Why the Financial Statements Are Not Supposed to Say Everything About Climate Risk

Ask most investors (e.g., the PRI signatories), NGOs (e.g., Carbon Tracker, 2025), or even accounting academics (e.g., van der Tas, Aggarwal, and Maksimovic, 2022) whether financial statements say enough about climate risk, and you will hear a familiar complaint: not nearly enough. Sustainability reports have ballooned into hundreds of pages of climate strategy, targets, and scenario analysis, while the audited financial statements — the document that actually feeds valuation models and covenant calculations — often seem to say almost nothing. Carbon Tracker's Flying Blind reports have made this argument loudly and repeatedly, and regulators from ESMA to the IASB have responded with guidance urging preparers to reflect climate matters more explicitly when applying existing standards.

We set out to test this "climate-silent financial statements" narrative systematically. We built a large-scale dataset covering the STOXX Europe 600 from 2018 to 2023, benchmarked against the S&P 500, and split every firm's annual reporting package into disclosure inside the financial statements and notes versus disclosure outside them — in (separate) sustainability reports, management commentary, and the rest of the annual report. We measure climate content two ways: a keyword-based count and a machine-learning classifier (ClimateBERT) that flags climate-related paragraphs. We then push further with a structured large-language-model analysis that traces individual climate topics raised outside the financial statements and asks, topic by topic, whether and how each one shows up inside.

Three findings changed how we think about this debate.

First, European inside climate disclosure increased strongly. From 2018 to 2023, inside climate disclosure in European financial statements grew roughly fourfold on the keyword measure and about twofold on the ClimateBERT measure, and the acceleration lines up closely with ESMA's The Heat is On report and its enforcement priorities naming climate disclosure as a supervisory focus. U.S. firms, over the same period, show low and essentially flat inside disclosure, even as their outside disclosure kept growing. That transatlantic gap is itself informative: it suggests inside disclosure responds to institutional pressure — enforcement, audit scrutiny, standard-setter guidance — rather than simply mirroring how much climate exposure a firm has.

Second, inside and outside disclosure are not the same information delivered at different lengths — they are functionally different. Inside disclosure concentrates in the most climate-exposed firms (really the top two deciles of exposure; the rest of the distribution looks fairly similar), tracks audit and enforcement variables, and is linked to actual recognition and measurement outcomes such as impairments, useful lives, and environmental provisions. Outside disclosure, by contrast, is far larger in volume, less sharply differentiated by exposure, and skews toward opportunities, strategy, and commitments rather than risk. Put simply: inside disclosure is where climate risk gets translated into numbers that might move the balance sheet; outside disclosure is where the broader, more forward-looking story gets told. Conflating the two, or expecting one to look like the other, misreads what each venue is designed to do.

Third, a large share of the apparent gap between outside and inside disclosure has legitimate reasons. When we trace individual outside climate topics into the financial statements, we do find that many go unmentioned inside. But once we account for legitimate boundary reasons — a topic being non-monetary, purely forward-looking, or simply not meeting recognition criteria — much of that gap dissolves. What looks like silence is often the financial statements correctly declining to house information that was never meant to live there. We call this an expectation gap: the mistaken assumption that a rich outside climate narrative should be fully mirrored inside the audited numbers.

There is a final twist that we find genuinely encouraging. Firms with more extensive inside disclosure also produce outside narratives that are more specific, more risk-oriented, and less reliant on vague commitment language — what the literature calls "cheap talk." They also show fewer abandoned or low-ambition climate targets. We are careful not to claim causality here, but the pattern is consistent with inside disclosure acting as a disciplining anchor for the softer, more expansive outside story.

So what should policymakers, standard-setters, and connectivity advocates — EFRAG's Connectivity Project among them — take from this? Not that financial statements need to say everything sustainability reports say — they shouldn't, and structurally can't. The more useful question, and the one our topic-level approach is built to answer, is whether the link between the two venues is working: does a climate matter that becomes financially material inside the numbers get flagged there, and does the broader narrative outside stay honest? On our evidence, that link is strengthening in Europe, less so in the U.S., and is worth measuring directly rather than inferring from page counts alone. The same logic, incidentally, should apply well beyond climate — to AI risk, geopolitical exposure, or whatever the next "soft" reporting frontier turns out to be.

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Maximilian A. Müller is Professor of Financial Accounting at the University of Cologne, and a member of the German-Science-Foundation-funded researcher group TRR 266, Accounting for Transparency, and co-founders of the Sustainability Reporting Navigator, an open-science platform for corporate sustainability data and analytics.

Gaizka Ormazabal is Professor of Accounting and Control and Associate Dean for Research and the PhD Program at IESE Business School, and an ECGI Research Member. 

Thorsten Sellhorn is Professor of Accounting and Auditing and Director of the Institute for Accounting, Auditing and Analysis at LMU Munich, and a member of the German-Science-Foundation-funded researcher group TRR 266, Accounting for Transparency, and co-founders of the Sustainability Reporting Navigator, an open-science platform for corporate sustainability data and analytics.

Victor Wagner is an Assistant Professor of Accounting at the Stockholm School of Economics, working on sustainability reporting, and a member of the German-Science-Foundation-funded researcher group TRR 266, Accounting for Transparency, and co-founders of the Sustainability Reporting Navigator, an open-science platform for corporate sustainability data and analytics.

This blog is based on a paper presented at the Lisbon Sustainability Week 2026, held at Católica-Lisbon School of Business and Economics and organised with Santander Central Services and ECGI. Visit the event page to explore more conference-related blogs.

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