Accounting for climate-related transition risk : Analysis of reporting in European energy firms

Abstract

The discussion on the potential financial impacts related to climate change and the low-carbon transition has intensified during the last ten years following the 2015 Paris Agreement. A significant number of initiatives have called for the integration of climate-related risks into the strategic planning and risk management of organizations exposed to these risks. There is also a growing body of literature focusing on the exposure of firms to climate-related risks, what their financial implications could be, and to what extent they are currently priced in by the financial markets.

Despite the growing significance of climate-related financial risks, a limited amount of accounting research has so far been conducted to understand how firms are reporting about the financial risks related to climate change. Reporting of climate-related risks and opportunities has become an established practice in corporate reporting since the publication of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations in 2017. This study aims to address this gap by providing insights on how the reporting of climate-related transition risks, i.e. the financial risks related to the low-carbon transition and tightening climate policies, has evolved during the last 10 years by studying the reporting of European firms operating in the energy sector, who are under pressure by the EU Green Deal regulation and accelerating energy transition.

This study utilizes a qualitative interpretive method of textual analysis, drawing on discourse theory, to develop insights that allow better understanding of how accounts of climate-related transition risks are constructed and how they have changed over time. The results of this study suggest that climate-related transition risks have become increasingly integral to the reporting of the studied firms, permeating the strategic and financial discourses and being increasingly recognized as having major financial consequences. However, the results also amplify the existence of three disconnects related to accounting for climate change. First, translation of the systemic phenomenon of climate change to organizational level is still at best partial, although the growing number of net-zero transition plans have enabled some form of translation. Second, a full financial internalization of long-term climate-related risks has not been achieved, impairing the comparability of reporting, and often not demonstrating a clear link to climate science. Third, the difficulty of integrating uncertainty into financial accounting systems might cause climate-related transition risks to be underreported, as the accounts cannot be backed with existing methodology.

The connection between financial information and sustainability information has been a subject of interest in accounting research for a long time. This study contributes to this body of knowledge by providing empirical evidence and insight into accounting for climate-related transition risks. These accounts have a role to play in creating the urgency and financial significance that is required to accelerate the transition towards a low-carbon economy, and thus it is worth investigating how accounting could assist in connecting climate science and financial decision making.