Climate Counting: Accounting, Finance, and Greenhouse Gas

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As the world grapples with the challenge of combating climate change, there is a vital role to be played by accountants and finance professionals. By standardizing the way that the world measures emissions, they will help facilitate greener policies and potentially lessen the future impacts of climate change. Meanwhile, by measuring and analyzing climate-related natural, regulatory, and social threats faced by corporations, they will help their clients or employers avoid fiscal calamity.  

Accountants and Finance Professionals to the Rescue

“Climate change has evolved from an issue that was considered ‘ethical’ or non-financial to one that is broadly recognised as having material financial risks and opportunities,” says Sarah Barker, partner and head of climate risk governance at Minter Ellison.1

EY Global Public Policy Vice Chair Ruchi Bhowmik notes the role that accounting has played in bringing trust, transparency, and confidence to capital markets for over a century, and considers the climate crisis to be a natural extension of the accountant’s role. 

“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,” she says.2

Accounting and ESG

According to the Harvard Business Review, about 90% of S&P 500 companies now issue ESG reports.3 These usually include an estimate of GHG emissions, but accounting for upstream and downstream emissions is notoriously difficult, leading to hot debate about methodology. Further clouding the picture is the wide spectrum of issues that fall under the term Environmental, Social, and Governance. 

To skeptics, ESG-reporting has become something of an artform in deflection, distraction, and selective presentation, leading to accusations of greenwashing and calls for more concrete standards. 

“ESG in its current form is more a buzzword than a solution,” say the authors of the HBR article. “Each of its three domains presents different measurement opportunities and challenges, a fact not adequately addressed by existing disclosure standards. As a consequence, few ESG reports engage meaningfully with the moral trade-offs within the three domains and with the company’s profits.”3

Efforts to Standardize GHG Accounting 

During COP26, the UN global summit to address climate change, the IFRS Foundation of Trustees announced the formation of “a new International Sustainability Standards Board (ISSB) to develop … a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs”.4

The initiative was a welcome development to Co-Chairs of the Value Reporting Foundation Board Richard Sexton and Robert K Steel.

“Today’s announcement is a reflection of the changed world we live in—a world in which sustainability and long-term thinking are increasingly at the heart of business and investor decision-making,” said the two in a statement. “The consolidation announced today will help deliver effective disclosures to drive global sustainability performance.”4

Accounting for Risk and Exposure

“Accountants need to reconsider historical assumptions around the material drivers of value and whether or not, in this contemporary risk environment, climate-related issues have a material impact on financial performance, financial position and financial prospects,” says Barker.1

Moody’s Analytics considers climate change when analysing ‘alternative dimensions of risk’ for clients in the commercial real estate industry. Victor Calanog, the company’s head of commercial real estate economics, notes that climate change can have an impact on debt-service-coverage ratios, loan-to-value ratios, and probability of default, among other metrics. Canalog believes that a market-wide approach to risk analysis is too blunt, noting that various regions, or even neighborhoods, have differing risk levels. 

“For example, we could find that flooding risk in Florida will knock a company’s net operating incomes down by X percent, far more than a similar loan in another state,” explains Canalog, citing the need for practical, concrete information.5

Not only do different jurisdictions have different physical risks associated with climate change, but they also exist in different regulatory and social environments, further adding to the need for sharp analysis.

Accountants and Financial Talent in Demand

Talented accountants and financial analysts find themselves in high demand in the current employee’s labour market. Many industries face changing paradigms, owing in no small part to the pandemic. As they reassess long term strategy, they are relying upon the sage advice of insightful accountants and finance professionals to help chart a path forward. Factors such as inflation and rapidly evolving technology further add to the need for strong, savvy, adaptable recruits. 

Climate-change is just one area in which executives are looking to analyse and mitigate risk, but it’s certainly among the most important. 

“Sustainability, and particularly climate change, is the defining issue of our time,” says IFRS Foundation Trustees Chair Erkki Liikanen. “To properly assess related opportunities and risks, investors require high-quality, transparent and globally comparable sustainability disclosures that are compatible with the financial statements.”4

Cited Sources
1 “2022 Trends for Finance and Accounting.” INTHEBLACK, January 16, 2022. 
2 Lawless, Kyle P., and Ruchi Bhowmik. “Three Ways Accountants Will Lead on Climate Action.” EY. EY, June 22, 2021.
3 “Accounting for Climate Change.” Harvard Business Review, January 31, 2022. 
4 “Home.” IFRS. Accessed February 4, 2022. 
5 CRE, Moody’s Analytics. “How Evaluating Risk Can Prepare You for the Worst of Climate Change.” Commercial Observer. Commercial Observer, February 3, 2022.