Why environmental reporting isn’t just a COP26 fashion fad

Irina Cheburdanidze

Irina Cheburdanidze

Financial Reporting Advisory Services Director

Back in 2009, psychologist Albert Bandura warned: “Billions more consumers will overwhelm any benefits from green, clean technologies. We have only 40-50 years to clean up our act, to prevent the irreversible collapse of entire ecological systems”.

Whilst we can leave the debate about the exact expiry date of the planet’s ecology to the scientists, one thing is clear – there is no more time for eco-procrastination.

At COP26 in Glasgow in November last year, the Chancellor pledged to make Britain the world’s first net-zero financial centre. Note that his emphasis was on the economy rather than the whole country. This means that the Government is hoping that changing the way businesses operate will be the catalyst for changing our behaviours outside of work - i.e. a complete societal shift.

Going forward we can expect more stick and less carrot to weed out bad corporate behaviours and penalise those who don’t commit to the decarbonisation agenda. Glasgow could be a global game changer by directly coupling the availability of external finance to clearly articulated net-zero and ESG strategies. Fundamental to this new era of green accountability is the introduction of International Sustainable Accounting Standards and in time a standardised ESG reporting framework to allow comparability and consistency in climate reporting.

Another way to induce an eco-friendly economy is by making businesses report on their environmental activities. Since 1 April 2019, large entities have been required to disclose their energy use and carbon emissions as part of their financial reporting. Whilst these obligations include providing intensity ratios and information on any energy efficiency measures implemented, for now, Scope 3 emissions generated by sources connected to business (supply chain emissions) are excluded.

Additional regulations have been recently drafted by the Department for Business, Energy & Industrial Strategy (BEIS) and are expected to be implemented from 6 April 2022. These will require more than 1,300 UK public interest entities, AIM companies, high turnover companies and LLPs to make financial disclosures in relation to their climate-related risks.

Climate reporting does not only affect the ‘front-end’ of the accounts. In a 2020 Open Letter on Accounting Standards, major investor groups representing global assets worth over $103 trillion stated that, whilst most companies assumed business as usual in their financial statements, the focus of their investment will be on those businesses that are more likely to thrive in a carbon-constrained future.

Regulators have already pointed out that climate-related risks and strategies should be factored into the numerical side of the financial statements by reviewing assumptions for going concern, impairment testing, fair value accounting and provisions. The Capitals Coalition, a global collaboration aiming to harmonise approaches to managing all forms of capital, proposed the creation of asset and liability types to reflect debts to nature and efforts in enhancing natural capital. The recently created International Sustainability Standards Board is working on new environmental accounting standards which will be in play for the largest companies on the planet this year.

It is only a matter of time before these reporting requirements are going to be extended to smaller businesses. Business owners of all sizes need to consider how their existing operations are going to fit into the future net-zero economy, so they stay ahead of the competition and set themselves apart.

Ultimately running an environmentally friendly business is not just a fashion statement but is becoming a matter of absolute necessity. People, Planet and Profit will be co-existing on an equal footing.

If you have any queries or would like to discuss these issues further, please don't hesitate to get in touch with me or Mark Stewart, Head of our Energy, Infrastructure & Sustainability team.

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