By Ian Lavis on behalf of Praxity Global Alliance
As pressure mounts on cash-strapped governments to declare a climate emergency, the onus is on companies to do more to avert environmental catastrophe.
Time is running out to save the planet from irreversible climate change, according to the United Nations. Calling for urgent action to cut C02 emissions, it states: “There is alarming evidence that important tipping points, leading to irreversible changes in major ecosystems and the planetary climate system, may already have been reached or passed.”
In the face of such a crisis, you’d think climate-related reporting – where companies accurately disclose the potential financial impacts from climate change on their business – would be an absolute priority for any company that values the health of its workers, their families and future generations.
Yet, while there is growing acceptance globally that human activity is the prime driver of recent global warming, many companies seem unconcerned by their carbon footprints, and unable or unwilling to navigate the complex world of sustainability reporting.
The irony is that by doing more to demonstrate a commitment to protecting the environment through climate-related reporting, companies are likely to attract investors and build public trust, and generate greater financial returns in the future.
So why aren’t more companies taking the initiative by declaring their own climate emergency? And why isn’t more being done to make climate-related reporting, and indeed sustainability reporting, a priority?
Confusion and exaggeration
Hans Hoogervorst, chair of the International Accounting Standards Board (IASB) believes there are too many standards in place and exaggerated expectations of what sustainability reporting can achieve in the absence of policy and political intervention.
In a speech at the Climate-Related Financial Reporting Conference at Cambridge University, UK, in April, published on the IFRS website, he says the myriad of standards and initiatives “leads to a lot of confusion among users and companies themselves”.
The Financial Times recently ran a report on wildly different rankings of global companies based on different ratings for environmental, social and governance (ESG) criteria. In one example, electric car maker Tesla was rated top by MSCI, bottom by FTSE and somewhere in the middle by Sustainalytics.
The IASB chief says: “People may be forgiven for not making heads or tails of it. Moreover, with so many standards, the potential for disclosure overload is enormous.”
While acknowledging climate-change reporting, or more broadly sustainability reporting, is an important catalyst for change, he says “we should not expect sustainability reporting to be very effective in inducing companies to prioritise planet over profit”.
However, James Kallman, CEO, Moores Rowland Indonesia, a participant firm in Praxity Global Alliance, says irrespective of still emerging best practice and over-expectation, responsible companies should be doing far more to tackle climate change and provide accurate climate-related disclosures.
“Companies should be held accountable and should be out in front on this crisis, showing that they care about this issue. I fundamentally disagree that we should push back and simply wait for government action or more likely inaction.”
He points to the ground-breaking case of Exxon Mobil, which is being sued by New York’s attorney general for allegedly deceiving shareholders on climate change. In an article published in the New York Times, it is claimed the company defrauded shareholders by downplaying the expected risks of climate change to its business.
He adds: “The state of New York has done something very important by holding companies responsible for the quality of their reporting.”
A helping hand
The problem many companies have when it comes to climate-related disclosure is understanding what they need to do to provide accurate, meaningful information for stakeholders.
This is where forward-thinking accounting firms within Praxity Global Alliance are taking the lead. By sharing global expertise on climate-related reporting, participant firms are ideally placed to advise boards and clients on best practice.
The advice includes helping companies understand and comply with the Global Reporting Initiative (GRI), which recently announced a two-year project focused on driving better alignment in the corporate reporting landscape. The goal is to make it easier for companies to prepare effective and coherent disclosures that meet the information needs of capital markets and society.
Firms are also helping clients follow the reporting framework of the Climate Disclosure Standards Board (CDSB) and recommendations of the Task Force on Climate-Related Disclosures (TFCD). This will help organisations prepare and present climate-related information in mainstream reports for the benefit of investors.
Moores Rowland Indonesia is also prominent in advocating more sustainable finance initiatives. The firm, in partnership with TUV Nord, is among those globally authorised to certify green bonds which are used to finance climate change mitigation projects such as renewables and energy efficiency.
James Kallman advocates a more holistic approach to sustainability reporting combining climate-related disclosure with other environmental, social and governance criteria if companies are to demonstrate a real commitment to improving the world we live in.
He says more and more stock exchanges and regulators are focusing on this type of reporting, and “it needs accountants like us to make sure the quality of reporting is high”.
There is clearly a long way to go in a world where big polluters such as aviation and oil companies remain attractive to investors despite their colossal carbon footprints, but it does seem the tide is finally changing.
All eyes will be on Exxon Mobil case to see just how much impact accurate climate-related reporting will have on a company’s bottom line and its reputation.
In the meantime, what can be done to convince companies that climate-related reporting really should be a priority and really can make a difference – both economically and environmentally?
The way forward
Hans Hoogervorst believes the best hope lies with the increasingly influential strand of reporting “focused on the impact of sustainability issues on the company itself, rather than on the public good”.
This type of reporting aims to provide investors with information on how sustainability issues might impact the company’s future financial performance.
The TCFD, for example, is encouraging firms to report regularly on climate-related topics like water and energy use to help shareholders and investors make decisions about which companies are actively managing their climate risks.
Similarly, the CDSB wants to change the corporate reporting model to “equate natural capital with finance capital”. It says there is “considerable risk looming to companies which fail to keep up”.
Governments should also play a part although evidence to date suggests they cannot be relied upon to create effective climate-change policies. The G20 is moving in the right direction but lacks concrete measures.
“It is good that the G20 is promoting climate-related disclosure; it would be a thousand times better if they could agree on the introduction of a kerosene tax,” the IASB chief says.
What young people care about
Perhaps G20, individual governments and companies worldwide should pay more attention to the youngest generation of stakeholders – whose investment decisions are likely to be far more environmentally-driven than their predecessors.
“This is what young people care about, and companies need to take into account what their future shareholders care about, as do their reporting accountants,” James Kallman says.
In the end, powerful young environmental campaigners such as 16-year-old Swedish activist Greta Thunberg may well have more sway than longstanding organisations when it comes to influencing company actions and public policy. “These young people who hold sway over public opinion are todays true Regulators”, adds James.
Either way, companies that fail to take climate-related reporting seriously could be living on borrowed time.