Net-zero commitments

When a company makes a commitment to be net zero – e.g. by 2050 – this usually means that by 2050 it plans to reduce its greenhouse gas emissions to as close to zero as possible and offset its remaining emissions. Offsets are verified removals of carbon (e.g. through growing new forests).

Net-zero commitments typically include all value chain emissions (defined in the GHG Protocol as Scope 1, 2 and 3 greenhouse gas emissions), but sometimes may only include emissions from direct operations (i.e. Scope 1 and 2).

Companies can make many other similar commitments, including the following.

• Carbon neutral: Often used as an interim target towards net zero. This is primarily a commitment to acquire and retire carbon offsets.
• Carbon negative: A commitment to remove more carbon than a company emits in a given year.
• Climate positive: A commitment to achieve carbon-negative emissions for a company’s total emissions across its entire value chain, similar to net zero.

To determine the financial reporting impacts at each reporting date, companies need to assess their detailed net-zero plan – including specific actions and timelines – which may evolve over time. The potential financial reporting impacts of a company’s planned actions include the following.

Setting and announcing a net-zero target, on its own, does not automatically trigger a liability. A company needs to consider the nature of its commitment and how it will deliver it.

There are specific requirements in IAS 37 Provisions, Contingent Liabilities and Contingent Assets for determining if a liability exists at the reporting date and if it needs to be recognised in the financial statements. As a company cannot recognise a liability for future operating losses, its commitment needs to create a present obligation at the reporting date as a result of a past event (e.g. ‘damage done’).

The IFRS Interpretations Committee has discussed climate-related commitments based on a specific scenario and published an agenda decision. The Committee highlighted two tests that must be met to recognise a liability. This assessment may require significant judgement based on the specific facts and circumstances.

Read our talkbook for further details, including our insights on how to perform an analysis of whether a company’s public statement has created a valid expectation.

The International Accounting Standards Board is also reviewing its guidance on liabilities and may consider adding new examples illustrating how to apply IAS 37 to net-zero commitments. 

Investors and regulators expect a company’s financial statements, management discussion and analysis (MD&A) and sustainability-related disclosures to provide a coherent, connected and integrated picture. To achieve this, companies need to provide enhanced disclosures on the impact of net-zero commitments in their reporting.

• Specific disclosures in the financial statements: Once companies have assessed the financial reporting impacts of the individual actions in their net-zero plan, they need to consider the disclosures required by the specific IFRS accounting standards. In some cases, a disclosure may be required even though there is no current-period financial statement impact.
• Overarching disclosures in the financial statements: Companies also need to consider the requirements of IAS 1 Presentation of Financial Statements. This includes disclosing additional information that is necessary for investors to understand the impact of net-zero commitments on the company’s financial position and performance, and information that could influence their decisions.
• Other disclosures outside the financial statements: If a planned action does not impact the company’s financial position and performance at the reporting date and is not subject to the specific or overarching disclosures – e.g. a commitment to offset emissions after 2030 by purchasing carbon credits – then the company may explain that there is ‘no financial reporting impact’ as part of the net-zero disclosures outside the financial statements. Disclosing 'no impact' may be specifically required by some sustainability reporting frameworks.

Read our talkbook and use our illustrative example to help you tell a connected story.