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Recently the impact of climate change on businesses has been of unprecedented interest to markets and governments as the road to net zero starts to take shape.
Nowhere has the potential impact been greater than on the extractive sector, for example with their extensive reserves of oil and gas. This report follows up a study of the 2019 reports of the most important extractive companies that ACCA published in February 2021 looking at the extent of disclosures on the effect of climate change. This time we look at their 2020 reports to update the picture and see what has changed in a period when the awareness of the speed and extent of impact has increased. It looks at the extent of disclosures in the narrative front end of the reports as well as in the financial statements.
Text accompanying the February 2021 release of Climate change risk-related disclosures in Extractive Industries
As mankind intensifies efforts to mitigate the catastrophic consequences of climate change through international initiatives such as the Paris Agreement and the UN Sustainable Development Goals, companies in the extractive industries, being responsible for half of global carbon emissions (IRP 2019), are facing an ever-increasing challenge: to address the urgent issue of climate change and, at the same time, to remain competitive.
Extractive industries (mining, oil and gas) are one of the sectors that are most exposed to changes that governments may be making in order that climate change can be restricted. This report looks at the annual reports of extractive companies around the world to gauge how well and completely they are communicating that exposure to their investors and other stakeholders.
The study looks at 60 of the most carbon-intensive extractive companies and at the extent and quality of disclosures they make in the management report and in the financial statements about the potential impact of climate change on their business. Clearly there are risks to the long-term viability of their activities which would impact their mineral or hydrocarbon reserves and the related infrastructure and leave them with ‘stranded’ assets.
Overall the findings are that the reporting is not good enough and that annual reports lack clarity of and depth in climate change related disclosures. In the management report (the ‘front end’ of the annual report) though most make reference to the issue, not all by any means provide adequate information for example about their reserves, the impact of different climate change scenarios or how their business model is adjusting to the risks.
The visible impact on the financial statements is scantier still. Only 10% refer to climate change when considering impairment of their assets and none acknowledge its impact on their estimates of the useful lives of the assets.