Kunkels oversees corporate reporting, the incorporation of climate change risk and the new Shell strategy called ‘Powering Progress’ in the annual report. 

“Climate change and net-zero emissions, in step with society, is at the heart of Shell’s new ‘Powering Progress’ strategy,” he tells ICAEW Insights. “The strategy, which is outlined in the annual report, fully supports the Paris Agreement goals. There is, however, no standard or definition of Paris-aligned accounts when it comes to the financial statements. But there is no need for a new standard to reflect existing climate change risks appropriately in the financial statements.”

In fact, Kunkels concurs with Nick Anderson, a member of the International Accounting Standards Board, who said in November 2019 that existing requirements within IFRS standards relate to climate change risks and other emerging risks. Anderson’s article showed how the principle-based approach of IFRS Standards means that climate change and other emerging risks are addressed by existing requirements, even though such risks are not explicitly referenced.

“IAS 36, IAS 16, IAS 37 and IAS 12 are all standards that help you to address climate change and the energy transition in your financial statements,” says Kunkels. “In 2020, Shell updated price assumptions and reprioritised developments and as a result booked significant impairments and enhanced disclosures in this area. We also reviewed onerous contracts based on revised outlooks as well as decommissioning and restoration provisions and booked new provisions and disclosed contingent liabilities. And we reviewed the recoverability of deferred tax assets and applied additional risking in countries with downstream energy transition uncertainties.”

“We also enhanced disclosures on how climate change impacts significant accounting policies, judgments and estimates in our annual report, highlighting that financial statements need to reflect the reality of the world as it exists today. But we did not stop there. We also included new voluntary disclosures, for which there is no current requirement. For example, emission schemes have become increasingly important for our business. To provide the reader a holistic overview of such schemes this is summarised in a voluntary note on emissions accounting.”

He continues: “There is no definition of Paris-aligned accounts, but for us the key questions are: how do you get to net-zero carbon and the goals of the Paris Agreement and reflect that in your strategy and targets, how is this reflected in the annual report and how do you ensure your financial statements address climate change and energy transition risks?”.

What is the biggest challenge?

Shell reflects its strategy, targets, risks and activity around climate change and energy transition in the front half of the annual report. “We report on our strategic risks, including climate change and energy transition and the potential impact on the balance sheet. The audit committee report and the Section 172 statement also show how the board deliberates on climate change and energy transition. And finally, there is a dedicated section on energy transition and climate change in the annual report.”

As for challenges around reflecting these risks in the financial statements, Kunkels says: “There is no dedicated section in the financial statements and no single overview of all climate-related risks and how these have been taken into account, so it is embedded within many disclosures. In the back half of the annual report, these risks and judgments are across the balance sheet such as in property, plant and equipment, deferred tax, decommissioning & restoration and other provisions, emissions schemes and many more. It goes across so much of the balance sheet and accounting policies you almost have to summarise it again to provide that specific lens on the financial statements … but we are looking how to address this in 2021,” he says.

Energy transition and new business models

But does Kunkels consider that financial statements should be viewed more widely than net zero and energy transition? Should it mean accounting for nature and biodiversity too? “For Shell, all these risks and opportunities are embedded in the strategy. The strategy we introduced in February 2021 comprises four components: creating shareholder value, net-zero emissions, respecting nature, and powering lives. Respecting nature is an essential part of our strategy,” he says. 

“It is an important time in the energy transition, with lots of innovation and fast-growing new business models such as Nature Based Solutions, Carbon Capture and Sequestration (CCS), Biofuels, Hydrogen, Emissions Schemes, Electric Vehicle charging etc.” Kunkels is keen to point out that finance professionals will first need to understand the business before applying accounting standards to new activities. “From that perspective, it's an intellectually exciting time,” he says. 

“Also, here you do not need new IFRS standards, it is how to apply existing standards to new business models, which no doubt will require rich discussions on the interpretation of standards and their application.”

Non-financial reporting: growing fast

“Beside financial reporting, we see an accelerating trend of looking at non-financial data to evaluate companies across the full ESG landscape in a comparable and consistent manner. The Shell powering progress strategy encompasses shareholder value but also many non-financial elements specifically for net-zero targets, respecting nature, and powering lives.”

Kunkels points out that the promulgation of so many non-financial reporting standards and frameworks has not helped consistency and comparability. To this end, he welcomes the announcement that the IFRS Foundation’s International Sustainability Standards Board is underway.

Final thoughts

Referring back to climate change and energy transition risks, Kunkels urges finance professionals to undertake a full review of the financial statements, as these risks do not affect just one balance sheet area. He also reminds us that disclosures are written for an audience, and it is important to find out what they need before holding the pen. 

“COP26 has shown that a lot of work needs to be done. Our hope is that governments can take a big leap forward to achieving the goals of the Paris Agreement on climate change. But finance professionals do not need to wait for a new standard, what is important is how we reflect climate change and energy transition risks in the financial statements today under the existing IFRS framework. The principle-based approach of IFRS gives you the required guidance.”