Senior figures from standard-setters, regulators, auditors and industry gathered in London today (7 July) for the Climate Risk in Financial Reporting Forum 2026. The day's discussions kept returning to a single thread: existing accounting rules are largely considered fit for purpose, but connecting climate risk to the financial statements remains a significant challenge in practice.
Sessions ranged from the International Accounting Standards Board's (IASB) new illustrative examples to the sector-specific pressures facing industries such as oil and gas as they navigate stranded asset risk and transition plans.
The IASB has concluded that its existing standards are sufficient to address climate-related risks in financial statements, opting against amendments in favour of a small set of illustrative examples designed to change preparer behaviour.
While it started working on this issue through the lens of climate risk, the standard-setter's final illustrative examples dropped the 'climate' tag to talk about 'uncertainties' more broadly, reflecting the reality that materiality is dynamic - risks that were immaterial a decade ago may warrant disclosure today - and the Board cannot predict what the next material uncertainty will be.
The examples focus on three areas flagged as most relevant to investors - materiality, key assumptions and estimates, and the aggregation or disaggregation of information.
At the forum, held under the Chatham House Rule, a session deep dived into two of the IASB's examples. One illustrated that a company may need to explain why a strategically significant transition plan has had no effect on the numbers, since silence itself could risk misleading investors.
A second example, on impairment testing, shows that climate-related factors such as future carbon price assumptions need not automatically trigger an impairment. However, where they represent a key assumption, investors should be able to understand how management arrived at it and how sensitive the conclusion is to change - giving them a "hook" for follow-up engagements.
Underlying both examples is a push for greater connectivity between sustainability reporting and financial statements: not just cross-referencing, but a coherent, joined-up narrative that builds investor trust.
Yet expectations shouldn't be overstated. Disclosures which become common market knowledge over time may cease to be material and that success will ultimately be measured by whether companies present a consistent story to the market over the coming reporting cycles, rather than by any single metric.
Even if the standards are fine and the reporting framework needs no rewrite, applying it is no simple task. For preparers, the theory of connecting climate risk to the financial statements is proving far harder to execute in practice.
One challenge is timing: impairment testing typically spans a 10-year cash flow horizon, meaning companies must translate long-term transition plans into short-term assumptions, and panellists stressed the need for robust climate scenarios to bridge that gap.
A second challenge is the data itself: climate information arrives from disparate sources (risk management, sustainability teams, business units and external vendors) using different methodologies, time horizons and levels of granularity, requiring significant investment in data infrastructure, governance and reconciliation dashboards, particularly for financial institutions under regulatory and audit scrutiny.
A third, less obvious, challenge is organisational: one panellist described having reduced financial reporting to four or five systems company-wide, while sustainability reporting still runs across a far larger number, including spreadsheets, meaning sustainability disclosure remains disproportionately labour-intensive compared with financial reporting.
Panellists were also candid about the risk of over-disclosure driven by uncertainty rather than materiality.
One noted that companies sometimes include disclosures that are "clearly trivial", simply because preparers feel obliged to say something once a requirement exists, rather than applying a genuine materiality threshold, a dynamic which one panellist attributed to discomfort with judgement calls rather than any regulatory demand.
The consistent advice was to work backwards from operational risk: identify what could affect the business physically or through transition pressures, assess likely financial consequences, and let that analysis - rather than a checklist mentality - determine what belongs in the financial statements.
Centralisation emerged as a practical enabler of this, with one company noting that concentrating climate risk expertise centrally, rather than expecting it to develop uniformly across dozens of local subsidiaries, was essential to maintaining consistency and quality.
That preference for centralisation echoes a belief amongst CFOs' that, to make sustainability disclosure practical, one needs to start by placing the sustainability function inside finance itself.
One panellist described embedding the sustainability team directly under finance so that disclosures are grounded in the same data discipline and governance as financial reporting, arguing this brings "a dominant voice of logic and reason" to a process otherwise pulled in many directions.
The priority, on this account, is cutting through complexity rather than adding to it: simplifying taxonomies and data points down to what is genuinely material, while using internal data - energy consumption, asset usage, carbon emissions captured digitally at source - as the more reliable foundation than external repositories, some of which have been discontinued or are inconsistent in quality.
Disclosure integrity directly links to long-term strategy rather than short-term earnings pressure, with one participant noting that credibility with long-term institutional investors depends on consistency between what a company says operationally and what it discloses, since any perceived overstatement or greenwashing becomes a reputational and business risk in itself.
A second panellist described tying executive and long-term incentive pay to sustainability performance as a practical mechanism for embedding this connection between strategy and disclosure at the leadership level, reinforcing that the disclosure process is only as credible as the underlying business decisions it reflects.
If CFOs are working to align the two sides of reporting internally, EFRAG's connectivity project has been grappling with the same question from a standard-setting angle: where, precisely, should the boundary between the financial statements and sustainability disclosures sit?
The project highlights this central question, noting that not every sustainability-related exposure carries a corresponding disclosure within the financial statements.
The suggested starting point is materiality, assessed in the specific context of the financial statements. However, grey areas remain, particularly around forward-looking information such as expected synergies in business combinations or the treatment of climate commitments that fall short of recognised contingent liabilities or assets.
Views diverge here: some investors welcome more forward-looking information being brought inside the financial statements precisely because it then carries the higher assurance that comes with audit, while others are more cautious about extending the boundary too far, and there have been calls for the IASB to clarify explicitly where that line should be drawn.
While sustainability-reporting standards embed connectivity requirements, doing the same directly into accounting standards isn't necessarily a good idea for standard-setters as it risks forcing information that isn't genuinely material into reports, undermining rather than serving the qualitative characteristics (understandability, relevance, faithful representation) that connectivity is meant to achieve.
The more useful mechanism, in this view, is not a new boundary-setting rule but clearer narrative discipline: illustrative examples showed that disclosures work best when management gives a well laid-out explanation of why something (such as an asset retirement obligation tied to a transition plan) has not yet crystallised in the financial statements, rather than simply stating a number without explaining its time horizon, measurement basis, or how it relates to what's already recognised.
That same emphasis on narrative over numbers is true for audit committees, though from a governance vantage point.
For audit committee members, climate has become one more risk to be assessed within existing governance structures rather than a fundamentally new discipline, with a growing emphasis on specialist expertise and on assurance over sustainability data given how much of it relies on estimates.
Panellists were notably candid about the limits of quantitative climate reporting, one speaker described scepticism toward scenario models and interim targets that reward inaction in the near term while penalising early transition, arguing that the qualitative narrative around the numbers matters more than the numbers' apparent precision.
That scepticism toward the numbers found its mirror image in the investor community, where the message was that qualitative narrative alone is not enough as climate risk ultimately has to show up in the numbers if it is to shape capital allocation.
One panellist argued that materiality is defined by relevance rather than a fixed quantitative threshold, and that as the economic backdrop shifts, exposures that weren't material in the past may become so, with investors less interested in the conclusion a company reaches than in seeing the reasoning behind it, since many of the underlying scenario models used to justify "immaterial" conclusions have proven unrealistic in practice.
Another speaker put the challenge to the audience directly: strip away the front-half narrative reporting, and would a reader still be able to tell from the accounts alone whether climate was a material risk to the business?
Investor engagement, panellists said, works best when it starts from a conversation about the story behind the numbers rather than a demand for technical figures.
Engagement teams are often reluctant to raise accounting questions because they aren't accountants themselves, but the aim should simply be to understand how a company arrived at its conclusions.
Voting against audit committee chairs was described as a genuine lever of last resort where climate risk appeared under-weighted in the financial statements.
One panellist cited Shell's enhanced disclosure – which included detailed sensitivity analysis against demanding transition scenarios - as an example of sustained investor engagement which eventually produced real change.
Asked for a single request of companies, regulators or auditors, the panel's answers converged on openness: less emphasis on rigid figures and pre-set assessments, and more willingness to have a genuine conversation about why a disclosure was, or wasn't, made.
Connectivity and cohesion in reporting is emerging from a regulator's standpoint. Whilst not perfect, there is more of a sense these days of a single product, whereas in the past reporting was done by two different teams in two different voices within an annual report,
However, a concern remains that a proliferation of additional reporting requirements without thoughtful consideration of the efficiency of the overall reporting risks undermining the value of annual reports as a concise decision-useful package for investors.
A key factor here is the issue of materiality, which some described as increasingly poorly understood and inconsistently applied.
"There is a need for more challenging but more valuable conversation between companies and investors about how to narrow down what is material and identify the really important things that they need to report," a panellist argued.
