If the world is to prevent environmental disaster, sustainability reporting must be repositioned as a regulatory rather than a cultural issue, says Robert Bruce
This article was first published in the June 2019 UK edition of Accounting and Business magazine.
If you watch the filmed interview between David Attenborough and Prince William from this year’s World Economic Forum at Davos, your eye will be drawn, or at least mine was, to a revealing detail. In the midst of discussing the environmental disasters ahead, the prince crosses his legs and his foot dangles towards the cameras. And you notice that, unmistakably, he has a hole in the sole of his shoe.
You could say it was just sheer absent-mindedness. I prefer to think that it was a sign that sustainability had reached the realms of the royal footwear. And maybe it is a sign that the two competing strands, the cultural and the regulatory, in the struggle to create a sustainable world, have reached an element of resolution.
Certainly the cultural side has been making ground. Across a bitterly cold holiday weekend in May this year, the UK managed five days without burning any coal or other fossil fuels to generate electricity. It was all renewables. And, in a striking historical comparison, it was said that this was the first time that such a thing had happened since the Industrial Revolution when dark satanic mills were the norm, and not windmills on moor and sea.
Culturally this is the direction in which we are travelling. Yet the regulatory side is vital. Hans Hoogervorst, chair of the International Accounting Standards Board, made this plain the other day. For him, climate change is a market failure. Air travel is a disaster of greenhouse gases. ‘Yet’, he said, ‘the price of international airline tickets in no way reflects the negative externalities of flying.’ Instead, aviation is subject to no fuel tax or VAT and is heavily subsidised. ‘As a result,’ Hoogervorst pointed out, ‘a gas-guzzling flight from London to Amsterdam can be cheaper than the eco-friendly hybrid taxi to the airport. The economics of the aviation industry is a market failure, compounded by a public policy failure.’
Reporting as catalyst
Ideally all this would change through financial disclosure showing the true cost of the product. Currently it doesn’t. ‘This is the reason why many people see climate-change reporting, or more broadly sustainability reporting, as an important catalyst for change,’ Hoogervorst said. Yet sustainability reporting is still largely a cultural rather than a regulatory issue. The voluntary route has brought results. The use of integrated reporting has brought enormous change by showing the consequences of corporate actions. The broad adoption of rules of disclosure of climate-related financial information is doing the same. It is cultural change that is bringing this about.
Much of this is working in the right direction. Even the magazine in which you are reading this column now arrives on people’s doorsteps in a wrapper derived from potato starch that will gently self-destruct in due course. But cultural issues and conflicts remain.
The fundamental economic enabler of Asian and Middle-Eastern nations is the air-conditioning unit. The first prime minister of Singapore, Lee Kuan Yew, was fond of pointing out that it had ‘changed the nature of civilisation by making development possible in the tropics’. China now accounts for far more air-conditioning units than the US. By 2030 Saudi Arabia is expected to be using more energy to run air-conditioning than it currently exports as oil. Over 20% of total world electricity currently comes from the need for air-conditioning. But it also saves untold numbers of people who would previously have expired from the heat.
There are huge contradictions at work in all of this. As Hoogervorst is fond of reminding people, there are currently ‘at least 230 corporate sustainability standards initiatives across more than 80 sectors’. This is where the cultural side of the process will eventually triumph. The sheer critical mass of all the change being promulgated should tilt the balance. The other advantage is that it does not come, as an aviation tax surely will have to, by diktat. Cultural change is soft. Regulatory change is not.
Robert Bruce is an accountancy commentator and journalist.
"The use of integrated reporting has brought enormous change by showing the consequences of corporate actions"