Samantha Ross: The Role of Accounting and Auditing in Addressing Climate Change

U.S. federal securities laws are founded on the idea that transparency promotes well-functioning capital markets. This is particularly true when it comes to the urgent goal of reducing global greenhouse gas emissions to prevent the devastating impacts of climate change. For companies, those impacts include both physical risks, including the risk that facilities will be destroyed by fire or flood, and risks related to the global transition to a low-carbon economy. That transition may involve extensive policy, legal, technology, and market changes, each with associated risks. For example, policy actions to shift from fossil fuels to green energy and transformative technological innovations, such as electric vehicles and carbon-free grids, may pose financial, liability, competitive, and reputational risks for companies.

Robust disclosure by companies of the climate-related risks associated with their business, including their emissions, helps reduce the cost of capital needed to fund their own plans, whether they are leaders in the transformation or just trying to ensure their businesses and products remain relevant and viable in the future. Disclosure also facilitates efficient allocation of capital to companies that are best positioned to transition to low-carbon business models. And it gives the providers of capital—investors and financial institutions—the information they need to hold managers accountable for meeting goals…

The Role of Accounting and Auditing in Addressing Climate Change – Center for American Progress

Because climate matters may have an impact on a company’s financial reports, it is critically important that climate-related disclosure be provided in a document that auditors are at least charged to read, so that they can consider whether the financial statements are missing key information that could bear on whether they are fairly presented and free of material misstatement. Equally important, investors—in other words, capital markets—are missing out on the immense benefits of consistent and reliable measurement of climate-related impacts on and by companies. High-quality disclosure that reduces information asymmetries between the providers and users of capital improves the efficiency of capital allocation, reduces the cost of that capital, and boosts investment. This synergistic effect of information disclosure in well-functioning capital markets is needed now more than ever to weather the extreme disruption of the energy transition that has already begun.

The current approach to climate disclosure is instead costly and ineffectual, and it thwarts investors’ ability to hold managers accountable for reducing emissions and managing climate-related risks. 

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