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September 2, 2013

Editor’s letter: Climate challenge for the profession

Many governments around the globe have acknowledged the need to shift towards a low carbon economy. The international consensus is to keep the current global warming at no more than 2°C over the next 50 years in order to avoid the effects of climate change. If decarbonisation targets are ever to be achieved, carbon emissions should be halved by 2050. According to the majority of scientists that’s the tipping-point in which the earth’s climate, if no action is taken, would change with catastrophic consequences.

Since the start of the financial crisis, the debate on climate change seems to have run out of steam. However, policy makers in various jurisdictions have continued efforts to reduce their carbon emissions outputs. Since 2004 Canada has put in place a compulsory emissions reporting program. Similarly, Australian companies have disclosed their carbon footprint since the enforcement of the 2007 National Greenhouse and Energy Reporting Act. And the European Union (EU) has continued efforts to decarbonise the economies of member states and is aiming at reduction targets of 80% by 2050.

On top of that, carbon reporting duties overlap with emissions trade schemes for energy intensive sectors in different countries, such as the EU or the US. Emissions trading or the so called cap-and-trade schemes, represent another way to decarbonise economies. Typically, in an emission trade scheme the government caps the amount of emissions a company can emit. This way, emissions become carbon credits of a real market where companies who exceed its limit have to buy more allowances from other companies subject to the scheme.

This summer the UK government amended the Companies Act 2006 (see page 8-9), which will see quoted companies disclose, alongside financial statements, the quantity of emissions for which they are responsible. As a result, carbon emissions have been mainstreamed into their annual financial reports.

Climate change has traditionally been deeded more of an environmental cause than a material financial issue. However it’s now clear that climate change is also a business risk and therefore it should be explained to investors in annual reports.

The opportunities arising from this are limitless for the profession. This is not smoke and mirrors: emissions have to be quantified, reported, explained, and assurance will have to be provided in the future. In order to do so the skills of the accountancy profession should be brought to the centre of these developments.

If accounting is the language of business and audit an indicator of business health, then carbon emissions need to be translated into this language. Accountants should take the lead in carbon reporting despite the challenges that might stand in the way. It could be a great opportunity for the profession to demonstrate that it can be forward looking and help businesses better face the future.<

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