Evolving Landscape of Climate-Related Financial Reporting

This article highlights some key climate-related considerations that directors and audit committees should focus on when preparing financial statements (FS) for FY2024.

Regulatory Developments in Climate Reporting

From FY2025, all issuers are required to disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions, aligning with the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards set by the International Sustainability Standards Board (ISSB). These regulations aim to improve the connectivity between sustainability reporting (SR) and financial reporting (FR), ensuring that stakeholders can assess financial impacts alongside corporate sustainability commitments.

Key Climate-Related Financial Considerations

1. Financial Impacts of Climate Policies and Initiatives

Companies must consider how climate-related regulations, such as carbon tax increases, affect operational costs. Rising electricity and gas tariffs due to sustainability policies could lead to higher input costs, influencing financial performance and long-term strategic planning.

2. Connectivity Between Sustainability and Financial Reporting

Investors and stakeholders expect a cohesive narrative between SR and FR. Businesses must disclose key climate-related assumptions in financial statements, such as the effects of net-zero commitments, green financing, and carbon trading initiatives. A lack of alignment between sustainability goals and financial disclosures could raise concerns about greenwashing.

3. Accounting for Renewable Energy Projects and Emission Schemes

Companies may adopt Power Purchase Agreements (PPAs) to source renewable energy. Accounting for these agreements requires careful evaluation of key factors, including contract duration, pricing mechanisms, and energy volumes. Additionally, firms with obligations under GHG emission regulations must disclose their liabilities related to purchasing emission rights.

4. Impairment of Non-Financial Assets

Climate risks can impact asset valuation and impairment assessments. Companies must consider how changing regulations, shifting consumer preferences, and emerging sustainability risks influence the recoverability of assets. When estimating cash flows for impairment testing, firms should incorporate climate-related risks and disclose key assumptions related to discount rates, growth projections, and expected future costs.

Preparing for the Future of Climate Reporting

As Singapore moves towards new sustainability reporting requirements, companies must proactively integrate climate-related considerations into financial planning and risk management.

Recommendations for Audit Committees:

• Assess the impact of climate-related risks on financial statements.
• Engage early with auditors to ensure proper accounting treatment of climate-related matters.
• Plan for the integration of IFRS Sustainability Disclosure Standards into financial reporting frameworks.

Is your organization prepared to navigate these financial reporting challenges? Let’s explore how we can support your compliance journey effectively. For a discussion on this topic, please contact Chetan Hans Tin Wei, Hong Anne Liew .