The impact of climate risk on accounting conservatism: a cross-country study

Objective: We examine the effect of climate risk on accounting conservatism for a sample of listed companies operating in 26 developing countries.

Method: We employ the Climate Risk Index developed by Germanwatch to capture the severity of losses due to extreme weather events at the country level. We use different approaches to measure firm-level accounting conservatism.

Findings: We find that greater climate risk leads to a lower level of accounting conservatism. The results hold even after using different estimation methods.

Research limitations and implications: Although our analysis is limited to the period 2007-2016, it could be helpful for standard setters such as International Accounting Standards Board (IASB) and International Sustainable Standards Board (ISSB) as they may consider the potential effect of climate risk in their international standards.

Practical implications: The negative impacts of climate risk on the quality of financial reporting as proxied by accounting conservatism could trigger regulators and standard setters to require disclosure of information relating to climate risks and to incorporate climate-related risks in their risk management systems. In addition, for policymakers, incorporating accounting conservatism as a financial quality reporting standard could help promote greater transparency, accuracy, and reliability in financial reporting in the context of climate risk.

Originality: We add to the literature on international differences in accounting conservatism by showing that climate risk significantly affects unconditional and conditional conservatism. Our results provide fresh evidence of the dark side of climate change. That is, climate risk is shown to decrease financial reporting quality.