Accounting for climate change

“The Financial Services sector can play a critical role in the successful transition to the net-zero economy,” says Zsuzsanna Schiff, ICAEW’s Auditing and Reporting Manager. “Using its experience to assess, manage and mitigate climate change-related risks, it can also help establish what is the best transition pathway.

“Banks, insurers and asset managers can contribute to finding the best mitigation and adaptation options, as well as influencing the policy choices. Through well-considered investments, they can also assist in transforming carbon-intensive sectors and provide sustainable infrastructure while considering the social impacts.”

The Task Force on Climate-related Financial Disclosures (TCFD), which was established in 2015, recommends that organisations provide climate-related financial disclosures in their mainstream (ie, public) annual financial filings. Its recommendations are structured around four thematic areas that are core elements of how organisations operate – governance, strategy, risk management, and metrics and targets.

Premium-listed companies, banks, building societies, insurance firms and occupational pension schemes worth more than £5bn could be the first entities subject to TCFD-aligned, climate-related disclosures, according to the roadmap set out by the UK Joint Government-Regulator TCFD Taskforce. This sets out a transition plan over the next three to four years, with the scope for mandatory reporting widening each year.

Former Governor of the Bank of England and UN Special Envoy on Climate Action and Finance Mark Carney spoke about the importance of embracing TCFD-aligned disclosures at November’s Green Horizon Summit. More than 60 countries and national authorities support the TCFD, with New Zealand leading the way in enshrining it in law. “We have governments setting the goal of net zero. We have over $100tn of capital demanding action,” he said. “At a minimum, companies must disclose whether the assumptions in their accounts are aligned with Paris. In other words, are they joining us on the road to Glasgow [COP26] or not?”

Almost half of companies with a market capitalisation greater than $10bn are disclosing in line with the majority of TCFD recommendations, Carney said. “But most isn’t yet enough, we need full disclosure … particularly about forward-looking strategies. And this underscores the need to make climate-related disclosures mandatory.”

Investors representing more than $140tn of assets are also demanding information and disclosure in line with TCFD. They are also calling on companies to disclose whether or not the assumptions in their financial statements are compatible with the Paris Agreement.

“The announced rise in regulatory expectations in this area has been long anticipated this year,” says Francesca Sharp, ICAEW’s Technical Lead on Climate Change. “It’s clear that while the 2020 pandemic has delayed the UK’s ambitions on climate, it certainly hasn’t dampened them. We can expect further serious reporting commitments in the run-up to November 2021’s COP26, but reporting mustn’t be seen as the only tool in the box when it comes to tackling the climate emergency.”

The World Business Council for Sustainable Development (WBCSD) is a membership body with 200 large multinational corporations under its umbrella, including Apple and Unilever. It has worked with ICAEW’s Audit and Assurance Faculty to create guidance around good practice for the profession, explaining how assurance might be useful to users of non-financial information, to show how accountants are already central to many sustainability questions.

Mario Abela, Director, Redefining Value, at WBCSD, says: “We are organised around changing six systems: the circular economy, cities and mobility, climate and energy, food and nature, people, and redefining value. It is this sixth system that is relevant here, and this is where the guidance for accountants fits into WBCSD’s strategy.

“We are trying to make the financial system sensitised to sustainability issues,” says Abela. “The question is how do we shift capital away from unsustainable business to sustainable business, and how do we fund the transition?”

The new ICAEW Sustainability and Climate Change Community aims to provide inspiration and insight for professionals delivering on sustainability and acting on climate change. As a member, you will be able to develop deeper understanding, stay up to date and receive guidance in e-bulletins. You will also learn how to integrate sustainability and climate change into your role.

• Sustainability and Climate Change Community

Based on a 2019 ICAEW survey, there is a low awareness among SMEs of the importance of climate change, and limited knowledge of World Economic Forum (WEF) climate governance principles and TCFD’s recommendations on voluntary climate-related financial risk disclosures. Some 58% of those surveyed felt that there was not enough information available, while 59% said senior management commitment was a main driver.

Entering into a corporate partnership with an organisation can make a real impact, both practically and financially. As a side benefit, such collaborations can improve a company’s public image (though that should not be the only reason for doing it). Here are a few UK organisations that welcome business partnerships.

• B1G1 Business for Good
• Born Free Foundation
• WWF
• Marine Conservation Society

Every year, across just five UK cities, businesses are paying around £60m in unnecessary energy bills as a result of energy being wasted by office buildings. A report from think tank Green Alliance suggests better use of digital technologies, such as smart sensors and algorithms to track and modulate energy use in different parts of a building, as an obvious solution for businesses to save both money and carbon. For smaller businesses, taking simple steps such as changing to LED bulbs and making sure the heating/air conditioning is used efficiently are a small start to keeping energy consumption in the office down, as is switching to a renewable energy provider. Changing to LED lights is tax deductible under the Enhanced Capital Allowance scheme.

Every year, across just five UK cities, businesses are paying around £60m in unnecessary energy bills as a result of energy being wasted by office buildings. A report from think tank Green Alliance suggests better use of digital technologies, such as smart sensors and algorithms to track and modulate energy use in different parts of a building, as an obvious solution for businesses to save both money and carbon. For smaller businesses, taking simple steps such as changing to LED bulbs and making sure the heating/air conditioning is used efficiently are a small start to keeping energy consumption in the office down, as is switching to a renewable energy provider. Changing to LED lights is tax deductible under the Enhanced Capital Allowance scheme.

While global daily emissions fell in April 2020 by 17% relative to the previous year, by early June, as factories and offices reopened, emissions were back up to within 5% of 2019 levels, according to a UN report. The pandemic has clearly highlighted the impact of travel on emissions, so increased videoconferencing and working from home will certainly lower a business’s carbon footprint. But even where travel is necessary, businesses can reduce emissions by replacing ageing, higher-carbon vehicles with ultra low emission vehicles (and will find tax incentives to help), and positively encouraging staff to ditch the car and cycle, walk or use public transport where possible.

Yes, we’ve been doing it for years, but we can still do more. Office waste in the UK costs British businesses at least £15bn a year. While about 70% of that is recyclable, on average only 7.5% is actually recycled. Figures show that recycling just one tonne of paper can save almost 32,000 litres of water, 17 trees, 1,727 litres of oil, 2.2 cubic metres of landfill space, and 4,000 kilowatts of energy. If you want to help more, you can also plant trees for as little as £2.31 per tree with B1G1, a non-profit organisation dedicated to helping SMEs become sustainable.

The ICAEW Library & Information Service provides full text access to leading business, finance and management journals, as well as a selection of key business eBooks. Further reading on green business and accounting for climate change is available through the resources below.