No. 144: Climate Disclosure in Financial Statements

Abstract

Climate exposure, a firm’s financial risks and opportunities related to climate change, is increasingly recognized as a driver of firm value. We study its reflection in financial statements. Whereas firms increasingly discuss climate exposure elsewhere (e.g., in ESG reports), investors and policymakers worry that the financial statements, the bedrock of corporate reporting, largely ignore it. To explore this emerging accounting phenomenon, we present three sets of analyses. First, EU firms – unlike U.S. firms – increasingly disclose climate impacts on key accounting items such as asset impairments and contingent liabilities. Second, these disclosures increase in firms’ climate exposure and vary with supply frictions (e.g., preparation cost) and demand forces (e.g., from enforcers). Third, in contrast to the largely voluntary, unaudited disclosures made elsewhere, climate disclosures in financial statements more strongly reflect firms’ fundamental climate exposure, in line with their role of grounding the corporate information environment in reliable ‘hard facts’.