The opaque world of climate reporting

Investors, lenders, and stakeholders need a basis to accurately assess the impact of climate change on company operations. Sebi's climate change-reporting framework is well-intended but not adequate

The transition to net-zero greenhouse emissions by 2070 may lead to extensive policy, legal, technological, and market-related changes. Each change carries associated risks. We are already witnessing a shift from fossil fuels to green energy as well as technological innovations, such as electric vehicles and carbon-free grids. Companies that do not take cognisance of the emerging reality and fail to align themselves may find it difficult to survive and sustain the resultant financial, competitive, and reputational risks. Investors, lenders and other stakeholders would need a basis to comprehensively assess the impact of climate change on company operations, the resultant risks, the impact thereof on the business model, and measures taken for mitigating risks.

Company managements, the government and regulators, such as the Securities and Exchange Board of India (Sebi), Reserve Bank of India, and Insurance Regulatory and Development Authority of India, have recognised the need for climate-related information and have emphasised adequate disclosures on climate-related effects that are financially relevant and material for investors and other stakeholders.

However, the intent has not been translated into commensurate action and desired outcomes. Stakeholders are left to read and appreciate the disclosures made in the financial statements or in the directors’ report, which in most cases give minimal information merely to comply with the related requirements under the Companies Act or as mandated by Sebi .

Some companies also voluntarily provide information, but it is nothing more than general statements. It lacks transparency, reliability and a holistic perspective. The disclosures are not audited, or evaluated to ensure that the financial statements are consistent with the assertions made about climate risk and implications provided in the voluntary report or to Sebi under reporting requirements. At times they misguide the investors in assessing the company’s efforts to mitigate existing or potential risks or the companies’ performance over time in this regard. The investors under the circumstances are left to content themselves with the information available publicly or derived from other sources. Large investors somehow manage to obtain accurate information through engagement with the management. This practice, however, in a publicly-listed company is unfair to the small investors and other stakeholders and needs to be checked by making such information publicly available to both small and large investors simultaneously.

Sebi’s Business Responsibility and Sustainability Reporting guidelines issued in May 2021 make it mandatory for the top 1,000 listed companies to publish a detailed sustainability report covering six key areas, including environmental aspects, from FY 2022-23 and voluntarily for FY 2021-22. However, a critical look at the annual report of a few companies suggests a lack of information; or scanty details about stakeholder engagement or integration of climate aspects with their mission, goal-setting, and action plan; or the priority accorded to these issues in boardroom discussions; or how climate management is integrated into organisation structure and systems. It is to be understood that managing climate change is much deeper and wider than mere investment into renewable energy or measures for waste treatment or reduction in electricity consumption. Indeed, there are practical limitations to this, for example, the renewed focus on coal-based power generation to meet the increasing electricity demand.

In order to achieve net-zero  targets, it is imperative that companies set quantifiable targets, monitor action plans, treat climate change as a key performance area for chief executive officers and others, and make this an important criterion in deciding the board composition and items in the board agenda. A separate committee of the board to deal with climate change rather than camouflage this with corporate social responsibility or sustainability-cum-corporate social responsibility committee is also necessary. Failing these, the well-intended Sebi guidelines will not bring desired outcomes.

It is in the interest of companies themselves that they make appropriate disclosure on how climate change affects their business model. This helps reduce the cost of capital, and ensure that their products remain relevant to the changing market needs and expectations.

Auditors have an important role to play in assessing the reasonableness of management’s assertions on climate risks and their implications on financial statements and operating performance. If required, auditors should give details of the same in their reports as key audit matter. They can thus be instrumental in ensuring compliance with Sebi guidelines. Sebi should leverage the audit to ensure climate-related risks are adequately reported in financial statements and other corporate reports. Admittedly, climate-related risks impose costs and impact financial health, which is difficult to measure. However, third-party assurance on management assumptions and assessment is necessary for ensuring their reasonableness.

The writer is a former secretary of the Institute of Chartered Accountants of India