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Utopia & Lost Futures: Paris-aligned Financial Reporting

January 2023. Lecture notes from Victor Wagner

The world is increasingly at risk of missing the Paris Agreement’s 1.5°C goal. What would corporate financial statements look like if the world were on track to meet the Paris Agreement’s 1.5°C goal?

In this project, we introduce Paris-Aligned IFRS Financial Statements (PAIFS): IFRS financial statements that reflect a firm’s financial position and performance using assumptions in line with the IEA’s Paris-aligned Net Zero Emissions scenario. In addition to approximating firm-level PAIFS for companies in energy-intensive sectors, this project aims at simulating Paris-aligned intrinsic equity values for these firms.

We then consider the implications of other scenarios for firms’ intrinsic equity values in order to infer the climate scenarios most consistent with firms’ current market values. Finally, we examine the transparency and consistency of firm’s financial disclosures about the climate scenarios underlying their reported IFRS financial statements and public net-zero pledges.

These insights are relevant for investors and other stakeholders by shedding light on the transparency and consistency of firm’s financial reports and net-zero pledges in the light of widely accepted climate scenarios. Specifically, they help these stakeholders assess the likely financial impact of a firm’s ultimate convergence onto a Paris-aligned transition pathway.

A policy recommendation following from our analysis is to demand greater transparency about the climate-related scenarios underlying firms’ financial statements and net-zero pledges. By benchmarking these assumptions to those made by leading authorities on climate change, stakeholders can assess the realism and reliability of firms’ reporting.

Victor presented his thoughts based on a paper he recently published:

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