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Accounting responds to global climate change

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29th Nov 2011
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As carbon emission specialists keep watch on the Durban-based COP 17 Climate Change talks in South Africa, a recent report from CIMA has reinforced the key role accountants will have to play in greenhouse gas reduction. Gail Purvis reports.

“As the gloom of the impending COP meeting in Durban is dominating headlines, our research report tells us that regardless of the progress in the international arena, many organisations are proactively developing their response to global climate change and are also realising the benefits from doing so,” commented professor Jan Bebbington, head of accounting and sustainable development at St Andrews University.

To prepare their CIMA-sponsored report ‘Strategic responses to global climate change: a UK analysis’ Bebbington and her colleague Dr Nick Barter together interviewed some 24 public and private sector organisations in carbon-intensive industries such as electricity, oil and gas, and manufacturing sector that have already had to get to grips with CO2 emmissions.

The UK government is currently looking for a 36% reduction in greenhouse gas (GHG) emissions by 2020. To work towards this target, accountants in affected industry have realised that accounting support is needed in three areas:

  • Developing baseline data on organisation-related GHG emissions and reporting that data within and outside the organisation.
  • Ensuring GHG emissions are incorporated into current-decision making and performance measurement.
  • Providing information to support choices about the future – both mitigation and adaptation pathways.

The report sets out a 10-step “whole system” approach to address climate change.

  • establishing consensus
  • defining a vision of a low carbon future
  • developing a data baseline
  • defining a procurement plan
  • supporting  current and future leaders
  • developing process standards for a sector
  • putting climate change in a wider sustainable development approach
  • funding the transition
  • ensuring financial accountability
  • developing an adaptation plan.

Two interviewees said climate change and sustainability needed more attention within financial decision-making, for example around the practice of discounting future carbon costs in project appraisal. PwC partner Alan McGill noted: “Most companies are still using the traditional net present value discounting models... once you go beyond sort of five or six years... because of the discount rate you’ve applied, it means that it’s marginal. There is an interesting piece about looking at stepped discounting, which has been talked about by a few corporates, but none of them are bold enough to apply it.

“But certainly they are running sensitivities with step discount rates so that there’s a smaller discount rate for the future periods where they go out beyond a certain timeframe [and] that means…those potential savings or implications are not as marginalised as they are with an existing discount factor.”

Separating the evaluation of capital and operational expenditure decisions when making capital investment decisions can have a significant impact on GHG emissions during operations, the report added.

Some organisations are taking a wider “whole system” perspective, but find their accounting decision making protocols working against this view. If this scenario persists, many more organisations will struggle to adapt to a low carbon economy.

PwC’s McGill thought organisations were at the “crossroads” for making serious investments and commented that what was needed was a “step change” rather than more tweaking at the edges.  “That’s getting them to start thinking critically about their business model,” he said.

Graham Hutcheon, operational director of the whisky distilling and bottling group Edrington commented, “In terms of strategic drivers for business, I  think we’re probably just at the start of the game.”

The report authors conclude that the accounting profession has an essential role to play in achieving a low carbon economy. They are starting to be aware that the physical realities they have previously worked within are going to change radically and rapidly.

“It’s broadly recognised that… the entirety of the European framework of legislation that’s been transposed into law was written in a pre-carbon era,” report noted. But when that legislation changes, demands for organisational change will accelerate. 

CIMA's Victor Smart has also provided a guest blog where he explains the competitive advantage to be gained by companies who set out to build sustainable businesses.

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