Accounting and Finance 55 (2015) 607–625

The role of accounting in supporting adaptation to

climate change

Martina K. Linnenluecke, Jacqueline Birt and Andrew Griffiths

UQ Business School, The University of Queensland, St Lucia, QLD, Australia

Abstract

The study is one of the first concerned with the topic of accounting and climate
change adaptation. It proposes that the accounting role can support organ-
isational climate change adaptation by performing the following functions: (i) a
risk assessment function (assessing vulnerability and adaptive capacity), (ii) a
valuation function (valuing adaptation costs and benefits) and (iii) a disclosure
function (disclosure of risk associated with climate change impacts). This study
synthesises and expands on existing research and practice in environmental
accounting and sets the scene for future research and practice in the emerging
area of accounting for climate risk.

Key words: Accounting; Adaptation; Climate change

JEL classification: M14, M41

doi: 10.1111/acfi.12120

Introduction

The recently released 5th Assessment Report of the Intergovernmental

Panel on Climate Change (IPCC) has sent a clear message: Human
interference with the climate system is occurring, and climate change poses
severe risks for human and natural systems. Many impacts are already
observable. The atmosphere and ocean have markedly warmed since the
1950s, the amounts of ice and snow have diminished, sea level has risen, and
the concentrations of greenhouse gases have increased (IPCC, 2014). The
scientific evidence points to the need to respond to the threats posed by
climate change across businesses, industry and society (Linnenluecke and
Griffiths, 2010; Surminski, 2013), and to adapt to those changes that will
occur even if greenhouse gas emissions were stopped immediately. Adapta-
tion to climate change can be defined as ‘the process of adjustment to actual

Received 28 January 2015; accepted 5 March 2015 by Kathy Walsh (Editor).

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608 M. Linnenluecke et al./Accounting and Finance 55 (2015) 607–625

or expected climate and its effects, in order to moderate harm or exploit

beneficial opportunities’ (IPCC, 2012).
Despite scientific warnings that climate change will have a significant impact
on climate-exposed sectors such as water, agriculture, forestry, health and
tourism (Hoffmann et al., 2009; IPCC, 2012; Linnenluecke and Griffiths, 2013),
the corporate world has been slow to react, possibly also due to a lack of
legislative guidance and formal changes to risk assessment, governance and
disclosure requirements. While high-polluting companies in regions with
emerging carbon legislation had to start addressing carbon reduction and
energy efficiencies, other businesses not captured by regulatory regimes have
been grappling with the business case for climate action. Beyond legislated
mitigation schemes and some voluntary initiatives aimed at greenhouse gas
emission reduction efforts (Herbohn et al., 2012; Clarkson et al., 2014),
adaptation to the physical impacts of a changing environment is still not yet
high on the corporate agenda.
Companies are typically focused on adaptation to short-term changing
business conditions (including technological and legislative changes and
changes in competitors and market demand) – and a substantial body of
studies exists studying the conditions and measures supporting successful
adaptation in these contexts (e.g. Fox-Wolfgramm et al., 1998; Schindehutte
and Morris, 2001). Lesser attention has been paid to adaptation to conditions
that include long-term changing dynamics of the natural environment
(Linnenluecke et al., 2013). Finance and accounting systems are set up
accordingly and focus on short-term outcomes and the management of
short-term costing, reporting and disclosure, rather than on longer-term
climate risks. Accountants have viewed their role as largely technical and
nonstrategic (Lovell and McKenzie, 2011). In response to the need to account
for carbon emissions, progress has been made in regards to the development of
mitigation accounting standards, such as the Greenhouse Gas Protocol
Corporate Standard (http://www.ghgprotocol.org/), which provides standards
and guidance for companies and other organisations preparing a greenhouse
gas emissions inventory. This study proposes that there is scope for the
accounting function to support climate change adaptation.
Companies will increasingly and inevitably have to address climate change
adaptation as an integral aspect of their business strategy and risk management
(West and Brereton, 2013). Failure to manage the impacts of a changing
climate can expose organisations to considerable risk: infrastructure and supply
chains are adversely impacted due to climate and weather extremes with
resulting financial impacts, business models and their limits are exposed (e.g.
insurance companies and investment funds facing changing risk profiles), and
reputational, legal and regulatory obligations arise. Companies’ risk profiles
and their strategic positioning are directly affected by global and local changes
in temperature, extreme weather and resource availability. Greater storm
activity, water supply variability and a larger number of high-temperature days

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impact on health and safety, productivity and financial performance (BHP

Billiton, 2014). Keef and Roush (2005), for example, show that sunshine and
wind levels in New Zealand impacted on stock return indices and stock prices.
The impact of climate change has also received attention in securities filings in
cases where direct financial risks or opportunities can be identified (Cogan,
2006; Morrison et al., 2009).
As the impacts of climate change become more visible, particularly impacts
from trend changes in weather extremes, they will need to be reflected in the
costing, reporting and disclosure of impacts, vulnerabilities and adaptive
capacity, with resulting implications for corporate governance. Decision-
makers will need decision-relevant information valuing the economic implica-
tions of climate impacts and adaptation to support cost-benefit analyses,
identify risks, vulnerabilities and liabilities, devise adaptation plans, and derive
information in the form of adaptation performance and benchmarking metrics.
A question primarily for managerial accounting is how risk assessment
approaches and related metrics can be developed and presented so that
decision-makers have the necessary information available for managing
adaptation processes. One key issue which is not just related to the assessment
of vulnerability and adaptive capacity, but to strategic planning in general, is
how to overcome a focus on short-term budgets and targets to adopt long-term
adaptation planning (Chartered Institute of Management Accountants, 2010).
Companies will also need to address broader questions around how to
measure climate change vulnerability, adaptive capacity as well as adaptation
costs and needs. Investors, ratings agencies and lenders are increasingly
demanding information on climate change impacts and the consequences for
capital allocation decisions (West and Brereton, 2013). A growing number of
institutional investors are organising themselves in groupings such as the
Global Investor Coalition on Climate Change, requiring companies to consider
climate impacts as part of their corporate governance agenda. Investors’
growing concern about climate change has already resulted in a wave of
shareholder proxy activity – such as witnessed in the United States (Cogan,
2006). In private politics, shareholder resolutions filed against companies
increase the likelihood that the company’s practices will be consistent with
climate change strategies (Reid and Toffel, 2009). Institutional investors have
also collectively influenced the extent and quality of climate change informa-
tion provided in disclosures (Cotter and Najah, 2012). Even voluntary
reporting initiatives, such as the Carbon Disclosure Project (CDP), are now
asking companies to report on the physical risk associated with climate change.
In doing so, they have moved beyond their original remit of reporting on
mitigation activities.
These developments will eventually require companies to develop risk
assessment methodologies to investigate climate and broader investor risks, to
implement frameworks for evaluating adaptation options and to disclose
climate risk. To respond to these challenges, this study is one of the first

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concerned with the role of accounting and climate change adaptation – in

particular its role in (i) assessing climate risks and adaptive capacity, (ii) valuing
adaptation costs and benefits and (iii) climate disclosure. To date, the literature
has virtually been silent on how the accounting function is adding to climate
change adaptation beyond discussions of accounting requirements for carbon
units and carbon trading purposes, as well as compliance with emergent
mitigation (i.e. carbon reduction) policies. Given the technical knowledge
required to account for climate change adaptation issues (combined with costs
of potentially outsourcing this knowledge), questions such as how clients of
accounting firms will receive climate change adaptation services in practice are
critical. This study contributes to this emerging area by synthesising existing
knowledge and sets the scene for future research and practice in this area. It is
also a first step in the direction of understanding how the accounting profession
can support adaptation to climate change.

A brief history of accounting and the natural environment

The need to consider the natural environment in accounting decision was first
introduced in the 1960s and 1970s (e.g. Beams and Fertig, 1971). At the time,
growing environmental problems led to increased awareness of organisational
impacts on the environment, and the idea emerged that these issues could – at
least in part – be addressed by identifying, measuring and possibly valuing the
interchanges and interactions between organisations and the environment.
Contributions identified different methods for accounting for environmental
impacts, including input/output accounting (analysing the physical flow of
inputs such as materials, energy, waste and output such as carbon emissions or
waste), sustainable and full-cost accounting (accounting for the amount of
money a company would have to spend to return the environment back to the
state where it was at the beginning of the accounting period), and natural
capital accounting (accounting for natural capital such as habitat or biodiver-
sity costs usually not factored into pricing decisions) (see Mathews, 1997 for a
detailed review).
These initial studies led to further research into the topic of environmental
accounting, and since the late 1980s and early 1990s, a growing body of
literature has emerged highlighting that the accounting profession should be
actively involved in examining a company’s interdependence with its natural
environment. Much of the early conceptual development in this domain has
been attributed to Gray (1990) who suggested that a paradigm shift would
be needed to include environmental and social considerations into account-
ing literature and practice, considering the aspects such as compliance and
ethical audits, waste and energy reporting, environmental impact assessment,
environmental and social reporting as well as accounting for environmental
assets and liabilities. Subsequently, Elkington (1997) coined the term ‘triple-
bottom-line’ (TBL) and argued that companies should not only report on

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their financial performance, but also on their social and environmental

performance. Elkington’s publication prompted researchers to propose that
accounting could and should support companies’ efforts in addressing their
environmental and environmental performance. Environmental accounting
developed into a rich field of research, including areas such as voluntary
disclosures (e.g. Deegan and Blomquist, 2006; Herbohn et al., 2014), ethical
issues (e.g. Gray et al., 1997), costing of externalities (e.g. Deegan, 2008) and
capital market impacts (e.g. Bachoo et al., 2013; Chapple et al., 2013;
Clarkson et al., 2014).
In parallel, other developments emerged and included new reporting
awards schemes and attempts to standardise reporting practices. The Global
Reporting Initiative (GRI) was launched in 1997 as a joint initiative of the
United Nations Environment Programme (UNEP) and the US-based
nongovernmental organisation Coalition for Environmentally Responsible
Economies (CERES), with the aim to improve the quality, rigour and utility
of TBL reporting. This development culminated in the design of a
comprehensive Sustainability Reporting Framework and the release of the
Sustainability Accounting Guidelines at the World Summit on Sustainable
Development in Johannesburg in August, 2002. The GRI started to provide
sector guidance and support, such as standard templates, checklists, certified
software and tools to assist with data collection and report preparation. The
guidelines set out the principles and standard disclosures which companies
can use to report their economic, environmental, and social performance
and impacts, and are now widely used across sectors. The framework
enables greater organisational transparency and accountability (Global
Reporting Initiative, 2015). Companies with a higher pollution propensity
have been found to disclose more environmental information to the GRI
(Clarkson et al., 2011).
Facing increasing pressures to address sustainability in their activities,
many companies started to issue reports that include social and environ-
mental performance measures. In Australia, the National Environment
Protection (National Pollutant Inventory) Measure (NPI NEPM) has
required companies since 1998 to report on pollutants that are seen as
important due to their possible effect on human health and the environment.
Some companies have gone a step further and also produce a separate
stand-alone sustainability report (e.g. Qantas Ltd, BHP Billiton Ltd, CSR
Ltd). These reports feature sections on governance, employees, the environ-
ment and society.
Subsequently, the emerging carbon legislation (with emissions trading as a
primary policy response) gave rise to new roles for the accounting function,
ranging from internal carbon accounting to determine a company’s liability to
the accounting of tradable rights arising from emissions taxes and emissions
trading schemes (West and Brereton, 2013; Ascui, 2014). Companies needed to
consider their reporting requirements under new and emerging legislation. To

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provide guidance for reporting under the European Emissions Trading Scheme,
the International Accounting Standards Board (IASB) issued IFRIC 3:
Emissions Rights through the International Financial Interpretations Com-
mittee (IFRIC) in 2004. The Interpretation specified that the rights (allow-
ances) issued to participating companies to emit a specified level of emissions
were to be recognised in the financial statements as intangible assets. As the
participating company produces emissions, it recognises the provision for its
obligation to deliver allowances which is measured at the market value of the
allowances needed to settle it. IFRIC 3 was subsequently withdrawn because of
negative reactions from a large number of stakeholders concerning where to
account for carbon and how to balance assets and liabilities (Lovell and
McKenzie, 2011).
As a result of increases in disclosure, many (especially high-emitting)
companies started to develop informational infrastructure for assessing,
measuring, reporting and managing greenhouse gas emissions and set up
greenhouse gas accounting capabilities to establish emission baselines, measure
actual emissions and budget for the future purchase (or sale) of emission credits
(Kolk et al., 2008). Recognising that many companies were lacking capabilities
in these areas, professional accounting firms began to specialise on providing
advice on assessing, accounting for, reporting on and auditing carbon
emissions information (KPMG, 2015). Companies utilising these services are
now reporting the costs associated with sustainability and carbon-related
assurance services. For CSR Ltd, these costs have almost doubled between
2013 and 2014 ($86 000 and $156 200, respectively). The assurance of this
information has been associated with increases in the quality of the information
disclosed (Moroney et al., 2012). However, companies have started to engage
with and invest in carbon management not only to meet compliance standards,
but also to improve competitiveness, explore opportunities associated with
carbon disclosure and assess the impacts of carbon constraints on firm strategy.
Until recently, the accounting profession’s focus has largely been confined
more to the short-term accounting for environmental impacts of a company on
its environment, and even these efforts have not been without criticism (Gray,
2010). Less attention has been given to the broader question as to how the
accounting function and profession can assist with evaluating the larger threats
long term from environmental changes on the company and its broader
operations. The next section looks at the rising impacts of climate change and
associated impacts that arise, in terms of measuring and disclosing risks to
investors, rating agencies and a range of stakeholders, but also in terms of
integrating climate change adaptation costs into investment and capital
allocation decisions. The risks to public and private organisations are very
tangible and also reflected in recent lawsuits: in April 2014, US-based insurer
Farmers Insurance Co. filed nine class-action lawsuits against nearly 200 local
councils in the Chicago area, arguing that these councils failed to prepare water
infrastructure for heavier rainfall and subsequent flooding caused by climate

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change even though they were aware of the risks, resulting in substantial flood
in Illinois during April 2013.1

What are climate changes’ current and future impacts on organisations?

The scientific community has put forward a large body of evidence which shows
that climate change is occurring and that resulting impacts are presenting very
real and significant threats. The reports by the Intergovernmental Panel on
Climate Change (IPCC), which summarise the latest body of knowledge on
climate change, show that the impacts of climate change such as rising
temperatures, changes in sea levels and changes in ice and snow covers are
already observable (Casti, 1997). Impacts from climate change are expected to
significantly increase in the future especially due to larger climate variability –
characterised by changes in the frequency, intensity, spatial extent, duration and
timing of extreme weather events such as extremely hot days or heat waves (IPCC,
2012). It can be expected that vulnerabilities of business and industries are in
particular related to these trend changes in extreme weather events, rather than to
gradual climate change (Wilbanks et al., 2007).
Any changes to the occurrence of weather extremes have the potential to bring
about considerable adverse impacts (Hertin et al., 2003; Keef and Roush, 2005;
Wilbanks et al., 2007), often with significant flow-on effects such as disruptions to
or impacts on critical infrastructure (Wilbanks et al., 2007). Insurance statistics
are already showing greater losses due to the occurrence of weather extremes over
past decades (Munich Re, 2012), which can be attributed to a number of
underlying drivers including an increase in exposure (due to population growth
and industrial expansion into higher risk areas such as coastal zones and cities)
and adverse climate impacts (due to climate change and weather extremes)
(Munich Re, 2009). Impacts are thereby dependent on the particular sector and
location, with greater vulnerability expected in those sectors and locations that
are climate sensitive or dependent on stable climate conditions.
The question of how organisations should best respond to climate change has
led to much debate. The best way to avoid dangerous levels of climate change
would be to take immediate action aimed at mitigation and substantially
reducing greenhouse gas emissions (Kates, 2000). However, despite some
efforts, progress on a global scale has been slow to date, and greenhouse gas
emissions continue to rise globally. Given that it now seems increasingly
unlikely that climate change can be successfully mitigated, researchers and
policy-makers are paying greater attention to the development of strategies that
will enable society to adjust, alongside mitigation mechanisms. Such strategies
are commonly referred to as adaptation (Dow et al., 2013) and are aimed at

1
This lawsuit was since withdrawn by Farmers Insurance who believed that the lawsuit
brought important issues to the attention of cities and counties and that the
policyholders rights would be protected going forward.

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initiatives and measures to reduce the exposure and vulnerability to actual or

expected climate change. Adaptation strategies can take a number of different
forms, including structural or physical changes (e.g. upgrades to infrastruc-
ture), ecosystem-based measures (e.g. investing in ecosystem health), as well as
financial mechanisms such as insurance (Noble et al., 2014).
Despite the significance of adaptation to climate change, many companies
have only started to engage with the topic of climate change, often with a focus
on mitigating their greenhouse gas emissions due to emerging legislative
requirements. Adaptation is largely a voluntary exercise (there is no mandated
requirement to undertake or disclose adaptation activities); most companies
have not yet undertaken comprehensive assessments to account for the impacts
of climate change on their operations. In the ASX top 100, only 25 companies
address issues relating to climate change adaptation (West and Brereton, 2013).
As the impacts of climate change become more visible, companies will require
(i) a risk assessment function (assessing vulnerability and adaptive capacity),
(ii) a valuation function (valuing adaptation costs and benefits) and (iii) a
disclosure function (disclosure of risk associated with climate change impacts).
In our view, the accounting role can support climate change adaptation by
performing these functions. In addition, it can promote a framework for
preparing organisations pre-emptively through the design of accounting
practices. The study offers a discussion of these aspects in the following
sections.

Risk assessment function: assessing vulnerability and adaptive capacity

Both managerial accounting and financial accounting have a role to play as a

risk assessment function to determine climate risks and how they affect value-
creating activities (i.e. to determine the vulnerability of assets and operations to
climate change). Investors will increasingly require information about climate
change-related investment risks. While existing financial accounting standards
address the disclosure of risk (e.g. IFRS 9 Financial Instruments and IFRS 13
Fair Value Measurement), areas such as vulnerability and adaptive capacity are
not usually covered, and there is no robust consolidated approach to financial
risk assessment of climate change (West and Brereton, 2013). Decision-makers,
on the other hand, will require information on climate impacts as they affect the
organisation and the adaptive capacity inherent in value-creating activities to
understand how vulnerability can be reduced. To provide this information, an
understanding of how climate change impacts an organisation’s value-creating
activities is an important starting point for risk assessments.

Assessing vulnerabilities of value-creating activities

Climate risks not only result from gradual changes in climate, but in
particular from trend changes in weather extremes – those types of impacts that

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exceed certain thresholds or climate records. In order to assess their

organisation’s vulnerability to change impacts as they affect the location(s) in
which the organisation is operating, corporate decision-makers need data in
regards to future climate change impacts, changes in policy, economy, society
and technology that exacerbate or mitigate climate change impacts; and an
assessment of how vulnerable value-creating activities are as a result.
Additional vulnerabilities can result from flow-on effects from climate change
impacts that affect an organisation’s supplier, buyer or resource base.
Information about vulnerabilities can be derived from hazard maps that
overlay the organisation’s location with future climate data (Linnenluecke and
Griffiths, 2014; Noson, 2015) and can be used as a basic input for future risk
assessments to understand which assets and activities might be affected. As part
of a vulnerability assessment, organisations can also use scenario planning
exercises which evaluate vulnerabilities of assets and operations to climate
change under different climate change scenarios to achieve a quantification of
the likelihood of adverse climate impacts and resulting consequences for the
organisation.

Assessing adaptive capacity

While adaptive capacity is regarded as important to adapt the organisation to

future climate impacts and risks, many investors currently view adaptive
capacity as idle resources ‘in excess of the minimum necessary to produce a
given level of organisational output’ (Nohria and Gulati, 1996: 1246).
Examples for adaptive resources that can aid with climate change adaptation
are changes to the organisational infrastructure (such as changes to buildings)
to be able to adjust to climate change impacts above the level that would be
deemed necessary for an organisation to continue operating within its current
business environment (West and Brereton, 2013). For example, BHP Billiton
reports that the identification and assessment of increasing storm intensity and
storm surge levels has resulted in raising the height of the trestle at their coal
port facility in Australia (BHP Billiton, 2014).
To date, the creation of adaptive capacity to respond to climate change
impacts has not yet been given much consideration in the accounting
framework or standards, neither in external financial reporting nor in internal
planning and decisions. Companies such as BHP Billiton are in the minority.
On the contrary, the creation of adaptive capacity may incur detrimental
accounting treatment if it occurs in the absence of tax relief under certain
accounting principles and standards (West and Brereton, 2013). In addition,
investments in adaptive capacity may be regarded by investors as ‘unnecessary’
investments in the short run and perceived as disadvantageous to the
organisation’s overall competitive position. These issues are likely to change
as climate change adaptation standard development progress, but are still
important investment considerations in the short term.

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Valuation function: understanding adaptation costs and benefits

There are methodological challenges involved in estimating the effects of

climate change, such as impacts on natural capital (organisational inputs), and
accounting for the distribution of costs and benefits across different timescales
and parts of the organisation. Existing managerial accounting systems may
inadvertently favour activities that have been highly profitable and subject to
low risk and low-frequency shocks in the past (Herring and Wachter, 2005) –
which includes expansions into sectors or locations highly vulnerable to climate
change. Given that the impacts of climate change are not fully visible and
foreseeable yet, many existing company activities may appear misleadingly
profitable. Appropriate provisions for potential future vulnerability and
resulting losses due to climate impacts are often not fully included as costs in
investment and infrastructure decisions, and are also not incorporated and
monitored within current accounting systems. For organisations, the question
arises how to calculate climate losses (and climate adaptation allowances, see
below), and how to derive appropriate discount rates to a portfolio of climate-
impacted assets. Some assets may change in vulnerability over time – for
example, because of changes in their life expectancy and changes in climate
impacts. Using a climate change-free risk assessment is clearly much simpler
from an operational viewpoint, but does also not reflect future impacts and
vulnerabilities.
A common assumption in the literature on the adaptation of socio-economic
systems to climate change is that early investment in climate change adaptation
will likely be more cost-effective and bring greater incentives in the long run,
compared to a ‘wait and see’ approach. However, in contrast to climate change
mitigation (i.e. efforts targeted at the reduction of greenhouse gas emissions),
there are no established frameworks for evaluating adaptation success and the
effectiveness of different adaptation options over time. While the cost and
benefits of undertaking mitigation efforts can be established through mecha-
nisms such as greenhouse gas emissions accounting, similar approaches do not
yet exist for adaptation. The difficulty here is that adaptation strategies, as
compared to mitigation strategies, cannot as easily be linked to financial
performance benefits for organisations. Mitigation strategies such as emission
reductions efforts that encourage resource (e.g. energy) savings directly
correspond to decreased expenditure for resource inputs, while adaptation
strategies are intended to deliver outcomes in the long run. These aspects also
make it easier for companies to evaluate their progress and benchmark
themselves against others within the industry in terms of carbon footprint and
emission reductions objectives and achievements.
Overall, while mechanisms for accounting for mitigation have become more
established, the accounting for adaptation needs, costs and benefits associated
has proven to be more difficult. The 4th Assessment Report (AR4) of the
Intergovernmental Panel on Climate Change (IPCC) concluded that mecha-

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nisms for understanding adaptation costs and benefits are ‘quite limited and
fragmented’ (Adger et al., 2007) and that ‘comprehensive estimates of
adaptation costs and benefits are currently lacking’ (Parry et al., 2007: 69).
Other studies on adaptation costs and benefits (Agrawala and Fankhauser,
2008) have come to similar conclusions. Recent survey results shows that few
businesses have established comprehensive adaptation strategies, plans and
activities alongside indicators to track their adaptation progress (United
Nations Environment Programme, 2012).
Difficulties in establishing indicators to track progress on adaptation and
evaluating trade-offs between adaptation costs and benefits can be attributed to
a number of reasons. First, the effectiveness of any adaptation measure depends
on the level of future climate change (which, in turn, is dependent on mitigation
outcomes) and other socio-economic factors, such as population growth and
development in high-risk areas. In addition, adaptation outcomes are also
dependent on the actions taken by others (e.g. greater investment by legislators
in the adaptation of communal infrastructure to climate change is likely to
bring benefits to businesses dependent on this infrastructure). Lastly, adapta-
tion success is more difficult to evaluate and less directly visible than the
outcomes of other forms of investments and more difficult to capture (i.e. data
would be needed on the losses avoided due to climate impacts) (Linnenluecke
and Griffiths, 2015).
Nonetheless, a number of tools and techniques provide initial avenues for
evaluating and adaptation options in terms of their costs and benefits. These
include qualitative assessments such as expert assessments, stakeholder
consultations and scenario-planning exercises, but also quantitative approaches
such as cost-benefit analysis and multicriteria analysis. Cost-benefit analysis is a
common analytical approach used for decision-making purposes (contrasting
costs with anticipated future benefits), while multicriteria analysis is more
sophisticated in that this type of analysis does not just contrast cost and
benefits, but also includes more sophisticated and multimetric evaluations
which can include dimensions such as risk and uncertainty in order to provide
more sophisticated support to decision-makers (Chambwera et al., 2014;
Linnenluecke and Griffiths, 2015). Some researchers have also started to use
Real Options valuation to investigate adaptation costs and benefits (e.g.
Kontogianni et al., 2014) In compiling useful analyses about adaptation
options using such methodologies, the accounting function can be of great
value to organisational decision-makers, in particular in providing information
on adaptation costs and a valuation of future benefits considering different time
horizons and level of climate impacts alongside other variables.

Disclosure function: disclosure of risks associated with climate change impacts

Institutional investors and other interest groups are already pressing

organisations for greater disclosure about climate change impacts, in particular

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because of the potential material negative financial effects, but also because of
current low disclosure rates (Stanny and Ely, 2008). These groups have the
collective power to influence the extent and quality of disclosures (Cotter and
Najah, 2012). The CDP already requests information on greenhouse gas
emissions, energy usage as well as risks and opportunities associated with
climate change from thousands of the world’s largest companies and 767
institutional investors with US$92 trillion in assets. The voluntarily disclosed
information is made available for integration in organisational, investment and
policy decision-making. While the CDP has mostly focused on greenhouse gas
emissions in the past, the scope is increasingly extending to cover information
on climate change impacts and risks. The CDP currently provides a disclosure
score and a performance score which assesses the level of action taken on
climate change. These scores are based on a company’s data disclosed to the
CDP in response to its questionnaire. The GRI and the CDP are currently
working together on future iterations of reporting guidelines and disclosure
questionnaires (including questions on climate change) to improve the
consistency of disclosure globally (CDP, 2015).
In addition to the CDP, the Climate Disclosure Standards Board (CDSB) is
also committed to the integration of climate change-related information into
mainstream company reporting (Climate Disclosure Standards Board, 2015). It
has developed a Climate Change Reporting Framework which focuses on the
disclosure of nonfinancial information. The Framework proposes that compa-
nies present this information in their reports and in alignment with the
requirements of Integrated Reporting (Table 1).
Integrated Reporting is a process that results in a periodic integrated report
about value creation over time. It includes information on a company’s
strategy, governance, performance and prospects, in the context of its external
environment, which lead to the creation of value in the short, medium and long
term (Integrated Reporting, 2015). The International Integrated Reporting
Council (IIRC) and the IASB entered into a memorandum of understanding to
promote the harmonisation and clarity of corporate reporting frameworks,
standards and requirements to promote coherence, consistency and compara-
bility in corporate reporting (IASB, 2014). While existing financial accounting
standards already address disclosure of risk, such as liquidity, interest rate and
exchange rate risks (e.g. IFRS 6 Exploration and Evaluation of Mineral
Resources, IFRS 7 Financial Instruments: Disclosures, IFRS 12 Disclosure of
Interest in Other Entities and IFRS 13 Fair Value Measurement), the IASB
recently issued Agenda Paper 7: Non-IFRS Information, which includes the
issue of incorporating climate change information into annual reports.
Due to the expected increase in adverse impacts, including more frequent
and/or severe weather extremes, financial accounting and reporting standards
but also listing rules will likely require more explicit corporate risk disclosure
on climate change. The ASX’s Corporate Governance Principles and Recom-
mendations have recently been updated to include Recommendation 6.2 which

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Table 1
Emerging disclosure demands for risks associated with climate change impacts

Body Details

Carbon Disclosure The CDP requests (on behalf of institutional investors)

Project (CDP) information from thousands of the world’s largest companies
on their greenhouse gas emissions, energy use and climate
change risks and opportunities. Disclosure takes place via the
CDP questionnaire and is voluntary. Results are collated and
presented on the CDP website (https://www.cdp.net/).
Climate Disclosure The CDSB is a consortium of global business and
Standards Board (CDSB) environmental nongovernmental organisations (NGOs). The
CDSB Climate Change Reporting Framework is a voluntary
reporting framework designed for companies to disclose climate
change-related risks and opportunities and implications for
shareholder value in their financial reports. The reporting
framework is available via the CDSB website (http://cdsb.net/).
International Accounting The IASB is the independent standard-setting body of the IFRS
Standards Board (IASB) Foundation. IFRS standards already address the disclosure of a
International Financial wide variety of risks. A more explicit integration of climate
Reporting Standards (IFRS) change risks in disclosure standards is likely to occur in the
future as climate change becomes more visible.

incorporates environmental groups into its definition of a wider stakeholder

engagement programme. Recommendation 7.4 also states that a listed entity
should disclose whether it has any material exposure to economic, environ-
mental and social sustainability risks and, if it does, how it manages or intends
to manage those risks (ASX, 2014).
The Carbon Tracker Initiative, in conjunction with a former Securities and
Exchange Commission (SEC) commissioner, submitted a request to the
Financial Accounting Standards Board (FASB) on 10 December 2013, arguing
that organisations with significant fossil fuel reserves should be required to
submit a financial disclosure of carbon content. While this submission
primarily reflects a concern about changes in future demand and prices due
to legislative and/or technological changes, it nonetheless demonstrates an
increasing awareness around the significant implications of climate change.
Furthermore, as climate impacts become more noticeable, the asset allocation
of financial institutions as well as investment and superannuation funds is likely
to change, with implications for risk accounting in investment portfolios.

Practical implications and research requirements

Undoubtedly, climate change will have a significant future impact on standards

and regulations, also affecting the accounting function. The impacts are visible in
the case of legislation around greenhouse gas mitigation efforts. As climate
change impacts are increasing in the future, adaptation will play a greater role

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alongside mitigation. This means that new tools and approaches are required, as
well as an improved understanding of climate risks and opportunities. These
changes are already evident in the collaborative work of the IASB, the GRI and
the CDP. The CDP and the GRI are working together to ensure consistent
Frameworks and Guidelines, the ASX has made changes to its Corporate
Governance Principles and Recommendations to include environmental issues
for a broader definition of stakeholders, and the IASB is collaborating with the
IIRC in the promotion of the Integrated Reporting Framework.
The introduction of carbon emission legislation, for example the EU-ETS or
the Australian Emissions Trading Scheme,2 has shown that any legislative
changes associated with climate change lead to an increased demand for
nonconventional accounting services. Professional accounting firms have
expanded their offering of risk consultancies to include climate change and
sustainability services (KPMG, 2015). They also have influenced the method-
ologies of the legislative requirements for members when performing environ-
mental audits (Martinov-Bennie and Hoffman, 2012). Companies are now
disaggregating their assurance expenditure to include assurance for sustain-
ability and carbon-related services (CSR, 2014). Professional bodies such as
CPA Australia and Chartered Accountants Australia and New Zealand
(CAANZ) have the opportunity to run professional training courses, fund
research on climate change, and initiate workshops and seminars (Lovell and
McKenzie, 2011). Ultimately, this raises the question of whether and how such
services will be regulated or left to self-regulation by professional services
providers and their representative professional bodies. In terms of practical
implications, this means that there is currently a window of opportunity for
leading companies, professional services providers and accounting bodies to
contribute to climate change adaptation standard development, application
and transfer, rather than leaving this opportunity to policy-makers and
government bodies.
Future research is necessary on a variety of aspects. For example, future
research can build on the ideas presented in this study to expand existing
research on asset impairment (see Cotter et al., 1998) to factor in the impacts of
climate change. There is growing concern that climate change may lead to some
assets becoming so-called ‘stranded assets’ (Ansar et al., 2013) as climate
change leads to their unanticipated or premature write-down, devaluations or a
conversion to liabilities. In China, for example, water scarcity, local pollution,
improving energy efficiency and growing developments in clean energy
technology have started to threaten coal-fired power generation. Such
developments have potentially widespread implications for investments in
energy infrastructure and asset allocations, but also for impacts on coal and
coal-related assets in Australia which is a large and growing exporter of coal to
China (Caldecott et al., 2013).

2
Abolished in 2014.

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 M. Linnenluecke et al./Accounting and Finance 55 (2015) 607–625 621

Future research can also focus on the creation of a ‘best practice’ approach
for organisations to understand how climate impacts can be accounted for and
to deliver decision-makers with clarification of ways in which climate
adaptation can be understood, operationalised and economically measured.
Companies may implement methodologies such as cost-benefit analysis,
multicriteria analysis, Real Options valuation or internal management schemes
around climate change (see Tang and Luo, 2014) to help evaluate issues relating
to climate change strategies. More insights are needed regarding the relative
strengths and weaknesses of these methodologies, and how they can best be
integrated within organisations. Further development also needs to be
undertaken in the following areas: (i) the development of a consolidated
approach to financial risk assessment of climate change, including frameworks
for assessing organisational vulnerability and adaptive capacity; (ii) the
development of methodological avenues for accounting for the distribution
of costs and benefits across different timescales and parts of the organisation;
and (iii) and increasing awareness around the need to report on climate impact
and adaptation outcomes.

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