This article was first published in the May 2020 Ireland edition of
Accounting and Business magazine.

It may have slipped in priority as Covid-19 ruptures the global economy, but the way that businesses manage and report on the environmental and social issues that affect them will return with a vengeance once governments and businesses reboot and retool in the months and years to come.

In the lead-up to the current coronavirus-triggered crisis, the threat that climate change in particular poses to financial stability was becoming the central non-financial concern for both public and private sectors.

Earlier this year, for example, the EU launched an initiative to revise its non-financial reporting directive (Ireland was the first member state to apply it, in late 2017). The European Commission held an open consultation that ended in February. The next version of the directive will undoubtedly reflect mushrooming investor demand for greater disclosure of climate and environmental data by companies, and include a more stringent system to measure their efforts.

Meanwhile KPMG research released in January gave teeth to the argument that investors are demanding more and better information in this regard. It found that two-thirds of business leaders surveyed think climate change is directly impacting their M&A activity.

Russell Smyth, head of KPMG Ireland’s sustainable futures team, says: ‘Climate change and sustainability have been on the agenda for decades. In reality, more has changed in the last 12 months than in the last 30 years. Business leaders recognise that climate change can have a long-term impact on value unless they embrace and make changes.’

Regulators target the risks

A report from Mazars issued in February this year found that climate change is also influencing the thinking and actions of regulatory bodies. The survey of 33 central banks and regulatory authorities across the world revealed that 70% view climate change as a major threat to financial stability and are in the process of integrating the risks into their supervisory practices and institutional stress-testing.

The Mazars research also found considerable variations between central banks about where the responsibility for action on the issue lies. While 55% of central banks surveyed are actively monitoring climate risks, only 27% say they are actively responding to those risks.

Rudi Lang, Mazars partner and leader of its global financial institutions group, describes the increasing involvement of regulatory institutions in this area as inevitable. ‘As instigators of much that is considered beneficial in modern life – as well as perpetrators of many developments considered misdeeds or worse – banks and financial institutions are caught in the maelstrom… governments have thrust central banks and other regulatory bodies into the centre of the struggle.’

While Ireland has been viewed as underperforming in addressing the sustainability challenge in recent years, with the taoiseach Leo Varadkar describing the country as a ‘climate change laggard’, there are signs the finance industry here will have a central role in driving action in the future.

From laggard to leader

Last year the government launched Ireland for Finance, an international financial services strategy that identifies the development of sustainable finance as a key priority in growing the sector in Ireland to 2025. The strategy document removes any ambiguity about what the term means, defining sustainable finance as ‘the capital required to tackle climate change’ and listing practical examples as ‘green bonds, ESG and socially responsible investing (SRI) investments, sustainable infrastructural investments, climate finance, and performance bonds’.

Vasileios Madouros, director of financial stability with the Central Bank of Ireland, says: ‘Ensuring that the financial system is resilient to climate-related risks falls squarely within the Central Bank’s mandate.’

Speaking at the Irish Fiscal Advisory Council’s annual conference in February, Madouros identified two key conditions to ensure the financial system could play its role in the transition to a low-carbon economy: first, investors need to be able to understand the carbon footprint of their investments; and second, they need to be able to genuinely understand and assess the climate-related aspects of their investments.

Highlighting the role that the newly revised EU directive could play in this, he explained: ‘Central banks will not drive the transition to a low-carbon economy. This is the role of elected governments.’ However, he added: ‘A climate-resilient financial system is a necessary condition to enable the transition to a low-carbon economy.’

While no one knows how the coronavirus disaster will ultimately be resolved, it’s already clear that, both nationally and globally, financial stimulus packages on an unprecedented scale will be key. Climate change activists have made clear that sustainability must be built into the process.

Leading such calls is former president of Ireland Mary Robinson, who also served as UN climate envoy. She argues that governments should not go back to ‘bad habits’ as vast sums are spent rebuilding economies, businesses and lives. ‘They must do it with a very strong green emphasis. The threat from climate change is as real as the threat from Covid-19, though it seems far away.’

Just how the definition of sustainability will evolve as part of this is perhaps a question for another day. What is abundantly clear at the moment is that neither governments, the public nor the commercial sector will ever again need convincing that non-financial risks are a central concern in all business and economic planning.

Donal Nugent, journalist