Connectivity in practice: the IASB’s new project on Climate-related Risks in the Financial Statements

By IASB Chair Andreas Barckow

At its March 2023 meeting, the International Accounting Standards Board (IASB) started a project to explore whether and how companies’ financial statements can provide better information about climate-related risks. This project and the work of our sister board, the International Sustainability Standards Board (ISSB), complement each other and illustrate how the work of the two boards is connected. In this article, I will take a closer look at the project and how it relates to the work of the ISSB.

Why is the IASB starting a project on climate-related risks in the financial statements?

IFRS Accounting Standards require companies to consider climate-related matters in their financial statements when the effect of those matters is material information for investors. We have highlighted these requirements in:

• educational materials 'Effects of climate-related matters on financial statements' (November 2020); and
• the article 'IFRS Standards and climate-related disclosures' (November 2019). 

So if companies are already required to consider climate-related matters in their financial statements, why is the IASB starting a project on this topic? Our reasons for taking on this project are based on what we heard in our Third Agenda Consultation. Respondents to that consultation told us:

• climate-related risks are often perceived as remote, long-term risks and may not be appropriately considered in the financial statements; and
• investors need better qualitative and quantitative information about the effect of climate-related risks on the carrying amounts of assets and liabilities reported in the financial statements.

For example, some stakeholders have asked:

• why companies that are expected to be affected by climate-related risks do not provide information about these effects in their financial statements;
• why companies that have made net zero commitments do not recognise liabilities or impair the value of their assets as a result of those commitments; and
• how companies should factor long-term uncertainties into the measurement of amounts in the financial statements. 

What will the IASB explore in this project?   

In response to stakeholder feedback, the IASB decided to undertake a maintenance project on Climate-related risks in the Financial Statements to determine whether it should do more in this area. We will start this project by exploring, through research and outreach, the nature and causes of stakeholder concerns about the reporting of climate-related risks in the financial statements.

By better understanding the causes of those concerns, we can be more informed about appropriate actions to take. Causes of those concerns could include:

• unclear or insufficient requirements in IASB Standards.
• lack of compliance with current requirements by companies.
• investor information needs that go beyond the objective of financial statements. Such information needs are outside the scope of this project. Rather, the ISSB’s climate standard (S2) addresses these information needs.

What are possible outcomes of this project?

The outcomes of this project will depend on the causes of stakeholder concerns. This is a maintenance project, so any outcomes will be narrow in scope—for example minor amendments to IASB Standards, limited new application guidance or new illustrative examples. We could also decide to publish further educational materials. 

This project will not seek to:

• develop an IASB Standard on climate-related risks, or extensive application guidance on how to consider the effects of such risks when applying IASB Standards. Doing so would risk undermining the IASB’s approach to developing principles-based Standards.
• broaden the objective of financial statements or change the definitions of assets and liabilities.
• develop accounting requirements for pollutant pricing mechanisms. The IASB has a related project—Pollutant Pricing Mechanisms—on the reserve list of projects. Projects on the reserve list could be added to the workplan in the future if additional capacity becomes available.

How does the IASB’s project on Climate-related Risks in the Financial Statements relate to the work of the ISSB? 

This project and the work of the ISSB complement each other in facilitating connectivity in general purpose financial reports. 

Both financial statements—applying the IASB’s Standards—and sustainability-related financial disclosures—applying the ISSB’s Standards—are focused on providing information to inform investment decisions. Sustainability-related financial disclosures and financial statements complement each other. For example, sustainability-related financial disclosures may explain the sustainability-related risks and opportunities arising from an entity’s activities and its assets and liabilities. Such disclosures may also provide early indications of matters that will subsequently be reflected in financial statements. For example, a company’s commitment to net zero emissions could, over time, result in liabilities being reported in the financial statements.

Now that the ISSB has completed its deliberations on its first two Standards, we have a stable set of decisions to inform our project. We also have ISSB staff experts to support our project team. Subject to future IASB decisions about the scope of this project, we could leverage the ISSB’s work and consider questions such as:

• whether we should cover opportunities as well as risks, if it can be done as a narrow-scope project. Such a scope would be consistent with the ISSB’s approach of considering both sustainability-related opportunities and risks.
• whether we should cover sustainability-related risks and opportunities beyond those related to climate, again, if it can be done as a narrow-scope project. Such a scope would be consistent with the ISSB’s conclusion that it is not always possible for companies to separate the financial effect of climate-related risks and opportunities from other sustainability-related risks and opportunities.
• how scenario analyses provided when applying ISSB Standards could inform the measurement of assets and liabilities in the financial statements.
• whether connectivity mechanisms in the ISSB’s first two Standards could be mirrored in IASB Standards. For example, S1 and S2 will require companies to explain connections between information about sustainability-related risks and opportunities in their sustainability-related financial disclosures and information in their related financial statements. S1 and S2 also require companies to use assumptions consistent with the financial statements when applicable and to disclose information about the current and anticipated effects of sustainability-related risks and opportunities on the financial statements.

What’s next?

Our publications noted above from November 2020 and November 2019 will guide companies in ensuring that they appropriately consider climate-related risks in the financial statements. 

At the same time, we encourage you to follow the IASB’s work by ensuring your email alert preferences are up to date. Your views are important to us, and we look forward to hearing from you as this project progresses.