Carbon-Adjusted Balance Sheets: Toward a Conceptual Accounting Framework for Climate Risk Disclosure

• Daniel K. Mercer

  Author

As climate change increasingly reshapes economic systems and financial markets, the limitations of traditional accounting frameworks in capturing climate-related risks have become more pronounced. This paper proposes a conceptual framework for carbon-adjusted balance sheets, aimed at integrating carbon exposure and transition risks into the core structure of financial reporting. Drawing on the conceptual foundations of financial accounting established by the International Accounting Standards Board and incorporating insights from climate finance and sustainability reporting, the study develops a normative and analytical model that extends the recognition and measurement of assets, liabilities, and equity to reflect carbon-related factors. The framework introduces key components, including carbon-adjusted assets that account for stranded asset risks and green investment opportunities, as well as carbon liabilities encompassing both explicit regulatory obligations and implicit transition exposures. It further proposes measurement approaches based on market data, model-based estimation, and scenario analysis, consistent with recommendations from the Task Force on Climate-related Financial Disclosures. This study contributes to the literature by bridging the gap between sustainability disclosures and financial accounting, moving beyond narrative ESG reporting toward a structured, balance-sheet-based approach. The proposed framework enhances the relevance, comparability, and decision-usefulness of financial statements, while providing practical implications for firms, investors, and regulators. It also offers a conceptual foundation for emerging standards developed by the International Sustainability Standards Board. Overall, the paper advances the development of climate-integrated accounting systems and highlights the need for a paradigm shift in financial reporting in response to the transition to a low-carbon economy.

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