Could accountants deflate the ‘carbon bubble’?

THE CAMPAIGN to raise the alarm about the so-called “carbon bubble” faced by global markets has secured an important new ally in the unlikely form of the world’s accountants.

The Association of Chartered Certified Accountants (ACCA) has this week teamed up with the Carbon Tracker Initiative, the group that has popularised the concept of a “carbon bubble” whereby fossil fuel companies are sitting on billions of pounds of overvalued and unburnable oil, coal and gas assets. Together they have released a major new report detailing how accountants could play a key role in highlighting climate-related risks to investors, Accountancy Age’s sister publication reports. 

Writing in the foreword to the report, Warren Allen, president of the International Federation of Accountants (IFAC), argues the profession has a responsibility to develop more effective reporting standards which better highlight the risks fossil fuel companies will face, if governments accelerate policies designed to drastically curb greenhouse gas (GHG) emissions .

“Higher quality business reporting and disclosure are needed to better reflect the climate change uncertainties facing companies,” he writes. “This information is required by both companies and their investors in order to take appropriate action. To understand the potential environmental impact of carbon stocks, companies need to measure uncalculated stores of GHG emissions within their fossil fuel reserves and account for them accordingly.”

It is an argument echoed by Carbon Tracker’s James Leaton, who argues that accounting standards need to be updated to better quantify carbon-related risks. “Accounting standards require reasonable assumptions to be applied,” he said. “Given that fossil fuel reserves already exceed the global carbon budget, it seems reasonable to start assuming not all of them will be burnt.”

Significantly, Richard Martin, head of corporate reporting at ACCA, which boasts 162,000 members and a network of over 89 offices globally, agrees the sector needs to take a closer look at carbon bubble risks.

“Standard setters, stock exchanges and other reporting frameworks need to review their disclosure requirements in response to the inevitable change in the world’s energy mix,” he said. “Currently they do not give investors the economic viability of reserves in a carbon constricted economy.”

Specifically, the report recommends that the annual reports and other disclosures produced by accountants at fossil fuel companies should convert reserves into potential carbon dioxide emissions, in order to help investors and managers better understand the organisation’s exposure to any concerted effort to restrict emissions. In addition, it calls on firms to “discuss the implications of this data when explaining their capital expenditure strategy and risks to the business model”.

Leaton said there was a compelling case for reporting standard reforms, including moves to encourage more fossil fuel firms to produce “sensitivity” analyses detailing how their reserves and valuations would change under different price and demand scenarios. “The SEC provides firms with an option where they can provide different numbers for their reserves based on different oil price scenarios,” he explained. “Companies could apply that to different price scenarios that are informed by climate and climate regulation scenarios… instead of assuming a single scenario based on a single price companies should be looking at different prices and policies and how that would impact reserves and valuations.”

The report argues relatively simple changes to reporting standards and rules could play a critical role in deflating a “carbon bubble”, which, given the extent to which fossil fuel companies dominate global stock exchanges, poses a major threat to the global economy. “Through their reach and influence, accountants could provide the ultimate mechanism for creating the missing links in the corporate reporting chain,” said Martin. “Working alongside other professionals they have an excellent opportunity to stimulate change.” Perhaps it is accountants that could prove to be the powerful allies sustainability executives have been seeking.

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