5 minute read 22 Jun 2021
German wind turbines in offshore wind farm in north sea

Three ways accountants will lead on climate action

By Ruchi Bhowmik

EY Global Public Policy Vice Chair

Action-oriented public policy strategist. Seeks to earn and maintain EY’s seat at the policy discussion table. Geopolitical and macroeconomic junkie. Will Ferrell fan. Buoyed by family and friends.

Contributors
5 minute read 22 Jun 2021

The accounting profession has the opportunity to apply its experience over the last century to the fight against climate change.

In brief

  • The skills of accounting professionals will help ensure that globally consistent climate metrics are achieved.
  • They will provide independent assurance over climate reporting and disclosures.
  • Through their roles on boards and in management, accounting and finance professionals will bring discipline to climate and sustainability reporting.

The world’s current yearly total greenhouse gas emissions is approximately 51 billion tons. Climate science tells us the largest carbon emitters must get to net-zero emissions by 2050 to avoid a climate catastrophe. Getting to net zero will require major commitments from government and businesses and will only be possible if the human activities that cause the emissions are accurately documented to fully reflect the environmental damage they do.

In their June communique, G7 Finance Ministers and Central Bank Governors called for mandatory climate-related financial disclosures based on the Task Force on Climate-related Financial Disclosures (TCFD) framework. In their letter, they emphasized “the need to green the global financial system so that financial decisions take climate considerations into account. This will help mobilise the trillions of dollars of private sector finance needed, and reinforce government policy to meet our net zero commitments.”

The accounting profession as we know it today emerged in the late 19th century to provide reporting and auditing services and to serve the public interest. As the profession has grown, it has brought trust, transparency and confidence to capital markets the world over. Today, the profession is faced with both a challenge and an opportunity: bringing together its century of experience in measurement, disclosure and assurance and partnering with governments, businesses and civil society to address the climate crisis. Here’s how it will happen:

1.  Helping achieve globally consistent metrics

Since the establishment of the International Accounting Standards Committee (which was subsequently replaced by the International Accounting Standards Board (IASB)) in 1973, progress toward achieving global accounting standards has been significant. Today, most global organizations report using US Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), the latter of which is in use by over 160 jurisdictions.

While US and IFRS accounting standards do not explicitly reference climate change, the Securities and Exchange Commission (SEC) and the IASB have provided guidance in recent years regarding disclosure requirements relating to climate change. In 2010, the SEC provided guidance (pdf) to public companies regarding existing disclosure requirements, as they apply to climate change matters — guidance that SEC leadership recently directed the agency to review. In November 2020, the IFRS Foundation published educational material to highlight how existing requirements in IFRS standards mandate that companies consider climate-related matters when their effect is material to the financial statements.

At the same time, dramatic progress has been made toward setting explicit standards for climate and broader sustainability reporting. This includes the SEC’s call for input on climate change disclosures, the European Commission’s proposed Corporate Sustainability Reporting Directive (CSRD) and the IFRS Foundation’s proposed creation of a sustainability standards board.

As the global standard-setting process for climate reporting and disclosure continues to evolve, many questions remain, including which information should be subject to voluntary vs. mandatory reporting, what information is considered material, and whether climate reporting should be integrated into the management report or remain in a separate sustainability report. The contributions of accounting professionals to this process will be vital to achieving globally consistent metrics and disclosures that are reliable, comparable and relevant.

2.  Providing assurance over climate reporting and disclosures

As more organizations expand the information they report and disclose to stakeholders about climate commitments and the impact, questions are expected to increase regarding the depth of disclosures being made, risk exposure and resilience, as well as concerns over so-called “greenwashing.” Companies may want — or be requested to provide — verification regarding their disclosures as a way of maintaining stakeholder confidence.

Independent assurance over climate reporting and disclosures can increase the credibility of reporting, business resiliency and trust in the financial markets. This process can ensure a robust audit trail related to climate and broader environmental, social and corporate governance (ESG) reporting including through the examination and testing of management reporting, models and disclosures (e.g., underlying assumptions, the sensitivity of models and the internal controls underpinning the information).

Companies should begin focusing on audit preparedness as a means of building stakeholder confidence and complying with expected regulatory obligations. The European Commission’s proposed CSRD will, for example, require many companies to seek limited assurance around their reported sustainability information from either their statutory auditor or an independent assurance services provider.

3.  Integrating the accounting and finance function

A company can only deliver value to all its stakeholders when it draws on the skills and input of the entire organization, under the shared vision of leadership. Accounting and finance can play a key role in this collective effort by engaging with, understanding and connecting the requirements of stakeholders — particularly investors — and translating those into relevant and material metrics and disclosures.

Reporting must be trusted, credible and relevant to stakeholders and make a clear link between financial and nonfinancial information. CFOs and financial controllers can instill discipline into nonfinancial reporting processes and controls, based on their experience and knowledge of leading practices to support sustainability and ESG reporting. The finance function can help to establish effective governance and obtain independent assurance over nonfinancial processes, controls and data outputs — vital to building trust and transparency with stakeholders.

As illustrated in our new report, The future of sustainability reporting standards, produced in collaboration with Oxford Analytica, the next 12-18 months are likely to result in the most significant innovations in corporate accounting and reporting in decades.

While jurisdictional and global standards are developed, we must remember that climate reporting and disclosures are not a panacea for our net zero future — but they are critical to the global challenge to reduce emissions and combat climate change.

Summary

The accounting profession has a crucial role to play in collaborating with governments, business and civil society to address the climate crisis.

About this article

By Ruchi Bhowmik

EY Global Public Policy Vice Chair

Action-oriented public policy strategist. Seeks to earn and maintain EY’s seat at the policy discussion table. Geopolitical and macroeconomic junkie. Will Ferrell fan. Buoyed by family and friends.

Contributors