Climate change addressed in consultations on finance, reporting and governance
By Carol Adams CA
11 January 2019
ICAS CEO, Bruce Cartwright recently warned of dire consequences for business, the planet and its inhabitants if urgent action on climate change is not taken now.
The last year has seen an unprecedented number of corporate reporting, governance and green finance consultations asking questions about climate change and sustainable development issues. In the UK these have come from the Government’s Green Finance Inquiry, the Financial Reporting Council and the Government’s taskforce on impact investing and in Australia from the ASX and Australian Senate.
Green Finance Enquiry
The UK Government’s cross-party Environmental Audit Committee’s (EAC) Green Finance Inquiry was ‘deeply concerned’ with the lack mechanisms in place to ensure climate change risks are incorporated into investment decisions (see its second report published this year). Key concerns included: ‘misunderstandings’ of the meaning of fiduciary duty – pension fund trustees have a fiduciary duty to consider long term financial risks of climate change; and, lack of reporting (or plans to report) on climate-related financial disclosures.
The Inquiry’s second report proposed that the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations should be mandatory and enforced for large asset owners by 2022. The Government rejected this proposal, but the pressure on asset owners to report against the TCFD recommendations, for example, from young pension fund members investing for the long term, will intensify.
FRC guidance
The UK Financial Reporting Council’s (FRC) 2018 Guidance on the Strategic Report: non-financial reporting (the Guidance) sets out the questions Boards should consider with respect to a range of social and environmental issues, including considering whether climate change presents risks for the company. It places increased emphasis on non-financial reporting and broader influences on long term value ‘generation’.
Yet, whilst the FRC’s (2018) corporate governance code consultation asked whether a more specific reference to the UN SDGs should be considered, the final revised code to be adopted from 2019 does not mention them. Nor did it propose that Boards are guided by the TCFD recommendations, yet a recent report by the Climate Disclosure Standards Board found that 30 companies (38%) in their sample already reference the TCFD in their annual report.
Better Reporting initiative
In October, the UK Government’s Taskforce charged with implementing recommendations to grow a culture of social impact investing released the findings of its Better Reporting work stream which is chaired by Olivia Dickson and Paul Druckman. The report argued that there is a lack of methodologies to measure social and environmental impacts and that assurance and verification processes are inadequate for impact reporting which limits its usefulness to investors. The next phase of this project will develop specific proposals on social and environmental impact reporting to inform the Taskforce’s recommendations to the UK Government in early 2019.
Developments in Australia
ICAS has 685 members in Australia where the recent Australian Securities Exchange (ASX) consultation on revised corporate principles proposed that Boards should identify sustainable development risks in their external environment and that climate change and sustainability risks should be on the Board skills matrix. The revised principles are yet to be released.
Meanwhile, the Australian Senate Inquiry on the UN Sustainable Development Goals has heard from investors, accounting professional bodies and companies urging the Senate to facilitate greater private sector take-up of the TCFD recommendations and contribution to the SDGs. A number of responses to the Inquiry referenced The Sustainable Development Goals, integrated thinking and the integrated report published by ICAS and the IIRC.
Conclusion
The imperatives of sustainable development and adapting to climate change mean that these (quasi) regulatory developments will continue to intensify. Some businesses are adapting even faster. The context in which the accountant prepares and provides information for decision making is changing. The education and training of accountants needs to change with it.
Carol Adams CA is a Professor of Accounting at Durham University Business School and Swinburne Business School. She is a member of the ICAS Sustainability Panel and regularly writes on her website.