Welcome to another instalment of the Climate Change Blog, an article series that aims to cover news and events related to climate change and relevant to actuaries and the industries they advise.

This month’s edition focuses on the accounting and auditing bulletin on Climate Disclosures, and its potential impact on financial disclosures.

Accounting and Auditing Joint Bulletin on Climate Disclosures

The Australian Accounting Standards Board and Auditing and Assurance Standards Board have published a joint bulletin on climate disclosures and assessing the materiality of climate related risks. Within this bulletin, they identify that climate-related risks may be considered material, even if there is no impact on the amounts recognised in financial statements. Under AASB 101 and APS 2, information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a company.  

Where climate-risk is material, financial statements should also disclose how climate risk has affected any of the amounts recognised or disclosed in the financial statements, or why there is no impact.

For example, for general insurers considering long-term physical risks, climate-related risks may be material to the company, as it may affect decisions that users make, but the amounts in the financial statements may have no adjustment if the physical risk is considered to affect claims on future policies, rather than affecting liabilities for incurred claims. The company would then need to disclose climate-related risk information and justify why no adjustment is required to amounts in the financial statements.


The following flow chart contains key recommendations for both individual entities and auditors.

Source: https://www.aasb.gov.au/admin/file/content102/c3/AASB_AUASB_Joint_Bulletin_13122018_final.pdf

These recommendations are quite broad by nature, covering the need to make relevant disclosures, as well as consider climate-related risks when determining the amounts recognised on a financial statement.

The need to make relevant disclosures supports the disclosure recommendations developed by the Taskforce on Climate-related Financial Disclosures of the Financial Stability Board (TCFD), summarised in the figure below. The TCFD disclosures are considered part of the annual report, but not part of the financial statements, whereas the joint bulletin specifically applies to the financial statements.

The joint bulletin also notes that where a company undertakes disclosure in line with the TCFD recommendations, then it is reasonable to expect that this information could impact on the decisions made by investors, and so climate-related risks are material to the financial statements.

Source: https://actuaries.asn.au/Library/Miscellaneous/2017/TheDialogue3ClimateRiskWEB.pdf


The consideration of climate-related risks when recognising amounts on the financial statement seems to be a logical expansion of the TCFD requirements when combined with the principle of fair value accounting.

This has some potentially interesting implications to consider:

  • Would long-term assets exposed to chronic physical risks (e.g. mortgages) require an adjustment for climate-related risks? Is there a need to consider climate-related risks capital requirements for mortgages? This was considered in The Dialogue (2017).
  • The issue of stranded assets (assets that may never be utilised due to regulatory and market responses to climate risk) have been in the news recently following Glencore’s decision to cap global coal production, as well as the NSW Land and Environment Court decision to block the development of the proposed coal mine near Gloucester. What other assets or liabilities may also be affected by transition or liability risks rather than physical risks?
  • The city of Miami undertook a $400m bond issue financing climate resilience projects across the city due to rising flood and storm risk. One notable insight was “one of the reasons there is so little investment in adaptation is the lack of financial incentives… Investing in resilience protects businesses and communities from devastating losses, so it must be measured in the lives saved and businesses that remain open. We are only now learning how to quantify these benefits to communities”. Perhaps as an added incentive, entities may recognise the value added by resilience projects within their Notes to Financial Statements, similar to the reporting of Embedded Value by Life Insurers.


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