The impact of climate risk on financial reporting

The accelerating global warming has prompted a critical need for climate-related risks to be integrated into financial reporting, as traditional methods fall short in addressing the impact of climate change. Regulators and investors are pushing for greater transparency, urging companies to adapt their disclosures to reflect the challenges posed by the climate crisis. Quantifying climate-related financial risks is complex, as it requires forward-looking assessments based on future scenarios rather than historical data. This introduces uncertainty, particularly when dealing with long-term projections. The field of climate reporting is still developing, with businesses struggling to find standard methodologies for quantifying these risks. Companies face challenges in accessing relevant, consistent, and accurate climate-related data, which is essential for assessing risks to their operations. Tools exist to evaluate inherent climate risks, but translating these outputs into financial impacts remains a complex process. Regulators play a crucial role in setting clear reporting requirements and providing guidance to help businesses meet disclosure standards. In Singapore, for example, the introduction of climate reporting has seen significant uptake, with 96% of listed companies engaged in climate-related reporting for the financial year ended December 2023. Investor expectations are also evolving, with a growing demand for transparency in how companies incorporate climate risks into their business strategies and assess their potential impact on financial performance. This has led to challenges in standardizing climate risk assessments, driving the push for international standards to ensure better comparability across companies. The influence of climate risk on asset and company valuations is increasing, particularly as extreme weather events and regulatory changes begin to impact industries. Physical risks, such as floods and rising sea levels, can lead to business disruptions and impairments of damaged assets, while transition risks, such as carbon taxes, can erode profit margins for companies with high emissions. To address these challenges, companies are developing best practices and leveraging technology to effectively communicate climate risks to stakeholders. The Task Force on Climate-Related Financial Disclosures (TCFD) provides a clear framework for reporting on governance, strategy, risk management, and metrics and targets. Companies are

Source: businesstimes.com.sg
Published on 2024-10-01