Given a lack of adequate climate-related corporate disclosures and the growing urgency around climate change, Barbara Davidson asks if it is time to mandate
This article was first published in the February/March 2020 International edition of Accounting and Business magazine.
The magnitude of this season’s Australian bushfires is unprecedented. Yet many continue to deny that climate change is the cause. What more evidence do we need to start effecting real change?
In 2018 the world’s largest companies reported US$1 trillion at risk from climate impacts. Recent scientific information calls for making ‘finance flows consistent with low greenhouse gas emissions and climate-resilient development’. The European Commission (EC) estimates that €180bn (around US$200bn) a year in additional investments is needed to meet EU climate and energy targets alone.
To evaluate and respond to climate risks and opportunities, investors need good data. Various organisations recognise this. The Global Reporting Initiative, the Sustainability Accounting Standards Board, the CDP (formerly Carbon Disclosure Project), and the Climate Disclosure Standards Board (collectively, the NGOs) are among the more prominent bodies to develop frameworks and standards for companies to use to provide such information.
Public policy efforts are also growing, including recommendations by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) for disclosing climate risks and opportunities, the EU’s guidelines on reporting climate-related information and a recently formed Project Task Force on Climate-related Reporting.
While many companies support these endeavours, there has been limited uptake. Investors are frustrated by the lack of transparency and inconsistent information around the financial impacts of climate change on businesses and the resilience of company strategies. In response, there is talk about mandating corporate climate-related disclosures. But is now the right time? And if so, should a single body oversee this?
To mandate or not?
Investors need reliable information that is easy to find and comparable across entities. This non-financial (or extra-financial) information is typically outside financial accounting and reporting boundaries. It is not standardised, making it less comparable. It is frequently located in separate, company-specific sustainability reports and is rarely assured. Mandating a single set of disclosures would:
- force companies to incorporate material climate or environmental, social and governance (ESG) matters into their governance framework, and to liaise across functions to evaluate risks, impacts and strategies
- increase transparency and improve stakeholder dialogue
- help investors identify opportunities, such as technologies that can contribute to a low-carbon economy
- ensure information is prepared to similar levels as accounting information, is assured, and is included within annual reports.
This cannot be fixed overnight. It takes time for companies to gather the information. Those that have started implementing the TCFD recommendations need two or three years to get them right. Despite this, some argue that it is still too soon to go down the mandatory disclosure path.
Standards and enforcement
The current variety of guidance, standards and frameworks causes confusion among companies and investors. A single set of disclosure standards would eliminate this. Although the NGOs in this space have been working to identify areas of alignment, they have different missions and governance structures. Some target different stakeholders. These distinctions may inhibit their ability to merge or to cede responsibility to a single organisation.
One solution would be to leverage existing accounting standard-setting infrastructure. For example, the International Accounting Standards Board (IASB) develops standards to bring ‘transparency, accountability and efficiency’ to global financial markets. It is familiar with the growing pains that non-financial reporting is experiencing. It has strong due process, a funding procedure, a clear governance structure, and focuses on a primary stakeholder group: investors. It could consolidate and codify the existing guidance from NGOs and governments, drawing from their vast knowledge and experience. It could also address concerns around issues such as materiality.
Despite a recent article highlighting the ways in which IFRS and the IASB’s Management Commentary project could be used address climate change issues, the topic is not currently in accounting standard-setters’ remits, which could be a barrier to agreeing a role for them.
The ‘long-term’ effects of climate change are happening today. A clear understanding of the associated financial risks, as well as opportunities and strategies, is key to both ensuring effective financial markets and to closing the gap between our temperature goals and our actions. Voluntary reporting measures have not yielded sufficient information in a timely fashion. More targeted, urgent action is required.
Stakeholder support is strong and there is ‘political will’ in many countries for a single mandatory set of disclosures. Oversight by a single body will help us move forward.
Barbara Davidson has 20 years’ experience in international financial markets and was formerly head of investor engagement at the IASB.