Accounting: Green reports

As night follows day it is inevitable that climate change
reporting is set to be one of the biggest challenges to confront finance
directors. Annual reports and accounts are a logical place for companies to
report on their contribution towards combating climate change. Of all the
special interest groups that have tried to engineer reports for their own
particular purpose, it is hard to see how the call of the environmental
campaigners can be resisted.

The question for FDs with a major responsibility for producing annual reports
is what climate change reporting will look like and how onerous it will be to
achieve.
Developments in sustainability reporting are fast-paced. And so far there has
been no attempt to codify best practice from standard setters. Indeed, word from
the International Accounting Standards Board is that it declines to see
producing guidance on reporting for climate change as its responsibility.

But even without input from the IASB, measuring the impact of business on
climate change is the next logical development. Within two decades, the first
movement to produce reports on environmental impacts has moved through a number
of phases: impact on society and economies; the concept of the ‘triple bottom
line’; external verification to provide assurance over completeness of
reporting; and now, moving to metrics to assess impacts on climate change. The
companies most concerned with climate change reporting are high- or
medium-impact sectors. But with so much pressure from governments and consumers
it seems all companies that report will need to disclose standard climate change
information to prove their green credentials.

Set out in a discussion paper Improving Climate Change Reporting, accountancy
body ACCA suggested that companies need to look at climate change across a range
of measures. At the top level, corporates should formulate and articulate a
climate change policy explaining the general principles and framework to which
the companies will work, including high-level objectives to achieve emissions
reductions. Next, companies should be starting to address the challenge of
reporting on product impacts: companies whose products give rise to significant
carbon emissions need to report and allocate responsibility for them more
clearly. ACCA says there is little material available explaining the monetary
savings associated with improved energy efficiency and no common methodology on
inter-product comparisons of efficiency.

Companies are being challenged to improve accessibility of climate change
information. In particular, the report suggests that climate change has to be
communicated as a key business issue, explaining climate change’s overall impact
on the organisation. The discussion paper challenges business to set and
communicate climate change targets, following consultation with stakeholders
ensuring that they are “credible and in line with peer company efforts”.
Performance metrics need to be thought about ­ for example, manufacturers should
use an emissions-per-product-figure as a comparative metric, rather than
emissions-per-turnover. Finally, the work in this area needs verification. Two
standards already exist on climate change assurance standards, but as the
importance of climate change disclosures increases, a reasonable level of
assurance will be needed for both data and narrative information. Companies will
have to factor this into budgeting and planning processes and stakeholders will
need educating on the nature of the assurance being given.

As part of the discussion paper, 42 UK companies which have a reputation as
leading environmental reporters were surveyed. Among these leaders, 89% provided
some form of carbon data in their reporting and more than half had this verified
independently. However, while 57% disclosed short- or medium-term targets for
carbon emissions, only 43% provided long-term (over five years) targets and no
company disclosed any product targets.

Some companies may be handling particular issues well, but the research could
not find a single company reporting evenly across all the key climate change
issues ­ especially those relating to product impacts and initiatives to reduce
carbon emissions. And reporting, even at this patchy level, is not widely
practised or monitored.

The possibility of severe and irreversible climate change threatens us all
and is impossible to ignore. Inevitably annual reports will be used to raise
awareness and increase knowledge. As with the rest of this sensitive and still
controversial issue there is much work to do. But bringing transparency and
clarity should lead to improvements in environmental performance. The financial
markets should be able to assess risks to long-term shareholder value and so
allocate more effectively resources in ways that mitigate the threats of global
climate change. It seems inevitable that FDs ­ whether they like it or not ­
will be expected to play a major part in this work and will, therefore, once
again be in the vanguard of fundamental changes in reporting corporate
performance.