Accounting for the Financial Impacts of Climate Change: ASTM Releases a New Standard

Now that the SEC has indicated that public companies should be considering climate change in evaluating financial risks, the pressing questions include what should be evaluated and how it should be reported.  ASTM’s newly released standard on Financial Disclosures Attributed to Climate Change, E2718-10 may be just the thing.  The standard, which has been under development for the last 2 years, provides guidance on processes for identifying, quantifying and disclosing potential material impacts related to climate change, both the benefits and liabilities. 

The standard does not set out specific measurements, but rather guidelines.  The degree and type of disclosure depends on the scope and objective of the financial statements and contractual obligations, court decisions or regulatory directives might also apply.  The first step in determining whether disclosure is warranted involves cataloging the major circumstances that might give rise to financial impacts, such as enforcement of laws and regulations, compliance and reporting costs, or even use of resources and technologies. Companies should also evaluate predicted changes in assets due to changes in weather, sea level, disease, and resource availability.  If the potential impacts have a likelihood that is more than remote, could have a severe impact on the entity, and might occur during the near-term of the next year, the standard recommends that they be disclosed, although disclosure may still be warranted even if the level of uncertainty or time horizon are too great to allow meaningful estimation.   Materiality, of course, also plays a role in whether potential impacts rise to the level where disclosure is appropriate.

As with much in financial disclosures, the trick is to find the right balance.  ASTM notes that it will not be possible to eliminate uncertainty regarding the financial impacts of climate change, and cautions that subsequent disclosures should not be used to criticize previous disclosures, which hindsight and new standards may paint with an unfairly harsh light.  ASTM has also acknowledged that the costs to obtain information about the financial impacts of climate change should not outweigh the benefits of the information, but that it is important to use all of the relevant and reasonably ascertainable information a company can access.

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