Accounting for climate change | News | Eco-Enterprise



“Accountants will save the world,” said Peter Bakker, CEO of the World Business Council on Sustainable Development. He might be right. Investors and consumers alike are looking for better disclosure of what companies are doing to manage environmental issues and mitigate the risks of climate change. With a century of experience under its belt, the accounting profession has the opportunity to help fight climate change.

Victor Ng, regional vice president for Asia, BlackLine, a cloud-based financial automation company, said CFOs and finance teams are increasingly engaged to help guide efforts to sustainable development and align internal stakeholders around the environmental and social aspects of a company. and governance responsibilities (ESG), especially as climate reporting continues to evolve.

“Having to juggle the changing demands of the finance function and knowing more about what is required for sustainable accounting is still relatively new to finance teams,” Ng said at a panel discussion in August.

This is particularly the case in Asia-Pacific, according to Tan Chee Wee, senior environmental and social specialist at the Asian Infrastructure Bank. The depth and sophistication of understanding the impact of climate on business “is simply not at the level necessary to promote the sense of urgency and change required,” he said.

“You need this high level membership first. So if the boss, the CEO, hasn’t woken up yet… professional accountants need to help get the word out with solid data and solid analysis, ”Tan said.

Growing pressure to disclose

Investors have made it clear that they want the companies they own to commit to a business model that is compatible with climate change. Investors managing more than $ 2.5 trillion called on governments to force companies and auditors to file financial accounts aligned with global net zero emissions goals, in a letter in September.

“Accounts that do not take into account significant climate impacts misinform managers, shareholders and creditors and thus result in misdirected capital,” said the investor group.

Likewise, an open letter published last September by investor organizations with $ 100,000 billion in assets urged companies to follow the guidelines of the International Accounting Standards Board (IASB), issued in 2019.

The IASB’s “opinion” made it clear that taking account of climate risks in company accounts is already required under existing rules, if it is relevant and significant, even if most companies do not. haven’t done so yet. United Nations (UN) climate envoy Mark Carney said the IASB’s findings should also be reflected in companies’ income statements.

Most countries around the world use International Financial Reporting Standards (IFRS), which are established by the International Accounting Standards Board (IASB).

The IFRS Foundation said at the COP26 climate conference on Wednesday that it would form the International Sustainability Standards Board (ISSB), which will be responsible for creating a unique set of standards “to meet investor and information needs.”

“The ISSB will focus on meeting investors’ sustainability information needs to assess company value and make investment decisions. Its standards will help investors understand how companies respond to ESG issues, such as the climate, to inform capital allocation decisions, ”said Erkki Liikanen, Chairman of the IFRS Foundation Trustees. “The standards will form a comprehensive global benchmark for sustainability information. “

Drawing on the Principles for Responsible Investment (PRI), the Institutional Investors Group on Climate Change (IIGC), the United Nations Environment Program Finance Initiative and other investor-led organizations , also stated that companies had to explain the key assumptions made in terms of climate risk and ensure that they are compatible with the objectives of the Paris climate agreement.

The industry-led Climate-Related Financial Disclosures (TCFD) Task Force has also made it clear that companies should measure the material risk of climate change and inform investors of its likely impact on their bottom line.

These risks can range from physical hazards such as rising water levels and the destruction of factories, to new regulations putting a higher price on carbon emissions, for example, which could make products and services redundant or require re-pricing, affecting profits and contingent liabilities.

BlackRock, the world’s largest asset manager, supported the initiative, saying: “Financial reports should reflect reasonable assumptions about the impact of climate change and the transition to a low carbon economy. BlackRock goes on to point out that if companies do not include it in their accounts, it could be considered “misleading.”

Retooling of accountants

Analysis from Ernst & Young, a professional services firm and analytical firm, Oxford Analytica suggests that the next 12 months are expected to bring the most significant innovations in corporate accounting and reporting in decades.

There is no shortage of sustainability standards, which in itself is a challenge. The process of setting global standards for climate reporting and disclosure continues to evolve, but questions remain as to what information should be subject to mandatory disclosure, what is considered important, and whether climate reporting should. be integrated or not in the management reports or remain separate.

Some of the world’s biggest carbon emitters still don’t, despite growing pressure to do so. A recent study by Carbon Tracker and the Climate Accounting Project, an informal team of accountants and financial experts drawn from the investment community and commissioned by the PRI, found that more than 70% of the world’s highest-emitting companies had not disclosed all the risks. in their 2020 publications, 80% of audits showed no evidence that the risk had been assessed.

Accounting and banking organizations agree that a link between financial impact, credit risk and reputational risk must be forged with ESG fundamentals. While the audit profession alone will not change the course of climate change, better accounting standards that accurately reflect the risks businesses take have a crucial role in supporting the energy transition.

“Getting stakeholder buy-in to the process will be essential, and constant communication of the impact of sustainability on business results will be the way forward,” said Ng.

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