Climate Risk in Financial Statements: What Boards Must Now Ask

The two-report problem

Open almost any Indian annual report and you will find two documents living under one cover. The first says climate change is a material risk to the business — physical risk to plants, transition risk to margins, a net-zero commitment pencilled in somewhere around mid-century. The second is a set of financial statements in which climate change appears nowhere at all.

Nobody sets out to publish a contradiction that flat. It happens because the two halves are built by different teams, to different standards, on different timelines, and until recently nobody was formally required to reconcile them. The sustainability team writes about exiting coal by 2035. The finance team depreciates the same asset to 2048. Both documents reach the same board, in the same meeting, and get approved together.

That gap is now closing, and it is closing from three directions at once.

No new standard. Just nowhere left to hide.

In November 2025 the International Accounting Standards Board published Disclosures about Uncertainties in the Financial Statements — six illustrative examples added to the guidance accompanying IFRS 7, IFRS 18, IAS 1, IAS 8, IAS 36 and IAS 37. Every one of them is built on a climate fact pattern.

What is striking is what the IASB chose not to do. Investors had spent three years complaining that climate risk was invisible in the numbers. The obvious answer was a new standard. Instead the Board issued examples that carry no effective date and no transition relief, on the stated expectation that entities implement them promptly. The message is hard to misread: the requirements were always there. Companies were simply not applying them.

For Indian preparers this matters more than the “guidance, not rules” label suggests. Ind AS is converged with IFRS, and Ind AS 36, Ind AS 37, Ind AS 107 and Ind AS 1 carry substantially the requirements those examples illustrate. The examples themselves are not part of Ind AS, and an audit committee could technically wave them away. It would be a poor use of the technicality. When an auditor asks why an impairment model assumes flat demand while the business responsibility report promises a transition, “the illustrative examples don’t apply in India” is not an answer that survives the second question.

The Indian stack has moved too

SEBI got there first. Its circular of 28 March 2025 replaced compulsory “assurance” of BRSR Core with a choice between assessment and assurance, deferred value-chain ESG disclosures by a year, and added a voluntary green-credit indicator. The easing is real; the direction of travel is not. The glide path still runs from the top 150 listed entities in FY 2023-24 to the top 1,000 by FY 2026-27 — which means the current financial year is the last quiet one before externally checked ESG data becomes ordinary for a thousand Indian companies.

The RBI moved next. On 28 November 2025 it issued the Climate Finance and Management of Climate Change Risks Directions, 2025 for commercial banks, with parallel sets for small finance banks and deposit-taking NBFCs. Boards must approve a green deposit policy and a financing framework; the framework needs external review before it goes live; allocation of proceeds requires annual third-party verification; impact assessment is annual; a review report must reach the board within three months of year-end; and greenwashing is defined and prohibited outright. The Directions also point banks to the Financial Statements: Presentation and Disclosures Directions, 2025 for what belongs in the accounts themselves.

The profession is catching up in parallel. ICAI’s Sustainability Reporting Standards Board issued exposure drafts in May 2026 for SSA 5000 and a Framework for Sustainability Assurance Engagements, tracking the IAASB’s ISSA 5000 — which takes effect for sustainability information reported for periods beginning on or after 15 December 2026. Translated into Indian reporting years: FY 2027-28 is realistically the first in which sustainability assurance here is performed under a purpose-built standard rather than a repurposed one.

The evidence that boards are not there yet

Two numbers are worth putting in front of any audit committee.

The first is European, and it is unflattering. A 2026 study in the Journal of Applied Accounting Research examined 80,628 key audit matters disclosed in European auditor reports between 2015 and 2023. Just 678 of them referenced climate — under one per cent, across nearly a decade, in the most heavily regulated disclosure market in the world. Where climate did surface, it clustered around conventional estimates: impairment, provisions, valuation.

The second is Indian. Climate Risk Horizons’ May 2026 assessment of 35 banks with a combined market capitalisation of roughly ₹50 trillion found that 92% now disclose Scope 1 and 2 emissions, up from 40% in 2022, and 63% obtain third-party verification. Board-level climate oversight is reported almost universally. But only 22 of the 35 could show that the oversight actually influenced credit decisions, portfolio alignment or risk appetite. Five disclose financed emissions. Six have a net-zero target.

Disclosure has improved dramatically. Decisions have not.

“A disclosure that never changes a number is not a disclosure. It is a press release with a page number.”

Eight questions worth asking before signing

None of these require a board to become climate scientists. They require it to behave like an audit committee.

1.            Which line item did climate actually move this year? If the answer is none, that is a finding, not an exemption. Impairment assumptions under Ind AS 36, useful lives and residual values under Ind AS 16, restoration and levy provisions under Ind AS 37, expected credit losses under Ind AS 109 — at least one of these should have felt the transition plan.

2.            Do the impairment models and the transition plan use the same assumptions? Carbon price, demand trajectory, plant utilisation, replacement capex. This is where inconsistency hides most comfortably, because each set of numbers is perfectly defensible on its own.

3.            Has any asset’s useful life changed? A strategy promising exit by 2035 and a depreciation schedule running to 2048 cannot both be true. One of them is a management representation the auditor will test.

4.            What have we told the market that we have not told the auditor? Under SA 720 (Revised), the auditor reads the rest of the annual report looking for material inconsistency with the audited numbers. Better the board finds the mismatch first.

5.            Does our estimation-uncertainty note tell a reader anything? “Climate change may affect the group’s operations” discloses nothing. Ranges, sensitivities, and the assumptions that would have to break do.

6.            Who owns the BRSR Core data, and would it survive an evidence trail? SEBI allowed a choice between assessment and assurance. That is a governance decision about credibility, not a procurement decision about cost.

7.            Can we defend an emissions number the way we defend revenue? Same question set: definitions, boundaries, controls, restatement policy, and who signs.

8.            If a physical event hit our largest facility next month, what is the number and who knew? Insured value, deductibles, business interruption cover, replacement capex, covenant headroom. Boards that can answer this in the room rarely have a disclosure problem.

Where this becomes a solvency question

Climate rarely kills a company in a quarter. It works slower than that. An insurer withdraws cover or reprices it. A lender tightens a covenant. A refinancing goes from routine to negotiated. An asset that was going to earn for two more decades quietly stops. Each step is individually survivable, and collectively it is the exact shape of a going-concern problem.

That matters because the going-concern assessment under SA 570 (Revised) is not a long-dated exercise. It looks roughly twelve months ahead — precisely the window in which physical and transition risk stop being strategic and start being liquidity. By the time a climate-stressed borrower reaches the NCLT, the matter has become a credit event rather than a disclosure one, and the disclosure window has shut for good.

A shrinking perimeter, unchanged arithmetic

It would be easy to read the global mood as a retreat. The EU’s Omnibus Directive, in force since 18 March 2026, lifted CSRD thresholds to 1,000 employees and €450 million turnover, taking roughly nine in ten previously in-scope companies out of the net for financial years beginning 1 January 2027. The SEC proposed rescinding its 2024 climate rules outright in May 2026. Against that, ISSB Standards had been adopted or otherwise used in 28 jurisdictions as of April 2026, with a further dozen committed.

So the perimeter of sustainability disclosure is being redrawn. The requirements of accounting standards are not. Ind AS 36 has never asked whether Brussels or Washington believes in climate risk; it asks whether the assumptions inside a cash flow forecast are reasonable and supportable. That question is jurisdiction-proof, and it is on the audit committee’s agenda whether or not anyone puts it there.

Which returns the board to a fairly simple test. The old job was to approve a climate narrative. The new one is to establish whether the narrative and the numbers were written by people who spoke to each other. If the answer is no, the audit committee has just found its first climate risk — and it is sitting inside the company.

Sources

IFRS Foundation — Disclosures about Uncertainties in the Financial Statements (project page, final stage, November 2025) — https://www.ifrs.org/projects/completed-projects/2025/climate-related-risks-in-the-financial-statements/

UK Endorsement Board — summary of the final illustrative examples and standards covered — https://www.endorsement-board.uk/projects/climate-related-and-other-uncertainties-in-the-financial-statements/

SEBI — Circular SEBI/HO/CFD/CFD-PoD-1/P/CIR/2025/42, 28 March 2025 (assurance or assessment, value chain, green credits) — https://www.sebi.gov.in/legal/circulars/mar-2025/measures-to-facilitate-ease-of-doing-business-with-respect-to-framework-for-assurance-or-assessment-esg-disclosures-for-value-chain-and-introduction-of-voluntary-disclosure-on-green-credits_93102.html

SEBI — FAQs on LODR Regulations covering BRSR Core assessment and value chain scope — https://www.sebi.gov.in/sebi_data/faqfiles/apr-2025/1745399101865.pdf

Vinod Kothari Consultants — analysis of the SEBI value chain deferral — https://vinodkothari.com/2025/04/brsr-disclosures-for-value-chain-partners-eased-by-sebi/

RBI — Commercial Banks: Climate Finance and Management of Climate Change Risks Directions, 2025, DOR.SFG.REC.No.91/30.01.021/2025-26 dated 28 November 2025 (full text) — https://taxguru.in/rbi/rbi-commercial-banks-climate-finance-management-climate-change-risks-directions-2025.html

RBI — parallel Directions for deposit-taking NBFCs and housing finance companies — https://taxguru.in/rbi/rbi-non-banking-financial-companies-climate-finance-management-climate-change-risks-directions-2025.html

ICAI Sustainability Reporting Standards Board — Exposure Draft, Standard on Sustainability Assurance (SSA 5000), May 2026 — https://www.icai.org/post/srsb-exp-draft-ssa5000-20052026

ICAI Sustainability Reporting Standards Board — Exposure Draft, Framework for Sustainability Assurance Engagements, May 2026 — https://www.icai.org/post/srsb-exp-draft-framework-20052026

IAASB — Understanding ISSA 5000, including effective date and jurisdictional adoption — https://www.iaasb.org/focus-areas/understanding-international-standard-sustainability-assurance-5000

Tham, Lehner and Ittonen (2026), “Rendering climate risk auditable”, Journal of Applied Accounting Research — https://www.emerald.com/jaar/article/27/6/94/1361415/Rendering-climate-risk-auditable-the-discursive

Climate Risk Horizons — Small Steps for a Big Problem: Despite Climate Crisis, Indian Banks Stuck In Compliance Mode, May 2026 — https://climateriskhorizons.com/app/uploads/2026/05/BankingReport4_May2026.pdf

S&P Global Sustainable1 — Where does the world stand on ISSB adoption? (April 2026 data) — https://www.spglobal.com/sustainable1/en/insights/research-reports/issb-q2-2026

Norton Rose Fulbright — EU adopts Omnibus Directive amending CSRD and CS3D — https://www.nortonrosefulbright.com/en/knowledge/publications/1679488b/european-parliament-votes-to-adopt-omnibus-proposal-amending-csrd-and-cs3d

Accountancy Europe — Omnibus explained: key changes to the CSRD and CSDDD — https://accountancyeurope.eu/publications/omnibus-explained-key-changes-to-the-csrd-and-csddd/

U.S. SEC — Rescission of Climate-Related Disclosure Rules (proposed rule, May 2026) — https://www.sec.gov/rules-regulations/2026/05/s7-2026-19