The International Accounting Standards Board should be commended for its latest guidance on how companies should incorporate material climate risk into financial reporting, according to Natasha Landell-Mills, head of stewardship at Sarasin and Partners.
"This is a vital step in ensuring financial flows are aligned with the Paris Agreement's goals of keeping global warming well below 2C, with an aim of 1.5C," she says.
"Critically, the paper emphasises materiality is not merely an assessment by incumbent directors of their view of the quantitative impact. Directors must regard whether investors ‘could reasonably expect that emerging risks, including climate-related risks, could affect the amounts and disclosures reported in the financial statements.'
"The letters [attached] we sent to the Big Four audit firms, which we published today, explicitly state investors expect to see fossil-fuel-related companies take account of climate risks in financial statements. In other words, these risks should be treated as material for the purposes of financial reporting.
"We will be writing to individual company audit committee chairs and lead audit partners over the coming weeks, setting out these expectations for 2019 annual reports and accounts. We will specifically ask for assumptions to be stress-tested for Paris Agreement alignment, to ensure investors can see how resilient companies are in relation to government climate policies.
"If company audit committees and auditors fail to ensure Paris Agreement-aligned accounting, investors should vote against their reappointment. Governments should consider mandating Paris-aligned accounting. This should not be optional."