An Investigation Into Recent Trends And Challenges Of Accounting – ‘Climate Instruments’ | Sudeep Rathee & Sheeba Kapil

The paper studies the recent trends in accounting practice for disclosure of ?climate mitigation assets? related information in financial statements and examines the challenges it raises for private investors and investee firms. The paper provides a comparative analysis of accounting policies in three regions ? Europe, America and Asia ? for treatment of emissions credits and renewable energy certificates only. It examines the information shared in four leading market surveys on the accounting practice currently followed by firms to report, measure and disclose these climate instruments. A logical analysis is then presented to analyse the challenges raised by this accounting diversity for private investors and publicly listed firms. In the end the paper presents a potential scenario for future developments. The paper finds out a clear absence of definitive and uniform accounting guidance on treatment of climate instruments in these three regions. A review of market surveys provide evidence that a range of diverse accounting practices has now emerged among firms for reporting and disclosure of climate trading rights and obligations. This accounting conundrum has created a hidden deterrence to investment research and deters the overall mobilisation of private investments for climate-affected firms. In long-term a status quo deadlock of accounting policy can potentially be a significant barrier to create a truly liquid and transparent world wide climate market. Invariably this lack of accounting parity deters price fungibility among similar climate instruments and raises valuation challenges for international investors interested in allocating portfolio capital to debt and equity securities of firms exposed to these climate instruments. Firms raising new funds or listed firms are also likely to find it difficult to communicate true value impacts of such ?climate instruments? to various stakeholders. So, as accounting rules are still evolving and climate information disclosure practice is yet to get standardised, there is a significant need to explore where the climate accounting is at present and why? This in-depth research attempts to fill that gap and provides answer to these questions. The research provides comprehensive, up-to-date information on climate accounting practices of firms to potential investors. It also presents conceptual aspects on financial accounting for climate policymaking and, ultimately adds practical value to the ongoing climate financial accounting debate.