Climate change reporting for CPAs: An introduction

As CPAs and the broader business community are aware, climate change has been referred to as the defining issue of our times. Economic, social and policy drivers have created a demand from capital investors and regulators for organizations to disclose details of climate change impacts that have already affected the organization’s financial standing and may likely affect it in the near-term and long-term. This article provides an overview of economic drivers, policy drivers, reporting standards, reporting regulations and reporting structure to support CPAs in understanding climate change reporting

1. Economic drivers

Communities, companies and capital markets are experiencing the consequences of extreme weather events and climate change. The cost of these is predicted to impact the global economy $38 trillion annually by 2049. We’re already seeing these costs add up, with the recent fires in Los Angeles estimated to exceed $95 billion in property and capital losses, and droughts in 2023 causing a $1 billion revenue shortfall for BC Hydro.

The impacts of climate change are already present and set to increase, making it both a near-term and long-term concern that requires consideration in corporate risk management and economic development.

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2. Policy drivers

Multilateral, national and subnational commitments have been established in order to mitigate the worst impacts of climate change.

International

In 2015, 196 parties at the UN Climate Change Conference (COP21) adopted the Paris Agreement, a legally binding international treaty with the goal of limiting global average temperatures from exceeding 2 °C above pre-industrial levels. To align with these limits, global carbon emissions must decrease by 50% by 2030 and the global economy must become carbon neutral by 2050.

Canada

The Canadian Net-Zero Emissions Accountability Act became law in 2021. This enshrined into legislation the Government of Canada’s commitment to achieve net-zero greenhouse gas (GHG) emissions by 2050. The 2030 Emissions Reduction Plan provides a roadmap to achieve GHG emissions reductions of 40-45% below 2005 levels by 2030.

In British Columbia, the Climate Change Accountability Act, legislates the B.C. government to submit an annual report outlining progress on climate action. CleanBC is government’s plan to lower climate-changing emissions by 40% by 2030.

Europe

The European Climate Law sets a legally binding target of net zero GHG emissions by 2050.

United States

No federal laws or commitments have been made. However, several states have adopted GHG emissions targets. While each state has adopted a target and baseline year that suits its circumstances, the prevalence of these targets shows the widespread support for climate action and subsequent reporting requirements.

3. Reporting standards

In 2023 the International Sustainable Standards Board (ISSB) published the IFRS Sustainable Disclosure Standard S2 on Climate-Related Disclosures to address the demand from capital investors, regulators and reporting organizations for transparency and accountability related with economic and policy drivers associated with climate change impact. In 2024 the Canadian Sustainability Standards Board (CSSB) adapted IFRS S2 to the Canadian context and published CSSB C2 in the CPA Canada Handbook. While the IFRS and CSSB standards remain voluntary frameworks, they will act as an influential reference point for Canadian regulators deciding on mandatory rules for climate-related disclosure.

4. Reporting regulations

Although climate-related reporting is not yet mandatory in Canada or the United States, both Europe and the state of California have implemented reporting requirements that will be phased in and require limited or reasonable assurance.

Europe

The Corporate Sustainability Reporting Directive (CSRD) came into effect in 2023, with an omnibus proposal currently under consideration by the European Commission. CSRD requires large companies to disclose information on risks and opportunities arising from social and environmental issues, including climate change. If the omnibus proposal is accepted, only Canadian firms with over €450 million net turnover in Europe and over 250 employees at European subsidiaries will be required to report.

United States

In early 2024 the United States Securities and Exchange Commission (SEC) adopted new rules requiring publicly traded companies to submit climate-related disclosures. A month after adoption, the rule was voluntarily stayed. In February, the acting SEC Chair published a statement that effectively ended the Climate-Related Disclosure Rule. Despite the federal withdrawal from climate-related reporting, several states are set to mandate it. California’s Senate Bills 219, 253, 261 and Assembly Bill 1305 are in effect, with New York Senate Bill S3456 and others up for legislation.

5. Reporting structure

Although there are many different reporting frameworks, standards and regulations surrounding climate change, the objectives, structures and terminology across them is fairly consistent. The intention behind this structure is to provide investors, regulators and other interested stakeholders with insights into how the reporting organization is tackling the challenges of climate change to provide sustainable value delivery.

As part of this, new terminology for CPAs to understand includes:

1. Physical risk – the direct impact of climate change. This includes:
   1. acute physical risk, or the increased severity of extreme weather events such as floods, hurricanes, heatwaves and wildfires; and
   2. chronic physical risks that arise from longer-term shifts in climatic patterns including changes in precipitation and temperature which could lead to sea level rise, reduced water availability, biodiversity loss and changes in soil productivity. Acute and chronic climate risks could result in financial losses due to direct damage to assets and/or supply chain disruptions.
2. Transition risk – the risks that arises from the efforts to transition to a low-carbon economy. This includes policy, legal, technological, market and reputational risks that could carry financial implications for an organization.

The key outcomes from climate change reporting are meant to answer the following questions:

1. How is the reporting organization managing its climate-related physical risk?
   1. In the reporting year, has climate change affected the financial standing of the reporting organization?
   2. What is the likelihood of physical risk affecting the financial standing of the reporting organization in the future? How is the reporting organization preparing to mitigate these risks?
2. How prepared is the reporting organization to operate in a low-carbon economy?

To answer these questions, the reporting organizations must disclose how climate change is incorporated into governance, risk management and strategy, with applicable metrics and targets to validate the organization’s approach.

Governance

Organizations will need to explain how climate change is considered in their oversight framework:

• Board oversight of climate-related issues (disclosure of responsible person or committee on the board and frequency of briefings on climate change)
• Board member climate change skills and training
• Management’s role in assessing and managing climate-related risks and opportunities
• Management compensation connected to ESG and climate-related targets and metrics.

Strategy

Organizations will need to describe how climate change is considered in planning for the future:

• Disclose the established short, medium and long-term time horizons for strategic planning
• Explain any identified climate-related risks and opportunities across short, medium and long-term time horizons
• Describe the impact of climate-related risks and opportunities on the organization’s strategy and financial planning under various climate-related scenarios (these could focus on physical and/or transition risk scenarios)
• Describe any established transition plans to mitigate identified risks through scenario analysis

Risk Management

To reassure stakeholders that potential threats have been considered and can be mitigated, organization will need to:

• Explain how climate change physical and transition risks are incorporated into the organization’s enterprise risk management system
• Determine financial thresholds and describe the financial planning elements that the climate-related risk(s) affect (examples include revenues, costs, capital expenditures, acquisitions and divestments, assets, liabilities, reserves, etc.)
• If identified as material, organizations are required to disclose additional information; if not considered material, organizations must explain the rationale

Metrics and targets

Transparency and accountability are the key objectives for climate change reporting requirements. Organizations must disclose metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is relevant. Under anticipated regulations, this disclosure will require at least limited assurance.

The Greenhouse Gas Protocol has been the accepted approach to disclosing GHG emissions in sustainability reporting. Organizations that have set targets for emission reductions as part of strategy must explain the metrics chosen and their approach to meeting the stated targets.

For a deeper drive into climate change metrics and targets keep an eye out for CPABC’s primer, coming soon. Other useful resources to support CPAs become more familiar with climate change reporting include the Canada Climate Institute’s Climate Costs Tracker and Simpson Thacher’s Preparing for California’s Climate Disclosure Laws.