The COP26 Summit, arguably the most important climate conference to date, is set to run between 31 Oct- 12 Nov. A lot has changed since the Paris Agreement which was adopted by 196 countries in 2015, and the world will be watching how political leaders from across the globe plan to tackle the climate crisis, as we continue to overcome the Covid-19 pandemic.
Across the accountancy profession, momentum has increased over the past few years in providing organisations with ways to report on sustainability related issues. Currently, there are numerous standard setters and organisations which aim to make it easier for business to report on sustainability and for investors to better assess climate risk. The need to assess climate risk is only increasing for investors; it is not only the risk to the climate itself that is at stake, but the brand reputation of the business of the companies they will potentially invest in.
There are many such organisations, Global Reporting initiative (GRI), Climate Disclosure Standards Board (CDSB) the recently formed Value Reporting Foundation, which was created through a merger between Sustainability Accounting Standards Board (SASB) and International Integrated Reporting Council (IIRC), which provide standards and guidance for non-financial and sustainability reporting.
However, there is not one set of standards which are universally adopted. That is not to say that these organisations are not without their merits, but the profession and investors alike will be keen to see how the International Financial Reporting Standards (IFRS) Foundation’s, which currently sets globally-accepted accounting standards, proposed International Sustainability Standards Board (ISSB) will develop.
The IFRS has been consulting with a range of stakeholders over the past year to best decide on the benefits that ISSB could provide and the best way to deliver them. While the relationship between the accountancy profession and sustainability targets and measures have been something we have been writing about for a number years in The Accountant and International Accounting Bulletin, over the past few months, the focus has been on the development of the ISSB, in the runup to COP26.
Individually, we can all work on limiting our negative impact on the climate, but for serious progress to be made, it will come down to businesses taking the lead. If corporates and the public sector have a set of comparable standards to work to, they can be held accountable by investors and the public alike.
While the situation is dire, it is important that a holistic set of sustainability standards need to be robust from the outset of any sustainability programme’s launch.
Support for the ISSB
In August 2021, while communicating its support for the ISSB, the Association of Chartered Certified Accountants (ACCA) expressed the need for greater clarity over the scope of the standards the IFRS Foundation will introduce. ACCA corporate reporting and tax manager Yen-pei Chen said, “In ACCA’s view, there’s a need for a global baseline of standards on a wide range of topics, extending beyond financial performance and position, but equally beyond environmental or social impact. They include intangibles not recognised on the balance sheet, such as innovative processes, know-how and corporate culture as represented by the six interconnected capitals in the International Integrated Reporting Framework.”
CPA Canada, which is backing its country’s bid to host the headquarters of the ISSB, also supported this view; that the ISSB needs to provide a single set of comparable standards. Director of External Reporting & Capital Rosemary McGuire said, “Companies we have spoken with have expressed concern with the fragmented sustainability reporting environment, lack of a single set of global standards and varying requests for ESG information from various parties. International sustainability reporting standards will enable organisations to deliver consistent, comparable and reliable ESG information in a more helpful, effective and efficient way.
“What differentiates the proposed ISSB from other initiatives is the widespread global support it has received at this early stage, most notably from securities regulators and governments, many of which are looking at the need for ESG disclosure rules.
“It is particularly important that the International Organisation of Securities Commissions has formed a technical expert group to collaborate with the IFRS Foundation on preparatory work for the ISSB. This is a major and helpful signal, as regulation and enforcement are key aspects of consistent global sustainability reporting.”
Other than the governing bodies, there is certainly demand from the audit market as well.
BDO International EMEA CEO Trond-Morten Lindberg said, “Global consistency, robustness and comparability of most sustainability data and information, including GHG emissions, is still a major issue which investors, regulators and reporters themselves are pointing out. As suggested by the formation of the International Sustainability Standards Board (ISSB), this issue needs to be addressed using uniform metrics and reporting baselines that set a globally consistent starting point on which more advanced jurisdictions can add additional reporting requirements as they consider to be appropriate (often referred to as a ‘building blocks’ approach). The risk otherwise is that sustainability reporting will be jurisdictionally fragmented and continue to be seen by many users as an additional compliance requirement, rather than being central to evaluating company performance and future prospects, including financial risks of climate change.”
The ISSB will hopefully establish a set of standards that will have a meaningful impact. However, its success will ultimately depend on whether or not businesses adopt the standards.
While many businesses are heavily advertising their commitments to sustainability, research from a recent report by the Chartered Institute of Internal Auditors (Chartered IIA), worryingly suggests the opposite.
Chartered IIA’s Risk in Focus 2022 report found that 9 in 10 organisations are not spending major time and effort preparing for the ‘existential risk’ of climate change.
The report, which surveys over 700 chief audit executives (CAEs) across a range of organisations across Europe, also found that 69% of CAEs do not even consider climate change to be a ‘top five’ risk to business.
While this means that that there is a low number of CAEs who view climate change as a top five risk, this was an increase of 41% compared to the Risk in Focus 2021 report.
Mike Ashley, chair of the audit committee at Barclays said, Climate change is extremely high on the Government’s agenda, particularly with COP26 coming up, and business has a critical part to play. At a minimum, companies should record and publish their activities related to climate risk and sustainability, using internationally recognised standards such as the Task Force on Climate-Related Financial Disclosures (TCFD), and internal auditors have an important role to play in providing assurance on these performance metrics and that they are embedded in how the business actually operates.
“Fundamentally, we need to ensure that high level sustainability announcements by businesses are actually lived up to, so I think there is work that internal audit can do in that space to ensure that we do walk the talk.”
In light of the report’s findings, Chartered IIA recommended that organisations consider climate change a ‘forever risk’. It suggested that companies should:
- Ensure climate change and sustainability is central to the organisation’s values, mission and strategic goals,
- Establish sustainability goals which align with the UN’s 17 Sustainable Development Goals,
- Invest in projects that will future proof products and services,
- Plan for any climate-related physical and political risks which may jeopardise an organisation’s future,
- Reduce organisational greenhouse emissions and moving away from harmful or unsustainable manufacturing processes or materials.
The risk that climate change poses to businesses is not just limited to the effects of climate change itself; reputational risk also comes into play. We have seen it before and are sure to see it again. Public attention and engagement on how businesses operate in a sustainable way is only growing.
PrimeGlobal CEO Stephen Heathcote says, “The public awareness of the existential threat of climate change has sharpened dramatically over the pandemic. Customers are increasingly expecting organisations to act in a sustainable manner and will make their buying decisions based on their assessment of how green an organisation is. As more and more companies, investors, and governments focus on the global goal of net zero carbon emissions, economic transformation is accelerating.”
He continued, “Clearly it is critical for society to act. For our firms its an opportunity to do the right thing, and it’s a significant business opportunity. Our firms are developing to help their clients implement processes which are sustainable, prepare sustainability reports and provide assurance over processes and controls.
“Polls consistently show employees expect their employers to commit to better environmental policies and sustainability, with three quarters of workers wanting their workplace to improve its sustainability policies. To retain and attract staff, firms will need to demonstrate that they are committed to improving their environmental impact.”
The evolution of the trusted advisor
Accountants in practice are already the trusted advisor to many businesses. By guiding companies to be more sustainable, their reporting will become more holistic and will highlight new kinds of risk that may have been overlooked.
The IFRS Foundation is in an excellent position to develop a set of comparable sustainable standards because they already set globally accepted financial standards. They have worked with a wide range of stakeholders while consulting on the ISSB and drawn upon their expertise.
While the task of combatting climate change is complex to say the least, the development of the ISSB will be a step in the right direction to push business onto a sustainable path and allow them to be held accountable for their action or inaction, by investors and the public alike.