‘Paris-aligned accounts’ is a phrase that is becoming increasingly common in the climate debate. However, there is confusion about what this means in practice. The term emerged from discussions about how the 2015 Paris Agreement impacts business strategies. This treaty on climate change is legally binding on the 196 nations that adopted it at ‘COP21’. It aims to limit global warming to well below 2°Celsius, preferably to 1.5° C, compared to pre-industrial levels. Achieving this objective will require nations to reduce their greenhouse gas emissions to ‘net zero’ levels by 2050.
While the treaty is not binding on individual organisations, governments are expected to pass local measures which will be binding. Many businesses are already taking proactive steps without government intervention – and investors want to understand whether these are aligned with the Paris Agreement.
To be aligned with the spirit of the Paris Agreement, organisations need to set a strategic goal of achieving net zero (or better) emissions by 2050. Those looking for Paris-aligned accounts expect organisations to reflect this strategic goal throughout their annual report and accounts – across both the ‘front half’ narrative and the ‘back half’ financial statements, and in a consistent manner.
A significant number of investors have called on boards to reflect in their financial reporting the financial effects from addressing both the physical impact of climate change and their future approach to net zero transition. For example, institutional investor members that are part of the Climate Action 100+ have been engaging with companies on aligning their strategy (and financial statements) with achieving net zero by 2050 (or sooner) and a no more than 1.5° C temperature pathway. Separately, the Institutional Investors Group on Climate Change (IIGCC) issued a report setting out its view on Paris-aligned accounts. This has stimulated a number of questions across the accounting profession, for example:
- What would Paris-aligned accounts look like?
- Would new standards or amendments to existing standards be required? How would these types of accounts fit in with the recommendations of the work of the Taskforce of the new International Sustainability Standards Board, as well as any green taxonomies under development?
- Would auditors be asked to express an opinion on whether the accounts are ‘Paris-aligned’, in the way that they attest that the accounts are ‘true and fair’?
- What additional audit or assurance work would this require, if any?
- What should businesses that do not have net zero or Paris-aligned strategies disclose to stakeholders?
While there are a variety of views on this and we can’t yet say with any certainty what ‘Paris-aligned accounts’ are, these are matters that ICAEW will be exploring further in the coming months, with its members, standard-setters, regulators and other stakeholders.
What is clear though is that for any accounts to be Paris-aligned, the business strategies and operations of the organisation would first need to be aligned with the Paris Agreement. These actions to align strategies with Paris goals can then begin to flow through into the narrative and numbers in the annual report and accounts. Greenwashing must be avoided above all. Good reporting is important, but words and numbers, after all, do not negate the need for action.
ICAEW members can start to lay a foundation for Paris-aligned accounts by playing their part in making business accountable under the principles of the Paris Agreement and assessing the financial impacts of climate-related risks in the context of current accounting and auditing requirements.
- Firstly, to be Paris-aligned means having a clear business strategy designed to ensure a steady transition to net zero emissions by 2050.
- Secondly, this strategy needs to be based on meaningful and measurable targets (including interim targets), following a robust framework, such as the Science Based Targets Net-Zero Standard.
- Thirdly, it means being transparent on the journey – from the stage the business is at, to the future assumptions and sensitivities that we consider, and how we share our progress with stakeholders.
- Fourth, we all need to recognise our critical role in this journey, members of boards and audit committees, regulators, investors, preparers and auditors alike. We can each begin to ensure that we consider the goals of the Paris Agreement in the work we do.
The time for action is now. Paris-aligned accountability means applying a climate focused lens now to everything we do as ICAEW Chartered Accountants. It means action for all, including those who have not adopted a net zero strategy – the pervasiveness of climate change will impact financial statements regardless of whether businesses change or not.
This hub page provides resources to get you started, as well as perspectives from stakeholders across the financial reporting ecosystem. We encourage you to get involved in the debate – please get in touch with your views.
A look at how accountants in business and practice can align corporate reporting to the Paris Agreement objectives.
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The expectations of financial services organisations and other corporates are changing fast. Profit cannot be the only measure of success – environmental, social and governance principles need to be observed and taken into consideration to satisfy a broad range of stakeholders.Find out more
Inspiration, information and practical resources to support the goals set out in the Paris Agreement and in the UN Sustainable Development Goals.Find out more