Investors provided their expectations for financial reporting by U.S. oil and gas companies when it comes to addressing climate risk and avoiding stranded assets, according to a report issued Thursday by Ceres.
Companies and their investors are at risk of stranded assets unless that financial reporting adequately reflects the impact of both climate change and the clean-energy transition, the report said.
The report, "Lifting the Veil: Investor Expectations for Paris-Aligned Financial Reporting by Oil and Gas Companies," advises the oil and gas industry on how to address climate change in compliance with U.S. financial disclosure standards and to meet investor expectations for transparency.
Recommendations for companies, corporate boards, audit committees and auditors should ensure that financial reporting is aligned with the Paris Agreement goal to limit global temperature rise to no more than 1.5 degrees Celsius and is consistent with generally accepted accounting practices required by the Financial Accounting Standards Board.
"Existing accounting standards are designed to give investors fair warning when it looks like assets may become stranded, as can happen in any period of disruption and transition," report author Samantha Ross said in a statement. "If companies don't disclose the assumptions they use to set and test asset values, it is very difficult for investors to understand the extent of the value at risk of future stranding. Financial accounting requires numerous estimates about the future."
According to the report, many U.S. oil and gas companies have yet to set targets or fully acknowledge the financial implications of the energy transition, including a global drop in demand for fossil fuels, more regulation and increasingly affordable renewables.
Anne Simpson, chairwoman of Ceres' Climate Action 100+ steering committee and managing investment director of board governance and sustainability at the $469.8 billion California Public Employees' Retirement System, Sacramento, contributed to the report.
"Investors need comprehensive reporting on risks and opportunities that drive returns. That is fundamental to our fiduciary duty in allocating capital and exercising stewardship, Ms. Simpson said in an emailed statement.
"Investors need company financials to reflect sustainable assumptions, with the assurance that audit committees and auditors have signed off on the numbers and the narrative. Without this we are navigating uncertainty through a fog of unregulated data points which blur our line of sight into risk and return," Ms. Simpson added.
