Accountants look to ESG reporting as UN focuses on climate change

Accounting

The accounting profession is increasing its involvement with sustainability issues as the United Nations hosts world leaders at its COP26 climate change conference in Glasgow, Scotland.

Like countries across the globe, some accounting firms are making commitments to achieving net zero carbon emissions over the next few years, while also helping clients with environmental, social and governance reporting as ESG funds increase in popularity among investors.

During a panel discussion Tuesday hosted by the International Federation of Accountants and the Climate Disclosure Standards Board on how accountants are using recommendations from the Task Force on Climate-related Financial Disclosures, IFAC CEO Kevin Dancey talked about the urgent need for the profession to help with climate change.

“Professional accountants in business, as well as auditors, will be in the thick of these discussions,” said Dancey. “Climate change is a global and systemic risk, with significant societal and financial consequences. It’s a mainstream business and financial matter that has rightly garnered significant global attention in capital markets, among investors, regulators and accounting communities, to name a few. Achieving net zero emission targets, which is the foundation of stabilizing temperature increases to 1.5 degrees Celsius, involves transitioning businesses and operating models, particularly those of high emitters over a short time period.”

International Federation of Accountants CEO Kevin Dancey

The urgency is underscored by the increasing frequency of catastrophic weather events in the U.S. and other parts of the world in recent years. “I think today we are on the Titanic, and unfortunately too many members of my profession run around the Titanic counting its fixtures and fittings, and occasionally run to the back of the ship to look over to see that the engines are still running as an indication of a going concern, when in reality we need to be looking over the bow of the ship and making sure that the ship is changing course,” said Rodney Irwin, chief operating officer of the World Business Council for Sustainable Development. “In summary, climate-related risk is not a risk, it’s a reality, and we’re not very good when it comes to protecting our future given the mess we’ve been in for the last 18 months.”

The current ways of measuring are dependent on companies self-reporting, which they often don’t do. “One very good indicator is if a company is disclosing emissions,” said Viola Lutz, head of climate solutions at Institutional Shareholder Services. “We’re monitoring nearly 30,000 companies on disclosure of emissions, and actually less than a sixth are reporting on their emissions.”

Energy companies are particularly loath to disclose information, according to a recent study. “We expected to see information in the financial statements and there was almost nothing,” said Barbara Davidson, senior analyst on climate and accountancy at the Carbon Tracker Initiative. “It was a very disappointing study. Some 70% of 107 companies provided no indication of how climate can affect energy transition or their own targets financially today. How are their assets going to be used going forward in the energy transition? What are the asset lives, or can they continue to use these assets over the next 20 or 30 years, like they’re saying they can? What are they considering when they’re impairing these assets? What are they using for estimated long-term cash flows? Is demand changing? Is production changing? Are growth rates changing? Are the commodity prices changing? Are their carbon prices going up? We didn’t know. For provisioning, are they decommissioning assets if they have to decommission them? Are those being accelerated? We don’t know.”

Separately on Tuesday, in conjunction with COP26, the Institute of Management Accountants released a Statement of Position with nine principles on sustainable business information and management. endorsed by IMA’s Sustainable Business Management Global Task Force (IMA.SBM.GTF). “We are releasing this Statement of Position as the world considers sustainability in business as part of the global conversations around COP26,” said Brigitte de Graaff, chair of the IMA.SBM.GTF, in a statement. “These nine principles are the task force’s first output because management represents a critical stakeholder — a building block — to building a sustainable business accounting ecosystem. Too much of the conversation today is about ESG reporting in a way that overlooks management’s needs and ability to take action. Our principles bring us into this conversation.”

A survey released Monday by PwC and the Conference Board found that a 70% majority of the executives polled rate their boards’ ESG expertise as fair or poor, the lowest scores for any subject matter that the survey asked about. Only 25% of directors say their boards have a strong grasp of ESG risks. Just 28% of the directors polled said their board has a strong understanding of their company’s ESG and sustainability messaging. However, fewer than one in five directors (18%) are in favor of mandatory reporting or disclosure requirements. Two-thirds (67%) still prefer the current voluntary approach.

Also on Monday, the CFA Institute, the global association of investment professionals, released the first voluntary Global ESG Disclosure Standards for Investment Products to enable investors, consultants, advisors and distributors to better understand, compare and evaluate ESG investment products.

The U.S. has a long way to go in curbing emissions compared to other countries. KPMG’s Net Zero Readiness Index report found the U.S. ranks 14th in the world in its net zero readiness. The 32 countries in the index account for about three-quarters of global emissions. Nine countries have made binding net zero commitments, while 10 have set net zero targets in policy documents. These countries represent 51% of global emissions.

“The current lack of delivery capability in 80 percent of the countries analyzed in our Index could be an Achilles’ heel for the global transition to net zero,” said global KPMG Impact Leader Richard Threlfall in a statement.

On Monday, Grant Thornton joined some of the other major firms like KPMG, PwC and Deloitte in committing to net zero emissions by 2030, while Ernst & Young hopes to reach the target by 2025 (see story).

Accounting and tax software developers like Intuit are also getting involved. On Tuesday, Intuit committed to helping 1 million small businesses in the U.S. and the U.K. slash their emissions in half by 2030. The company has created the Intuit Climate Action Marketplace, a site where small businesses can find ways to reduce their carbon emissions.

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