Today, institutional investors increasingly seek, but don’t always find, corporate disclosure of relevant, decision-useful, comparable, and material climate-related data and information. Moreover, investors continue to flag inconsistencies when comparing what is reported in issuers financial statements, Management, Disclosure & Analysis (MD&A) filings, and sustainability or annual reports.

A company may, for example, commit, in its sustainability report, to phasing out fossil fuel assets and achieving net-zero by 2040. Yet the same company, in its financial statements, depreciates these assets over a 30-year useful life, without acknowledging any inconsistency.

Why is this?

Timing: From an issuer’s perspective, assessing the impact of climate matters on financial reporting requires making judgements about an uncertain future. On one hand, some climate risks may materialize over decades and appear to have limited impacts on the firm’s balance sheet and bottom line. On the other hand, physical and transition risks can significantly impact the business’ cash flows, revenues, inventories, and supply chains, with resulting impacts on profitability, liquidity, assets, and valuation.

Accounting judgements: Companies may rely on overly optimistic assumptions for commodity prices, inflation, consumer demand, asset life or discount rates, which may serve to overestimate asset value and underestimate liabilities in the financial statements.

Connectivity of disclosures: Climate impacts may be reflected in financial statements without being explicitly identified as climate-related in accompanying notes or links. For example, lower revenues in the income statement may be the result of physical risks such as flooding. Similarly, climate change may create opportunities that could impact cash flow forecasts, such as adopting eco-efficiencies, reducing operational costs, or developing greener products and services to meet changing customer demand.

Fragmentation: As of today, no single accounting standard addresses all climate-related issues. An entity may determine an item material to disclose under one International Financial Reporting Standards (IFRS) accounting standard, but not under another, or that it is more appropriate to disclose the information in the MD&A. This situation contributes to fragmented sustainability reporting.

Norms: Issuers’ accountants and auditors may simply not yet recognize climate as material to report in the financial statements, especially if they are domiciled in markets where climate related financial disclosures are still voluntary. A 2022 KPMG study of 35 global insurers found that while 40% of insurers mentioned climate in the financial statements, the disclosure was limited, often to a boilerplate statement that observable effects of climate change were considered.

Yet one might expect recognition of the materiality of climate risk to be greater for the insurance industry, considering insured losses from natural catastrophes climbed to over US$100 billion in 2025, with many property & casualty (P&C) issuers hiking premiums or even exiting markets to stem losses, with potential implications for the insurance business model.

The International Accounting Standards Board (IASB) response

In response to these limitations, the International Accounting Standards Board (IASB) published illustrative examples to help entities report on uncertainties in its financial statements. By bundling climate change into broader uncertainties IASB is signaling that climate risks are simply another category of risks and uncertainties that preparers of financial statements must address. In doing so, IASB normalizes climate risks, which contributes to further embedding climate considerations into core risk assessment and financial disclosures.

The IASB focuses on the questions an entity asks itself and the processes it should follow to determine whether additional climate disclosures would provide material information. This includes qualitative and quantitative factors, such as how exposed the entity’s exposure to physical and transition risks, and whether, based on jurisdiction and industry, users of the financial statements are likely to be influenced by this information.

How do these examples help preparers and users?

Entities are not expected to create new processes and controls to identify uncertainties. Instead, they should use their existing risk management processes and controls to determine whether climate disclosure is material. The IASB emphasizes the final six examples do not alter the IFRS accounting standards. Rather, they are intended to help reporting entities better align the information they provide in their financial statements with the information disclosed in general purpose financial or sustainability reports. Although there is no effective date, preparers will likely consider them for December 2025 year-ends.

The IASB developed six examples for disclosures about uncertainties in financial statements:

1) Entity A, which operates in a carbon-intensive industry, determines additional disclosure is necessary to disclose how it determined its climate transition plan had no impact on its financials (e.g., its existing inventory of raw materials will be consumed before new, lower carbon materials are purchased, which means no write-downs are anticipated).  

This example is significant as the entity discloses why a specific circumstance (its transition plan) is not applicable, which is atypical for financial statements.

2) Entity B is a service provider operating in an industry with low greenhouse gas emissions (GHG) or transition risks. It considers qualitative and quantitative factors, the impact of its GHG policy on future operations and, given its industry concludes, that additional disclosures are not necessary.  

In example 2,regulations require a carbon intensive entity to purchase GHG allowances. Although no impairment is recognized, the recoverable amount of its cash generating unit is considered sensitive to assumptions about future emissions costs. As a result, the entity discloses key assumptions for a full range of economic conditions, as required by IAS 36 Impairment of Assets, including assumptions that influence expected emissions allowance costs.

In example 3, although no impairment is recognized, the entity observes that IAS 1.125 and IAS 8.31A require disclosure of key assumptions and major sources of estimation uncertainty, including future legal, regulatory, economic, and market developments, which may include climate risks. The overall level of uncertainty regarding future events increases the risk that assumptions could change rapidly. For example, property, plant, and equipment could face impairment in the future due to commodity price volatility driven by geopolitical risks and significant change in price assumptions could result in an impairment charge and carrying value of property, plant, and equipment in the next financial year.

In example 4, a financial entity determines that climate risk is material to its agricultural and real estate loan portfolios, with potential impacts on loan maturities, especially considering the size of the portfolios relative to its overall lending portfolio. Specific reporting applications exist under IFRS 7 and IFRS 9 Financial Instruments, and under IFRS 7.35A–38, which require disclosure of the effects of particular risks on credit risk exposures and credit risk management practices, and how these practices relate to the modelling, recognition, and measurement of expected credit losses. This may include disclosures on properties held as collateral that are subject to flood risk, and on whether that risk is insured.

In example 5, the entity concludes that although the plant decommissioning and site-restoration obligations have an immaterial effect on the carrying amount of this provision, information about these obligations is nevertheless material. The major uncertainties for decommissioning liabilities are primarily based on asset life assumptions and when decommissioning will actually occur. Frequent new climate-related market, economic, regulatory, technological and legal developments increase the likelihood that the entity will need to review its assumptions in the next financial year, or even move decommissioning obligations forward significantly, requiring funds sooner than planned. As a case in point, Investors for Paris Compliance (I4PC) determines there is a $113-billion gap between top Canadian oil/gas companies’ reported decommissioning liabilities and estimated costs, creating material risks for shareholders, not to mention hindering climate commitments.

In example 6, which addresses aggregation and disaggregation, the entity aggregates two types of property, plant, and equipment with different climate risk characteristics and vulnerabilities: high-emission assets such as diesel trucks and lower-emission assets such as electric vehicles. Aggregating assets with different climate risk profiles may obscure the fact that certain assets are more exposed to physical risks due to geographic location or transition risk such as carbon pricing and regulations. Disaggregating information by asset type could therefore reveal material information, as different assets may be affected differently by GHG reduction regulations or changes in consumer demand.

Conclusion

Entities should ensure they present a coherent and connected story about their climate performance and strategy so that investors see alignment across the MD&A, financial statements, and sustainability-related disclosures. The examples are instructive and suggest the IASB sees room for companies to strengthen their climate-related financial disclosures, particularly, with respect to various assumptions, such as those underpinning restructuring provisions, for impairment testing and credit risk, and to move beyond boilerplate disclosures in their MD&A.

The Canada Climate Law Initiative submitted their recommendations when the IASB opened a consultation on the illustrative examples. Read the submission here.