OPINION | Sachiko Suzuki, Asia climate and energy analyst for Market Forces, a Melbourne-based initiative researching the financing of environmentally destructive projects.
Profusion of standards has allowed companies to obscure potential financial impact
These days, many Asian companies are putting out climate-related information about their operations and investments. But these disclosures often fail to tell investors what they really need to know about the growing financial risks the companies face due to climate change.
Part of the problem has been a profusion of different international and national reporting standards for climate-related information. Fortunately, the stage is set for this situation to improve thanks to new sustainability disclosure guidelines from the International Financial Reporting Standards (IFRS) Foundation that took effect this month.
This new standard is setting a global baseline for requiring companies to disclose all climate-related risks and opportunities that could reasonably be expected to affect their prospects. Japan has an opportunity to lead the way in Asia in the disclosure of climate information by making this standard binding on companies listed on its stock markets.
The Sustainability Standards Board of Japan has pledged to issue its own standard based on the new international guidelines by March 2025. It would make good sense for the economy and the global climate for the board to heed the advice of the head of the U.N. Principles for Responsible Investment by fully adopting the new international standard. The Japanese Financial Services Agency and Japan Exchange Group could then make the standard mandatory for local companies.
Currently, companies in Japan and across Asia that extract and trade coal, oil and gas and their utility customers are keeping secret the financial impact of climate stress tests on fossil fuel-related assets.
Investors are likely to be highly concerned once these financial impacts are finally disclosed in line with the new IFRS standard. Many Asian companies have been hiding such figures and pretending that the risk of their fossil fuel-related assets getting devalued is limited.
But a tsunami of stranded assets looms on the horizon as carbon prices rise and related infrastructure is retired early. This is an inconvenient truth all companies in Asia must face.
Full disclosure will reveal which companies are relying on unproven and economically unviable low carbon technologies. So far, fossil fuel companies are getting away with talking about developing solutions without showing what this would mean in terms of costs, profits and lifecycle emissions.
Both the co-firing of fossil fuels together with hydrogen or ammonia in thermal power plants and carbon capture, utilization and storage systems embed huge hidden risks. But leading Japanese companies are pushing for these technologies and planning to export them across Asia. Yet they are failing to disclose embedded risks involving factors such as costs and lifecycle emissions.
Globally, many companies have recognized that climate-related risks are material and are taking steps to set and meet emissions targets. But hundreds of them are failing to disclose the potential financial impact of these commitments and risks, according to an analysis by climate accounting and finance think tank Carbon Tracker.
The new IFRS stand thus can be a vital step on the journey to redirect capital to help limit global warming to 1.5 C.
Globally, guidelines developed by the Task Force on Climate-Related Financial Disclosures, which set the stage for the IFRS rules, have drawn considerable interest. Yet in general, corporate climate-related financial disclosure has remained woefully inadequate.
Task Force data shows that only 4% of 1,365 companies surveyed globally have made disclosures in line with all the requirements of the body’s guidelines. In Japan, 30% of surveyed listed companies referred to the guidelines in their public filings.
Inconsistent narratives and a lack of adequate disclosure are harming investors and companies. Nearly nine out of ten investors use financial statements to assess how investee companies address risks and opportunities, including those related to climate change, according to an annual survey of global investors by PwC.
More investors are becoming concerned about insufficient disclosure. Some 87% of them suspect companies engaged in “greenwashing” by creating false impressions about their climate action, making it more difficult to redirect capital away from carbon-intensive businesses to more sustainable options.
The new IFRS standard presents an important opportunity for companies to improve reporting by connecting financial statements and climate-related information. Increased transparency will enable investors to assess and price climate-related risks and allocate capital appropriately.
One of the requirements under the rules is that companies disclose expected changes in financial performance and cash flows over the short, medium and long term due to climate change. The IFRS says this information must be represented faithfully by being “complete, neutral and accurate.”
Investors have a key role to play to avoid a major collapse in asset values. Fund managers need to demand that companies disclose adequate information in line with the new standard. Responsible stewardship ought to include voting against management and backing shareholder resolutions if engagement does not bear fruit. Japan can help build momentum for action in Asia and reinforce its market leadership by taking prompt action.
First published in NikkeiAsia Jan 19 2024