By Ian Lavis on behalf of Praxity
For decades, global businesses have been under pressure to demonstrate a commitment to environmental protection. Climate-related disclosure could be the tipping point, heralding a sea change in reporting that might just make the world a better place.
Whether you believe in global warming or not, and most people do, there is little doubt we are experiencing a period of dramatic climate change coupled with increasingly frequent and costly natural disasters worldwide.
Evidence compiled by NASA indicates the planet's average surface temperature has risen about 2.0 degrees Fahrenheit (1.1 degrees Celsius) since the late nineteenth century, and most of this warming was over the past 35 years. A large body of evidence supports the conclusion that human activity is the primary driver of recent warming, according to the National Oceanic and Atmospheric Administration (NOAA).
It’s not just a problem of global warming. The United Nations Environmental Programme Widespread says deforestation and sea pollution are pushing us towards an environmental crisis, while many believe the air we breathe is so bad it’s killing us.
Evidence from environmental groups suggests the human race isn’t very good at looking after our planet and making it fit to live in for ourselves let alone future generations. Many would argue multinationals don’t have a great track record of putting trees, or even people, before profits, and there’s not much help around at the moment from cash-strapped governments.
Until now, it could be claimed not enough people have cared about protecting the environment, at least not in positions of power. But there is renewed hope. A raft of new environmental and social reporting standards and directives have been introduced, and one of the most recent, the Climate-related Finance Disclosure, could be pivotal in persuading global companies to adopt a greener, more sustainable agenda.
The Task Force for Climate-related Finance Disclosure (TCFD), which draws on support from more than 100 companies with $11 trillion of assets, is leading a drive towards consistent, coherent principles and guidelines for companies requiring them to disclose their climate-related risks.
Lead by Michael Bloomberg, CEO of Bloomberg, and Mark Carney, Governor of the Bank of England, the TCFD 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.
According to Business Insider more than 200 firms, managing a combined $81.7 trillion, have pledged to report regularly on the risk that climate change poses to their business, and make progress on initiatives to reduce their impact on the planet.
Markets appear to be already actively shifting towards a low-carbon economy and pressure is mounting on directors to get to grips urgently with what climate-related disclosure means and how to implement it.
The Climate Disclosure Standards Board (CDSB), an international consortium of business and environmental NGOs, is among the organisations leading calls for companies to address their climate risks. The CDSB wants to change the corporate reporting model to “equate natural capital with finance capital” and says there is “considerable risk looming for companies which fail to keep up”.
A strong advocate for environmental and social accountability is James Kallman, CEO of accounting firm Moores Rowland Indonesia, a participant firm in Praxity, the world’s largest alliance of independent accounting firms. He says big businesses need to act decisively and positively, adding: “Stakeholders are demanding more accountability from these huge organisations which are becoming more and more powerful. These businesses have to have a positive impact. They have to be seen to be doing good. Governments don’t have the cash so they need the private sector to step up to their responsibilities.”
Why is climate-related disclosure important?
The TCFD claims: “Better access to data will enhance how climate-related risks are assessed, priced, and managed. Companies can more effectively measure and evaluate their own risks and those of their suppliers and competitors. Investors will make better informed decisions on where and how they want to allocate their capital. Lenders, insurers and underwriters will be better able to evaluate their risks and exposures over the short, medium, and long-term.”
The task force recommendations are currently just that. They haven’t been adopted into national regulations, yet. But “most listed companies already have a legal obligation to disclose material information to investors – including material climate-related information,” according to Corporate Citizenship, a global management consultancy specialising in sustainability and corporate responsibility.
Environmental disasters like the undersea oil well explosion in the Gulf of Mexico in 2010, for which BP was held ultimately responsible, can seriously damage the reputation of a company and its industry. Some businesses never recover. With the rise of social media, environmental mishaps or mismanagement can become world news in an instant.
Companies involved in activities which are a significant source of greenhouse gas emissions are likely to come under increasing scrutiny. Those involved in gas flaring, for example, where unwanted or excess gasses or liquids are burnt off, are among the worst polluters. In 2012 gas flaring emitted more than 350 million tonnes of carbon dioxide, around 10% of the annual emissions of EU member states.
What do companies need to do?
The problem for many companies is how to address climate risk as part of their corporate reporting. Climate-related disclosure is a complex area and finance directors need to know what to include in an annual report to ensure it is proportionate and material to investors. Materiality is a grey area. In simple terms, it’s about identifying material that is likely to be relevant to primary users making decisions based on what climate risk information is supplied.
Climate-related disclosure is of course only one piece of the sustainability jigsaw, albeit a big one. Environmentally-minded companies should be familiar with the Global Reporting Initiative (GRI), the independent international organisation that produced the first and most widely adopted global standards on sustainability. These GRI Standards are designed to help organisations measure, manage and communicate about their use of carbon, energy, water and other resources.
James Kallman argues companies need to be on top of the GRI Standards and adopt better reporting of environmental, social and governance (ESG) criteria, from climate risk to human rights, if they are to demonstrate a real commitment to improving the world we live in. “When we start looking at sustainability in silos that doesn’t help. We need to integrate all of this together. A company may have a beautiful climate profile but may be doing a lot of other things wrong.” He acknowledges it’s difficult to integrate everything but warns “it’s risky not to”, adding: “This is all about corporate responsibility and corporate reporting and what the regulators are saying is report or explain.”
The vital role of accountants
Accounting firms are playing a leading role in helping companies understand and adopt climate-related reporting and generate sustainability reports. This report presents the organisation’s values and governance model, and demonstrates the link between its strategy and its commitment to a sustainable global economy.
Large companies are turning to Moores Rowland Indonesia and other Praxity participant firms for their global reporting expertise. “Sustainability reporting is becoming a bigger and bigger part of our practice. Over the last year this type of business has at least tripled,” James Kallman says. His colleague Steve Crewe, ESG specialist, adds: “In Indonesia, the number of companies publishing annual sustainability reports has grown exponentially from just 15 in 2010 to 120 in 2016, with over half using GRI reporting standards. And this will likely grow in light of the Financial Services Authority of Indonesia (OJK) issuing a regulation in 2017 requiring Financial Services Institutions (FSI), Issuers and Public Listed Companies to develop and submit sustainability reports to OJK.
Accountants within Praxity are perfectly positioned to help companies report on climate-related risk and ESG concerns worldwide. “We are accountants and accountants deal with accountability. That covers a lot of things and we need to be accountable for all of them. Just as we can design systems to capture financial data, we can design systems to capture environmental, social and governance criteria,” James Kallman states.
Whether it’s climate risk, human rights or other environmental and social concerns, he says the three questions accounting firms must consider are:
1. Is it measurable?
2. Is it verifiable?
3. Is it reportable?
If the answer to all three is ‘yes’, then there’s no reason why multinationals and big businesses shouldn’t be demonstrating a far greater commitment to the environment and society in general, through clear, accurate and consistent reporting.
Task Force on Climate-Related Finance Disclosures
Beyond carbon, beyond reports (GRI)