With the climate crisis growing ever more serious, researchers have warned that the lack of detail in firms' financial reports will greatly reduce their chances of reaching emission targets.
There are four main types of financial statements: balance sheets; income statements; cash flow statements and statements of shareholders’ equity. They all show people where a company's money came from, where it went and where it is now. Therefore, a lack of detail or transparency means that there is no way of knowing if money is being put into combating climate change.
Carbon Tracker, a think tank, has called for firms “to be more transparent as to how they will hit sustainability targets”.
With 70% of firms not including climate impacts in their financial statements (according to a study by Climate Tracker on 107 global firms), it is difficult to understand, and thus appropriately deal with, the impact of global firms on the climate.
Furthermore, with the lack of financial information, funds could be being allocated to unsustainable businesses, such as within the oil industry. This would further reduce nations chances to decarbonise in the short time remaining to achieve the Paris goals.
One potential solution is to force firms to consider the climate impacts in their financial statement by giving them monetary costs.
A system that has tried to achieve this is the EU Emissions Trading System (EU ETS). How it works is that emitting firms are given a set number of permits allowing them to emit a certain level.
Firms that expect not to have enough permits must either cut back on their emissions or buy permits from other firms. The free market determines prices naturally through demand and supply.
This means that firms that can reduce their emissions at a low cost will sell their permits, making a profit, while firms that would incur a large cost at reducing emission can buy permits for a lower cost, thus making a profit.
Therefore the levels of emissions will remain constant at the desired level, but it can be achieved cost-effectively.
There are however some drawbacks to this scheme. Firstly it is fairly new so its impacts and effectiveness are not fully known. It also took a long time to work, as at first supply of permits was too high, causing prices to fall and emissions remaining high.
Furthermore, firms in the area that the scheme is being used will incur extra costs compared to those located outside. This may cause a fall in international competitiveness, and potentially cause firms to relocate outside the scheme's areas. If this was to happen, the scheme would be ineffective and economic growth may be prohibited in scheme areas.
On the other side of the argument of firm responsibility to the climate crisis, Andy Mayer (chief operating officer at free-market think tank the Institute of Economic Affairs IEA) said firms should not have to focus on “ticking boxes for activists’”. This suggests that firms should continue to focus on their own profit and economic growth.
The International Auditing and Assurance Standards Board (IAASB) said: "If climate change impacts the entity, the auditor needs to consider whether the financial statements appropriately reflect this" rather than Governments.
Therefore, is it up to the responsibility of Governments to manipulate firms' incentives to combat climate change, or do we wait patiently for the free market to attempt to solve the issue, even though from the current standpoint, it seems unlikely that it will fix the growing catastrophe we face.
Written by Charlotte Hurst
Research compiled by Jonas Theaker