Corporate sustainability and ESG: counting on accountants

Bernard Lakey CPA, a financial controller at Direct Lifts Australia and convenor of the CPA Australia Sustainability Discussion Group, believes the rising significance of environmental, social and governance (ESG) issues for firms and their clients means that accountants must be cognisant of the impact of climate change.

“They have to as an individual, they have to as a business, and they have to as part of a nation,” Lakey says.

While acknowledging that climate risk disclosure is crucial to pricing risk and allocating capital, he urges finance professionals to consider climate change issues in a way that goes beyond merely a technical or financial viewpoint.

“If they can understand the issues from a social community base, then their readiness to accept them at a technical and business level becomes much greater,” he says.

Blueprint for change

In June 2017, the Task Force on Climate-related Financial Disclosures (TCFD), set up by the Financial Stability Board, finalised its recommendations on climate-related financial risk disclosures.

The framework aims to provide a meaningful reporting guideline for climate risks that may potentially be integrated with current financial reporting disclosures.

At the heart of such standards are fears that the landmark Paris Agreement, signed in 2016 to combat climate change and promote a low-carbon future, is failing to adequately cut global carbon emissions.

A recent report from the Intergovernmental Panel on Climate Change, a global group of climate scientists convened by the United Nations, warns that based on current policies and commitments, global emissions are not estimated to peak by 2030 let alone by 2020 as required under the Paris goals.

Dr Johanna Nalau, an adaptation scientist and Australian Research Council DECRA fellow at Griffith University, says the indications of climate change are obvious and alarming in Australia and beyond.

“We’ve had cases where the asphalt is melting in Perth and bats are falling out of the sky because it’s too hot, so such events are signalling that there are environmental changes,” she says.

Nalau says a motivated private business sector and standards such as the TCFD provide clear signals that the private sector is starting to see climate change as part of the emerging risk management matrix.

“A lot of the big companies are getting really concerned about climate risk, and they are trying to better understand their risks, so [they’re] doing more of the prudent risk management in a changing climate,” she says.

Dr John Purcell FCPA, CPA Australia’s former ESG policy adviser, says the TCFD blueprint is a comprehensive framework that provides a path for businesses on climate change.

Accountants, he adds, must recognise that they are living in environmental systems that are under severe stress.

“To say in any way that we can disengage ourselves from an awareness of what’s going on is quite fraught and dangerous.”

Aligning the disclosure standards

The TCFD is one of a number of acronyms in the climate change disclosure space that has led to calls for simplification and consolidation of sustainability-related standards.

Others include the GRI (Global Reporting Initiative), CDSB (Climate Disclosure Standards Board), the SASB (Sustainability Accounting Standards Board), and the IIRC (International Integrated Reporting Council).

Promisingly, the Corporate Reporting Dialogue, an initiative of the IIRC, is seeking, through its Better Alignment Project, to bring together the major global standard-setters and framework providers. Its technical mapping reveals a strong alignment between the various frameworks and the recommendations by the TCFD.

“There’s work being done in recognition of the fact that it’s a very complex reporting environment,” says Marian Gruber, founder of ZOOiD, a certified training partner of the GRI in Australia and New Zealand.

Gruber believes the Corporate Reporting Dialogue and other initiatives will help streamline climate risk reporting.

She notes, too, that in the past year more accountants have joined her GRI training sessions – a sign that they are becoming more alert to climate change issues.

“A lot of self-education can be done, but it is also important to speak to other business sectors to fully understand the risks and opportunities in relation to climate change and sustainability.”

Purcell agrees that the various standards can work in relative harmony.

 

"A lot of the big companies are getting really concerned about climate risk, and they are trying to better understand their risks, so [they're] doing more of the prudent risk management in a changing climate."

 

“I think the TCFD recommendations are written in a sufficiently robust and principle-based manner that financial accounting should be able to adapt,” he says.

There will, nevertheless, be challenges associated with TCFD adoption, Purcell adds, including ensuring that narrative disclosures are robust and not simply “green washing” to try to protect corporate reputations.

The TCFD recommends disclosure under four headings: governance; strategy; risk management; and metrics and targets.

It expects companies to address each category in considerable detail, although disclosures under the strategy and metrics and targets headings are subject to materiality. The TCFD believes organisations should provide such information in annual financial filings.

If the company describes risks as non-material, they need only be included under governance and risk management.

Purcell says a key element is how the recommendations will work their way into financial accounting disclosures, adding that climate change risks and opportunities will have an impact on the profit and loss statements and balance sheets of businesses.

“It’s understanding at one level how accounting’s existing financial accounting tools of measurement, recognition and disclosure are going to be affected by these factors, and how they’ll ultimately require disclosure in standard financial statements,” Purcell says.

The quality of disclosed information will be crucial, given that markets will receive and respond to that information.

“Directors are liable for these disclosures, and should be dependent on accountants in terms of being able to assure not only the external auditing assurance process, but also to understand that the internal business information systems are producing robust information.”

The role of accountants

Adoption of the TCFD recommendations is voluntary in most countries.

The TCFD's 2019 Status Report states that while progress on disclosure has been made in recent years, “not enough companies are disclosing decision-useful climate related financial information”.

As information flows rise, Gruber says accountants and finance professionals are well placed to have an impact.

“Accountants are really quite powerful people in terms of where they sit within organisations,” she says.

“There is the ability for them to do a whole lot more than they currently are doing, which will require educating themselves in sustainability issues, including climate change.”

In the past, the bottom line dominated sustainability strategies, but Gruber says the conversation is now changing and including broader considerations around the adoption of sustainability practices. “[But] it’s still been a slow burn here in Australia.”

CPA Australia’s Sustainability Discussion Group has been engaging with members in a number of cities to discuss climate change issues. Nalau believes organisations such as CPA Australia will play a key educational role, especially for resource-poor small and mid-sized firms.

Drawing from the collective knowledge of groups such as insurers, environmental researchers and business and industry leaders will also be vital.

“Sharing that knowledge and experience is really a key in enabling more robust ways to manage risk,” she says.

Take the lead

Speaking in London in early 2019 at the Sustainable Insurance Forum, UN Environment Program chair and board member of the Australian Prudential Regulation Authority (APRA) Geoff Summerhayes stated that “forward-thinking business leaders aren’t waiting to be pushed” on climate-risk issues, and that “rather than economic factors being a barrier to taking action on climate change, far-sighted business leaders recognise that economic factors make such actions imperative”.

As the impact of TCFD and other climate risk accounting standards expands, accountants will be in the front line as they assist clients and investors to make informed decisions.

Purcell concludes that it is clear that accountants must adapt to shifting economic conditions “which are happening off the back of the reality of climate change”.

While sectors such as mining, extractive industries and agriculture will directly feel the effects of climate change, Purcell says it is an issue that will ultimately affect all businesses and accounting firms, large and small.

“You have to appreciate that accounting businesses operate within extended value chains and supply chains, so to say that one particular part of a sector because of its size is not impacted shows a dangerous lack of understanding of the complexity of the issue.”

Implementing TCFD Recommendations

1. Assess climate related data and information

Ensure any missing climate related data and information is at hand, so your firm can make informed decisions and calculate climate risks with a degree of accuracy.

This is essential if the business is to implement appropriate management strategies. Ask how your products and services could be affected by carbon policies and targets, or any climate-related risks, and whether those factors are integrated into your business strategy, supply chain or sourcing strategy.

2. Do a scenario analysis

Adhering to the task force on climate-related financial disclosures (TCFD) regime may require firms to collect new types of information and data, and adopt new processes and governance structures.

While the recommendations make for complex reading, Bernard Lakey CPA says the key first step is to consider the specific type of climate risks to which the business is exposed.

“The reality is that a business simply needs to start with a scenario analysis – what’s going to happen at my front door?” he says. “If we get flooded out, or if we get hit by hailstorms, how do we deal with it? Once they understand this, they can build the systems and structures to minimise or avoid risk.”

3. Communicate with relevant parties

In addition to documenting TCFD processes, it is also crucial to communicate with key stakeholders about climate risk analysis and management responses.

Understand how decisions could impact the business’s climate footprint and potentially affect the rollout of products and services. Lakey expects one of the key issues in the evolution will be to ensure that technology can manage and process climate-related data flows.

“Existing ERP systems and accounting aren’t designed to look at this information flow and this structure,” he says.

4. Integrate your climate plan into risk management frameworks

Business leaders and board members are key players when it comes to mitigating climate risks and taking advantage of opportunities, whether around the development of new products, or moving into untapped markets.

Remember that it may take several years for a firm to fully respond to the TCFD recommendations and put in place a strategic plan.

The sooner the business acts, the better it will be able to engage with clients and stakeholders on any associated impacts or opportunities.