Accounting: Seeking a unified standard to keep score of carbon emissions

The accountancy profession is convinced of the need for a
standard setter for climate change reporting. The Copenhagen summit held at the
end of 2009 failed to produce the blockbuster deal on emission targets and
cutting greenhouse gases that many were hoping for. But while the politicians
missed their opportunity to make a breakthrough, financial professionals believe
company reporting and disclosure are powerful forces that could help to drive
concrete achievement in tackling climate change.

Leaving aside the science disputes on the grounds of “if you can’t measure
it, you can’t manage it”, the leading accountancy bodies are entitled to call
for a set of universally accepted standards by which companies can report their
levels of CO2 output – an environmental IFRS, of a kind.

Michael Izza, chief executive of the Institute of Chartered Accountants in
England and Wales (ICAEW), who was at Copenhagen spearheading the accountancy
profession’s interests in the single environmental reporting standard, says a
single standard for reporting the effect business has on climate change, which
is incorporated into their mainstream financial reporting, is only the first
step in a larger process.

What is required is trusted, accurate and reliable information delivered to
investors and other stakeholders so they can make decisions that can drive the
kind of scale of behavioural change necessary to achieve a low-carbon economy.

According to the Association of Chartered Certified Accountants (ACCA), that
type of information doesn’t yet exist in the corporate world. As well as being
part of the disclosure consortium calling for universal standards on climate
change, ACCA sees business as the elephant in the room when it comes to the
battle to reduce carbon emissions.

Both the ACCA and the Global Reporting Initiative (GRI), which works to set
up the reporting framework on which such standards could be based, has examined
the business world’s response to climate change. It investigated the way large
companies from the 15 most high-impact industry sectors have started to disclose
greenhouse gases emissions and their strategies for reduction.

The bad news is that less than half of the companies studied disclosed
specific climate change-related information using GRI indicators in their
published sustainability reports.

But some encouraging signs feature, too. Companies from Brazil, China, India
and South Africa are proving themselves strong in reporting on climate change
policies, strategies, governance and risk, as well as having set and published
emission targets, measurement procedures and mitigation and adaptation plans.

Despite some bright patches, though, it is clear that the standards of
voluntary corporate climate change disclosure still need improvement. Senior
policymakers such as Bank of England Governor Mervyn King and Financial Services
Authority chairman Adair Turner condemn the corporate response to climate change
as timid, sleepy and not yet sufficient.

If that is the perception of senior policymakers, it is not surprising that
analysis of current mandatory and voluntary disclosure schemes shows that, over
the past few years, the disclosure web has grown tighter for businesses. A
near-mandatory disclosure standard would be another significant turn of the
screw for corporates.

The International Accounting Standards Board is working on an accounting
standard for emissions trading, for which an exposure draft is due in Q2 this
year and the completed standard is expected in the first half of 2011. But the
IASB remains firmly focused on standards as they impact financial aspects of
corporate reporting and has little interest in underwriting a process of largely
non-financial climate-change disclosures.

The natural standard setter would seem to be a body such as the Carbon
Disclosure Standards Board. Of course, as the accountancy profession knows only
too well after decades of in-fighting over setting accounting standards,
creating a standard setting body with resource and authority – and on a global
scale – is not straightforward.

And there are powerful forces at work that could leverage considerable
influence. It is a project of interest to the Prince of Wales through his
Accounting for Sustainability project, seeking to develop practical tools to
enable environmental and social performance to be better connected with business
strategy and financial performance, and so embedded in day-to-day operations and
decision-making.

Despite this heavyweight attention, according to Roger Adams, the ACCA’s
executive director of policy, research shows that the corporate response is not
matching up to the seriousness of the issues. Developing countries are expected
to account for 75% of greenhouse gas emissions over the next 25 years. On the
assumption that there is a high positive correlation between corporate reporting
and behaviour, then the extent to which corporates across the globe embrace
climate change reporting will be critical to the future of the planet.

Perhaps the most important task for the accountancy profession in 2010 is
making a tough, effective climate change standard-setting process a reality.

Peter Williams is a chartered accountant and freelance journalist