Experts sound the alarm about blind spot in corporate financial reporting: 'Still in a nascent stage'

Corporations are facing new challenges associated with financial reporting, as the effects of warming global temperatures make it more important than ever for businesses to be transparent about potential climate risks, according to The Business Times.

What's happening?

Whereas traditional financial reporting generally analyzes historical data, climate reporting often requires companies to make forward-looking predictions, as The Business Times explains, introducing a new type of uncertainty to the economic landscape.

"Climate reporting, when compared with financial reporting, is still in a nascent stage," UOB chief sustainability officer Eric Lim told the publication. "Businesses are facing a lack of standard methodologies for quantifying climate-related financial risks."

Olam Agri vice president and head of sustainability finance Nikita Asthana added that some companies may not have access to the right kind of data to most effectively analyze all of the complexities ingrained into the process of reporting climate risks for investors, while their resources may also be stretched too thin to support such work.

Why is this important?

The growing demand for climate-risk transparency from investors highlights how the effects of a warming planet could significantly impact companies' overall value and ability to generate cash.

The cost of doing business is becoming more expensive as global temperatures rise, and extreme weather supercharged by the warmer climate is one reason why, per NASA.

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According to the Potsdam Institute for Climate Impact Research, one estimate suggests a changing climate will cause $38 trillion in damages by 2050, ultimately resulting in an income reduction of 19%.

And while individual consumers have plenty of known ways to use their purchasing power to hold corporations accountable for their environmental practices, there aren't strong regulated standards on climate-risk reporting.

"A challenge that large institutional investors face is consolidating data from investee companies that utilize varying assumptions and tools for their climate risk assessments," Asthana explained to The Business Times.

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What is being done about this?

Ernst & Young assurance partner Ken Ong pointed out how regulators should play a crucial role in supporting consistent and better quantified climate-related risks, helping businesses and investors make decisions to minimize the potential for loss and boost economic growth.

"Regulators are a key enabler in accelerating action for consistent, comparable and quality climate-related disclosures," Ong told The Business Times, noting that Singapore, for example, had 96% of its listed companies participating in climate reporting for the 2023 financial year.

New frameworks to understand climate risks are also making their way into the mainstream, including what The Business Times calls the "emerging standard" of the Task Force on Climate-Related Financial Disclosures, or TCFD. This framework lays out a detailed methodology for reporting metrics, targets, governance, strategy, and risk management.

According to the report, other tools to help fill in the climate-risk analysis gap include artificial intelligence — a developing technology showing promise in myriad areas, from wildlife monitoring and support to crop management.