The Impact of Climate Change in the Valuation of Production Assets via the IFRS Framework

Abstract

An interesting relatively new development in the field of corporate climate change disclosures is the Task force on Climate-related Financial Disclosures (TCFD). The TCFD aims to help identify the information needed by financial stakeholders to appropriately assess and price climate change related risks and opportunities. In its first Report (2016), the TCFD recommends that companies provide climate change related disclosures specifying the impact thereof on their financial performance through mainstream (i. e. public) financial filings.In this paper, we look at the financial accounting standards as an institutional framework, and in particular pose the question to what extent this framework supports companies to disclose how climate change impacts their operations and the value of the production assets. To test to what extent companies make disclosures in relation to climate change, we selected four energy companies and conducted a comparative case study analysis. Our focus is on the valuation of production assets, more specifically, drilling platforms, windmill platforms, heavy equipment and transport means used to support the production, and pipes and cables to transport the energy units produced.Interesting findings were: (i) in all four cases, potential future changes (caused by climate change) concerning the valuation of the production assets are not (yet) accounted for in their Balance Sheet Annex. This is remarkable because climate change is likely to have an effect on the future value of the production assets employed in the two types of industries, among others caused by the development that renewable energy demand increases at the expense of non-renewable energy demand; and (ii) the current financial reporting system does not support renewable energy companies to provide meaningful and quantitative insights in expected increases of their future cash inflows and their financial and innovation potential. This impedes financiers and investors to accurately and meaningfully assess the value of a renewable energy company’s business compared with a non-renewable company’s business.