CLIMATE CHANGE RISK-RELATED DISCLOSURES

IN EXTRACTIVE COMPANIES – A FOLLOW UP REPORT

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August 2021
Contents

Context 4

Sample 4

Method 5

Findings – Front end 5

Findings – Back end 6

Commentary 7

Recommendations 7

APPENDIX A: Sample companies 8

APPENDIX B: Instrument for annual report analysis: Front end 9

APPENDIX B: Instrument for annual report analysis: Back end 10

APPENDIX C: Results 11

APPENDIX D: Examples 12

3
Context
In February 2021, ACCA and the University of Glasgow published a report on the disclosures
that extractive companies around the world were making in their 2019 corporate
reports. During 2020, we gained an impression that there had been a step change in the
recognition of the impact that climate change might have, by investors and by companies.

In particular, several major extractive companies made announcements that reinforced that change of perception by
disclosing significant impairments and changes in strategy. So it seemed useful to look at the extent to which that could
be seen in the 2020 reports of the same companies, using the same measures as before.

Sample
Both the study of the 2019 reports and this follow-up More than half the sample are based in Europe, compared
covered both the annual management report (front end) with just under half in the 2019 report.
and the financial statements (back end) of the reports. To
simplify the interpretation of the results of the financial The 47 are split between sectors as shown in Table 1.
statements, the studies were restricted to those reporting
The most carbon-exposed companies in oil, gas and
using International Financial Reporting Standards (IFRS) or
coal account for just over half the sample in both years.
national standards based substantially on them. The main
There are proportionally fewer iron and steel companies
exclusions were therefore US companies. The studies were
in the 2020 study, because of the absence of the Indian
of extractive companies because this is a sector expected
companies. Some of the general mining companies have
to be acutely affected: negatively for hydrocarbon
interests in oil, gas and coal. Some of the changes noted
producers and those in iron and steel, but positively for
below may in part reflect the absence of the 13 companies
some metal (for example copper) producers, which could
missing as yet from the 2020 analysis. The 47 companies
be expected to benefit.
are identified in Appendix A.
The 60 extractive companies chosen for the 2019 study
For this study, in addition to the 47 from the 2019 one,
were those that had the largest Scope 1 and Scope 2
a few smaller listed companies were looked at to judge
carbon emissions in the preceding years and with publicly
whether any trends in the larger extractives applied to the
available reports in English. The sample included 13
sector more widely. These were seven companies listed in
companies (mostly from India and Australia where March
London from the oil, gas and coal sector – four exploration
and June reporting dates are common) whose most recent
companies listed on the AIM (secondary market) and three
reports are not yet available. This follow-up study therefore
mid-size oil and gas producers. We also looked at the report
covers 47 companies from around the world (Figure 1).
of Saudi Aramco, the world’s largest oil and gas producer.

FIGURE 1: Geographical distribution of the reports TABLE 1: Distribution of the sample reports by sector
n Africa, 3
4 3 n Asia, 6
SECTOR 2020 2019
2 n Europe, 27
6 Oil, gas and coal 26 31
n North America, 5
5 n Oceania, 2 Iron and steel 6 11
n South America, 4
General mining and other metals 15 18

TOTAL 47 60

27

4
Method
Exactly the same questions were considered in 2020 as had been in 2019. These are set out in Appendix B. These identify
matters relevant to climate change that might be expected to appear in the annual reports and accounts of companies
that could be significantly affected.

Findings – Front end

For the front end of the reports, this study found that Oil and gas companies provided much of the
68% of the possible climate-related disclosures had been improvement by including scenario analyses (particularly
provided and that this was up significantly from the 52% recommended by the TCFD) and the incorporation of
found in the 2019 reports. This would seem to bear out climate risk in their business model.
the expectation that climate risk disclosures are now being
addressed much more completely. There has indeed been Despite this step change in front-end reporting, there
a step change in the reporting by these larger companies. is a way to go. It remains the case that scenario analyses
are only provided by about half these large companies.
The matters in the front half where this improvement While the great majority have climate-related key
among was most marked are set out in Table 2. performance indicators (KPIs) (see Evraz example in
Appendix D), under half link those KPIs to executive
remuneration. One-third have not made a commitment
68% OF THE POSSIBLE to following the disclosures recommended by TCFD.
CLIMATE-RELATED The full results are available as Appendix C.
DISCLOSURES HAD
The smaller hydrocarbon companies appear to be
BEEN PROVIDED AND lagging well behind in discussing the climate risks, as their
THAT THIS WAS UP equivalent figure was only 25%. For them, the discussion
SIGNIFICANTLY FROM of key climate change impacts was very scant as most
of their score derived from providing numerical reserves
THE 52% FOUND IN THE information and a description of their business model.
2019 REPORTS. This was also true of the largest company, Saudi Aramco.

TABLE 2: Areas covered in the front end of the sample reports in 2019 and 2020

2020 % 2019 %

Provision of a reserves report, including relevant numerical information 74 60

Provision of scenario analysis that considers climate change risks 53 23

A statement that addressing climate change risk is an integral part of the company’s business model 83 60

Inclusion of an international initiative for climate change (eg the Paris Agreement) in the discussion 45 25
of the company’s business model

Provision of a statement that the company follows the recommendations of the Task Force on 66 43
Climate-related Financial Disclosures (TCFD).

5
Findings – Back end
In the financial statements there has been much less For example, none of the sample reports discussed
change. The potential effects of climate change remain assets’ useful lives and depletion with reference to
less discussed than in the front half of the reports, as climate change. There remain fewer explanations than
was the case in the 2019 review. As some investors have there should be of the impact on the actual impairments
commented, this is a concern because the extent to which recognised. Climate change features in only a small
the implications of climate change are incorporated into number of provisions and contingencies.
impairments of assets and in asset lives/depletion for
depreciation, in particular, is often not clear. Likewise, it is Table 3 shows areas where there had been some
not made evident whether there is alignment between the improvement, albeit still at a low level. Of these, the
unaudited discussion of strategy in the front end and the increasing reference to climate change as a matter of
audited carrying values of assets in the back end. See the judgement in estimating impairment is an encouraging
examples from Total Energies and from BP in Appendix sign, even if the impact on any impairments recognised
D, looking particularly at forward estimates of crude oil in the year is made clear much less frequently. Auditors
prices, which can be seen as a key disclosure and link are also more frequently identifying climate change as a
between the different parts of the report. significant matter for them to assess.

Overall, the 2020 study found that in the financial The smaller hydrocarbon companies made little or no
statements only 27% of possible climate-related reference to climate change in their financial statements.
disclosures were provided by the companies, and this was The average was 13% of possible climate change
little changed from the 26% in 2019. disclosures, half that of the large companies in the main
sample. None of the possible matters were disclosed in
That means that significant potential impacts of climate Saudi Aramco’s accounts.
change are still not addressed in the financial statements.

TABLE 3: Areas in the financial statements showing greater recognition of climate change

2020 % 2019 %

Climate change included as a matter of judgement or estimation uncertainty in the following:

• Carrying values of exploration and evaluation intangibles 6 2

• Carrying values of property, plant and equipment (PP&E) 9 2

• Impairments 30 18

Recognition of carbon allowances as assets or liabilities 23 17

Climate change included as a key audit matter 21 15

THE 2020 STUDY FOUND THAT IN THE FINANCIAL

STATEMENTS ONLY 27% OF POSSIBLE CLIMATE-RELATED
DISCLOSURES WERE PROVIDED BY THE COMPANIES,
AND THIS WAS LITTLE CHANGED FROM THE 26% IN 2019.

6
Commentary
The better discussion of climate change in the front consumers and governments to switch to other sources of
half of the reports is a marked change, especially in the energy and endanger oil and gas business prospects.
business model and the provision of scenario analysis.
The increasing adoption of the TCFD’s recommendations Why has there yet been much less evidence of the
should help to continue these trends. They probably recognition of climate change in the financial statements,
reflect the increased investor interest and regulatory especially effects on asset depreciation and impairment?
requirements, current and future. These are, however, The answer is not clear. A common narrative in the
crude measures. For example, environmental strategy, hydrocarbon sector may refer to energy transition but
KPIs and related executive remuneration in the oil may also conclude that their products (especially gas)
and gas sector may consist of the reduction of Scope will continue to play a significant role for many years to
1 and 2 emissions from their own production. While come. Those who claim to be low-cost producers project
happy to include and measure these impacts on the that they will continue to be viable as demand shrinks and
environment and society, companies seem more reluctant others are priced out. See an example from Tullow Oil in
to incorporate the Scope 3 emissions that may cause Appendix D.

Recommendations
‘VERY FEW OF THE SAMPLE COMPANIES DISCUSS
EXTENSIVELY AND IN A COMPLETE MANNER THE
IMPACT OF CLIMATE CHANGE RISKS ON THEIR FUTURE
FINANCIAL PERFORMANCE’.
This conclusion from the 2019 report still holds, even Standard setters have a role to play in setting widely
though this study has confirmed that there has been a accepted standards for the front-end reporting to capital
step change in the reporting in the front end of reports. markets. The decision by the IFRS Foundation1, in
Companies should be ensuring that their reporting of particular, to establish a new board to set such standards
climate risks is more complete. The impacts in the financial (with an immediate focus on climate change) should be
statements, in particular, need to be clearer as well as very helpful. The International Accounting Standards
fully aligned with the front end. It seems that smaller Board (IASB) are currently consulting on their agenda for
companies need to make greater strides. the next five years2 and are suggesting a possible project
to improve the reporting of climate change in financial
Much of the improvement may have derived from investor statements. This report indicates that this should be a
pressure for better explanations of how companies are priority. The two boards working together should be well
addressing these important issues. That pressure seems placed to improve the alignment of reporting in front and
likely to continue. back ends, for example on key assumptions and ensuring
realistic future prices for carbon and oil.
Capital markets regulators should be assisting investors
by requiring that listed companies take up and comply Once standards are set, then auditors can provide
with the TCFD recommendations. Companies on assurance to investors and others on the front end as well
alternative markets such as AIM should not be excused as the back. The EU is proposing that assurance will be
from doing so. required for the sustainability report. Elsewhere assurance
may be voluntary, but company directors should carefully
consider obtaining it.

1 IFRS – IFRS Foundation Trustees announce strategic direction and further steps based on feedback to sustainability reporting consultation
2 IFRS - Request for Information and comment letters: Third Agenda Consultation

7
APPENDIX A:
Sample companies
COMPANY COUNTRY COMPANY COUNTRY
Oil, gas and coal Iron and Steel
YPF SA ARGENTINA Vale SA BRAZIL
OMV AG AUSTRIA ArcelorMittal SA NETHERLANDS
Petroleo Brasileiro SA BRAZIL Novolipetsk Steel PAO RUSSIAN
FEDERATION
Cenovus Energy Inc CANADA Severstal' PAO RUSSIAN
FEDERATION
Canadian Natural Resources Ltd EVRAZ plc UNITED KINGDOM
Suncor Energy Inc CANADA Ferrexpo PLC UNITED KINGDOM
Ecopetrol SA COLOMBIA
Total SE FRANCE General mining and other metals
MOL Magyar Olajes Gazipari Nyrt HUNGARY Antofagasta PLC UNITED KINGDOM
Eni SpA ITALY Kaz Minerals PLC UNITED KINGDOM
Petronas Dagangan Bhd MALAYSIA Teck Resources Ltd CANADA
Royal Dutch Shell PLC NETHERLANDS Imerys SA FRANCE
Equinor ASA NORWAY Anglo American plc UNITED KINGDOM
Polskie Gornictwo Naftowe i Gaz. SA POLAND Glencore PLC UNITED KINGDOM
Galp Energia SGPS SA PORTUGAL Rio Tinto PLC UNITED KINGDOM
NK Lukoil PAO RUSSIAN Barrick Gold Corp CANADA
FEDERATION
NK Rosneft' PAO RUSSIAN Polyus PAO RUSSIAN
FEDERATION FEDERATION
Novatek PAO RUSSIAN KGHM Polska Miedz SA POLAND
FEDERATION
Repsol SA SPAIN Norsk Hydro ASA NORWAY
BP PLC UNITED KINGDOM Zijin Mining Group Co Ltd MAINLAND CHINA
Woodside Petroleum AUSTRALIA AngloGold Ashanti Ltd SOUTH AFRICA
Santos Ltd AUSTRALIA Anglo American Platinum Ltd SOUTH AFRICA
CNOOC Ltd HONG KONG Sibanye Stillwater Ltd SOUTH AFRICA
Banpu PCL THAILAND
PTT Exploration and Production PCL THAILAND
PTT PCL THAILAND

Smaller companies sample – oil, gas and coal

companies from the London Stock Exchange
COMPANY LISTING MARKET CAP £M ACTIVITY
Borders and Southern AIM 4.6 Offshore oil and gas exploration in the
Petroleum Falkland Islands
Providence Resources AIM 39.5 Offshore oil and gas exploration in Ireland
Edenville Energy AIM 6.5 Coal development in Tanzania
Zephyr Energy AIM 74.7 Onshore oil exploration in Western USA
Nostrum Oil & Gas Full 21.3 Gas production in Kazakhstan
Gulf Keystone Full 358.5 Oil production and exploration in Kurdistan
Tullow Oil Full 661.3 Exploration and production in Africa and
South America
The market capitalisations above are as at 23/7/2021.

8
APPENDIX B:
Instrument for annual report analysis: Front end
RESERVES AND RESOURCES REPORTING (RRR)/STATEMENT

RRR1 Does the company provide a reserves/resources statement with relevant numerical information?

RRR2 Does the company report an assessment of climate change/environment-related risks and/or liabilities that are
pertinent to its projects, including, but not limited to, legislative requirements, assumptions and limitations?

SCENARIO ANALYSIS

SA1 Does the company provide scenario analysis which considers climate change risks?

SA2 For the companies that provide a scenario analysis as above, do they provide, within this, quantitative
information about the climate change factors, assumptions and impacts of their operations?

BUSINESS MODEL

BM1 Does the company explicitly discuss its business model?

BM2 Does the company identify addressing climate change risk as an integral part of its business model?

BM3 Does the company consider any international initiative for climate change (eg the Paris Agreement) in the
discussion of its business model?

CLIMATE CHANGE-RELATED PERFORMANCE INDICATORS (PIs)

KPI1 Does the company have climate change-related PIs?

KPI2 Does the company integrate financial and climate change-related information into its PIs?

KPI3 Does the company link executives’ remuneration to climate change-related performance metrics?

TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURE (TCFD)

TCFD Does the company follow the recommendations of the TCFD?

9
APPENDIX B:
Instrument for annual report analysis: Back end
ACCOUNTING POLICIES NOTE

AP1 Is climate change recognised as an important factor in the company's judgements and sources of estimations
uncertainty? – In financial instruments?

AP2 Is climate change recognised as an important factor in the company's judgements and sources of estimations
uncertainty? – In tangible and intangible assets?

AP3 Is climate change recognised as an important factor in the company's judgements and sources of estimations
uncertainty? – In exploration and evaluation assets?

AP4 Is climate change recognised as an important factor in the company's judgements and sources of estimations
uncertainty? – In impairment testing?

AP5 Is climate change recognised as an important factor in the company's judgements and sources of estimations
uncertainty? – In provisions and contingent liabilities?

IMPAIRMENT TESTING NOTE

IT1 Is climate change risk recognised to affect the company’s future estimated cash flows and hence the recoverable
amount of its assets such as property, plant and equipment; mineral resources; evaluation and exploration
assets; financial instruments; intangible assets; and goodwill?

IT2 When a company recognises impairments, does it recognise climate risk factors affecting these?

NON-CURRENT ASSETS NOTE

NCA1 Are climate change-related risks considered when estimating the useful lives of the company’s assets?

NCA2 Does the company capitalise expenses related to climate change?

NCA3 Does the company use financial instruments in order to settle future environmental obligations?
(eg South Africa fund)

NCA4 Does the company recognise carbon allowances as intangible assets?

PROVISIONS AND CONTINGENT LIABILITIES NOTE

PCL1 Does the company consider climate change-related risks in the estimation of its provisions?

PCL2 Does the company identify climate change risk as important factor in its contingent liabilities?

AUDIT REPORT

AR Does climate change give rise to key audit matters?

10
APPENDIX C: Results

2020 RESULTS 2019 RESULTS

CODE QUESTION OIL, GAS IRON & MINING TOTAL % TOTAL %

& COAL STEEL

FRONT END

RR1 Reserves – numerical analysis 19 4 12 35 74 36 60

SA1 Scenario analysis 15 3 7 25 53 14 23

BM1 Discuss business model 22 6 13 41 87 46 77

BM2 Includes climate change 21 6 12 39 83 36 60

BM3 Refers to international 11 5 5 21 45 15 25

agreements

KPI1 Climate change KPIs 22 6 14 42 89 51 85

KPI3 Climate change KPIs linked to 11 3 7 21 45 26 43

executive remuneration

TCFD Follows TCFD recommendations 31 66 26 43

FRONT-END AVERAGE 32 68 31 52

BACK END

Climate change in
accounting judgements

AP2 Tangible and intangible assets 3 6 1 2

AP3 Exploration & evaluation of 4 9 1 2

assets

AP4 Impairments 14 30 11 18

AP5 Provisions & contingencies 15 32 19 32

IT1 Climate change affecting future 5 0 1 6 13 6 10

cash flows

IT2 Climate change shown as a 2 0 1 3 6 3 5

factor in impairments

NCA3 Separate investment portfolio for 3 0 5 8 17 14 23

environmental liabilities

NCA4 Carbon allowances recognised 8 1 2 11 23 10 17

as assets

PCL1 Climate change affecting 4 3 5 12 26 17 28

provisions

PCL2 Climate change affecting 4 1 0 5 11 6 10

contingencies

KAM Climate change as a key audit 6 1 3 10 21 9 15

matter

BACK-END AVERAGE 8 18 9 15

11
APPENDIX D: Examples

Evraz – Annual Report and Accounts 2020, page 64

Climate-related KPIs in the iron and steel sector

<https://www.evraz.com/upload/iblock/f81/EVRAZ_AR2020_final_pages_lowres.pdf>

Total Energies – Universal Registration Document 2020, page 330

Extract from accounting principles for asset impairment

The oil and gas price trajectories adopted by the Group are based on the following assumptions:
– Following the deep recession caused by the health crisis in 2020, which strongly impacts the oil demand in 2020
and 2021 before reverting to a pre-crisis level, the oil demand should continue to grow until 2030, in a context of
sustained growth in global energy demand, due to population growth and improved living standards, and despite
the gradual electrification of transport and efficiency gains in thermal engines.
The Group thus selected the following profile of the Brent price to determine the recoverable value of CGUs:
$40/b in 2021, $50/b in 2022, $60/b in 2023.
For the longer term, the Group maintains its analysis, that the weakness of investments in the Oil & Gas upstream
since 2015, accentuated by the health and economic crisis of 2020, will result by 2025 in insufficient worldwide
production capacities and a rebound in prices, that would then reach $70/b and remain stable for the following
five years. Beyond 2030, given technological developments, particularly in the transport sector, the Group
anticipates oil demand will have reached its peak and Brent prices should tend toward the long-term price of
$50/b in 2040, in line with the IEA’s SDS scenario.
The average Brent prices over the period 2020-2050 thus stands at $572020/b.
– Natural gas demand would for its part be driven by gas substitution for coal in power generation and by its role as
an alternative source to mitigate the intermittent use of renewable energies. The abundant global supply and the
growth of liquefied natural gas would, however, limit the potential for higher gas prices.
In this context, the gas price level selected to determine the recoverable value of CGUs stabilizes from 2025
around $6.32020/MBTU for the NBP price (Europe) and $2.72020/MBTU for the Henry Hub price (United States).

Total Energies (2020), Universal Registration Document 2020 including the Annual Financial Report <https://totalenergies.
com/system/files/documents/2021-03/2020-universal-registration-document.pdf>, accessed 29 July 2021.

12
bp – Annual report and Form 20-F 2020, page 28
Oil price forecasts aligned between the front end (investment strategy) and back end (impairment).

BP (2020), Performing while Transforming: from IOC to IEC <https://www.bp.com/content/dam/bp/business-sites/en/

global/corporate/pdfs/investors/bp-annual-report-and-form-20f-2020.pdf>, accessed 29 July 2021.

Tullow Oil – 2020 Report and Accounts, page 11

Expectations for a continuing role for hydrocarbons in energy transition

Despite great efforts to decarbonise and grow renewable energy supply, fossil fuels will continue to account for up
to 50 per cent of the energy supply in 2050. The IEA’s scenarios for long term oil demand range from the ‘Current
Policies Scenario’ where oil demand continues to increase, approaching 120 million bopd [barrels of oil per day]
to 2040, through to the Sustainable Development Scenario (aligned to the Paris goals) which sees a potential
flattening in oil demand in the 2020s. Rising incomes in emerging markets and developing economies are expected
to create strong underlying demand for mobility which will offset reductions in oil use in developed economies,
where the electrification of transport and greater energy efficiency reduces demand. Despite the anticipated growth
in recycling rates, oil demand as a feedstock in the petrochemical sector for production of plastics is likely to rise,
especially in developing economies. In addition, growth will continue from energy and carbon-intensive sectors,
such as steel, cement and heavy industry. Even under the IEA’s Net Zero emissions by 2050 pathway, where demand
for oil declines from 98 million bopd in 2019 to 65 million bopd in 2030, an annual average reduction of >3.5 per
cent, this decline rate is slower than the underlying rate of decline in supply that we would see if there were to be no
investment in new or existing fields. In this case oil supply would decline by 8-9 per cent per year. Therefore, even in
a scenario aligned to the Paris goals, billions of dollars are required to sustain lower levels of production.

Tullow Oil (2020), Tullow Oil plc 2020 Annual Report and Accounts <https://www.tullowoil.com/application/
files/2816/1677/4099/Tullow_Oil_plc_2020_Annual_Report_and_Accounts.pdf>, accessed 29 July 2021

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