Accountants to bear brunt as UK floats new sustainability standardsby
Accountants and finance teams must have a better understanding of their climate impact under new sustainability reporting standards set to be unveiled by the government, but there are questions over the detail inside the environmental disclosure requirements.
Big businesses will have to disclose their emissions and true climate footprint to investors under new proposals announced by Chancellor Rishi Sunak, who is taking aim at so-called greenwashing.
The lack of common definitions around environmental sustainability allows businesses to muddy their true impact on the planet and mislead investors, Sunak said. This “is leading to greenwashing, misleading investors and consumers about how green a product really is,” he said.
Environmentally-conscious consumers will have more information about where to place their money and businesses will get a more transparent view of suppliers, the government said about the new standards it has labelled Sustainability Disclosure Requirements (SDR).
Announced ahead of the 2021 United Nations Climate Change Conference (Cop26) and the UK’s Budget, SDR will apply to pension schemes, investment products and asset managers and owners.
“We want sustainability to be a key component of investment decisions, and our plans will arm investors with the right information to make more environmentally-led decisions,” said Sunak.
A government report, Greening Finance: A Roadmap to Sustainable Investing, outlines further detail of the numerous legislative and regulatory updates required to make the proposals a reality.
First announced at the Chancellor’s Mansion House speech earlier in the year, the integrated regime will collect and streamline existing climate reporting requirements – such as the UK’s commitment to implement mandatory reporting aligned with the task force on Climate-Related Financial Disclosures (TCFD).
This includes requiring every investment product to set out, for the first time, the environmental impact of the activities it finances, and justify clearly any sustainability claims it makes. Asset managers will also need to set out how they incorporate sustainability into their investment strategy to allow consumers to make informed judgements about the kind of firms they want to invest in.
Next month, the UK welcomes global leaders at the Cop26 climate conference in Glasgow. The UN event has been positioned as a way of making countries live up to the standards set in the 2015 Paris accord.
As the event nears, several large firms have promised to cut their emissions to net zero by 2050, in line with the date set by the government to apply to the whole UK.
Soft disclosures, missing detail
Reaction has been mixed from the accounting sector, given the profession will be responsible for interpreting the environmental metrics and reporting taxonomies.
“The trouble is that greenwash is exactly what this proposal will deliver,” said tax and accounting expert Richard Murphy.
The proposals will be based on accounting standards issued by the new global International Sustainability Standards Board, but not aligned with International Accounting Standards.
Many of the disclosures are also ‘soft’, Murphy said, “that will be found in the front part of a set of accounts where the management waffle or greenwash might be found”.
None of the metrics require that any figure be included in a set of accounts to reflect the impact on the financial position of the company of the supposed climate reporting being made, he added.
Murphy expects investment companies and pension funds to protest about what will be demanded of them because they will be unable to deliver it due to not having access to the necessary data. The result will be a showdown that the government will lose, he said.
“We cannot afford a few wasted years whilst this is resolved,” Murphy said. “The future of life on this planet is dependent on the government getting this right. And it isn't.”
Direction of travel clear
Finance teams have a crucial role to play in the UK’s push to become net zero, said Julia Penny, principal of technical and training consultancy JS Penny. The industry should prepare for more such standards to come thick and fast.
“The requirements to report on sustainability have been increasing quite rapidly for the largest of companies but a variety of standards, recommendations and options makes this a complicated area,” said Penny. “Without measurement it is difficult to know if you are on track to meet targets or how to make investment decisions which promote the drive to net zero.”
Although all the full details are still to be finalised, the direction of travel in terms of increased disclosure requirements for an ever-widening net of companies is clear, she said.
“Many large companies are only just getting to grips with the requirements which are changing all the time to achieve further alignment internationally,” Penny told AccountingWEB.
It is vital that companies and those advising them invest the time in understanding the disclosure requirements and link this with strategic actions to reduce carbon emissions and increase sustainability more generally, she said.
“As with all disclosures it is usually the accountant that bears the brunt of this work – so be prepared and start to educate yourself in the language of climate change and related disclosure requirements,” Penny said.
She will be discussing the green accounting alongside Yogesh Patel and others at the AccountingWEB Live Expo on 1-2 December.
Meanwhile, organisations that fail to manage their climate-related risks “increasingly present financial risks to individuals and investors,” said Jessica Fries, executive chairman of Accounting for Sustainability.
“Importantly, the proposals recognise the need for an economy-wide framework, joining the dots along each link in the investment chain from individual savers and investors through asset owners and asset managers to companies,” said Fries.
Green-tech and other climate friendly businesses have flourished over the last 18 months, added Emma Wall, head of investment analysis at Hargreaves Lansdown, but there may be a hidden sting. “The popularity of responsible funds has become problematic as investment providers jump on the bandwagon, leading to accusations of greenwashing – saying you have better environmental credentials than you do,” Wall said. “The EU has already cracked down on providers and the US has launched investigations, and now the UK is following suit.”
Julia Penny will be speaking about the green finance strategy at AccountingWEB Live Expo on 1-2 December. Register now and reserve your place on over 60 panels, workshops and lectures.