emission technologies entering the market can be disruptive to incumbent operators. Changing consumer preferences and reputation risks can hurt companies that are negatively perceived in the marketplace. Risks such as these can, and should, be quantified in order to give an accurate corporate financial picture.

Dr. Willard did point out however, that the opposite side of the coin from risk is opportunity.

He told the audience that, “This recognition of risk will help you develop appropriate value-creating strategies for the long-term”. As examples, he cited improved energy productivity can lower production costs. Energy procurement of low emission renewables can be a hedge for carbon pricing. On-site distributed generation can give companies greater operational and cost control. Innovation in the development of business services and new products can come from risk mitigation efforts. Introducing lower emission products and services can give competitive advantage. New markets can be developed and customers found that might have otherwise been overlooked. Climate strategies to improve corporate resilience will improve company valuations.

Currently, many Canadian companies that report their actions to address climate and other environmental issues do so in their Environmental Social and Governance (ESG) reports or in their “sustainability plans”. A problem is that the actions reported in these documents do not find their way into the financial statements of the company. Neither do such reports identify how actions have positively impacted the company’s bottom line. As a result, actions to reduce environmental impact do not get the necessary visibility or the same scrutiny by stakeholders as do financial results. Linking the financial impacts of climate related risks directly into the financial results of the company would address a gap that is emerging in significance for investors and financial markets.

Energy optimization is at the heart of any corporate climate action plan. Reducing the burning of fossil fuels reduces GHG emissions. Any company executive who wants to know where to start, should begin with developing an energy baseline. From there, measuring and reporting progress on energy productivity improvements will support corporate goals for sustainability and reduce climate change related risks.

The importance of climate risks and the strategic significance of the opportunities they present have not yet caught the attention of many CEOs. As a solution, Willard urged financial professionals to identify utility costs higher up on income and expense statements to give energy a greater profile.

CPA Canada is the governing body for financial professionals. They sponsored the seminar because they have identified a need for corporate leaders to be objectively informed on the risks of climate change.