Businesses will struggle to quantify climate risks faced by their assets under new mandatory disclosure requirements, according to a climate risk accounting expert.

As climate disclosure requirements take effect, companies will face the challenge of translating complex scientific information into actionable climate risk insights.

“You've got this enormously complex science that's been developed over many decades that has generated these models, which we now want to use as accountants,” Dr Tanya Fiedler, climate risk accounting expert at the University of New South Wales, told Accounting Times.

“They're not regression models. They run on national supercomputers. They generate petabytes of information, and they can often take months to run a single simulation,” Fiedler said.

“There's an enormous piece of work that has to be done in translating or getting what you can that's of value from those projections, so that it's meaningful and decision-useful for business.”

Businesses have felt pressure to quantify risks that their assets may face due to climate change, Fiedler said. However, current climate models cannot accurately predict risks at such a small spatial scale.

“We don't have the capacity to model the physics of the entire earth system down to the scale of 100 metres, or 200 or 500 metres.”

“There's a challenge here because the standard setters are requiring certain things, and so businesses feel enormous pressure. They feel that they have to provide very precise information at the scale of an asset to satisfy regulatory requirements.”

According to Fiedler, companies may have to relinquish their focus on quantitative analysis and adopt a more qualitative approach when conceptualising climate risks for their assets.

“There's an enormous tension between precision and accuracy in this domain, and we can't get the accuracy that the standards are demanding and that people might like, but we can get information that is scientifically rigorous and decision-useful. The problem is we sort of have to compromise on quantification and precision.”

“You’re dealing with something very different to what we're accustomed to in financial accounting. And so trying to solve it in the same way that we do for financial accounting isn't necessarily appropriate.”

Fiedler and her colleagues argued that businesses should adopt narrative-based accounts of their climate risks instead of relying on quantitative analyses, which are inaccurate at the asset level.

“There are very rigorous ways of generating narratives which have numbers underpinning them, but which provide information in the narrative form, because they are a more accurate way of describing the uncertainty surrounding the phenomena,” Fiedler said.

Many climate intelligence models produced in the industry don’t stand up under scientific scrutiny, research has found.

“The problem is that, at the moment, there are lots of folks out there who are trying to build models that integrate [climate] projections into insights around individual assets, but research has shown that the outputs of those are non comparable, which suggests that there's a lack of accuracy,” Fiedler explained.

“They're also black boxed, so it's not possible for anyone to look under the hood and to verify that they are using science with veracity.”

By improving climate disclosures, the government hopes to enable regulators to assess and manage systemic risks to the financial system posed by climate change.

However, misuse of climate models could lead to overconfidence in risk assessments, misstatement of risk in financial reports, greenwashing and poor adaptation to climate risks, Fiedler’s research noted.

She said it would likely take businesses a while to adapt to the new requirements, and standards would evolve as regulators monitored implementation.

“Normally, standards come to resolve where there's divergence in practice. In this situation, there isn't a divergence in practice because we don't have the practice. The practice hasn't evolved yet,” she said.

“We can't expect that businesses will get it on day one. And similarly, the standards will most likely change in response once we begin to see different trends in reporting practice.”

According to Fiedler, companies will increasingly need to understand their own climate risks as extreme weather events become more common, regardless of politics and regulatory requirements.

She said she planned to work with businesses at upcoming events to educate practitioners on how to accurately integrate climate risks in their financial reporting.

“In climate models, there's enormously useful information, but you have to know how to use it, and that's where caution is required because it's just very complex information,” Fiedler said.

“It's a learning process for an organisation which, rather than outsourcing, means you begin to integrate an understanding of future climate into your organisation, which everyone's going to have to do because it doesn't matter which way the politics go.

“The climate is changing, and physics doesn't stop just because a certain politician is elected.”