CLIMATE CHANGE RISK FOR SUSTAINABILITY: THE IMPLICATION ON FINANCIAL AND ENVIRONMENT, SOCIAL AND GOVERNANCE REPORTING
Abstract
Objective: This study explores several aspects of climate change risk on financial reporting and the provision of non-financial information in relation to climate change risk and other important information in social and governance aspects (collectively referred to as environment, social and governance (ESG). This study also extends the analysis of assurance standard use in guaranteeing ESG reporting.
Methodology: This study utilizes professional and industry reports and research papers on issues related to the subject matter. The industry reports provide data from 2019 to 2020, and the current state of ESG reporting has been analyzed.
Findings: Climate change risk has a significant effect on financial reporting. Auditors should consider climate change risk when performing a financial statement audit. Non-financial information, such as ESG or sustainability reporting, has been included as part of corporate reporting, given that non-financial information has been used when stakeholders make their investment or other decisions.
Originality/Value: This study adds new knowledge by exploring the influence of climate change risk on financial reporting. Specifically, ESG frameworks, guidelines or standards are referred by companies when preparing the sustainability reporting to their stakeholders.
Implication: This study shows that practicing sustainable reporting helps companies increase trustworthiness to stakeholders. It also highlights that more research should be conducted on issues related to current ESG practices, accounting standards and acceptance of stakeholders towards better sustainability.
Keywords: Sustainable reporting, environment, climate change, audit, ESG framework.
Cite as: Kamarudin, Y., Mohd-Sanusi, Z., Musa, K., Kazemian, S., Hitam, M., Ghazali, A. W., & Shafie, N. A. (2023). Climate change risk for sustainability: The implication on financial and environment, social and governance reporting. Journal of Nusantara Studies, 8(TI), 277-299. http://dx.doi.org/10.24200/jonus.vol8issTIpp277-299
References
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Albitar, K., Hussainey, K., Kolade, N., & Gerged, A. M. (2020). ESG disclosure and firm performance before and after IR: The moderating role of governance mechanisms. International Journal of Accounting & Information Management, 28(3), 429-444.
Albuquerque, R., Koskinen, Y., Yang, S., & Zhang, C. (2020). Resiliency of environmental and social stocks: An analysis of the exogenous COVID-19 market crash. The Review of Corporate Finance Studies, 9(2020), 593–621.
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disclosures/#:~:text=The%20objective%20of%20IFRS%20S2,providing%20resources%20to%20the%20entity.
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Assurance-2019-2020-date.pdf
IOSCO. (2020). Sustainable finance and the role of securities regulators and IOSCO. The International Organization of Securities Commissions. https://www.iosco.org/library/pubdocs/pdf/IOSCOPD652.pdf
Manes-Rossi, F., Tiron-Tudor, A., Nicolò, G., & Zanellato, G. (2018). Ensuring more sustainable reporting in Europe using non-financial disclosure—De Facto and De Jure evidence. Sustainability, 10(4), 1-20.
Nations, U. (2015). Transforming our world: The 2030 agenda for sustainable development. United Nations. https://sdgs.un.org/2030agenda
Ng, K. (2021, April 16). DBS to Exit Thermal Coal Lending by 2039. The Straits Times. https://www.straitstimes.com/business/banking/dbs-to-exit-thermal-coal-lending-by-2039
Pertamina. (2021). 2020 sustainability report. Adapt IT. https://www.adaptit.com/hubfs/2022%20Sustainability%20Report/2022%20Interactive%20Sustainability%20Report/mobile/index.html
PwC. (2019). Older and wiser: Is responsible investment coming of age? PricewaterhouseCoopers.
PwC. (2020). Climate change and the food industry. PwC. https://www.pwc.de/en/retail-and-consumer/climate-change-and-the-food-industry.html#:~:text=%22The%20food%20industry%20should%20in,is%20already%20the%20case%20today.%22
PwC. (2021). Mine 2021: Great expectations, seizing tomorrow. PwC. https://www.pwc.com/id/en/pwc-publications/industries-publications/energy--utilities---mining-publications/mine-2021.html
PwC. (2022). The ESG execution gap: What investors think of companies’ sustainability efforts. PwC. https://www.pwc.com/gx/en/issues/esg/global-investor-survey-2022.html
Roychowdhury, S., Shroff, N., & Verdi, R. S. (2019). The effects of financial reporting and disclosure on corporate investment: A review. Journal of Accounting and Economics, 68(2-3), 101246.
Sani, N. F. A., Muda, R. M., Arshad, R., & Nair, R. (2020). The influence of environmental, social, governance factors and firm performance on the sustainable reporting of Malaysian companies. International Journal of Economics and Business
Research, 20(4), 407-424.
Schaub, S., & Finge, R. (2020). Effects of drought on hay and feed grain prices. Environmental Research Letters, 15(1), 034014.
Steiger, R., Scott, D., Abegg, B., Pons, M., & Aall, C. (2019). A critical review of climate change risk for ski tourism. Current Issues in Tourism, 22(11), 1343-1379.
TCFD. (2017). Recommendations of the task force on climate-related financial disclosures. TCFD. https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf
TCFD. (2020). Task force on climate-related financial disclosures: 2020 status report. TCFD. https://assets.bbhub.io/company/sites/60/2020/09/2020-TCFD_Status-Report.pdf
Weiskopf, S. R., Rubenstein, M. A., Crozier, L. G., Gaichas, S., Griffis, R., Halofsky, J. E., Hyde, K. J. W., Morelli, T. L., Morisette, J. T., Muñoz, R. C., Pershing, A. J., Peterson, D. L., Poudel, R., Staudinger, M. D., Sutton-Grier, A. E., Thompson, L., Vose, J.,
Weltzin, J. F., & Whyte, K. P. (2020). Climate change effects on biodiversity, ecosystems, ecosystem services, and natural resource management in the United States. The Science of the Total Environment, 733(1), 137782.
Abdul Razak, S. S., & Ali, N. (2023). Green financing and environmental protection. Management & Accounting Review, 22(2), 63-82.
Abnett, K., Daigle, K., & James, W. (2021, November 2). Nordic, UK pension funds commit $130 billion to fight climate change. Reuters. https://www.reuters.com/business/environment/nordic-uk-pension-funds-commit-130-billion-fight-climate-change-2021-11-02/
Adams, C. A., & Abhayawansa, S. (2022). Connecting the COVID-19 pandemic, environmental, social and governance (ESG) investing and calls for ‘harmonisation’ of sustainability reporting. Critical Perspectives on Accounting, 82(1), 102309.
Albitar, K., Hussainey, K., Kolade, N., & Gerged, A. M. (2020). ESG disclosure and firm performance before and after IR: The moderating role of governance mechanisms. International Journal of Accounting & Information Management, 28(3), 429-444.
Albuquerque, R., Koskinen, Y., Yang, S., & Zhang, C. (2020). Resiliency of environmental and social stocks: An analysis of the exogenous COVID-19 market crash. The Review of Corporate Finance Studies, 9(2020), 593–621.
Allison-Hope, D. (2016). Triangles, numbers, and narratives: A proposal for the future of sustainability reporting. BSR. https://www.integratedreporting.org/wp-content/uploads/2017/01/BSR_Future_of_Reporting_2016.pdf
Amiram, D., Bozanic, Z., Cox, J. D., Dupont, Q., Karpoff, J. M., & Sloan, R. (2018). Financial reporting fraud and other forms of misconduct: A multidisciplinary review of the literature. Review of Accounting Studies, 23(1), 732–783.
Anderson, N. (2020). Standards and climated-related disclosures. IFRS. https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s2-climate-related-
disclosures/#:~:text=The%20objective%20of%20IFRS%20S2,providing%20resources%20to%20the%20entity.
Atan, R., Alam, M. M., Said, J., & Zamri, M. (2018). The impacts of environmental, social, and governance factors on firm performance: Panel study of Malaysian companies. Management of Environmental Quality, 29(2), 182-194.
BlackRock. (2020). BlackRock's 2020 letter to clients: Sustainability as BlackRock’s new standard for investing. BlackRock. https://www.blackrock.com/corporate/investor-relations/2020-blackrock-client-
letter#:~:text=Because%20sustainable%20investment%20options%20have,our%20new%20standard%20for%20investing.
BSR. (2018). A practitioner’s view of sustainability reporting: Challenges and solutions. BSR. https://www.bsr.org/reports/BSR_A_Practitioners_View_of_Sustainability_Reporting_Challenges_and_Solutions.pdf
Ferriani, F., & Natoli, F. (2020). ESG risk in times of Covid-19. Banca D'Italia.
Fink, L. (2020). Larry Fink's 2020 letter to CEOs: A fundamental reshaping of finance. BlackRock. https://www.blackrock.com/americas-offshore/en/larry-fink-ceo-letter
Gojek. (2021). Sustainability report 2020: Creating long-term value for people and the planet. Gojek. https://lelogama.go-jek.com/Gojek_Sustainability_Report_30-04-2021.pdf
Gold, A., Heilmann, M., Pott, C., & Rematzki, J. (2020). Do key audit matters impact financial reporting behavior? International Journal of Auditing, 24(2), 232-244.
Green, M. (2019, September 23). Pension funds and insurers pledge climate action at U.N. summit. Reuters. https://www.reuters.com/article/us-climate-change-un-investors-idUSKBN1W81AG
Hornsey, M. J., & Fielding, K. S. (2019). Understanding (and reducing) inaction on climate change. Social Issues and Policy Review, 14(1), 3-35.
Huang, D. Z. X. (2019). Environmental, Social and Governance (ESG) activity and firm performance: A review and consolidation. Accounting & Finance, 61(1), 335-360.
IAASB. (2008). ISA 200: Overall objectives of the independent auditor and the conduct of an audit in accordance with international standards on auditing. In Handbook of international quality control, auditing, review, other assurance, and related
services pronouncements (pp. 50-67). International Auditing and Assurance Standards Board.
IAASB. (2020a). Effects of climate-related matters on financial statements. International Auditing and Assurance Standards Board. https://www.ifrs.org/news-and-events/news/2020/11/educational-material-on-the-effects-of-climate-related-matters/
IAASB. (2020b). The consideration of climate-related risks in an audit of financial statement. International Auditing and Assurance Standards Board. https://www.iaasb.org/publications/consideration-climate-related-risks-audit-financial-statement
IFAC. (2021). The state of play in sustainability assurance - The benchmarking global practice. IFAC. https://ifacweb.blob.core.windows.net/publicfiles/2023-02/IFAC-State-of-Play-Sustainability-Assurance-Disclosures_0.pdf
IFAC. (2022). The state of play in reporting and assurance of sustainability information: Update 2019-2020 data & analysis. IFAC. https://www.ifac.org/_flysystem/azure-private/publications/files/IFAC-State-of-Play-in-Sustainability-Reporting-and-
Assurance-2019-2020-date.pdf
IOSCO. (2020). Sustainable finance and the role of securities regulators and IOSCO. The International Organization of Securities Commissions. https://www.iosco.org/library/pubdocs/pdf/IOSCOPD652.pdf
Manes-Rossi, F., Tiron-Tudor, A., Nicolò, G., & Zanellato, G. (2018). Ensuring more sustainable reporting in Europe using non-financial disclosure—De Facto and De Jure evidence. Sustainability, 10(4), 1-20.
Nations, U. (2015). Transforming our world: The 2030 agenda for sustainable development. United Nations. https://sdgs.un.org/2030agenda
Ng, K. (2021, April 16). DBS to Exit Thermal Coal Lending by 2039. The Straits Times. https://www.straitstimes.com/business/banking/dbs-to-exit-thermal-coal-lending-by-2039
Pertamina. (2021). 2020 sustainability report. Adapt IT. https://www.adaptit.com/hubfs/2022%20Sustainability%20Report/2022%20Interactive%20Sustainability%20Report/mobile/index.html
PwC. (2019). Older and wiser: Is responsible investment coming of age? PricewaterhouseCoopers.
PwC. (2020). Climate change and the food industry. PwC. https://www.pwc.de/en/retail-and-consumer/climate-change-and-the-food-industry.html#:~:text=%22The%20food%20industry%20should%20in,is%20already%20the%20case%20today.%22
PwC. (2021). Mine 2021: Great expectations, seizing tomorrow. PwC. https://www.pwc.com/id/en/pwc-publications/industries-publications/energy--utilities---mining-publications/mine-2021.html
PwC. (2022). The ESG execution gap: What investors think of companies’ sustainability efforts. PwC. https://www.pwc.com/gx/en/issues/esg/global-investor-survey-2022.html
Roychowdhury, S., Shroff, N., & Verdi, R. S. (2019). The effects of financial reporting and disclosure on corporate investment: A review. Journal of Accounting and Economics, 68(2-3), 101246.
Sani, N. F. A., Muda, R. M., Arshad, R., & Nair, R. (2020). The influence of environmental, social, governance factors and firm performance on the sustainable reporting of Malaysian companies. International Journal of Economics and Business
Research, 20(4), 407-424.
Schaub, S., & Finge, R. (2020). Effects of drought on hay and feed grain prices. Environmental Research Letters, 15(1), 034014.
Steiger, R., Scott, D., Abegg, B., Pons, M., & Aall, C. (2019). A critical review of climate change risk for ski tourism. Current Issues in Tourism, 22(11), 1343-1379.
TCFD. (2017). Recommendations of the task force on climate-related financial disclosures. TCFD. https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf
TCFD. (2020). Task force on climate-related financial disclosures: 2020 status report. TCFD. https://assets.bbhub.io/company/sites/60/2020/09/2020-TCFD_Status-Report.pdf
Weiskopf, S. R., Rubenstein, M. A., Crozier, L. G., Gaichas, S., Griffis, R., Halofsky, J. E., Hyde, K. J. W., Morelli, T. L., Morisette, J. T., Muñoz, R. C., Pershing, A. J., Peterson, D. L., Poudel, R., Staudinger, M. D., Sutton-Grier, A. E., Thompson, L., Vose, J.,
Weltzin, J. F., & Whyte, K. P. (2020). Climate change effects on biodiversity, ecosystems, ecosystem services, and natural resource management in the United States. The Science of the Total Environment, 733(1), 137782.
Published
2023-09-30
How to Cite
Kamarudin, Y., Mohd-Sanusi, Z., Musa, K., Kazemian, S., Hitam, M., Ghazali, A. W., & Shafie, N. A. (2023). CLIMATE CHANGE RISK FOR SUSTAINABILITY: THE IMPLICATION ON FINANCIAL AND ENVIRONMENT, SOCIAL AND GOVERNANCE REPORTING. Journal of Nusantara Studies (JONUS), 8(3), 277-299. https://doi.org/10.24200/jonus.vol8iss3pp277-299
Section
Articles
