EFAG Seminar by Yannis Tsalavoutas (University of Glasgow)

Companies’ readiness to adopt IFRS S2 Climate-related Disclosures and firm risk

Abstract
We are witnessing a significant effort from accounting standard setters and capital market authorities to standardized corporate reporting for climate-related issues. The main goal of this standardization process is to make such disclosures, which are largely voluntary till today, more relevant for capital market participants. Investors are particularly interested in climate-related disclosures that deal with risks (both physical and transition) that companies are facing due to climate change and hence these new reporting standards are expected to play a key role in informing investors’ decision making. The IFRS Foundation is in the centre of these endeavours with the formation of the International Sustainability Standards Board (ISSB) in 2021. Soon after its formation, the ISSB released the exposure draft IFRS S2 “Climate-related Disclosures”, which focuses on firms’ disclosures around climate change with a particular emphasis on risk aspects. Motivated by these developments, we first examine the extent of climate-related disclosures in the 2021 annual and sustainability reports of an international sample of 150 companies from three industries (Chemicals, Construction Material and Metals and Mining) with high carbon footprint and hence high impact on climate change. In particular, we compare these firms’ climate-related disclosures against the total set of disclosures required by the IFRS S2 exposure draft to examine the ‘preparedness’ of these companies to apply the new Standard. Second, we examine whether the level of disclosures provided is associated with firms’ systematic and idiosyncratic risk. To the extent that these disclosures are informative over the climate risks companies are facing, we expect that the level of disclosures should be associated to firms’ risk. Our findings indicate that our sample firms disclose already, to some extent, information required by the IFRS S2 exposure draft. Further, we show that firms’ risk is lower for firms that already disclose particular categories of disclosures required by the IFRS S2. Our study provides useful evidence for standard setters and capital market authorities around their efforts to enhance the quality of climate-related disclosures.

About Professor Tsalavoutas
Yannis Tsalavoutas is a Professor of Accounting at Adam Smith Business School, University of Glasgow, UK. He is the founder and leader of the Adam Smith Observatory of Corporate Reporting Practices at the University of Glasgow. Yannis is a member of the ACCA Global Forum for Corporate Reporting, the ICAS Corporate & Financial Reporting Panel, and the UKEB Academic Advisory Group. He is the editor of the Journal of International Financial Management & Accounting and serves as section editor for Accounting and Finance for the European Management Journal, along with being on the editorial board of other reputable journals.

Yannis has extensively researched issues in relation to financial accounting and reporting with an appeal to practitioners, investors and the academic community. His research focuses on companies' reporting practices across different jurisdictions and the economic consequences that may arise from divergence in practice. His research has been published in various academic journals and it has been funded by professional bodies (such as the Association of Chartered Certified Accountants – ACCA and the Institute of Chartered Accountants of Scotland - ICAS).