Windmill in a landscape

It’s time for decisive action

  • Bill O'Mara, Leadership |

Last year was an eventful and volatile year on many levels. But one of the features that may ultimately mark 2019 out was a renewed awareness of the urgency of climate change and climate related risks. It is an issue that seems to have made a significant return to public consciousness, as ever more instances of unusual weather events have challenged us collectively to do more, faster to combat the growing threat.

One only needs to look at this year’s World Economic Forum (WEF) in Davos, to gauge how climate issues have reached the top of the agenda. In WEF’s summary of the four global issues that will feature prominently at the meeting, the very first one is “How to address the urgent climate and environmental challenges that are harming our global ecology and economy”. The minds of the world’s political and business leaders are on this subject right now.

The over-riding goal, of course, must be to tackle climate change itself through reducing carbon and other emissions and moving our societies and economies onto more sustainable footings.

But there is also a vital supporting role to be played in ensuring that businesses report on their carbon footprints and sustainability agendas in a consistent way, and that this information is reliably verified by independent parties. To slightly adapt an old adage, you can’t change what you don’t measure – accurate reporting is essential, to hold organizations responsible for improving their environmental impacts and to allow stakeholders and consumers to make informed decisions over who to do business with.

Another key facet of environmental reporting is for businesses to disclose their assessments of the risks that they face from climate change and the steps they are taking to mitigate them: this is a key consideration for investors, in particular long-term investors such as pension funds, as they make decisions over the allocation of capital.

But the fact is that, currently, corporate reporting requirements of climate and environment-related information are fragmented and inconsistent between countries. Of the G20 nations, only around three-quarters actually mandate some form of environmental reporting. Not all of those have any penalties for non-compliance with disclosure requirements. And only some of them require independent verification of disclosures, and fewer again have an accreditation scheme for verifying parties.

It is a piecemeal picture – amongst even the most developed and richest countries in the world. There is limited commonality between national reporting requirements, which are also usually focused on in-country information - whereas numerous businesses today operate across borders and have global supply chains on whom they rely for their operations.

At the same time, global accounting standards (IFRS) do not take explicit account of climate related information and risks, and nor does US GAAP.

I am very conscious that all of these gaps are a growing frustration for investors and other stakeholders who need comparable and robust environmental and climate risk data.

Of course, auditors such as KPMG member firms (and other specialist environmental consultancies) provide assurance over climate related reporting. Our Value of Audit research, conducted in 2018 amongst nearly 1,200 investors, non-executives and CFOs found that two-thirds of respondents would find auditor assurance over environmental and social performance valuable. But this assurance is on a national basis according to the rules and requirements in each country. With financial reporting, an investor can pick up a set of accounts under IFRS for a company based on one side of the world and easily compare the information with the accounts of another business based on the other side of the world - but this is simply not possible for climate related information.

There are many admirable initiatives that seek to fill the reporting gap – such as through the International Integrated Reporting Council, the Climate Disclosure Standards Board and the Sustainability Accounting Standards Board. The International Accounting Standards Board recently issued a briefing paper on climate related information, and the topic is being actively discussed by the IFRS Foundation to assess whether they could play a role in setting globally consistent standards.

With the pressure rising, I believe the time has come for decisive action. This could take the form of a significant group such as the G20 giving the mandate to one body to drive the push for globally consistent climate related disclosure requirements, calculation methodologies and verification standards.

My hope would be that we could have clear requirements and standards relatively quickly – at least in their general shape, by taking a pragmatic approach and building on what is already there, even if some of the fine details take longer to consult on and agree.

There is a consensus that we have limited time in the fight against climate change – we need quick action on reporting and assurance too.