How accountants can drive sustainability
As climate change and sustainability issues climb in public awareness, the accountancy profession faces new demands to play its part. Julia Penny explains how
The last year has been difficult, but has shown that we can adapt rapidly to changing circumstances. We may not have been as preoccupied with sustainability during the Covid pandemic, but as we emerge from the worst impacts of the virus, we can start thinking about how we can “build back better”.
The pandemic might seem quite different to the issue of climate change. In reality it is another risk that we knew existed, but for which we were still unprepared. Climate change is already impacting our environment with more extreme weather events such as hurricanes, floods, droughts, wildfires and loss of biodiversity.
In his book ‘How to Avoid a Climate Disaster’ Microsoft founder Bill Gates estimated that failing to deal with climate change would cost more than the 1.5m lives already lost to Covid-19. It’s a soberting thought, yet many businesses have not yet addressed these risks.
We are not going to solve the climate problem by asking people to give up their cars, their holidays or to stop using power in their homes or workplaces. What we need to do is to build businesses and economies that are sustainable in the long term.
This is all very well, you might be thinking, but I am an accountant not a climate expert, what’s it got to do with me? The answer is that the accountant is in a vital position to be able to help businesses build back better.
Think of the skills an accountant can bring to bear when working as an adviser or within a business:
- Identification and mitigation of risks
- Identification of opportunities
- Development of strategy
- Development of operational plans
- Advising businesses on compliance issues, including preparing accounts and dealing with disclosure requirements.
All of these skills can be brought to bear to ensure that businesses are not caught unaware when confronted by climate change and wider issues of sustainability.
Identifying the risks facing a business can be difficult. If we think of the pandemic, there was a general scientific understanding that a pandemic was likely at some point. But there was arguably little that businesses could do to prepare for the pandemic without understanding more of the specific threats it created. With climate change we have much more information on the potential impact and therefore the risks and opportunities that exist. (You can find out more about global risks in the World Economic Forum Global Risks Report 2021).
There are two key areas to consider when trying to analyse the impact climate change might have on a business’s risks. First, there are physical risks – damage to assets from flooding or wildfires, or disruption to supply chains from similar physical events.
Then there are transition risks, as governments make regulatory changes to encourage the move to net zero, a state defined by the Carbon Trust as when “the activities within the value chain of a company result in no net impact on the climate from greenhouse gas emissions”.
Identifying physical risks
Whether your, or your client’s, business is large or small it is important to be aware of how it might be affected by climate change, as well as other risks. For instance, might production facilities or supply chains be affected by severe weather events?
Might the cost of insurance for physical risks rise to levels that make products or entire businesses unprofitable? Might damage to the natural environment lead to lower sales, for instance if holiday destinations are made unattractive by climate damage?
The industries most at risk from climate change include infrastructure, insurance, agriculture, energy, beverages, fishing and tourism, including skiing. But even if the business is not directly in one of these industries, risks could still sneak up to surprise unprepared businesses such as supply change disruption.
Identifying transition risks
Next, think about transition risks. What changes could government impose that might impact the business? Will the business’s current products or services still be permitted or viable, or do they need to look significantly different in the future? For instance, regulations mean that new cars with combustion engines will be banned from 2030 in the UK. What might this mean for suppliers to the automotive industry, for those supplying servicing and fuel for such vehicles?
Of course, diesel and petrol cars are not going to disappear overnight, but with more electric cars on the road, steps may be needed to ensure that affected businesses can continue to be successful. Service engineers may need retraining, petrol pumps will need to be supplemented with electric charging points and so on.
In November, Glasgow will host COP 26, the biggest climate change conference in the world. The conference is a decision-making body of the UN and is where nations will agree coordinated action to tackle climate change. So you should anticipate further changes to regulatory requirements as a result of the conference, which will impact business risks.
Increases in government taxes or duties and the realisation that some resources are finite will lead to increases in prices of scarce commodities and carbon emissions. If the business uses a lot of energy, water, scarce minerals or other resources, it is vital to recognise that the prices of these will not stay constant.
How can products and services be adapted so that they are sustainable in the longer term? Can components be recycled more effectively? Can processes be amended to use fewer scarce resources? Dyecoo, for example, has developed a waterless fabric dyeing process that both reduces costs and has less impact on the environment.
With change comes opportunity
Just as the pandemic created opportunities for selling remote-working software, masks, hand sanitizer, vaccines and so forth, climate change means that sustainably produced energy, products and services are likely to be in great demand.
As well as mitigating the impact that climate change has on the planet, re-engineering businesses to be more efficient and sustainable can also reduce operating costs.
Cutting costs and carbon
Over the last year we discovered many meetings can successfully be held online without the need for travel, so reducing carbon use as well as costs.
We also discovered that some things don’t work so well online and still require face-to-face contact. As we plan to return to offices, we can work out how to make the most of both the physical and virtual worlds.
New products and services
New products, services and processes will create new opportunities in the zero carbon economy. For instance, sales of single use water bottles fall as consumers become conscious of the environmental impact. But this drives a demand for multi-use water bottles. Consumers in the UK reduced their meat and dairy consumption, but that created opportunities for substitutes such as plant-based vegan dishes, almond, oat and soya milk.
Even where consumers and businesses want to buy the same sorts of products as before, they are likely to demand higher standards of sustainability. If you can do this, new markets may open up as suppliers which fail the sustainability test lose out.
So, what can accountants do?
Accountants working within or advising companies can get the ball rolling by scheduling time to consider climate risks.
Very large businesses will no doubt already be on the path to demonstrating how their business will transition to net zero. Standing still will not be an option until a business is fully sustainable, as shareholders will be reluctant to invest if a business cannot convince them it can adapt.
Many businesses, particularly SMEs, may not even have started to look at climate issues. This is where the accountant can prompt them to consider what they do, how they do it and how to make it sustainable.
Financial and narrative reporting
As well looking at the risks, accountants determine what a business reports in its accounts. Climate change may affect the values of assets, liabilities and the disclosures needed. Assets may be impaired or have lower residual values or economic lives than originally expected, so adjustments to values or depreciation may be needed.
Additional provisions or disclosures may be required if decommissioning costs for an asset rise, or contingencies that were previously regarded as remote become possible or probable.
As well as reporting in the financial statements, narrative reporting on climate risks and action is becoming more of a priority for businesses. Many entities will already include extensive reporting on risks and voluntarily comply with the Taskforce on Climate-Related Financial Disclosures (TCFD) framework. Further reporting requirements are likely from a Sustainability Reporting Standards Board that regulators are planning.
However some commentators such as accountant and political economist Richard Murphy argue that separately dealing with the financial statements and climate disclosures separately misses the point. Sustainability is core to business survival. Accounts that don’t take account of climate risk are incomplete and misleading.
After all, if a business is only recording resources that it has to pay for externally, it will not reflect the cost to the planet of carbon emissions and other uses of scarce resources. It’s a little like ignoring spiralling debt because the date on which it must be repaid has not yet been reached.
At the moment, we do not have a framework to allow full reporting of such resource use, but we can at least ensure that the impact on the business is considered and disclosed in sufficient detail for sensible decisions to be made.
Detailed climate disclosures are likely to be disproportionate for smaller businesses, so the focus there should be on how the business tackles its climate risks internally and ensuring the financial statements are true and fair, bearing in mind the impact of such risks.
Be the climate hero
It is not often that accountants get a chance to be the hero, but there is a real opportunity for accountants in all types of businesses to help their employer or clients to identify the risks and the actions required to make both the business and the world, sustainable.
- ICAEW climate hub - includes learning resources and a wealth of other information
- New climate economy report – 2018 study on growth opportunities in a new climate economy
- Tesco sustainability commitment – How one company demonstrates its sustainability credentials
- Pearson plc sustainable business plan - Example of a company’s carbon journey
- The Climate Change Committee (CCC) – independent government advisor on climate change
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Julia Penny is the principal of JS Penny Ltd which provides technical and training consulting on anti-money laundering procedures, auditing and financial reporting. Julia is a member of ICAEW Board and Council, chair of the ICAEW Ethics Advisory Committee and past chair of the ICAEW...