Accounting and climate-related risks.
Date: 2024-04-09
Institutions: European Systemic Risk Board
Subjects: European Securities and Markets Authority, International Accounting Standards, banking supervision, business model, climate, environmental risk prevention, financial risk, financial transparency, governance, risk management

Climate-related risks and 
accounting 

April 2024 

 
 
 
 
  
 
Contents 

Executive summary 

1 

2 

Introduction 

Conceptual and methodological considerations 

2.1 

The boundaries of financial reporting 

2.2  Climate-related risks, accounting and financial stability 

3 

Main issues identified 

3.1 

3.2 

3.3 

The extent to which market prices incorporate climate-related risks 

The valuation of non-financial assets and liabilities 

The incorporation of climate factors into models 

Box 1 ECB observations on climate change in expected credit losses 

3.4  Disclosures 

4 

Conclusions and policy discussion 

References 

Annex 1: Work on climate-related risks by ESMA in its role as coordinator of accounting 

enforcers 

European Common Enforcement Priorities 

ECEP assessment 

Report titled “The heat is on: disclosures of climate-related matters in the financial 

statements” 

Next steps 

Annex 2: ESRS E1 Climate change 

Annex 3: IFRS accounting standards and the main issues identified 

Imprint and acknowlegements 

Climate-related risks and accounting April 2024 
Contents 

2 

5 

10 

10 

12 

17 

17 

20 

24 

24 

27 

29 

33 

36 

36 

37 

39 

39 

41 

45 

46 

1 

 
Executive summary 

This report analyses how climate-related risks are addressed in International Financial Reporting 

Standards (IFRS) and reflected in financial statements prepared in accordance with those 

standards, all from a financial stability perspective. It considers ongoing work by the IFRS 

Foundation, the European Commission and the European Securities and Markets Authority 

(ESMA). The report does not, however, discuss sustainability standards (e.g., the European 

Sustainability Reporting Standards or those issued by the International Sustainability Standards 

Board), except where they relate to connectivity. 

Climate-related risks can affect accounting, as well as the relevance, reliability and materiality of 

the information disclosed in the financial statements. The impacts of climate-related risks should be 

included in the financial statements to the extent that the recognition criteria set out in IFRS 

accounting standards are met – only in that case will the economic events and transactions 

carrying those risks result in an asset, liability, income or expense, gain or loss being reported in 

the financial statements. For this reason, financial statements may not always be able to fully 

capture the impacts of climate-related risks on a reporting entity’s financial position, results and 

risks. In particular, financial statements may not adequately reflect (i) risks that materialise beyond 

the time horizon over which the entity expects to derive economic benefits from its assets and cash 

outflows to settle its liabilities, and (ii) the future actions that an entity may be compelled to take in 

order to mitigate and address climate-related risks and to operate as a going concern. In this 

regard, prevailing uncertainty about the future impact and timing of the materialisation of climate-

related risks is an important factor to consider when assessing the extent to which accounting 

should reflect such risks. 

Although accounting is not primarily meant to foster financial stability, there are at least three 

channels of transmission: (i) transparency, (ii) behavioural response of economic agents to 

accounting information, and (iii) regulation (as accounting is either the starting point or key 

reference point when defining prudential requirements for regulated financial institutions). 

Accounting for climate-related risks could affect financial stability through any or all of these three 

channels. Moreover, while financial institutions have only limited direct exposure to climate-related 

risks, their interactions with the real economy (i.e., through loans, insurance contracts or holdings of 

securities) indirectly expose them to climate-related risks. The way in which non-financial 

corporations include climate-related risks in their financial information may also raise financial 

stability concerns. 

With these considerations in mind, the European Systemic Risk Board (ESRB) has assessed how 

climate-related risks are addressed in existing IFRS accounting standards and reflected in financial 

statements, identifying four relevant issues for financial stability: 

1.  The incomplete incorporation of climate-related risks in market prices can cause assets to be 

overestimated or liabilities to be underestimated, affecting both financial institutions (mainly 

through holdings of financial assets) and non-financial corporations (particularly through 

tangible assets measured at fair value, such as investment property). The expectation would 

be for market prices to gradually incorporate climate-related factors, as the transition to a low-

Climate-related risks and accounting April 2024 
Executive summary 

2 

 
carbon economy unfolds and as the uncertainty surrounding the physical impacts of climate 

change dissipates. However, a scenario of sudden adjustment cannot be completely ruled out. 

For instance, this could occur in the event of a sudden and disorderly transition, or due to non-

linearities and the sudden manifestation of the physical impacts of climate change. In any 

case, having climate-related risks reflected in the market price of assets is an issue that goes 
beyond the accounting realm and should be addressed by appropriate policy tools.1 

2.  The effect of climate-related risks on the initial and subsequent valuation of non-financial 

assets and liabilities, including property, plant and equipment, intangibles, goodwill, provisions 

and off-balance sheet items (e.g., contingent liabilities). Failing to fully include relevant climate-

related risks in impairment tests for non-financial assets may distort their valuation, affecting 

non-financial corporations and, indirectly, the financial sector through their exposures thereto. 

As a case in point nowadays, failure to adequately consider climate-related risks when valuing 

real estate, which plays an important role as collateral in bank lending, could affect financial 

stability in the event of sudden value adjustments. Moreover, non-financial corporations 

operating in certain sectors may fail to adequately report climate-related liabilities due to the 

prevailing uncertainty about the future financial impacts of these risks, among other factors. 

3.  The incorporation of climate factors into the models used to estimate expected credit losses 

under IFRS 9 Financial Instruments or expected cash flows from insurance contracts according 

to IFRS 17 Insurance Contracts. It may be operationally difficult for banks and insurance 

corporations to incorporate climate-related risks into their models, as they would need to 

frequently collect, review and update reliable and sufficiently granular sustainability data. 

Furthermore, in the case of catastrophe risks and insurance corporations, relying excessively 

on past data could lead to inaccurate estimates of insurance liabilities.  

4.  Disclosures. Efforts should be made to enhance disclosure requirements about how climate-

related risks are reflected in the financial statements. Even if IFRS accounting standards 

contain implicit requirements to disclose relevant information on climate-related risks, those 

requirements may go unnoticed and become ineffective, particularly if driven by a strong 

judgemental component. This puts the onus on enforcing appropriate interpretation and 

application of IFRS accounting standards. Furthermore, expanding the existing disclosure 

requirements without due consideration of the underlying estimates and data sources could 

have unintended consequences. 

The four issues identified ultimately relate to the existing uncertainty about the materialisation of 

climate-related risks. They also show that climate-related risks are viewed differently among 

stakeholders and reveal a lack of commonly accepted and sound methodologies for estimating their 

financial impact. This increases the risk of delayed recognition of climate-related risks in the 

financial statements, which could in turn lead to “information shocks” if sudden changes must be 

made to the financial statements as expectations are abruptly reassessed, potentially damaging 

financial stability via fire sales, higher cost of capital and suboptimal allocation of resources. Even if 

outside the accounting realm, further work should be carried out on methodologies to objectively 

1   See, among others, European Central Bank and European Systemic Risk Board (2022 and 2023). 

Climate-related risks and accounting April 2024 
Executive summary 

3 

 
 
gauge the impact of climate-related risks, in order to ensure comparability and aggregation of the 

impacts disclosed by individual institutions. 

The ESRB has considered possible actions related to the design and implementation of IFRS 

accounting standards that could be beneficial for the timely and accurate incorporation of climate-
related risks into the financial statements.2 

With regards to their design, IFRS accounting standards generally allow an entity to reflect climate-

related risks in the financial statements, within the boundaries of financial reporting. However, 

several amendments could prove beneficial for users of such financial information and, indirectly, 

for financial stability. These amendments relate to (i) the application of the materiality principle 

under IAS 1; (ii) the addition of climate factors to the list of indicators of impairment under IAS 36; 

(iii) how IAS 37 should be applied in view of climate-related-risks; and (iv) disclosure requirements, 

examples and guidance on how climate-related risks should be incorporated into the estimation of 

expected credit losses and the fair value of financial instruments (affecting IFRS 7 and IFRS 13). 

Work on the accounting treatment of pollutant-pricing (i.e., carbon-pricing) mechanisms should also 

be prioritised. 

Turning to the implementation of IFRS accounting standards, regulators, microprudential 

supervisors and/or accounting enforcers should consider developing guidance on disclosures by 

financial institutions, on how climate-related risks can affect the expected credit loss estimates of 

banks, and on how to compute cash flows from insurance contracts directly exposed to climate 

factors (including natural catastrophe events and home insurance in areas most affected by 

climate). Disclosure would be another area warranting further attention by regulators, 

microprudential supervisors and/or accounting enforcers. 

Given the boundaries of accounting, sustainability standards are crucial when it comes to disclosing 

the long-term financial impacts of climate-related risks. The entry into force of sustainability 

standards will not have the intended effects if reporting entities do not properly connect 

sustainability information with financial information in their financial statements. Insufficient 

connectivity can lead to duplications and divergent disclosures under financial and sustainability 

reporting, and, more broadly, deteriorate the quality of the information disclosed to capital markets, 

with potential consequences for financial stability. To avoid such an undesirable scenario, further 

work in this area by the respective standard-setters would be welcome. 

Last but not least, the scope of the assurance work carried out by auditors is crucial in this regard. 

Auditors can play an important role, particularly when assessing existing disclosures and 

challenging estimates affected by climate-related risks. Furthermore, ensuring that sustainability 

reporting (including transition plans) is subject to assurance work as part of statutory audits could 

be a valuable tool in addressing the lack of connectivity between accounting and sustainability 

standards. Work by the International Auditing and Assurance Standards Board at the global level 

and by the Committee of European Audit Oversight Bodies at the EU level is a first step towards 

equipping auditors with a common approach to the assurance of sustainability information. 

2   The term “implementation” should not be interpreted in connection with Regulation (EC) No 1606/2002 of the European 
Parliament and of the Council of 19 July 2002 on the application of international accounting standards, but rather in the 
traditional sense of the process of putting a decision or plan into effect. 

Climate-related risks and accounting April 2024 
Executive summary 

4 

 
 
1 

Introduction 

In recent years, the European Systemic Risk Board (ESRB) has been analysing accounting 

issues that could affect financial stability, with a strong focus on their macroprudential 

policy implications. Starting in 2017 with the publication of a report commissioned by the 
European Parliament on the financial stability implications of IFRS 9 Financial Instruments,3 the 

ESRB has been analysing the expected credit loss approach under IFRS 9, the macroprudential 

implications of financial instruments at fair value classified under Levels 2 and 3, and IFRS 17 
Insurance Contracts.4 These publications provide evidence of the interaction between accounting 

and financial stability. 

In this report, the ESRB analyses how climate-related risks are addressed in accounting 
standards and reflected in financial statements, taking a financial stability perspective.5 In 

particular, the report assesses, from a financial stability perspective, whether the current body of 

IFRS accounting standards contains adequate requirements and poses no restrictions to reporting 

entities in (i) recognising in an adequate and timely manner, (ii) consistently estimating, and (iii) 
fully presenting and disclosing the impact of climate-related risks in IFRS financial statements.6 As 

such, the report is limited to IFRS accounting standards and does not, therefore, cover national 

accounting standards or address the non-financial part of the annual report. In general, IFRS 

financial statements comprise, as a minimum, the statement of financial position (balance sheet), 

the statement of profit or loss and other comprehensive income for the period, the statement of 

changes in equity, the statement of cash flows, the notes, and comparative information as 
prescribed by IFRS accounting standards.7 Aside from the information on climate-related risks 

contained in the financial statements, there may be further references to such risks in other parts of 

the annual report, such as the management report or the corporate governance statement, which 
are not covered by this report.8  

Based on the definitions provided by the Financial Stability Board (2020a), this report 

considers both physical and transition risks within the exposure-risk framework as defined 
by the ECB/ESRB (Figure 1).9 The Financial Stability Board (2020a) defines physical risks as the 

possibility that the economic costs of the increasing severity and frequency of climate change-

related extreme weather events, as well as more gradual changes in climate, might erode the value 

3   See European Systemic Risk Board (2017). 

4   See European Systemic Risk Board (2019a, 2019b, 2020a and 2021a). 

5   Following the terminology of the Financial Stability Board (FSB), the report uses the term “climate-related risks”. It can be 

treated as a synonym of “climate risks”, which is also used in the field. 

6   Climate change presents not only risks but also opportunities, although this report focuses on the risks. 

7   See IAS 1.10. 

8   See Article 19 and Article 20 of Directive 2013/34/EU. 

9   These definitions are broadly consistent with those provided by the Basel Committee on Banking Supervision (2021). 

According to the Basel Committee on Banking Supervision, physical risks are those related to “economic costs and 
financial losses resulting from the increasing severity and frequency of: (i) extreme climate change-related weather events 
(or extreme weather events) such as heatwaves, landslides, floods, wildfires and storms (i.e., acute physical risks); (ii) 
longer-term gradual shifts of the climate such as changes in precipitation, extreme weather variability, ocean acidification, 
and rising sea levels and average temperatures (i.e., chronic physical risks or chronic risks); and (iii) indirect effects of 
climate change such as loss of ecosystem services (e.g., desertification, water shortage, degradation of soil quality or 
marine ecology).” Meanwhile, transition risks are defined as “the risks related to the process of adjustment towards a low-
carbon economy”. 

Climate-related risks and accounting April 2024 
Introduction 

5 

 
 
of financial assets, and/or increase liabilities. Transition risks relate to the process of adjustment 

towards a low-carbon economy. Physical and transition risks thus defined are placed in an 

exposure-risk framework, which identifies system-wide vulnerabilities as well as institution-specific 

vulnerabilities (European Central Bank and European Systemic Risk Board, 2022). 

Figure 1 

Climate-related exposure-risk framework 

Source: European Central Bank and European Systemic Risk Board (2022). 

This report does not elaborate on potential amendments to the prudential framework to 

address the systemic impact of climate-related risks, and nor does it address the interaction 

between the prudential framework and accounting. Rather, the scope of this report is limited to 

a reflection on climate-related risks in IFRS accounting standards and the resulting financial 

statements. Consequently, it does not discuss how the prudential framework could be used by 

authorities to prevent or mitigate the financial stability impacts of the materialisation of climate-
related risks.10 In the EU, there are ongoing discussions on how climate-related risks could lead to 

amendments to the capital requirements for banks and insurance corporations (European Banking 
Authority, 2023; European Insurance and Occupational Pensions Authority, 2023).11 While 

acknowledging the possible role of prudential regulation, this report does not perform any 

comparative analysis on the benefits and costs of using prudential regulation to address climate-

related risks. 

The IFRS Foundation, the European Commission and ESMA have been carrying out valuable 
work in the realm of accounting and climate-related risks.12 The International Accounting 

Standards Board (IASB) of the IFRS Foundation, which issues IFRS accounting standards and 

interpretations thereof, has issued two notes on how climate-related risks might interact with IFRS 

10   Recommendations on adequate risk management within financial institutions could also contribute to alleviating the impact 

of climate-related risks but are neither the goal of this report. 

11   See also European Central Bank and European Systemic Risk Board (2023). 

12   See also Martínez and Pérez Rodríguez (2023). 

Climate-related risks and accounting April 2024 
Introduction 

6 

 
 
 
accounting standards (Anderson, 2019; International Financial Reporting Standards Foundation, 

2023). In March 2023 the IASB launched a project to explore whether and how companies can 

provide better information about climate-related risks in their financial statements, and in 

September 2023 it initiated targeted actions to improve the reporting of climate-related and other 
uncertainties in the financial statements.13 Moving to the European Union (EU), respondents to a 

consultation on the Renewed Sustainable Finance Strategy in 2020 identified several areas in IFRS 

accounting standards that could hamper the adequate and timely recognition and consistent 

estimation of the impact of climate-related risks, particularly in relation to impairment, provisions 

and contingent liabilities (European Commission, 2020). Following on from that consultation, the 

European Commission is working with EFRAG (the European Financial Reporting Advisory Group), 

ESMA, the IASB and the industry to ensure that financial reporting standards are able to capture 

relevant sustainability and climate-related risks. Additionally, the EU Taxonomy Regulation was 

adopted in 2020, with the aim of creating a dictionary of activities considered green and effective in 

combating “greenwashing” practices. Recently, ESMA has flagged climate-related matters with 
regard to financial information as an enforcement priority.14 

This report does not consider sustainability standards issued by the International 

Sustainability Standards Board (ISSB) or the European Sustainability Reporting Standards 

(ESRS). In November 2021, the IFRS Foundation decided to create the ISSB, to deliver a 

comprehensive global framework for sustainability-related disclosures. The IFRS accounting 

standards and the IFRS sustainability standards issued by the ISSB should complement each other 

to provide investors and other capital market participants with comprehensive information to meet 

their needs. In this sense, neither of those sets of standards should be considered in isolation. 

ISSB standards relate to disclosures on material sustainability-related financial risks and 

opportunities and are not directly drawn from the IFRS accounting framework. On 26 June 2023 the 

ISSB issued finalised standards on general sustainability-related disclosure requirements and on 
climate-related disclosure requirements.15 In November 2022 EFRAG issued 12 Exposure Drafts of 
ESRS covering environmental, social and governance topics.16 The Commission adopted the first 
set of ESRS as Delegated Acts in July 2023 and published them in December 2023.17 Annex 2 

describes the content of ESRS E1 Climate Change. Further standard-setting activities are ongoing 

regarding a second set of ESRS, including sector-specific standards and other standards tailored to 

listed small and medium-sized entities, scheduled for June 2024. The ESRS and the first two 

standards issued by the ISSB at the global level were developed in parallel and in close 

cooperation, resulting in a very high degree of alignment, as evidenced by overlapping sections of 
ISSB standards having been integrated into the EU framework.18 Such alignment does not call into 

13   See IASB initiates project to consider climate-related risks in financial statements. 

14   Annex 1 describes in further detail the work of ESMA in this area. 

15   See ISSB issues inaugural global sustainability disclosure standards. 

16   See Public consultation on the first set of Draft ESRS and First set of draft ESRS. 

17   See Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 supplementing Directive 2013/34/EU of the 

European Parliament and of the Council as regards sustainability reporting standards. 

18   See European Commission, Questions and Answers on the Adoption of European Sustainability Reporting 

Standards. 

Climate-related risks and accounting April 2024 
Introduction 

7 

 
 
question the consistency of ESRS with the EU’s own legal framework and the objectives of the 
European Green Deal, which are broader in scope than the ISSB standards.19 

Connectivity between accounting and sustainability standards is important to ensure that 

they both contribute to the provision of accurate information to the public. In sustainability 

reporting, connectivity refers to the direct connection between sustainability information and 
information in the financial statements or the general ledger (EFRAG, 2021).20 The concept of 

connectivity is linked to the provision to the public of a set of coherent and comprehensive 

information in the annual report (Figure 2). The sustainability report, which is based on 

sustainability standards, should complement and supplement the information contained in the 

financial statements, which is based on accounting standards. In the EU context, ESRS 1 General 

Requirements calls for reporting entities to connect their sustainability information with the 
information they disclose in the financial statements.21 More precisely, ESRS E1 Climate Change 

requires a reconciliation of assets and net revenue linked to material physical risks to specific line 
items in the financial statements.22 This is one of the differences between IFRS S2 Climate-related 

Disclosures (issued by the ISSB) and ESRS E1, as IFRS S2 does not have a similar requirement. 

Connectivity should also prevent overlap of information in different parts of the annual report 
(EFRAG, 2021).23 A lack of connectivity between sustainability and accounting information can 

diminish transparency, with potentially adverse impacts on the credibility of the information 

disclosed, thus weakening market trust. 

19   For more information on the European Green Deal, see The European Green Deal – Striving to be the first climate-

neutral continent. 

20   While this could be defined as “direct” connectivity, it would also be possible to define “indirect” connectivity as referring to 
sustainability disclosures that cannot be directly reconciled to the financial statements or accounting estimates in the 
current period (EFRAG, 2023). 

21   See Section 9.2 of ESRS 1 General Requirements. 

22   See paragraph 68 and paragraphs AR77 to AR79 of ESRS E1 Climate Change. 

23   Some degree of overlap may, however, be unavoidable, given that each set of standards has to stand on its own. 

Climate-related risks and accounting April 2024 
Introduction 

8 

 
 
Figure 2 

International accounting and sustainability standards 

Source: IFRS Foundation. 

This report is organised as follows. Section 2 provides further methodological considerations on 

how accounting can reflect climate-related risks and discusses channels through which the related 

estimates could have an impact on financial stability. Section 3 presents the four main issues 

identified for financial stability. Section 4 concludes by discussing potential policy actions to 

address the issues identified. 

Climate-related risks and accounting April 2024 
Introduction 

9 

 
 
Conceptual and methodological 

2 
considerations 

This section of the report outlines several important conceptual and methodological 

considerations in the analysis of how accounting is able to reflect climate-related risks and 

how this could affect financial stability. Subsection 2.1 below discusses the boundaries of 

financial reporting, in relation to the events and transactions that lead to the recognition of an asset, 

liability, income or expense (or a gain or loss). The section continues with a discussion of the 

channels through which accounting can affect financial stability, focusing on climate-related risks. 

2.1 

The boundaries of financial reporting 

At a conceptual level, climate-related risks can have accounting impacts and can also affect 

the relevance, reliability and materiality of the information disclosed in the financial 

statements. Accounting can be seen as a process starting with a set of definitions, recognition 

criteria and measurement concepts, based on which accounting policy choices and judgements are 

then made and applied in order to produce the estimates that ultimately result in the financial 

statements. Climate-related risks can potentially affect accounting policy choices (e.g., when 

accounting for emissions and pollutant pricing mechanisms), judgements (e.g., on impairment) or 

estimations (e.g., of expected credit losses), as well as the criteria for the recognition and 

measurement of assets and liabilities (e.g., adjustments to the useful life of assets, or liabilities 

related to environmental damage). Decisions on the materiality of certain transactions can also be 

affected by the expectations of users of financial statements or practices among peers, which may 

render certain disclosures material, even if there are no quantified changes. 

Only economic events and transactions that meet the definition of an asset, liability, income 

or expense are reported in the financial statements. According to the conceptual framework for 

financial reporting, the objective of financial statements is to provide financial information about the 

reporting entity’s assets, liabilities, equity, income and expenses that is useful to users of financial 

statements. An asset is defined as an economic resource controlled by the entity as a result of past 

events, whereas a liability is a present obligation of the entity to transfer an economic resource as a 

result of past events. Meanwhile, income and expenses are changes in assets and liabilities that 

affect the net residual interest in the entity.  

Therefore, the impacts of climate-related risks are included in the financial statements to the 

extent that they meet the recognition criteria set out in IFRS accounting standards. Following 

the definitions of physical and transition risks by the Financial Stability Board (2020a), physical risks 

include, for instance, economic losses from natural catastrophes that have become more likely or 

more severe due to the effects of climate change. Such losses can be reflected in the financial 

statements to the extent that (i) they have already occurred and affect the existing rights and 

obligations of an entity, or (ii) their increased severity or frequency affects the economic benefits 

expected from the entity’s existing rights (for instance by reducing the useful life of property and 

equipment) or future transfers arising from existing obligations (for example, natural catastrophes 

Climate-related risks and accounting April 2024 
Conceptual and methodological considerations 

10 

 
may increase the costs that the entity will incur to settle its obligations under an existing contract). 

In contrast, recognition criteria preclude the financial statements from capturing the costs 

necessary for an entity to mitigate and adapt its activities to climate-related hazards until the point 

where it enters a legally binding commitment or has no practical ability to avoid its responsibility. 

Similarly, financial statements do not provide information on how those hazards affect the margins 

expected by the entity from new contracts entered into in the future. With regard to transition risks, 

shifts in policies, technological changes and changes in customer behaviours may affect the 

economic benefits that the entity expects to recover from its existing rights and should, therefore, 

be reflected in the valuation of its assets in the statement of financial position. However, such 

changes may also affect the entity’s ability to continue carrying on its activities in the future (i.e., as 

a going concern). Furthermore, shifts in policies are “recognised” on the liability side of the financial 
statements only once they are verified (e.g., when new legislation is enacted).24 As a result, the 

“going concern assumption” enshrined in the IASB Conceptual Framework for Financial Reporting 

could come under scrutiny, potentially leading to a different measurement approach being applied 

to certain items of the financial statements. 

Consequently, fully capturing the long-term financial impacts of climate-related risks cannot 

be achieved through accounting or sustainability reporting alone (Figure 3). Information 

about an entity’s exposure to climate-related risks can only be partially addressed through 

accounting. Even when designed and implemented optimally, accounting standards may not be 

enough in themselves to obtain a comprehensive and accurate view of the exposure, given the 

long-term and largely uncertain nature of climate-related risks. In particular, financial statements 

may not adequately reflect (i) risks that materialise beyond the time horizon over which the entity 

expects economic benefits from its assets and cash outflows to settle its liabilities, and (ii) the future 

actions that an entity may be compelled to take in order to mitigate and adapt to climate-related 

risks and continue to operate as a going concern. In other words, when accounting pays too much 

attention to future events, it can become less reliable and less robust; in turn, when it disregards 

future events entirely, it may not adequately represent the reporting entity’s financial position. To a 

certain extent, this limitation explains why the EU and the IFRS Foundation have adopted 

sustainability reporting standards, which are designed to complement financial reporting by 

providing information about how sustainability matters (including climate change) affect the entity’s 

activities, performance, risks and long-term value. Connectivity between both sets of information is 

key to the optimal disclosure of climate-related risks. 

24   Similarly, for liabilities associated with climate-related litigation arising from legislation, in many cases sufficient evidence 

would not arise until the new legislation is enacted (or is close to being enacted). 

Climate-related risks and accounting April 2024 
Conceptual and methodological considerations 

11 

 
 
Figure 3 

Climate-related risks, accounting and sustainability reporting 

Source: Own illustration. 

Lastly, uncertainty about the future impact and timing of the materialisation of climate-

related risks is an important factor to consider when assessing how accounting may reflect 

such risks. At this point, it is important to draw a distinction between “risk” and “uncertainty”: risks 

are in principle measurable (as the probabilities and possible outcomes are objectively or 

subjectively determinable) and, as long as they have a monetary or financial effect on the reporting 

entity, should be reflected in the financial statements, while uncertainty can at best be estimated as 

no probability can be reliably associated to any possible outcome. The prevailing uncertainty 

surrounding the timing and extent of the materialisation of climate-related risks can affect the 

assessment of an entity’s ability to continue as a going concern. Furthermore, bringing climate-

related risks into the financial statements may add complexity to several estimations, ranging from 

impairment testing to expected cash flows, risk adjustments to the discount rates or expected credit 

losses. Although IFRS accounting standards require forward-looking estimates of variables that 

affect the assets and liabilities reported in the financial statements at the end of the reporting 

period, these estimates should be disclosed over a short-term horizon only: the next financial year. 

In fact, IAS 1.125 requires that the entity’s assumptions about the future and other major sources of 

estimation uncertainty be disclosed only if the referred variables “have a significant risk of resulting 

in a material adjustment to the carrying amounts of assets and liabilities within the next financial 

year”. Consequently, the financial impact of climate-related risks over the longer term may not be 

captured in a company’s financial statements. 

2.2 

Climate-related risks, accounting and financial stability 

Accounting can be seen as a process of conveying the impact of economic events and 

transactions to users of financial statements. Based on conceptual foundations around the 

notions of assets, liabilities, equity, income and expense, accounting standards define the 

principles building on which economic phenomena are presented to users of financial statements in 

Climate-related risks and accounting April 2024 
Conceptual and methodological considerations 

12 

 
 
order to inform their decision-making in a relevant and reliable way.25 Inspired by those principles, 

management of reporting entities defines the accounting policies and measurement assumptions 

relied on in determining the estimates set out in the financial statements. The information contained 

in the financial statements should then provide decision usefulness, in the sense that it can be used 

by the public to make qualified and educated opinions on the reporting entity. 

Although the accounting process is not primarily meant as a tool to foster financial stability, 

there are at least three channels through which relevant and reliable financial information 

resulting from this process can be beneficial to financial stability: through transparency 

(channel 1 in Figure 4); through the behavioural response of economic agents to accounting 

information (channel 2 in Figure 4); and through regulation (channel 3 in Figure 4). First, 

transparency in accounting, understood as access to relevant, reliable, comprehensive and timely 

financial information about an economic agent, enables users of financial statements to make 

informed decisions of an economic nature. It promotes market discipline, which discourages 

reporting entities from engaging in risky behaviours and transactions and supports efficient 

allocation of resources. Transparency would thus be linked to the concept of “true and fair view”, 

according to which the financial statements should not contain falsehoods (i.e., be true) and should 

accurately report the condition they wish to portray (i.e., be fair). Second, even if theoretically 

accounting standards should be neutral for economic decision-making, in practice they may also 

incentivise certain behaviours among economic agents, which may, in turn, give rise to financial 

stability concerns. Lastly, accounting is either the starting point or key reference when defining 

prudential requirements for regulated financial institutions, thus affecting their solvency and liquidity 

picture. 

If markets function properly and information on risks is adequately incorporated into the 

financial statements, the pricing of different assets should adjust accordingly and no 

financial stability concerns should arise. This illustrates the crucial importance of properly 

accounting for risks in the financial statements. In the absence of such proper accounting, either 

one or all of those three transmission channels could be activated by a sudden reassessment of 

investor expectations that forces abrupt adjustments in the financial statements (i.e., an 

“information shock”). Those shocks could potentially affect financial stability through a combination 
of fire sales, higher cost of capital and suboptimal allocation of resources.26 

25  

In other words, accounting comprises the processes whereby business activities and commercial transactions are 
accounted for, together with the economic impacts relevant for their respective measurement. 

26   As explained by Pérez Rodríguez (2021), information shocks tend to follow episodes of unanticipated corporate failure 

associated with irrational balance sheet expansions, and their negative externalities are usually felt in the form of higher 
costs of capital being imposed on reliable and unreliable companies alike. 

Climate-related risks and accounting April 2024 
Conceptual and methodological considerations 

13 

 
 
Figure 4 

Accounting and financial stability 

Source: European Systemic Risk Board (2021). 

In the case of climate-related risks, “information shocks” and, more broadly, a lack of 

relevant and reliable financial information, could affect financial stability through the three 

transmission channels described above. In terms of transparency, accounting information that 

misstates the value of assets or liabilities, does not appropriately reflect the accrual of income or 

expenses, or fails to recognise gains or losses in timely fashion can lead users of the financial 

information to make suboptimal economic decisions. This would be the case where climate-related 

risks are not incorporated into the valuation of assets or liabilities, but also if poor disclosures are 

provided regarding the assumptions on how the reporting entity might be affected by those risks. In 

any of those cases, overestimation of assets, anticipation of income or gains, underestimation of 

liabilities, or deferral of expenses or losses could result in large adjustments if and when the risks 

materialise, especially where such risks are highly uncertain and/or have long horizons. Regarding 

the behaviour of reporting entities in response to how accounting reflects climate-related risks, 

certain types of responses would be detrimental to financial stability, such as delays in recognising 

certain liabilities or expenses arising from environmental considerations, concentration of 

exposures to certain asset types that receive a more favourable accounting treatment in 
comparable terms,27 or underestimation of the impact of climate-related risks on the balance sheet 

and statement of profit or loss. A generalised, inaccurate reflection of climate-related risks in the 

financial statements of reporting entities could lead economic agents to base their economic 

decisions on suboptimal information. Lastly, the inclusion in regulatory calculations of accounting 

information not appropriately reflecting climate-related risks could hamper the assessment by 

regulatory and supervisory authorities of the solvency and liquidity of the reporting entity. For 

instance, not incorporating climate-related risks into the expected credit loss model under IFRS 9, 

27   For example, this could occur in the case of certain assets measured at cost, for which the impairment test does not 

sufficiently take into account climate-related risks, while assets at fair value would already incorporate climate-related risks 
in their market values. 

Climate-related risks and accounting April 2024 
Conceptual and methodological considerations 

14 

 
 
 
or into the IRB model parameters, could affect the determination of capital requirements for banks. 

In all those cases, financial stability could be affected by an information shock and the ensuing 

adjustments could trigger widespread divestment in certain sectors and activities, a rebalancing of 

positions, and potentially significant movements in holdings of financial assets among market 

participants. 

While financial institutions may not be largely exposed to physical or transition risks 

directly, their interactions with the real economy indirectly expose them to climate-related 

risks, the materialisation of which can have financial stability implications. Looking at the 

definitions of physical and transition risks used in this report, the financial stability implications of 

direct exposures to these risks among financial institutions should be rather limited. However, 

through their exposures to the real economy in the form of loans, real estate collateral, insurance 

contracts or holdings of securities, they may be indirectly affected by climate-related risks. The way 

in which these risks are reflected in the financial statements may raise financial stability concerns. 

For example, climate-related risks could affect the value of real estate and similar immovable 

assets, and significantly affect banks and other financial institutions through large direct or indirect 

exposures (e.g., via real estate funds or securitisations). Similarly, a sudden and substantial 

deterioration in the quality of bank loan books, as a result of climate-related risks not adequately 

reflected in their value, could lead to deleveraging and a procyclical retrenchment in credit activity. 

This could also trigger credit rating downgrades, higher credit spreads and, more broadly, a loss of 
trust across financial institutions and their customers, with further contagion and spillover effects.28 

Similarly, failure to timely incorporate climate-related risks in the fair value of financial instruments 

could trigger large sudden decreases in their fair value, which, if held by banks or insurance 

corporations could trigger fire sales of assets and affect the availability of credit and insurance 
services.29 The emergence of large unrecognised losses from climate-related factors not 

considered when estimating the technical provisions of existing insurance contracts (such as home 

insurance policies) is another example of the type of information shock that could affect financial 

stability if accounting standards are not properly implemented, thus leading to suboptimal financial 

statements. 

The interactions between the financial system and non-financial corporations in considering 

and recognising the impact of climate-related risks, needs to be expanded, to take into 

account the environmental reality and the related sustainability standards (Figure 5). As 

shown in Figure 5, the environmental reality interacts with the economic reality and is the object of 

sustainability reporting standards. At this stage, connectivity between accounting and sustainability 

reporting standards is of paramount importance, as users of financial information and sustainability 

reports may otherwise receive contradicting information on the same reality. For example, when 

sustainability reporting explains the physical or transition risks arising from an entity’s activities and 

its assets and liabilities, such disclosures could be linked to the corresponding provisions that 

would be required in the financial statements. Sustainability disclosures may also provide early 

indications of matters that could subsequently be reflected in the financial statements (for instance, 

a commitment to net zero emissions could, over time, result in liabilities being reported in the 

financial statements). Accounting and sustainability information should, in conjunction, provide a 

28   This would be the case for loan portfolios used as collateral for collateralised loan obligations (CLOs). 

29  

In the case of securitisations, collateralised debt Obligations (CDOs) could also be materially affected. 

Climate-related risks and accounting April 2024 
Conceptual and methodological considerations 

15 

 
 
holistic, comprehensive and coherent picture of the climate-related risks faced by the reporting 

entity and their expected impact. Conversely, the use of disconnected information for prudential 

and environmental regulatory purposes could lead to inconsistencies. Reporting entities could also 

decide to favour disclosures in either the financial statements or in sustainability reporting, to suit 

their own objectives. A lack of connectivity between these two reflections of similar realities would 

certainly lead to a suboptimal provision of information to the public, potentially hampering the 

proper functioning of financial markets when it comes to risk pricing and the allocation of financing 

activities and capital flows from investing. 

Figure 5 

Accounting, sustainability reporting and financial stability 

Source: Own illustration. 

Climate-related risks and accounting April 2024 
Conceptual and methodological considerations 

16 

 
 
3 

Main issues identified 

A subset of IFRS accounting standards have been identified as being more closely related 

to climate-related risks. Based on other assessments (Anderson, 2019; European Commission, 

2020; International Financial Reporting Standards, 2020) and on expert judgement, the following 

IFRS accounting standards have been identified: IAS 1 Presentation of Financial Statements, IAS 2 

Inventories, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, IAS 16 

Property, Plant and Equipment, IAS 36 Impairment of Assets, IAS 37 Provisions, Contingent 

Liabilities and Contingent Assets, IAS 38 Intangible Assets, IAS 40 Investment Property, IAS 41 

Agriculture, IFRS 6 Exploration for and Evaluation of Mineral Resources, IFRS 7 Financial 

Instruments: Disclosures, IFRS 9 Financial Instruments, IFRS 13 Fair Value Measurement, and 

IFRS 17 Insurance Contracts. 

From an in-depth analysis of these IFRS accounting standards, the ESRB has identified four 

main issues of relevance for financial stability. They refer to (i) the extent to which market 

prices – and hence fair values of Level 1 and Level 2 financial assets or the discount rates used to 

compute present values – incorporate climate-related risks, both physical and transition; (ii) the 

effect of such risks on the initial and subsequent valuation of non-financial assets and liabilities, 

including property, plant and equipment, intangibles, goodwill, provisions and contingent liabilities; 

(iii) the incorporation of climate factors into the models used by preparers of financial statements, 

including factors affecting expected cash flows, risk adjustments to the discount rates for insurance 

liabilities or the estimation of expected credit losses from financial assets at amortised cost (e.g. 

loans); and (iv) disclosures. The following subsections explore these issues in further detail, while 
Table A1 in Annex 3 lists the IFRS accounting standards most closely linked to them.30 The order in 

which the four issues are presented does not imply any prioritisation or ranking. 

3.1 
related risks 

The extent to which market prices incorporate climate-

The incomplete incorporation of climate-related risks in market prices can cause assets to 
be overestimated or liabilities to be underestimated.31 Several IFRS accounting standards rely 

on market prices for the purpose of valuing assets and liabilities. Examples here include financial 

assets at fair value and, optionally, tangible assets and investment property or the discount rates 
applied when measuring insurance liabilities.32 It also holds true for the initial measurement of 

acquired assets, as cost is equivalent to fair value at the time of acquisition. If these assets and 

liabilities are directly or indirectly affected by climate-related risks but their market prices (or, 

30   Neither the four issues identified nor the related IFRS accounting standards are exhaustive. 

31   Market prices simply reflect prices of actual (or potential) transactions and may be under- or overestimating some risks. 
Ideally, all relevant risks, including climate-related risks, should be incorporated into the market price of an asset. This is 
the approach taken in the following paragraphs, which should not be seen as calling for a correction of market prices to 
incorporate climate-related risks. 

32   When measuring insurance liabilities, IFRS 17 requires the discount rates to be market consistent and to reflect the 

characteristics of the liability. That would imply eliminating any “climate-related risk premium” implicit in the fair value of the 
reference portfolio of assets when determining the discount rate. For further details on the computation of discount rates 
under IFRS 17, see European Systemic Risk Board (2021). 

Climate-related risks and accounting April 2024 
Main issues identified 

17 

 
 
alternatively, the discount rates) do not fully reflect such risks, financial statements could potentially 
lead to suboptimal economic decisions.33 Furthermore, failing to incorporate climate-related risks in 

market prices could also hamper the accuracy of computed liquidity premia. 

Not incorporating climate-related risks in the market prices of financial instruments would 

affect their fair values, as well as provisions or tangible assets measured at fair value and 
exposed to climate-related risk factors.34 Banks, insurance corporations, pension funds and 

investment funds can be affected through their holdings of equity instruments (including investment 

fund shares) and debt securities. While not in the aggregate, certain non-financial corporations may 

also be affected to the extent that they hold financial assets on their balance sheet. As shown in 

Chart 1, which reflects data from the Quarterly Sector Accounts, holdings of debt securities and 

equity instruments in the euro area amount to more than €25 trillion, representing around 50% of 

total assets in some institutional sectors. On top of that, non-financial corporations that opt for the 

revaluation model for their property, plant and equipment or measure investment property at fair 
value would also be affected,35 although there is sparse evidence of the extent to which such a 

measurement basis is actually applied among EU non-financial corporations. Christensen and 

Nikolaev (2013) find that only 3% of the 1,539 non-financial corporations included in their sample 

and domiciled in the United Kingdom and Germany use fair value for non-current assets after their 

first-time adoption of IFRS. Investment property represents a small share of the aggregated 

balance sheet of EU non-financial corporations (2.4% at the end of 2021, according to the ERICA 

database of the European Committee of Central Balance Sheet Data Offices) and is often 

measured at fair value, particularly by real estate non-financial corporations (Olante and Lassini, 
2022).36 

33   For example, certain climate-related factors (such as high locked-in greenhouse gas emissions) may not be reflected in the 
market price as of the acquisition date, thus affecting the asset’s initial measurement. Moreover, given the long-term 
horizon over which climate-related risks materialise, it may be the case that the market price of certain short-term financial 
instruments is not affected by those risks. 

34  

IFRS require the fair value of certain non-financial assets measured at amortised cost, such as investment property, to be 
disclosed in the notes to the financial statements. 

35   Assets measured at amortised cost could potentially be affected as well, in case their market value revealed a substantial 

decline in their recoverable amount, which would lead to the recognition of significant impairment losses. 

36   For further information on the ERICA database, see ECCBSO – Erica Working Group. 

Climate-related risks and accounting April 2024 
Main issues identified 

18 

 
 
Chart 1 

Debt securities and equity instruments held by euro area institutional sectors, Q2 2023 

a) Total volume 

(EUR trillions) 

b) Share of total assets of each sector 

(percentages) 

Sources: ECB and ESRB Secretariat calculations. 
Notes: Information based on the System of National Accounts. The sectors of rest of the world, money market funds, 
government and central banks are excluded. 

Regardless of the above considerations, the inclusion of climate-related risks in the market 

price of certain assets is a matter that goes beyond the accounting realm. Given that fair 

value is understood as an exit price, i.e., the price at which an asset would be transferred (or a 

liability assumed) between knowledgeable parties not forced to transact, accounting standards 

typically take market prices as a proxy for fair value. In that sense, the fair value of an asset is 

based on assumptions and methodologies developed by market participants and therefore reflects 

a “consensus” within a market at a point in time. For financial assets in Level 1 and, to a certain 

extent, in Level 2, fair value can be considered an objective measure, free from management 
influence.37 The underlying assumption is that market prices incorporate the significant risks to 

which the asset is exposed, though these prices may not fully incorporate all externalities related to 

the underlying asset. In these situations, accounting standards do not usually provide an alternative 

measurement criterion that can replace or adjust the asset’s fair value or, in the case of traded 

financial instruments, such alternative measurement criterion may not be preferable. There have 

been recent discussions on the extent to which climate-related risks are incorporated into the 

market prices of a wide variety of assets (European Systemic Risk Board, 2020b; Basel Committee 
on Banking Supervision, 2021).38 Even if this is a matter that goes beyond the accounting realm, 

accounting standard-setters have not questioned the reliance on fair value (subject to the 

necessary adjustments) to measure assets and liabilities in those cases. Eren et al. (2022) provide 

a summary of the findings in the academic literature on the same topic, revealing an incomplete 

and imperfect view of how market prices reflect climate-related risks. Stroebel and Wurgler (2021) 

37   For further information on the fair value hierarchy, see European Systemic Risk Board (2020a). 

38   See HSBC's Stuart Kirk tells FT investors need not worry about climate risk for a controversial contribution to the 

discussion. 

Climate-related risks and accounting April 2024 
Main issues identified 

19 

 
 
 
 
conducted a survey among 861 finance academics, professionals, public sector regulators and 

policy economists, with most respondents believing that asset prices underestimate climate-related 

risks. 

Although the expectation would be for market prices to gradually incorporate climate-

related factors, a scenario of sudden adjustment cannot be completely ruled out. While the 

transition to a low-carbon economy is likely to unfold over time and the current uncertainty around 

the physical impacts of climate change should gradually dissipate, we cannot rule out scenarios 

involving a sudden and disorderly transition or, as a result of non-linearities, a sudden and abrupt 

materialisation of the physical impacts of climate-related risks. Such scenarios could lead to large 

and abrupt shifts in market expectations, driving substantial changes in market prices, large 

revaluations or adjustments to the carrying amounts, and the accompanying losses. Either because 

of correlated exposures and herd behaviour, or as a result of counterparty risk and contagion given 

the significant interconnections existing within the financial system, this may simultaneously affect a 
large group of financial institutions, with the resulting adverse consequences for financial stability.39 

However, the information available to financial market participants on the exposure to climate-

related risks is expected to improve with the adoption of ESRS and ISSB standards, likely reducing 

the probability of a sudden incorporation of climate-related risks into the price of financial 

instruments. Meanwhile, the adoption of the ESAP (European Single Access Point) Regulation may 

also make it easier for market participants to collect and process information electronically, which 
could help in better pricing climate-related risks.40 

3.2 

The valuation of non-financial assets and liabilities 

Failing to fully include relevant climate-related risks in impairment tests for non-financial 

assets may affect their valuation. The valuation of certain categories of fixed assets (such as 

those accounted for under IAS 16 Property, Plant and Equipment, IAS 40 Investment Property, IAS 

41 Agriculture or IFRS 6 Exploration for and Evaluation of Mineral Resources) may be affected by 

climate-related risks (specific examples include machinery that fails to comply with certain pollution 

regulations, goodwill that fails to take on board the impact of physical or transition risks on the 

expected cash flows of the acquired business, land used for agricultural activities affected by 

heatwaves, or buildings with a low energy performance). These assets are typically accounted for 

at cost in the balance sheet of non-financial corporations, and are therefore subject to impairment 
under IAS 36 Impairment of Assets.41 According to IAS 36, entities must compare the carrying 

amount of assets with their recoverable amount (defined as the higher of fair value less costs of 

disposal and value in use) and recognise an impairment loss if the recoverable amount is below the 

carrying amount. With the exception of goodwill and certain intangible assets for which an annual 

impairment test is required, entities are required to conduct impairment tests whenever there is an 

indication of asset impairment. 

39   Furthermore, recent developments in energy derivatives markets show how non-financial corporations are increasingly 

participating in these markets. 

40   See Easy access to corporate information for investors: Provisional agreement reached on the European Single 

Access Point (ESAP). 

41   Fair value less costs of sale is the preferred valuation method under IAS 41, although cost less accumulated depreciation 

and impairment must be used when fair value measurements are unreliable. 

Climate-related risks and accounting April 2024 
Main issues identified 

20 

 
 
Where relevant, non-financial corporations should incorporate climate-related factors into 

the impairment tests, even if these factors are not explicitly mentioned in IAS 36. In 

particular, value in use is a forward-looking estimate that reflects an entity’s expectations about 

future cash flows over the lifetime of the assets, and therefore relies fully on management 

expectations. While there is no explicit guidance to incorporate climate-related risks in the 

estimation of an asset’s value in use, the time horizon for developing explicit assumptions about 

future cash flows is usually limited to five years (see IAS 36.33.b), and beyond this time horizon 

entities should use a long-term growth rate to infer expected cash flows over the lifetime of the 

assets. Consequently, the incorporation of climate-related risks in the value in use of an asset 

subject to impairment depends on the accounting policies, judgements and assumptions made by 

each entity, which can lead to inconsistent measurement and impaired comparability in the cross 

section. 

A scenario of sudden realisation of risks could critically affect the corporate sector, as well 

as the banking sector through lending exposures. It would be reasonable to expect a gradual 

adjustment over the years of the carrying amount of non-financial assets subject to significant 

climate-related risks, through appropriate and timely impairment charges. However, it is also 

possible that the process may not run smoothly system-wide, with asset values not being adjusted 
over time, thus leading to a sudden drop in value.42 If the related losses came to affect the financial 

position of a broad enough group of non-financial corporations representing a large share of banks’ 

loan portfolios, there could be a surge in credit losses and a rapid deterioration in the banking 

sector’s solvency. 

Looking at the aggregate balance sheet of the euro area banking system, loans to sectors 

highly contributing to climate change represent around 80% of all loans to non-financial 

corporations (diamonds in Chart 2). Recital 6 of Commission Delegated Regulation 2020/1818 

identifies the sectors that highly contribute to climate change, as those represented by NACE codes 
A to H, and L.43 On average, they account for around 80% of the loan exposures of EU banks to 

non-financial corporations. A similar classification of economic activities most affected by climate 

transition risks is provided by FINEXUS: Center for Financial Networks and Sustainability, revealing 
similar results.44,45 From this point of view, the late and massive recognition of climate-related 

changes in the asset values of non-financial corporations could have a significant impact on the 
balance sheets of banks (see also Battiston et al., 2017).46 

42   At the extreme, this could lead to the valuation of the related assets and of the non-financial corporations on a gone-

concern basis. 

43   See Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020 supplementing Regulation (EU) 2016/1011 

of the European Parliament and of the Council as regards minimum standards for EU Climate Transition 
Benchmarks and EU Paris-aligned Benchmarks. 

44   See Climate Policy Relevant Sectors. 

45   These results depend crucially on the estimation of how climate-related risks affect each sector of activity. Different 

estimations can lead, logically, to different results, particularly at national level where more granular information may be 
available. 

46   For further reading, see European Central Bank and European Systemic Risk Board (2023). 

Climate-related risks and accounting April 2024 
Main issues identified 

21 

 
 
Chart 2 

Loan exposures of EU banks to climate-sensitive sectors, 2022 

(percentages) 

Sources: ECB and ESRB Secretariat calculations. 
Notes: The bars represent the share of loans to non-financial corporations affected by climate transition risks, according to the 
classification by FINEXUS into sectors fully affected by climate-related risks (A – Agriculture, Forestry and Fishing, D – 
Electricity, Gas, Steam and Air Conditioning Supply, H – Transportation and Storage, and L – Real Estate Activities), sectors 
partially affected (B – Mining and Quarrying, C – Manufacturing, F – Construction, G – Wholesale and Retail Trade; Repair of 
Motor Vehicles and Motorcycles, I – Accommodation and Food Service Activities, M – Professional, Scientific and Technical 
Activities, and N – Administrative and Support Service Activities) and sectors not affected (E – Water Supply; Sewerage, Waste 
Management and Remediation Activities, J – Information and Communication, K – Financial and Insurance Activities, R – Arts, 
Entertainment and Recreation, and S – Other Service Activities). Sectors O – Public Administration and Defence; Compulsory 
Social Security, P – Education, and Q – Human Health and Social Work Activities are considered not affected. The diamonds 
represent the share of loans to non-financial corporations in the sectors highly contributing to climate change, as identified in 
Commission Delegated Regulation 2020/1818. Information retrieved from the ECB’s consolidated banking data dataset for 
domestic and standalone banks as well as for foreign subsidiaries and branches reporting under FINREP. 

More specifically, failure to adequately consider climate-related risks in the valuation of real 
estate can be a direct source of concern for banks and other financial institutions.47 

According to the EBA Risk Dashboard, EU banks had exposures towards the real estate and 

construction sectors of €1.487 trillion in the second quarter of 2023, representing around 30% of 

loans to non-financial corporations. Meanwhile, mortgages to households represent more than 20% 

of total loans granted by banks and real estate is used as collateral in around 6% of the total loans, 

thus increasing the exposure of EU banks to the real estate sector (Chart 3). The valuation of real 

estate can be affected by climate-related considerations, such as the asset being located in an area 

prone to flooding, a building’s energy consumption pattern or features rendering the asset 

uninsurable. If not promptly addressed, these considerations could generate large losses for the 

47   Although real estate is currently perceived as being particularly affected by climate-related risks, this does not prevent key 

assets in other areas of activity (such as shipping or aviation) from being similarly perceived in the future. 

Climate-related risks and accounting April 2024 
Main issues identified 

22 

 
 
 
banking system.48 Besides construction, real estate and mortgages, a second channel of exposure 

among financial institutions relates to their direct holdings, investments or participations in 

companies that hold non-financial assets potentially exposed to climate-related risks, such as 
commercial real estate.49 

Chart 3 

Loans related to real estate as a share of total loans of EEA banks 

(percentages, EUR billions) 

Sources: EBA Risk Dashboard and ESRB Secretariat calculations. 
Note: Amounts refer to the second quarter of 2023, as reported to the EBA Risk Dashboard for the sample of EEA banks. 

Similarly, non-financial corporations operating in certain sectors of activity may not 

adequately report climate-related liabilities due, among other factors, to the prevailing 

uncertainty about the future impact of climate-related risks. According to IAS 37 Provisions, 

Contingent Liabilities and Contingent Assets, entities must recognise a provision for liabilities of 

uncertain timing or amount only if an event has already occurred. Provisions must be measured at 

the best estimate (including risks and uncertainties) of expenditures required to settle the present 

obligation, reflecting the present value of such expenditures where the time value of money is 

material. Non-financial corporations may incur sizeable liabilities as a result of compensation 

sought by third parties for losses inflicted by the entity’s past polluting activity, new regulation 
requiring rehabilitation of environmental damage,50 or the liability risk resulting from non-compliance 

with environmental regulation (through potential stakeholder litigation or supervisory enforcement 

action). In turn, some contracts may become onerous as a result of transition risks (notably, in the 

oil and gas industry), in which case the non-financial corporation is required to recognise the loss it 

expects on those contracts only where an adverse climate-related event has already occurred. 

48  

In this regard, the modified Article 229 of the Capital Requirements Regulation (CRR) states that “The value of the property 
can exceed that average value or the value at origination, as applicable, in case of modifications made to the property that 
unequivocally increase its value, such as improvements of the energy performance or improvements to the resilience, 
protection and adaptation to physical risks of the building or housing unit.” (see Proposal for a Regulation of the 
European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards requirements for credit 
risk, credit valuation adjustment risk, operational risk, market risk and the output floor - Confirmation of the final 
compromise text with a view to agreement). 

49   See European Systemic Risk Board (2023). 

50   According to IAS 37.22, such regulation should be “substantially enacted”. More generally, in order to recognise a provision 

IAS 37 requires a present obligation. 

Climate-related risks and accounting April 2024 
Main issues identified 

23 

 
 
 
Lack of adequate provisioning in those circumstances could cause the liabilities and costs to be 

underestimated and, therefore, the company’s results to be misstated, which may ultimately raise 

going-concern issues. In any case, the requirements under IAS 37 – present obligation and a 

reliable estimate thereof – may limit the ability to recognise climate-related liabilities. 

3.3 

The incorporation of climate factors into models 

Climate-related risks must be incorporated into the macroeconomic and other models used 

by preparers of financial statements, including banks for the estimation of expected credit 
losses.51 When applying IFRS 9 Financial Instruments, banks (and insurance corporations) should 

recognise credit losses before they are incurred, based on the possibility of a default taking place. 

This requires a forward-looking perspective into the conditions and events that might affect credit 

risk, their probability distribution based on default scenarios that may play out, the most relevant 

loss drivers for each of those scenarios and their resulting weights, and their likely impact on the 
recoverability of cash flows given the bank’s exposure.52 Looking ahead, the models used by banks 

to determine expected credit losses would need to include the likely impact of climate-related risks 
as part of such forward-looking information.53 For example, physical risks (such as those resulting 

from heatwaves or wildfires) may have an impact on macroeconomic variables such as public 

spending, gross domestic product or employment, or lead to large socioeconomic changes. 

Physical risks can also affect the value of collateral in secured loans (for example, real estate in 

areas affected by rising sea levels could experience a significant drop in value). Failing to 

incorporate these factors into bank models may produce estimates of credit losses that are too 

benign, as they would likely result from delayed recognition of the significant increase in credit risk 
for exposures more vulnerable to climate-related risks.54 Likewise, not considering climate-related 

risk in the expected credit loss models could affect the estimation of probability of default (PD), as 

well as loss given default (LGD), through overestimation of the collateral value. Box 1 discusses the 

results of a recent qualitative exercise undertaken by ECB Banking Supervision on how banks are 

incorporating climate-related factors into their estimations of expected credit losses. 

Box 1 
ECB observations on climate change in expected credit losses55 

In view of the significant impact of climate-related risks on IFRS 9 disclosures, in November 

2022 the ECB ran a survey among 51 banks under its supervision. The recognition of climate-

related risks under IFRS 9 (expected credit losses and allocation of exposures to stages) is likely to 

have a substantial impact, mainly on the determination of regulatory capital, management bonuses, 

cost of risk, external ratings and audit assurance. The questionnaire polled banks on issues such 

51   More broadly, all models used to determine the reporting entity’s expected cash flows could be affected by climate factors. 

52   See Pérez Rodríguez (2021). 

53   Climate-related risks should also be factored into IRB models, which not only affect the determination of capital 

requirements, but are also often adapted for use in the estimation of expected credit losses. 

54   The level of expected credit losses also directly impacts capital levels and therefore may have an effect on financial 

stability. Furthermore, from a broader regulatory perspective, climate-related risks should also affect the computation of 
risk-weighted amounts. 

55   Box 1 is based on the information in McCaul and Walter (2023). 

Climate-related risks and accounting April 2024 
Main issues identified 

24 

 
 
 
as quantitative data for in-model adjustments and other relevant variables (including overlays), 

governance and control processes in place, and collective staging. A key finding was that banks 

lack the historical data on which classical expected loss provisioning models can be run. 

80% of the banks responded that climate-related risks were still not considered in their 

expected credit loss models (Chart A). This proportion is much larger than in the case of other 

emerging risk factors such as energy supply or inflation. As for how banks incorporate climate-

related risks into expected credit loss models, 12% do so through overlays, 4% via in-model 

adjustments (rating override) and 4% through the macroeconomic scenarios. 

Chart A 

How climate-related risks are included in expected credit loss models 

(percentages) 

Sources: McCaul and Walter (2023). 

Within the group of banks that already incorporate climate-related risks in their expected 

credit loss models, some best practices can be found. Regarding in-model adjustments, banks 

introduce climate-related risks through rating override of clients belonging to problematic sectors, 

using tools that project impacts on cash flows and financial ratios at entity level. Other banks 

introduce climate-related risks through the macroeconomic scenario, based on the assumption that 

their baseline scenarios include, as qualitative elements, factors such as developments of CO2 

prices and political interaction to reach the climate targets. 

Banks applying overlays generally do so at total expected credit loss level, identifying 

specific sectors and determining the overlays based on expert judgement. As opposed to 

such “umbrella overlays”, it would seem preferable for banks to apply overlays at PD or LGD level, 

resulting from models or simulations that consider, for instance, different scenarios on the transition 

towards fully electric vehicles, or that apply shifts to PD curves based on scores that capture 

exposures to physical and transition risks. 

Similarly, insurance corporations need to consider the effect of climate-related risks when 

estimating the future cash flows of their insurance contracts. IFRS 17 Insurance Contracts 

explicitly requires that estimates of future cash flows “reflect conditions existing at the measurement 

Climate-related risks and accounting April 2024 
Main issues identified 

25 

 
 
date, including assumptions at that date about the future” and that the expected value (i.e. the 
probability-weighted mean) takes into account the full range of possible outcomes.56 The scenarios 

developed must include unbiased estimates of the probability of catastrophic losses and reference 
is made to catastrophe bonds and weather derivatives.57 Typically, under IFRS 17, models used for 

the computation of future cash flows from insurance contracts use, among other inputs, data from 

the recent past, adjusted if “there are indications that historical trends will not continue, that new 
trends will emerge or that economic, demographic and other changes may affect the cash flows”.58 

In some circumstances, such as catastrophe risks, relying excessively on past data could lead to 

inaccurate estimates of future insurance liabilities. This is particularly relevant because IFRS 17 

does not allow for the recognition of catastrophe provisions and/or equalisation provisions (in other 

words, provisions generally build up over years, usually following a prescribed regulatory formula, 
so they can be released in years when claims exceed the normal trends).59 Only in cases where an 

insurance corporation is particularly risk-averse and requires very large compensation for bearing 

insurance risks could the related risk adjustment be tantamount to a catastrophe or equalisation 

provision. In any event, as natural disasters become more frequent in the future, issues concerning 
the insurability of the effects of these disasters will emerge and new solutions will be needed.60 

It may be operationally difficult for banks and insurers to incorporate climate-related risks in 

their models and, consequently, a scenario where estimates of expected credit losses or the 

value of insurance contracts are sharply adjusted due to the materialisation of certain 

climate-related risks cannot be entirely ruled out. Despite intensive work by the scientific 

community in recent years, considerable uncertainty remains about the timing and severity of the 

materialisation of climate-related risks. For banks, expected credit loss models typically forecast 

three years ahead, which may be too short a horizon to cater for most climate-related risks. 

Furthermore, uncertainty increases with contracts that have longer terms, which is often the case in 

the insurance sector. Quantifying the impact of climate-related risks on growth or employment is 

also subject to great uncertainty (Basel Committee on Banking Supervision, 2021). Accordingly, 

banks and insurance corporations may be faced with the daunting task of having to frequently 

review and update their models to account for climate-related factors, including data that are 
accurate and granular enough to capture the related risks.61 This would be particularly relevant in 

the case of transition risks, where institutions would need to react quickly to incorporate newly 

available data into their models. 

56   See IFRS 17.33. 

57   See IFRS 17.B40 and IFRS 17.B41. 

58   See IFRS 17.B41. 

59   For example, consider an annually renewable insurance contract covering a European policyholder against damage 

caused by tornadoes. The event has a low frequency (1/100) and a high severity (CU100). In other words, the event is 
expected to occur once every 100 years with an expected loss of CU100. Each year the insurer collects a premium of 
CU100*1/100=CU1, which is the fulfilment cash flow of the contract (no acquisition costs, no profit margin, no risk 
adjustment for non-financial risk and no discounting is considered). If no tornadoes occur in a given year, CU1 turns into 
profit. However, if a tornado does occur, then the insurer bears a CU100 loss. A fair consideration of risk factors should 
require the building up of a provision in the years without tornadoes, with no profit registered. 

60   Some initiatives imply the pooling of interests, such as in the case of products currently offered in the Netherlands to insure 
against the effects of terrorism, or newly designed laws and regulations that are complemented with insurance products. 

61   For example, the energy certification of individual real estate assets used as collateral in mortgage loans. 

Climate-related risks and accounting April 2024 
Main issues identified 

26 

 
 
3.4 

Disclosures 

Efforts should be made to enhance disclosures about how climate-related risks are reflected 

in the financial statements, as a way to ensure transparency towards market participants. 

IFRS accounting standards contain implicit requirements to disclose relevant information connected 

with climate-related risks (e.g., the importance of climate-related risks when determining 

impairment of intangible assets with an indefinite useful life). However, those requirements may go 

unnoticed and become ineffective, particularly when compliance by reporting entities is driven by a 

strong judgemental component, and also considering that IAS 1 allows entities not to disclose 

certain information if it is considered immaterial. This puts the onus on enforcing appropriate 

interpretation and application of IFRS accounting standards to foster transparency of accounting 

information. For example, climate factors can be important in determining the useful life of assets 

that are key to non-financial corporations operating in sectors heavily exposed to climate-related 

risks. In those cases, the absence of a coherent disclosure requirement could make it harder for 

users of financial statements to interpret the information they contain and lead to less informed 

economic decisions. Turning to financial institutions, there is no specific reference to the effects of 

climate-related risks in IFRS 7. Therefore, it could be difficult for users to understand the extent of 

the qualitative and quantitative impact of climate-related risks on the fair value of financial 

instruments, the estimation of expected credit losses or the assessment of a significant increase in 

credit risk. Furthermore, given that financial instruments classified as Level 3 are based on the 

entity’s own models, data and assumptions, disclosures on unobservable inputs used to determine 

their fair value should also include assumptions regarding how market participants include climate-

related factors when pricing risks. 

Expanding the existing disclosure requirements without proper consideration of the 

underlying estimates and data sources may not be sufficient and could even have adverse 

consequences for users of financial statements. Even though disclosure requirements aimed at 

providing relevant, meaningful and reliable information regarding the impact of climate-related risks 

on the reporting entity are desirable, an overdose of boilerplate disclosures would not be conducive 

to higher transparency and may hamper financial stability in the long term. Given the existing 

uncertainty about the financial impact of climate-related risks, disclosures about the estimates and 

data sources used by reporting entities are critical for users of financial statements to understand 

the potential limitations of the information disclosed. Understanding the methodologies and data 

used to value assets and liabilities may be as important as the valuation itself. This should be the 

main focus for enhancing current disclosures, as users that are unable to understand how these 
estimates have been made may make wrong decisions, leading to suboptimal outcomes.62 In turn, 

poor disclosure regarding the impact of climate-related risks could make it harder for preparers and 

users of financial statements to retrieve information that feeds into the fair valuation of financial 

instruments issued, underwriting, pricing or estimation of credit losses. 

Moving to initiatives in the private sector, both the Task Force on Climate-related Financial 

Disclosures (TCFD) and Carbon Tracker still find much room for improvement. The TCFD 

published a set of recommendations on climate-related financial risk disclosures in 2017, aimed at 

62   As already mentioned, given the considerable uncertainty about the timing and extent of climate-related risks, there would, 
in the absence of clear and detailed explanations of how estimates are made, be no benchmark available for users of 
financial statements to judge whether an estimate is sound or poor. 

Climate-related risks and accounting April 2024 
Main issues identified 

27 

 
 
allowing decision-useful and forward-looking information to be provided alongside financial 
information from a broad range of reporting entities.63 These recommendations are grouped around 
four areas: governance, strategy, risk management, and metrics and targets.64 The 2022 TCFD 

Status Report finds that, while substantial progress has been made since the recommendations 

were issued, there is a need for more urgent progress in this area (Task Force on Climate-related 
Financial Disclosures, 2022). Carbon Tracker65 has published two reports assessing the extent to 

which non-financial corporations with extensive use of carbon make adequate climate-related 

disclosures (Davidson and Schuwerk, 2021 and 2022). The latest report finds that “[non-financial 

corporations] failed to disclose the relevant quantitative climate-related assumptions and estimates 

used to prepare the financial statements, even when they indicated that climate-related risks may 

impact these assumptions” and that “no company used assumptions and estimates that were 

aligned with achieving net zero by 2050 or sooner”. It also notes that their “financial statements 

failed to fully reflect climate considerations included in the companies’ other reporting”, pointing 

directly to the issue of connectivity between accounting and sustainability standards. 

Failing to ensure connectivity between accounting and sustainability standards can have a 

negative effect on the quality of the information disclosed to capital markets, with 

potentially system-wide consequences. In general, information disclosed in the financial 

statements should be comprehensible on a standalone basis. Market participants should be aware 

of the characteristics of such information and the differences with respect to sustainability 

information (e.g., backward- and forward-looking, respectively), so as to be able to factor those 

differences into their economic decisions. However, in a scenario where information prepared 

under sustainability standards is not fully aligned with the information prepared according to 

accounting standards, market participants may become confused and unsure about which 

information they should be relying on when making their economic decisions. This could also be the 

case where unbalanced emphasis is placed on disclosures in either the financial statements or the 

non-financial part of the annual report, or if material information that should be disclosed in the 

financial statements is only disclosed through sustainability reporting, thus creating gaps. In any of 

these situations, inconsistent reporting requirements would create confusion among users of 

financial statements, who could thus adopt suboptimal economic decisions, potentially inducing 

system-wide consequences, as outlined in Section 2.2 above. 

63   The TCFD was set up by the Financial Stability Board to improve the reporting of climate-related financial information. In 
2023, the FSB asked the IFRS Foundation to take over the monitoring of climate-related disclosures in the financial 
statements and the TCFD was disbanded in October 2023. 

64   For further information on these recommendations, see Task Force on Climate-related Financial Disclosures (2017). 

65   Carbon Tracker is an independent think tank that carries out in-depth analysis of the impact of energy transition and high-

cost, carbon-intensive fossil fuels on capital markets. 

Climate-related risks and accounting April 2024 
Main issues identified 

28 

 
 
4 

Conclusions and policy discussion 

Existing uncertainty about the materialisation of climate-related risks, the varied 

understanding of the concept, and the lack of sound methodologies for estimating the 

financial impact of these risks define how climate factors are currently being incorporated 

into (i) market prices, (ii) the valuation of non-financial assets and liabilities, and (iii) 
macroeconomic and other models.66 The IFRS accounting standards directly affected (IAS 36 

Impairment of Assets, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, IFRS 9 

Financial Instruments, IFRS 13 Fair Value Measurement, and IFRS 17 Insurance Contracts) rely 

heavily on estimates by market participants (e.g. on the fair value of a Level 1 and, to a certain 

extent, Level 2 financial instruments) or by management of the reporting entities themselves (e.g. 

impairment of property, plant and equipment, or the estimation of environmental liabilities). Given 

the principles-based nature of IFRS accounting standards, preparers of financial statements are 

confronted with the difficult task of assessing the financial impact of climate-related risks and 

reflecting that impact in their financial statements, and such difficulty is compounded by the lack of 

commonly accepted and sound methodologies in that regard and by the fact that these risks are 
interpreted differently among stakeholders.67 In that sense, it would be desirable to maintain or step 

up efforts to develop methodologies capable, on a proportionate basis, of objectively gauging the 

impact of climate-related risks, in order to ensure comparability and aggregation of the impacts 

disclosed by individual institutions. 

Delayed recognition of climate-related risks in the financial statements could contribute to 

“information shocks”, potentially affecting financial stability. IFRS accounting standards do 

not refer explicitly to climate-related risks, and a lack of relevant guidance could result in their 

unsatisfactory application, leading to an overestimation of assets, underestimation of liabilities or 

deferral of losses. When climate-related risks materialise, or simply if financial market participants 

become aware of the magnitude of these risks and reassess their expectations, a sudden 

adjustment of the affected elements within the financial statements (i.e. an “information shock”) 
could trigger deleveraging, fire sales or a credit crunch to absorb the related losses.68 Uncertainty, 

lack of data, the sheer variety of risk factors that fall within the “climate-related risk” label and 

interconnectedness among institutions are all factors that could amplify the impact of climate-
related risks on the financial system.69 

Looking at their design, IFRS accounting standards generally allow an entity to reflect 

climate-related risks in the financial statements, subject to the boundaries of financial 

reporting. The four issues described in Section 3 can be placed in a continuum, ranging from the 

design of accounting standards by the IASB to the assessment of their implementation, which is 

usually a task that falls within the realm of audit assurance or accounting enforcement. Considering 

66   This is reflected in ESRS E1 AR66 and AR67. 

67   For instance, Financial Stability Board (2020b) provides a stock-take of the approaches followed by financial authorities to 
incorporate climate-related risks. Among its findings, it highlights the differences in these approaches and the lack of 
common definitions, scope and methodologies for quantifying how climate-related risks affect financial institutions. 

68   See Pérez Rodríguez (2021). 

69   See, among others, Boushey et al. (2021), Li et al. (2021), European Central Bank and European Systemic Risk Board 

(2022 and 2023) and Dubiel-Teleszynski (2022). 

Climate-related risks and accounting April 2024 
Conclusions and policy discussion 

29 

 
 
how the standards are designed, there seems to be no need to undertake a major revision to 

enhance the way climate-related risks should be reflected in IFRS financial statements. IFRS 

accounting standards are principles-based and should therefore provide enough flexibility for 

reporting entities to reflect their climate-related exposures. 

However, the ESRB has identified amendments to existing IFRS accounting standards that 

could be beneficial for users of financial information and, indirectly, financial stability. These 

amendments, which are broadly aligned with those already identified by the IASB (International 

Accounting Standards Board, 2023), are briefly explained below: 

(a)  The application of the materiality principle in IAS 1 Presentation of Financial Statements 

may need to be enhanced, as even if the transaction involved is immaterial in 

quantitative terms, user expectations or peer practice may justify its disclosure. In this 

sense, the assessment of materiality should not be overly reliant on quantitative 

thresholds and could also consider how the uncertainty affecting relevant elements in the 

financial statements may play out over the long term. 

(b)  Climate factors could be mentioned as one of the indicators of impairment in paragraph 

12 of IAS 36 Impairment of Assets. 

(c) 

IAS 37 Provisions, Contingent Liabilities and Contingent Assets could be amended along 

three lines. First, guidance would be welcome on how the standard’s principles should 

be applied in the context of transition risks, particularly as concerns how new 

environmental regulations or commitments fall under its scope (e.g., how commitments 

to net zero emissions are reflected through the recognition of provisions or contingent 

liabilities). Second, relevant examples of climate-related provisions and contingent 

liabilities should be introduced. Third, disclosure requirements should be amended to 

add detail and granularity on expected or committed liabilities arising from climate-

related risks.  

(d)  The estimation and assessment of the implications of climate-related risks could be 

improved by providing examples and application guidance on how those risks should be 

incorporated into the estimation of expected credit losses and the fair valuation of 

financial instruments, and on specific disclosure requirements within IFRS 7 Financial 

Instruments: Disclosures and IFRS 13 Fair Value Measurement. In particular, climate-

related factors could be introduced into the non-exhaustive list of information that may be 

relevant for assessing a significant increase in credit risk (paragraph B5.5.17 of IFRS 9 

Financial Instruments).  

Additionally, the IASB should revisit and prioritise work on the accounting treatment of 
pollutant-pricing (i.e. carbon-pricing) mechanisms.70 Currently, there is no specific guidance on 

the accounting of CO2 certificates, licences or trading schemes, and IAS 37 does not provide 

sufficient clarity to preparers of financial statements. As these mechanisms are expected to 

become increasingly important in the future, the absence of a clear accounting treatment may lead 

70   The IASB already conducted research in this field in 2015 (see International Accounting Standards Board, 2016). 

Climate-related risks and accounting April 2024 
Conclusions and policy discussion 

30 

 
 
to diversity in practice and affect the performance of reporting entities (through reduced margins, 

increased impairments or provisions), with a potential impact on financial stability. 

Turning to the implementation of IFRS accounting standards, there could be some 

measures with clear financial stability benefits when it comes to disclosure and expected 

credit losses. Implementation of IFRS accounting standards can vary across reporting entities and 

EU jurisdictions and the ESRB does not have an explicit mandate for carrying out a detailed cross-

country assessment. However, steps could be taken to better reflect the impact of climate-related 
risks when implementing IFRS, which would certainly be beneficial for financial stability.71 For 

instance, there could be merit in developing examples of best practice climate-related risk 

disclosures to be included in the financial statements of both financial institutions and non-financial 

corporations. The recent report by ESMA, focused on disclosures by non-financial corporations, is 

a welcome addition (European Securities and Markets Authority, 2023c). Regulators, 

microprudential supervisors and/or accounting enforcers could also consider developing guidance 

on how climate-related risks can affect the expected credit loss estimates of banks under their 

remit, ensuring that they adequately reflect both the banks’ and their borrowers’ exposures to 

climate-related risks. In this regard, consideration of the borrower’s sector of activity and the 

sector’s exposure to climate-related risks could be important, as could possible changes in the 

value of the real estate posted as collateral. Another area of increasing importance for 

microprudential supervisors refers to the computation of cash flows from certain insurance 

contracts directly exposed to climate factors, including natural catastrophe events and home 
insurance in areas most vulnerable to climate-related events.72 

In line with the FSB roadmap on climate change (Financial Stability Board, 2023), accounting 

and sustainability standard-setters should continue their work around connectivity. Given 

the boundaries of accounting, sustainability standards are crucial for disclosing the long-term 

financial impacts of climate-related risks. The entry into force of sustainability standards (ESRS and 

also those issued by the ISSB) might raise questions among preparers and users of financial 

statements on how the information prepared according to accounting and sustainability standards 

should interact. In the EU, that would refer to how the requirement in ESRS to connect 

sustainability information with the financial statements is applied in practice. In this regard, further 

work on connectivity, involving also the accounting side, would help to ensure that the desired 

outcomes (in terms of richer information on the impact of climate-related risks) are accomplished, 

while avoiding confusion and inconsistency in the information disclosed. 

The scope and work of auditors is crucial, including their role following the entry into force 

of ESRS. Currently, auditors are required to express an opinion on the financial statements, 

including disclosures. As such, they can play an important role, particularly when assessing existing 

disclosures on climate-related risks in the financial statements. In particular, auditors should be in a 

position to challenge the estimations disclosed by reporting entities on the impact of climate-related 

risks. Meanwhile, there are other parts of the annual report that are of a non-financial nature and 

71   These amendments, with a clear financial stability component, should be assessed in line with the overall objective of the 
IFRS Foundation (i.e., “to require high quality, transparent and comparable information in financial statements and other 
financial reporting to help investors, other participants in the world's capital markets and other users of financial information 
make economic decisions”). Similarly, singling out climate-related risks should not be interpreted as giving less importance 
to other risks to which reporting entities may be exposed. 

72   See, for example, recent dynamics in home insurance in Florida (5 trends to watch in 2024 with Florida's property 

insurance market). 

Climate-related risks and accounting April 2024 
Conclusions and policy discussion 

31 

 
 
are not subject to audit scrutiny. Information contained in non-financial reporting, such as transition 

plans, may be extensive as regards climate-related risks, but concerns over its reliability may arise 

if it is not verified by an independent third party. This may become increasingly important as the 
process of adopting ESRS within the EU moves forward.73 Leaving this information fully outside of 

the scope of the statutory audit may impair the quality and transparency of financial information. 

Furthermore, the requirement of audit assurance for sustainability reporting could be a useful tool in 

addressing the lack of connectivity between accounting and sustainability standards. In this regard, 

a welcome development is the July 2023 public consultation of the International Auditing and 

Assurance Standards Board (IAASB) on a draft International Standard on Sustainability Assurance 

(ISSA), which covers general requirements for sustainability assurance engagements and marks 

the first step towards equipping auditors with a common approach to the assurance of sustainability 
information.74 In the EU, further work by the Committee of European Audit Oversight Bodies 

(CEAOB) to harmonise practices on assurance during the first years of implementation of ESRS 

could be key in ensuring that sustainability reporting leads to the disclosure of more accurate and 

comprehensive information on the impact of climate-related risks on reporting entities. 

73   There is an assurance requirement in the Corporate Sustainability Reporting Directive for sustainability statements 

prepared using ESRS. Limited assurance will be in place from the initial application of ESRS, and by October 2026 the 
Commission will adopt mandatory limited assurance standards. Following a review in 2027, the Commission may adopt 
reasonable assurance standards by October 2028. 

74   See Public consultation ISSA 5000. 

Climate-related risks and accounting April 2024 
Conclusions and policy discussion 

32 

 
 
References 

Anderson, N. (2019), IFRS Standards and climate-related disclosures, November. 

Basel Committee on Banking Supervision (2021), Climate-related risk drivers and their 

transmission channels, April. 

Battiston, S., Mandel, A., Monasterolo, I., Schütze, F. and Visentin, G. (2017), “A climate stress-

test of the financial system”, Nature Climate Change, Vol. 7, Issue 4, pp. 283-288. 

Boushey, H., Kaufman, M. and Zhang, J. (2021), “New tools needed to assess climate-related 

financial risk”, Issue Brief, The White House, 3 November. 

Christensen, H. and Nikolaev, V. (2013), “Does fair value accounting for non-financial assets 

pass the market test?”, Review of Accounting Studies, Vol. 18, pp. 734-775. 

Davidson, B. and Schuwerk, R. (2022), Still flying blind: The absence of climate risk in 

financial reporting, Carbon Tracker Initiative, October. 

Davidson, B. and Schuwerk, R. (2021), Flying blind: The glaring absence of climate risks in 

financial reporting, Carbon Tracker Initiative, September. 

Denkstatt (2023), European Sustainability Reporting Standards (ESRS) in a nutshell, 22 

August. 

Dubiel-Teleszynski, T., Franch, F., Fukker, G., Miccio, D., Pellegrino, M. and Sydow, M. (2022), 

“System-wide amplification of climate risk”, Macroprudential Bulletin, European Central Bank, 

June. 

EFRAG (2023), Connectivity between Financial and Sustainability Reporting Information – 

Suggested scope and approach of EFRAG Research project, February. 

EFRAG (2021), EFRAG PTF-NFRS report – Appendix 4.4 Interconnection between financial 

and non-financial information, March. 

Eren, E., Merten, F. and Verhoeven, N. (2022), “Pricing of climate risks in financial markets: a 

summary of the literature”, BIS Papers, No 130, Bank for International Settlements. 

European Banking Authority (2023), Report on the role of environmental and social risks in the 

prudential framework, October. 

European Central Bank and European Systemic Risk Board (2023), Towards macroprudential 

frameworks for managing climate risk, December. 

European Central Bank and European Systemic Risk Board (2022), The macroprudential 

challenge of climate change, July. 

Climate-related risks and accounting April 2024 
References 

33 

 
European Commission (2020), Consultation on a renewed sustainable finance strategy – 

summary of responses. 

European Insurance and Occupational Pensions Authority (2023), Consultation Paper on the 

prudential treatment of sustainability risks, December. 

European Securities and Markets Authority (2023a), 2022 Corporate reporting enforcement and 

regulatory activities, March. 

European Securities and Markets Authority (2023b), 27th Extract from the EECS’s Database of 

Enforcement, March. 

European Securities and Markets Authority (2023c), The heat is on: disclosures of climate-

related matters in the financial statements, October. 

European Securities and Markets Authority (2023d), Consultation paper draft guidelines on 

enforcement of sustainability information, December. 

European Securities and Markets Authority (2022), European common enforcement priorities 

for 2022 annual financial reports, October. 

European Securities and Markets Authority (2021), European common enforcement priorities 

for 2021 annual financial reports, October. 

European Systemic Risk Board (2023), Vulnerabilities in the EEA commercial real estate 

sector, January. 

European Systemic Risk Board (2021a), Financial stability implications of IFRS 17 Insurance 

Contracts, December. 

European Systemic Risk Board (2021b), Climate-related risk and financial stability, July. 

European Systemic Risk Board (2020a), Macroprudential implications of financial instruments 

in Levels 2 and 3 for accounting purposes, February. 

European Systemic Risk Board (2020b), Positively green: measuring climate change risks to 

financial stability, June. 

European Systemic Risk Board (2019a), Expected credit loss approaches in Europe and the 

United States: differences from a financial stability perspective, January. 

European Systemic Risk Board (2019b), The cyclical behaviour of the ECL model in IFRS 9, 

March. 

European Systemic Risk Board (2017), Financial stability implications of IFRS 9, July. 

Financial Stability Board (2023), FSB roadmap for addressing financial risks from climate 

change – 2023 progress report, July. 

Climate-related risks and accounting April 2024 
References 

34 

 
Financial Stability Board (2020a), The implications of climate change for financial stability, 

November. 

Financial Stability Board (2020b), Stocktake of financial authorities’ experience in including 

physical and transition climate risks as part of their financial stability monitoring, July. 

International Financial Reporting Standards Foundation (2023), Effects of climate-related matters 

on financial statements, November. 

International Accounting Standards Board (2023), “Climate-related risks in the financial 

statements”, Staff Paper, September. 

International Accounting Standards Board (2016), “Pollutant pricing mechanisms”, Staff Paper, 

April. 

Li, H-M., Wang, X-C., Zhao, X-F. and Qi, Y. (2021), “Understanding systemic risk induced by 

climate change”, Advances in Climate Change Research, Vol. 12, Issue 3, pp. 384-394. 

Martínez, C. and Pérez Rodríguez, P. (2023), “Climate change, financial risks and reporting: 

Distant horizons?”, Financial Stability Review, Issue 44, Banco de España. 

McCaul, E. and Walter, S. (2023), “Overlays and in-model adjustments: identifying best 

practices for capturing novel risks”, The Supervision Blog, European Central Bank, 26 May. 

Olante, M.E. and Lassini, U. (2022), “Investment property: Fair value or cost model? Recent 

evidence from the application of IAS 40 in Europe”, Advances in Accounting, Vol. 56, 100568. 

Pérez Rodríguez, P. (2021), “Accounting and auditing of credit loss estimates: The hard and 

the soft”, Latin American Journal of Central Banking, Vol. 2, Issue 2, 100027. 

Stroebel, J. and Wurgler, J. (2021), “What do you think about climate finance?”, Journal of 

Financial Economics, Vol. 142, No 2, pp 487-498. 

Task Force on Climate-related Financial Disclosures (2022), 2022 Status Report, October. 

Task Force on Climate-related Financial Disclosures (2017), Recommendations of the Task 

Force on Climate-related Financial Disclosures – Final report, June. 

Climate-related risks and accounting April 2024 
References 

35 

 
Annex 1: Work on climate-related risks by ESMA 
in its role as coordinator of accounting enforcers 

ESMA’s responsibilities in the realm of corporate reporting are focused mainly on ensuring 

convergence in supervisory practices and outcomes, i.e. promoting harmonised practices 

when European enforcers examine information disclosed by issuers and when they take 

enforcement decisions. ESMA is heavily invested in enhancing the quality of corporate reporting 

(and thus contributing to investor protection) by publishing statements, recommendations and 

reports to issuers (including audit committees) and auditors and by responding to consultations 

received from standard-setters and other relevant bodies. ESMA also actively contributes to the 

development and maintenance of the relevant financial and sustainability reporting standards and 

provides opinions on the draft European Sustainability Reporting Standards prior to their adoption 

by the European Commission. ESMA does not, however, have direct supervisory powers over the 

regulated information disclosed by issuers in the European Economic Area (EEA), this being the 

task of European national enforcers for both financial and non-financial information. 

European Common Enforcement Priorities 

Establishing European Common Enforcement Priorities (ECEP) is an important way of 

fostering supervisory convergence across the EEA. ESMA has been developing these priorities 

on an annual basis since 2012. It has found that communicating them to issuers, auditors and 

investors before their annual financial statements are prepared helps to prevent misstatements and 

to enhance quality and consistency of reporting. To this end, ESMA issues a statement regarding 

financial and non-financial information in the third quarter of each year, normally towards the end of 

October. Following the publication of the ECEP, European enforcers (i) include them in their annual 

work plan for the next year, (ii) select issuers for examination for whom the ECEP topics are 

material, (iii) assess how issuers have adhered to ESMA’s recommendations, and (iv) take action 

when misstatements are encountered. The results of these assessments (including information 

regarding the actions taken) are published in ESMA’s report on corporate reporting enforcement 
and regulatory activities.75 

ESMA has identified climate-related matters with regard to financial information as an 

enforcement priority for annual reports covering the years 2021, 2022 and 2023. In particular, 

ESMA and enforcers have highlighted the need for issuers to be transparent and to enhance 

disclosures regarding the impact of climate-related risks and opportunities in the following areas:  

1.  accounting policies, significant judgements and estimation of uncertainty; 

2. 

impairment of assets; 

3. 

revision of useful lives of non-current assets; 

75   See European Securities and Markets Authority (2023a). 

Climate-related risks and accounting April 2024 
Annex 1: Work on climate-related risks by ESMA in its role as coordinator of accounting enforcers 

36 

 
 
4.  accounting of power purchase agreements; 

5. 

recognition of provisions, contingent liabilities and contingent assets; 

6.  specific considerations for financial institutions. 

ESMA has also identified climate-related matters with regard to non-financial information as 

an enforcement priority for the 2021, 2022 and 2023 reporting periods. In particular, ESMA 

and enforcers have highlighted the need for issuers to enhance disclosures in the following areas: 

1.  policies relating to climate matters and related outcomes; 

2.  metrics and targets, and specifically greenhouse gas (GHG) emissions; 

3.  climate goals and related transition plans; 

4.  materiality process for the identification of climate-related risks and opportunities; 

5.  disclosures pursuant to Article 8 of the Taxonomy Regulation. 

In 2022 ESMA highlighted that issuers should pay particular attention to climate-related 

matters affecting the development, performance, risks and uncertainties of their businesses. 

They should also consider whether the emphasis placed on climate-related matters in the 

management report and the non-financial information is consistent with the extent of disclosure in 

their IFRS financial statements. In this context, enforcers would challenge disclosures related to 
climate-related risks to identify and prevent potential greenwashing.76 In 2023 ESMA reiterated that 

issuers should use consistent assumptions between their IFRS financial statements and the non-

financial information they disclose. They should also explain material deviations between the 

assumptions used in impairment tests and provisions and their climate-related commitments, plans 

or strategy. 

ECEP assessment 

In March 2023 ESMA published the results of issuers’ adherence to the 2022 ECEP, which 

showed significant room for improvement in disclosures relating to the impacts of climate-
related risks and opportunities in annual financial reports.77 With respect to financial 

information, ESMA highlighted that enforcers did not identify significant inconsistencies and/or 

contradictions between the information disclosed in management reports and the information 

contained in financial statements. However, they did find that information regarding climate-related 

matters in financial statements was often incomplete or missing altogether. This was particularly 

concerning when the issuer operated in a sector that was expected to be heavily affected by 

76   Many of the commitments to reach targets related to climate-related risks are made in the context of voluntary “climate 

reports” or “sustainability reports”, so accounting enforcers may have limited powers to assess how realistic they are and 
the extent to which they are supported by relevant action plans. 

77   See European Securities and Markets Authority (2023a). 

Climate-related risks and accounting April 2024 
Annex 1: Work on climate-related risks by ESMA in its role as coordinator of accounting enforcers 

37 

 
 
climate-related risks or was located in areas where climate-related risks were expected to be 

relevant. In particular, ESMA identified shortcomings on disclosures: 

• 

when forward-looking assumptions were necessary, such as in recoverable amount 

calculations; 

• 

• 

regarding major sources of estimation uncertainty and judgements; 

in the accounting treatment of carbon and greenhouse gas emissions trading schemes, 

particularly when they affect issuers’ financial performance and position. 

Following their examination of 2021 financial statements, enforcers took seven actions to 

address misstatements when accounting for climate-related risks in financial statements 
prepared in accordance with IFRS accounting standards.78 In relation to 18 issuers, enforcers 

did not take any enforcement action but informed the issuers concerned about areas for future 

improvement in their disclosures. These concerned (i) progress made against climate-related 

targets; (ii) sensitivity analysis on the materialisation of climate-related risk events; (iii) additional 

explanation of climate-related factors considered when checking for indicators of impairment; (iv) 

disclosure of main judgements, major sources of uncertainty; and (v) consideration of climate-

related risks in the key assumptions used. 

With respect to non-financial information, the findings in relation to climate-related matters 

indicated that some issuers still do not report on such matters for no clear reason and that 

disclosures are not satisfactory in a number of areas, most notably: 

1.  consistency amongst objectives, targets, policies, actions, outcomes and key performance 

indicators; 

2.  Scope 3 emission disclosures; 

3.  segment information for GHG emission metrics; 

4.  alignment of emission patterns with the Paris Agreement; 

5.  progress made towards pre-set emission-reduction targets; 

6. 

resilience and management of physical or transition risks; 

7.  mitigation measures vis-à-vis climate-related impacts; 

8. 

financial consequences of climate change; 

9.  due diligence processes related to climate policies, including details concerning internal 

processes and the definition of specific KPIs; 

10.  forward-looking information on how the issuer intends to progress towards addressing climate-

related matters. 

78   Please refer to decisions 7 and 8 of European Securities and Markets Authority (2023b). 

Climate-related risks and accounting April 2024 
Annex 1: Work on climate-related risks by ESMA in its role as coordinator of accounting enforcers 

38 

 
 
After examining disclosures of climate-related matters in the 2021 non-financial statements, 

European enforcers took 12 enforcement actions. The actions taken addressed (i) additional 

information regarding sustainable accounting policies to accompany the sustainability data 

disclosed; (ii) additional information on environmental policies; (iii) reporting perimeters; (iv) KPIs 

and objectives; (v) GHG emissions segmentation and Scope 1, 2 and 3 breakdowns, including 

additional explanations on issuers’ phases of the value chain; and (vi) consistency of information 

provided on issues related to climate and information regarding issuers’ progress towards emission 

targets set in 2021. 

As mentioned above, climate-related recommendations continued to be prioritised in the 

2023 ECEP. ESMA therefore urged issuers to further improve their disclosures related to climate-

related matters when preparing both IFRS financial statements and non-financial statements. This 

should enable investors to understand the impacts of climate-related matters on the issuers’ 

financial position, financial performance and cash flows. ESMA will publish the results of the 2023 

ECEP assessment in 2024 and possibly include further recommendations. 

Report titled “The heat is on: disclosures of climate-related 
matters in the financial statements” 

In October 2023 ESMA published a report providing illustrative examples on how issuers 

may consider climate-related matters in their IFRS financial statements (European Securities 

and Markets Authority, 2023c). The report addresses disclosures, touching upon the following 

areas, among others: (i) significant judgements, major sources of estimation uncertainty and 

accounting policies; (ii) impairment of non-financial assets; (iii) useful lives of tangible and 

intangible assets; and (iv) provisions. Aside from the examples, certain areas for further attention 

are identified, as they may provide further insights on how issuers could improve the quality of the 

information they disclose in their financial statements. The report aims to assist issuers in preparing 

their 2023 annual financial reports, in particular, by providing entity-specific and useful information 

to users of financial statements. 

Next steps 

In light of the shortcomings identified when assessing the 2022 ECEP in relation to financial 

reporting, ESMA has set up a group to focus on the supervision of climate-related matters in 

IFRS. In addition, it regularly liaises with audit networks and the IASB on how issuers are taking 

climate-related risks into account. ESMA will continue to monitor and, where relevant, contribute to 

the initiatives of standard-setters in this area and provide further guidance to the market. 

In 2018 ESMA set up a specific working group enabling European national enforcers to 

discuss supervisory cases and develop recommendations in relation to non-financial 

reporting. Since 2022 this group has also been looking to improve the standard-setting process for 

both European Sustainability Reporting Standards and IFRS sustainability standards. In 2023 

ESMA continued to promote discussion of supervisory cases in relation to sustainability reporting, 

coordinate the review of reporting practices in this area and draw up recommendations for the 2023 

Climate-related risks and accounting April 2024 
Annex 1: Work on climate-related risks by ESMA in its role as coordinator of accounting enforcers 

39 

 
enforcement priorities. In the second half of 2023 ESMA and the national competent authorities 

conducted a fact-finding exercise on a limited sample of European issuers in relation to the 

reporting of environmentally sustainable business activities pursuant to Article 8 of the Taxonomy 

Regulation. In 2024 ESMA plans to finalise its Guidelines on the Enforcement of Sustainability 
Information following a public consultation.79 These Guidelines aim to achieve further convergence 

in the supervision and enforcement of sustainability statements prepared in accordance with ESRS 

and which include information related to the Taxonomy Regulation. 

79   See European Securities and Markets Authority (2023d).  

Climate-related risks and accounting April 2024 
Annex 1: Work on climate-related risks by ESMA in its role as coordinator of accounting enforcers 

40 

 
 
Annex 2: ESRS E1 Climate change 

The first set of European Sustainable Reporting Standards (ESRS) was published by the 
European Commission in July 2023, with ESRS E1 being devoted to climate change.80 ESRS 

must be applied by all entities subject to the Corporate Sustainability Reporting Directive (CSRD) 

and cover a full range of environmental, social and governance issues, including climate change, 
biodiversity and human rights (Figure A1).81 ESRS E1 focuses on climate change, with the main 

objective of allowing users of sustainability statements to understand (i) how the entity affects 

climate change, in terms of material positive and negative actual and potential impacts; (ii) the 

entity’s past, current and future mitigation efforts in line with the Paris Agreement and in limiting 

global warming to 1.5°C; (iii) the entity’s plans and capacity to adapt its strategy and business 

model(s) in line with the transition to a sustainable economy and to contribute to limiting global 

warming to 1.5°C; (iv) any other actions taken, and the result of such actions, to prevent, mitigate or 

remediate actual or potential negative impacts; (v) the nature, type and extent of the entity’s 

material risks and opportunities arising from impacts and dependencies on climate change, and 

how they are managed; and (vi) the financial effects over the short, medium and long term of risks 

and opportunities arising from the entity’s impacts and dependencies on climate change. 

80   The full text of ESRS E1 is available in Annex 1 of Commission Delegated Regulation 2023/2772. 

81   ESRS use the term “undertakings” to refer to those institutions under their scope. To keep alignment with the terminology 

used in IFRS accounting standards, “entity” is used throughout the text. 

Climate-related risks and accounting April 2024 
Annex 2: ESRS E1 Climate change 

41 

 
 
Figure A1 

Overview of ESRS 

Source: Denkstatt (2023). 

The requirements in ESRS E1 relate to disclosure requirements in other ESRS and to 

requirements at a global level. ESRS E1 interacts with other environmental ESRS (ESRS 2 to 

ESRS 5) and must be applied in conjunction with the disclosure requirements of ESRS 2 on 

general disclosures on matters such as the integration of sustainability-related performance in 

incentive schemes or the description of processes to identify and assess material climate-related 

impacts, risks and opportunities. The disclosure requirements in ESRS E1 cover virtually all 

disclosure requirements of the standards issued by the ISSB and of the standards prepared by the 

Securities and Exchange Commission in the United States. Compared to ISSB standards, ESRS 

come with additional discourse requirements on anticipated financial effects and impact-related 

disclosures. 

Following the CSRD requirement, ESRS E1 requires entities to disclose detailed information 

on their transition plans to a sustainable economy, in line with the Paris Agreement and the 

objective of reaching climate neutrality by 2050. Entities should include an explanation as to (i) 

the compatibility of GHG emission-reduction targets with limiting global warming to 1.5°C, (ii) the 

decarbonisation levers identified and key actions planned, (iii) the investments and funding 

supporting the implementation, (iv) potential locked-in GHG emissions from key assets and 

products, (v) the objective of aligning its economic activities with the EU Taxonomy, (vi) whether or 

not it is excluded from EU Paris-aligned benchmarks, (vii) alignment with overall business strategy 

and financial planning, and (viii) progress towards implementation. 

Climate-related risks and accounting April 2024 
Annex 2: ESRS E1 Climate change 

42 

 
 
In conceptual terms, material risks need to be identified on a gross and a net basis, taking 

into account actions and resources to mitigate them. Considering exposures under the risk of 

physical hazards or transition events would yield an initial quantification of gross material risks and 

their potential financial effects on the entity. Gross material risks can then be expressed in net 

terms after accounting for the actions and measures to mitigate them and for the ability of the entity 

to absorb them or adapt the business model. 

When identifying and assessing material impacts, risks and opportunities, entities are 

expected to use climate-related scenarios. These scenarios can also be used to analyse the 

entity’s resilience to climate change. Regarding physical risks, entities disclose how they analyse 

potential climate-related risks (including their probability, magnitude and duration) under high 

emission scenarios, in turn allowing them to identify potentially exposed activities and assets due to 

their location. The entity should then assess potential financial effects on assets and activities. In 

the case of transition risks, this analysis should relate to transition events (including their 

probability, magnitude and duration) related to 1.5°C climate scenarios such that the entity can 

identify activities, assets and liabilities that may be affected by the events. Then, the entity should 

assess potential effects on its financial position and results. 

ESRS E1 sets out the requirements for the disclosure of GHG emissions and targets, as well 

as other climate-related targets. These other targets may relate to renewable energy 

deployment, energy efficiency, climate change adaptation, and physical or transition risk mitigation. 

In the case of GHG emission targets, ESRS E1 defines in detail the information to be disclosed (for 
example, on Scope 1, Scope 2 and Scope 3 GHG emissions)82 and allows the entity to make this 

disclosure as a graphical pathway (Figure A2). GHG emissions are consolidated based on the 

control criteria of the GHG Protocol (financial and operational) and should also comprise the share 

of emissions covered by regulated emissions trading schemes. 

82   Scope 1 emissions are those emitted by sources that an entity owns or controls directly (for example, the fuel burned by its 
vehicles). Scope 2 emissions are those a company causes indirectly and come from the energy it purchases (for example, 
emissions produced while generating the electricity used to power its buildings). Scope 3 encompasses emissions that are 
not produced by the entity itself and are not the result of activities from assets owned or controlled by it, but by those that it 
is indirectly responsible for up and down its value chain (for example, products from suppliers). Scope 3 emissions include 
all sources not within the Scope 1 and Scope 2 boundaries. 

Climate-related risks and accounting April 2024 
Annex 2: ESRS E1 Climate change 

43 

 
 
Figure A2 

Example of disclosure of GHG emission target 

Source: ESRS E1 (paragraph AR31). 

ESRS E1 also requires the entity to disclose information on its energy consumption and 

mix, and state whether the entity applies internal carbon-pricing schemes. This information 

should include energy consumption from renewable and non-renewable sources, with further 
disclosures in case it operates in a high climate impact sector.83 If internal carbon-pricing schemes 

are used, the disclosed information should include how these schemes support decision-making 

processes at the entity, and how they incentivise the implementation of climate-related policies and 

targets. 

The disclosure requirements of ESRS E1 also refer to the anticipated financial effects of 

material physical and transition risks and potential benefits from material climate-related 

opportunities. For physical risks, disclosures should include the amount of current net assets at 

physical risk, a list of significant assets at physical risk, the share of net assets at physical risk 

covered by a climate change adaptation action plan, and the share of turnover of activities exposed 

to physical risks. For transition risks, disclosures should cover the estimated amount of potentially 

stranded assets, a classification of property assets by energy efficiency category, the share of net 

transition risk assets covered by a climate change mitigation action plan, the share of turnover from 

activities exposed to transition risks, potential future liabilities from emissions trading schemes and 

potential liabilities from contractual commitments to purchase future carbon credits. In terms of 

benefits from climate-related opportunities, entities must disclose the expected cost savings from 

climate change mitigation and adaptation actions, and the potential market size or expected 

changes to net revenue from low-carbon products and services or adaptation solutions to which the 

undertaking has or may have access. 

83   High climate impact sectors are those listed in NACE Sections A to H and Section L. 

Climate-related risks and accounting April 2024 
Annex 2: ESRS E1 Climate change 

44 

 
 
 
Annex 3: IFRS accounting standards and the 
main issues identified 

For illustrative purposes, Table A1 below lists the IFRS accounting standards largely 

affected by the four main issues of relevance for financial stability, as described in further 

detail in Section 3 of this report. Table A1 is based on expert judgement and does not 

necessarily mean that no other IFRS accounting standards may be affected directly or indirectly by 

the issues identified. 

Table A1 

Main issues identified and related IFRS accounting standards 

Extent to which market 
prices incorporate climate-
related risks 

Valuation of non-financial 
assets and liabilities 

Incorporation of climate 
factors into models 

Disclosures 

IFRS 9 Financial Instruments 

IAS 16 Property, Plant and 
Equipment 

IFRS 9 Financial Instruments 

IAS 1 Presentation of 
Financial Statements 

IFRS 13 Fair Value 
Measurement 

IFRS 17 Insurance Contracts 

IAS 36 Impairment of Assets 

IFRS 17 Insurance Contracts 

IAS 36 Impairment of Assets 

IAS 37 Provisions, 
Contingent Liabilities and 
Contingent Assets 

IAS 38 Intangible Assets 

IFRS 7 Financial Instruments: 
Disclosures 

IFRS 13 Fair Value 
Measurement 

IAS 40 Investment Property 

IFRS 17 Insurance Contracts 

IAS 41 Agriculture 

IFRS 6 Exploration for and 
Evaluation of Mineral 
Resources 

Source: Own illustration. 
Notes: The IFRS accounting standards shown in the table are those largely affected by each of the four main issues, based on 
the judgement of the ESRB. Other IFRS accounting standards may also be related to such issues, albeit to a lesser degree. 

Climate-related risks and accounting April 2024 
Annex 3: IFRS accounting standards and the main issues identified 

45 

 
 
 
 
 
 
 
 
 
 
 
 
 
Imprint and acknowlegements 

This report has benefited from extensive discussions by the ESRB Exploratory Group on Accounting 
Developments and Financial Stability (chaired by Luca Serafini, Banca d’Italia), and with Alexander Aronsohn, 
Silke Blaschke, Luca Ciavoliello, Angela Covic, Pedro Faria, David Grünberger, Malcolm Kemp, Vincent Papa, 
Eleonora Pellati and Riana Wiesner. The report also reflects the valuable feedback received during a meeting 
with members of the European Committee of Audit Oversight Bodies (chaired by Patrick Parent) and with 
representatives of audit firms. Comments by members of the ESRB Instruments Working Group (co-chaired by 
Carsten Detken and Tomas Garbaravičius), of the ESRB Advisory Technical Committee (chaired by Pablo 
Hernández de Cos) and of the ESRB General Board (chaired by Christine Lagarde) are gratefully 
acknowledged. 

The following members of the Exploratory Group on Accounting Developments and Financial Stability made 
substantial contributions to the report:  

Eduardo Damasio 
European Securities and Markets Authority; e-mail: eduardo.damasio@esma.europa.eu  

Alexandre Dubois 
Autorité de Contrôle Prudentiel et de Résolution; e-mail: Alexandre.DUBOIS@acpr.banque-france.fr  

Tommaso Loizzo 
Banca d’Italia; e-mail: tommaso.loizzo@bancaditalia.it 

Pablo Pérez Rodríguez 
Banco de España; e-mail: pablo.perez@bde.es 

Antonio Sánchez Serrano 
ESRB Secretariat; e-mail: antonio.sanchez@esrb.europa.eu 

© European Systemic Risk Board, 2024 

Postal address 
Telephone 
Website 

60640 Frankfurt am Main, Germany 
+49 69 1344 0 
www.esrb.europa.eu  

All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the 
source is acknowledged. 

The cut-off date for the data included in this report was 15 December 2023. 

For specific terminology please refer to the ESRB glossary (available in English only). 

PDF 

ISBN 978-92-9472-383-3, doi:10.2849/91949, DT-06-24-044-EN-N