Profession must lead the way on climate change

The Copenhagen climate change summit held at the end of 2009 failed to produce the blockbuster deal on emission targets and cutting greenhouse gases that many were hoping for. The politicians may have missed their opportunity, but financial professionals believe company reporting and disclosure could drive concrete achievement in tackling climate change.

Leaving aside the science disputes on the grounds of “if you can’t measure it, you can’t manage it”, the leading accountancy bodies are entitled to call for a set of universally accepted standards by which companies can report their levels of CO2 output – an environmental IFRS, of a kind.

Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, who was at Copenhagen, says a single standard for reporting the effect business has on climate change incorporated into mainstream financial reporting is only the first step in a larger process.

What is needed is trusted, accurate and reliable information delivered to investors and stakeholders so they can make decisions that can drive the behavioural changes necessary to achieve a low-carbon economy.

According to the Association of Chartered Certified Accountants (ACCA), that type of information doesn’t yet exist in the corporate world. As well as being part of the disclosure consortium calling for universal standards on climate change, ACCA sees business as the elephant in the room when it comes to reducing carbon emissions.

Both the ACCA and the Global Reporting Initiative (GRI), which works to set up the reporting framework on which such standards could be based, has examined business’ response to climate change. It investigated the way large companies from the 15 most high-impact industry sectors have started to disclose greenhouse gases emissions and their strategies for reduction.

The bad news is that less than half of the companies studied disclosed specific climate change-related information using GRI indicators in their published sustainability reports, although companies from Brazil, China, India and South Africa are proving strong in reporting on policies, strategies, governance and risk, as well as setting and publishing emission targets, measurement procedures and mitigation and adaptation plans. Despite some bright patches, though, it is clear that the standards of voluntary corporate climate change disclosure need improvement. Senior policymakers such as Bank of England governor Mervyn King and FSA chairman Adair Turner condemn the corporate response to climate change as timid and not yet sufficient.

If that is the perception of senior policymakers, it is not surprising that analysis of current mandatory and voluntary disclosure schemes shows that, over the past few years, the disclosure web has grown tighter for businesses. A near-mandatory disclosure standard would be another significant turn of the screw for corporates. The International Accounting Standards Board (IASB) is working on an accounting standard for emissions trading, for which an exposure draft is due in Q2 this year and the completed standard is expected in the first half of 2011. But the IASB remains firmly focused on standards as they impact financial aspects of corporate reporting and has little interest in underwriting a process of largely non-financial climate-change disclosures.

The natural standard setter would seem to be a body such as the Carbon Disclosure Standards Board. But, as the profession knows after decades of in-fighting over setting accounting standards, creating a standard setting body is not straightforward. And there are powerful forces at work that could leverage considerable influence. It is a project of interest to the Prince of Wales through his Accounting for Sustainability project, seeking to develop practical tools to enable environmental and social performance to be better connected with business strategy and financial performance.

Roger Adams, ACCA’s executive director of policy, says research shows that the corporate response is not matching up to the seriousness of the issues.

Developing countries are expected to account for 75% of greenhouse gas emissions over the next 25 years. On the assumption that there is a high correlation between corporate reporting and behaviour, then the extent to which corporates embrace climate change reporting will be critical to the future of the planet.

Perhaps the most important task for the profession in 2010 is making a tough, effective climate change standard-setting process a reality.

Peter Williams is a chartered accountant and journalist. This article first appeared in the February issue of sister publication Financial Director.