The role of accounting in the fight against the climate crisis

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The UN COP26 climate summit demands more than warm words; world leaders must explain how they will reduce emissions and prepare their countries to face all the risks that the climate crisis will bring. Accountants have a central role to play over the next decade and beyond.

Even for the most dismissive skeptics, the past six months have produced a series of compelling evidence that we will all suffer from climate change. From floods in Western Europe to wildfires in Turkey, Greece and the western United States, multi-year droughts in Australia causing an almost biblical mouse invasion and ongoing disasters in many of the world’s poorest parts of the world .

Slowly, a response is being built from politicians and businesses. For example, to date, 191 parties – 190 countries plus the European Union – have signed up to the goals of the Paris Agreement, a legally binding international treaty on climate change adopted at the UN COP21 in 2015. This aims to limit the rise in global temperatures to well below 2 ° C this century and to continue efforts to keep them below 1.5 ° C.

Unfortunately, in addition to being slow, this response is grossly insufficient. The historical report Climate Change 2021: The Basis of Physical Science, published by the Intergovernmental Panel on Climate Change (IPCC) in August, warned that in any future scenario that scientists consider likely, the goals of 1, 5 ° C and 2 ° C will be exceeded this century, unless much greater reductions in carbon emissions occur.

“It is widely accepted that the risk associated with climate change is a business and financial risk; there is the physical risk of climate change, for example the impact of weather events on a business, and there is also the risk of transition – the risk for a business to see the global economy evolve into a fully carbon-free world ” , explains public accountant Russell Picot, who retired as Chief Accounting Officer of HSBC Group in 2016. “It’s pretty clear that most, if not all businesses will be affected by one or other of these problems “.

“There is the broader societal aspect to this,” adds Picot, also special adviser to the Financial Stability Board’s Climate-Related Financial Disclosures Working Group and Senior Associate at the Cambridge Institute for Sustainability Leadership. “What will our customers and the general public find acceptable about the way we do business? “

And, of course, we must also expect changes from governments. “This problem cannot be solved by the market,” says Richard Spencer, director of sustainability at ICAEW. “There must be a political, legislative and regulatory response that bites too. “

The challenge facing organizations is how to respond to such a complex set of issues. As the recent IPCC report made clear, the focus has shifted from prevention to adaptation. “It’s about understanding how climate change is going to affect your specific business, what you need to do to mitigate those risks, and for us to make sure we have the resilience within our infrastructure to meet the challenges that change climate will bring, ”says Chris Tregenna, Group Treasurer at Pennon Group water company.

What finance teams need to do

What is increasingly clear is that finance teams have a central role to play both in quantifying the climate risks organizations face and in their communication to the company and other interested stakeholders. to make sure the problem is in place. “Companies recognize that they don’t really have a choice because their investors want to know, their employees want to know and their customers want to know,” says Richard Barker, professor of accounting and assistant dean at the University of Oxford, Said. Business school.

Ravi Abeywardana, CTO of the Climate Disclosure Standards Board (CDSB), believes the opportunity for accountants to apply their existing skills to help organizations create a more sustainable world is exciting. “We are at the heart of the business, generating numbers and providing insight, creating the ecosystem necessary to justify and implement adaptations. Over the next few years, accountants around the world have an immense responsibility and an immense opportunity to support the transition to a sustainable global economy.

It is important to understand that while good quality reporting in this area is necessary, it is by no means sufficient. “Good reporting needs to be rooted in good practice,” says Spencer. “Companies can’t just do what they’ve always done, but a little better; it’s just an efficiency game and it’s too late. We have to do things differently. “

The right standards and careful reporting will undoubtedly drive this change in behavior, however. IFRS requires the incorporation of important climate-related issues into financial reporting, and investors have made it clear that climate-related risks are important to their investment decision making. “Right now, listed companies as well as large private companies need to start mobilizing their resources to quantify climate risks in their annual reports, which include financial statements,” says Abeywardana.

“This is arguably the first and biggest step in changing the way our global economic system assesses business activity, to include environmental costs. This in turn helps them to provide decision-making environmental information to investors via the general financial report, thereby improving the efficient allocation of capital. Soon this requirement will extend to charities and public sector organizations.

The need for a common frame of reference

However, knowing exactly what to report and how to report it remains a tricky question. The uncertainty around the format that the standards should take and the absence of international standards remain points of friction. The increasing use of new voluntary sustainability reporting frameworks such as those of the Climate-Related Financial Reporting Working Group (TCFD) is to be welcomed, but their flexibility remains a double-edged sword; On the one hand, they allow organizations to focus on the areas and climate risks most relevant to their operations, on the other hand, critics argue that the immense field of interpretation leaves the door wide open to a possible greenwashing.

There is certainly no shortage of climate reporting initiatives; the trustees of the IFRS Foundation are setting up an international sustainability standards board whose first task will be to develop climate standards. Meanwhile, the European Commission continues to develop its own European sustainability reporting standards, the first set of standards to be adopted by October 2022. Some form of climate reporting is also on the agenda. of the United States Securities and Exchange Commission, although what and how they will do remains to be seen.

Former US Financial Accounting Standards Board (FASB) Chairman Bob Herz is both an expert advisor and a member of a G7. Impact working group formed under the UK Presidency of the G7, tasked with finding ways to improve transparency, integrity and trust in impact reporting and ways to accelerate capital mobilization to address global sustainability challenges. “I think one of our roles is to try to bring it all together and have a plan to move forward so that we have more consistent, more comparable and better defined standards,” Herz said. “At least there has to be a common baseline. “

It remains to be seen which of these competing approaches will dominate or if they awkwardly coexist. However, the lack of global consensus on climate reporting should not be used as an excuse to delay action, urges Picot. He chairs the Board of Directors of the HSBC Bank (UK) Pension Fund and is Director of the Universities Pension Scheme. Both organizations reported under TCFD.

As it stands, reporting on climate risks may not be based on a strict set of measurement rules and it is certainly not comparable to financial reporting standards, but the opportunities for the function financial statements are clear, says Barker: “You don’t get a well-developed model of carbon accounting and reporting without accountants being involved. The problems of capturing carbon emissions in your supply chain methodologically are bread and butter for accountants. It’s about measuring, capturing data and validating, so it’s just an extension of the business management accounting and reporting function.

At the same time, another issue that is surfacing is the extent to which companies are able to produce data on their Scope 3 emissions, i.e. the carbon emissions that emanate from their chain. supply. “What you count here is the entire value chain. The potential for expanding the role of accountants in all of this is huge, ”says Barker.

Despite the technical issues presented, Picot believes that a bigger issue is the challenge of communicating climate risks to stakeholders and explaining how your business plans to address them. “You need to make it clear to your stakeholders what you’re going to do and how your business will be successful in a low-carbon world – this is the opportunity. Companies that move early with credible plans will fare better than laggards. “

It’s an opportunity for the profession to play a bigger role on an issue that will only become more important, Barker believes, but there is also an undeniable sense of urgency as the broader implications of global warming become more evident. more apparent. “This is the biggest challenge facing humanity,” warns Barker, “and it has to happen quickly or we have huge problems.”




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