Measuring Sustainability for a Better Future
In August 2021, the Intergovernmental Panel on Climate Change (IPCC) issued a stark warning to world governments that unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming will not be kept below 2 degrees.
In the 2015 Paris Agreement, global leaders agreed to limit Global Warming to less than 2 degrees, and preferably by 1.5 degrees. Despite this, it is reported that a majority of leading scientists expect that, as a result of failure of governments to take sufficient action, temperatures will warm by at least three degrees by the end of the century.
It is abundantly clear that we need to take unprecedented action at a global scale to move our societies and economies away from the traditional carbon intensive model towards a more sustainable model that is not just carbon neutral, but carbon negative.
It is in this context that global leaders meet in Glasgow this week to agree a path to aggressively cut greenhouse gas emissions in order to reach global net zero by 2050. This is an enormous task, which will necessitate major structural changes to how we organise our societies and run our economies, and not all leaders agree about how this should be achieved.
Take for example India; it is one of the largest greenhouse gas emitters in the world, however, the emissions per capita of its citizens is a fraction of the per capita emissions of Europeans or North Americans. There is also the question of total cumulative emissions since 1850, of which Europe and North America account for over 60% with India accounting for less than 5%. Indian Prime Minister, Narendra Modi, believes that the onus is on Europe and North America to therefore take the greatest action. He has pledged that India will reach net Zero by 2070 rather than the 2050 being targeted by COP26.
On the other hand, leaders of many smaller Western countries are facing criticism from their citizens for signing up to emissions reduction pledges that don’t include a similar commitment from big polluters like India, China and Brazil.
The outcome of COP26 is likely to be a series of compromises, however, it is an important milestone in the implementation of the Paris agreement and an opportunity to apply pressure to global leaders who have not yet made commitments around emissions reductions. Australia, a long time Climate Laggard, has finally made a commitment to Net Zero in the week running up to COP26.
Another key objective of COP26 is the mobilisation of Climate Finance, with an estimated $100bn per annum investment expected to be required over the next decade in order for countries to meet their commitments around emissions reductions by 2030. This represents a coordinated investment on an unprecedented scale and is a massive opportunity for those who are capable and ready of assisting in this transition. However, as the old adage goes; what gets measured gets managed. In the absence of agreement and consistent standards around how to measure and report on various emissions and sustainability metrics, there has been a great deal of confusion in the market about what actually is and isn’t sustainable.
In recent years, with increased interest in sustainable finance and ESG investing, the market has responded by developing products and businesses seeking to attract this funding. While some of these have been genuinely sustainable and contributing to our global climate targets there has been a considerable degree of ‘Greenwashing’, whereby a ‘sustainable’ label has been applied to activities and businesses that are far from sustainable. ESG reporting, in particular, has demonstrated that some larger companies with unsustainable and polluting business models have managed to attract high ESG ratings by pouring money into the development of policies and procedures, but without taking any tangible action.
There is therefore a huge risk that the $100 trillion investment over the next decade may be misallocated towards businesses and projects that are labelled ‘Green’ but in reality do not move us towards our Net Zero target. What is urgently needed is a clear and consistent methodology to assess, measure, and report on the sustainability of projects and businesses, along with an independent assessment of company claims around sustainability. The publication of the EU Taxonomy Regulation established a list of environmentally sustainable economic activities and so provides companies, investors and policymakers with common definitions for environmental sustainability. This is a good start, but much more is required.
What can we do as accountants?
What is needed is a global standard which sets out what is sustainable and what is not, and clear guidance on how companies should report on this. While some may argue that we are in many cases dealing with qualitative issues that are hard to define and measure, at BDO we believe that this is a defeatist attitude. There was a time when there was no agreed ‘correct’ way to present financial statements and yet we now have IFRS. Until relatively recently, the pricing of risk was deemed too complex to do with any real degree of accuracy, but we now have multiple models to do so. Just because it is difficult to measure sustainability doesn’t mean we shouldn’t start.
We believe that the Accounting and Auditing profession is uniquely placed to lead this process. Through IAASB and IASB, Accountants and Auditors have developed robust standards to guide companies around the reporting of financial and governance aspects of their operations. In many cases the matters reported on, and subsequently subjected to audit, are extremely complex and continue to evolve as our understanding improves. Given that accountants and auditors already play a key role in the preparation and review of companies Annual Reports, it seems only logical that their role be expanded to cover ESG and Sustainability factors included in the Annual Report.
Major international bodies, including the Sustainability Accounting Standards Board, The International Integrated Reporting Council, The Global Reporting Initiative, The Carbon Disclosure Project, and the Climate Disclosure Standards Board have already announced their plans to align their standards more closely. The IFRS Foundation, has announced the creation of an International Sustainability Standards Board to work closely with the International Accounting Standards Board to develop a comprehensive global baseline of high-quality, sustainability disclosure standards with an aim to meet investors’ information needs. It is critical that these measures are advanced as quickly as possible to ensure that investors can be confident that they are allocating capital to projects and businesses that will achieve our climate goals.
There’s no doubt that this is a big ask of the accounting profession, to go beyond purely financial information and delve into the intricacies of carbon measurement, biodiversity management and other complex areas. However, the profession has shown itself capable over the years of adapting to client needs and changing operating environments. In the last 20 years, Auditors have had to contend with a mass digitisation of accounting records, an explosion in the volume of data, and the implications that this has had for auditing systems and controls, and indeed assessing cyber security risks. Those who were adaptable and ready to lead their clients through this transition have prospered and so it will be with sustainability and ESG measurement and reporting. Accountants have the opportunity to be global leaders stewarding businesses through a decade that will see major global structural and economic changes and is likely to be the critical time period in which we address the Climate Crisis.
If you are interested in learning more about measuring and reporting on sustainability and ESG initiatives, please contact Brian Haugh and our Advisory team who can assist you in developing a plan tailored to your specific business needs.
Brian Haugh [email protected]
Brian McEnery [email protected]
Stephen O’Flaherty [email protected]
To find out more about BDO's ESG initiatives, click here.