Climate Change Related Risks and the Financial Statements of Small Businesses

The accounting for and reporting on climate change-related risks are on the agenda of regulators, environment sensitive companies, the investment community, and audit and assurance service providers. This paper explores the effects of climate-related risks on the financial statements of small and medium-sized enterprises (SMEs). Using the Security and Exchange Commission’s (SEC) classification of climate-related risks into (i) physical risks (ii) chronic risks, and (iii) transition to decarbonization risks, the paper examined the recognition, measurement (monetization), and disclosure problems in the context of SMEs. The finding is that climate-related risks are complex and affect key elements of the balance sheet, the income statement, and the statement of cash flows. The paper finds that existing financial reporting concepts and standards are insufficient for recognizing and reliably measuring the financial statement effects of climate-related risks. The contribution of the paper to the literature is its problematization of climate related risks in the broader scientific debate and the identification of the sensitivity of financial statement items to carbon.