Tuesday, April 16, 2024

Time to clean up climate reporting standards

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The cause of climate change has been an unlikely winner of the coronavirus pandemic. The health crisis has been a wake-up call for governments and businesses of the dangers of ignoring external risks and undervaluing resilience. Experts have long warned of the consequences of global warming and it is hoped that 2021 will be a pivotal year in the fight against it. The past few months have seen an explosion in the number of companies promoting their environmental, social and governance standards. Money is also the engine of this ESG agenda. Larry Fink, Managing Director of BlackRock, used his annual letter to business leaders last month to warn that the world’s largest asset manager would push companies to reach net zero emissions by 2050.

The rise in corporate rhetoric, however, hides a large gap in the way companies take into account the risk of climate change. Recent analysis The UK Financial Reporting Council found that while a growing number of companies provide ‘narrative reports’ on climate-related issues, only six of the 24 reviewed made reference to climate change in their financial statements. The accounting industry may be an unlikely ally in an environmental fight, but a growing number of climate-conscious investors are rightly arguing that unless companies specify the potential impact on their profits, investing in businesses carbon intensive is likely to continue, with tragic consequences for the planet.

In reality, sustainability standards abound. The Amsterdam-based Global Reporting Initiative was created more than two decades ago to measure the external impact of companies on a wide range of things, including society and the environment. The Sustainability Accounting Standards Board provides 77 industry indicators that track the impact of environmental issues on company accounts. More recently, Mark Carney, the former Governor of the Bank of England, launched a voluntary framework, the Climate-Related Financial Disclosures Working Group system. It is therefore not surprising that investors complain that the proliferation of standards which are largely still voluntary prevents them from being able to accurately assess risks in different sectors.

The good news is that the accounting profession has recognized the challenge. The The big four auditors announced a new set of ESG measures last September designed to bring together the efforts of the top five independent standard setters. The end goal: a comprehensive corporate reporting system. The bad news is that achieving a uniform accounting framework is not an easy task. A common standard should not only penalize companies on the front lines of climate change, whose business is in fossil fuels. It should also be able to disentangle the climate sensitivities of those who would not automatically be considered vulnerable.

The 2015 Paris Climate Agreement is one way to measure business risk. There is merit in a recent investor proposal ask companies to ensure that their financial statements are consistent with the agreement’s goal of keeping the global temperature rise since pre-industrial times well below 2 ° C. And just as companies estimate the cost future of capital, CFOs should therefore take into account the future cost of carbon. A carbon price can be uncertain, as can the time value of money. The auditing profession alone will not change the course of global warming; it depends on governments and regulators. But accounting standards that accurately reflect the risks businesses take have a critical role to play in accelerating the transition to cleaner energy.

Climate capital

Where climate change meets business, markets and politics. Check Out FT Coverage Here

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