Rio summit is a game changer for accountants’ role in businesses

FOR some time now, the accountancy profession has been actively engaged in the debates on sustainable development and climate change, at least in respect of those areas that impact on accounting and business.

Despite best efforts, two commonly asked questions about environmental and sustainability issues continue to be asked. The first, asked by accountants, is: “what’s this got to do with me?” And the second, asked by non-accountants, is: “What have accountants got to do with environmental and sustainability issues?”

We are rapidly approaching a time when neither question should have to be asked again, because accountants are increasingly occupying – and being seen to occupy – a central role in both the climate change and the sustainable development debates. This developing role is likely to be recognised in this month’s United Nations Conference on Sustainable Development, widely referred to as Rio+20.

The COP 17 conference in Durban in late 2011 – which brought together governments of the UN Framework Convention on Climate Change – took its negotiations to a new place. Paul Toyne, head of sustainability at design consultancy WSP Group, outlined in the media the implications of the agreement struck by the conference for the business community: “What is significant about Durban is that all UN countries will need to [set reduction targets] by 2020, including the new big emitters such as China and India. This sets the whole world on a course for a low-carbon economy for the first time.

“The implications are profound for business, as companies that can sell services and goods that help realise this roadmap process will prosper. This should also stimulate investment in low-carbon technology and encourage the carbon offset markets, as negotiators at Durban acquiesced to new market mechanisms to put a price on carbon.”

At the business level, accountants – particularly finance directors, chief financial officers (CFO) and auditors – will need to be fully conversant with the implications of the Durban decisions. Between 2012 and 2020:

Tighter limits on greenhouse gas emissions will be set globally, and by 2020 may be legally enforceable.

Carbon emission trading schemes will expand and mature, as will their importance on balance sheets – the International Accounting Standards Board (IASB) has been developing a standard for some years.

Sophisticated carbon offset schemes and carbon-related financial instruments, including derivatives, will become common.

Investors will demand more and more disclosure detail on emissions and related risks, and governance systems will have to be augmented/expanded to deal with these new requirements.

Corporate risk management programmes and processes will need to respond, and corporate strategies will have to embrace the challenges of the low-carbon economy.

Emissions disclosure regimes will begin to bite at the annual reporting level, and carbon-intensive organisations will have to develop more focused investor relationship programmes, as well as convincing adaptation strategies.

Upstream and downstream reporting of greenhouse gas emissions (Scope 3 disclosures under the Greenhouse Gas Protocol) may be included within the new reporting regimes.

Third-party assurance for greenhouse gas emissions will become mandatory. The International Auditing and Assurance Standards Board (IAASB) is finalising guidance on the assurance of emissions trading schemes for issue later this year.

Internal management processes, such as capital investment appraisal decisions, will have to formally embrace emissions issues as well as other significant sustainability-related impacts.

At Rio+20, one agenda issue that has already been widely reported is a proposal that sustainability issues should be integrated into the annual reporting cycle. Clause 41 of the so-called zero draft for Rio+20 reads: “We call for a global policy framework requiring all listed and large private companies to consider sustainability issues and to integrate sustainability information within the reporting cycle.”

This recommendation appears to speak to the recent establishment of the International Integrated Reporting Council (IIRC) and the increasing demand for a reporting regime which embraces traditional financial reporting – as governed by the International Accounting Standards Board and sustainability reporting, largely determined by the Global Reporting Initiative (GRI).

According to the IIRC’s discussion paper Towards Integrated Reporting: Communicating Value in the 21st Century, integrated reporting sets out “to demonstrate the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, integrated reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing.”

Were clause 41 ever to become legally enforceable or incorporated into a standard, the corporate reporting environment would change significantly.

With Rio+20 and then COP 18 in Qatar later in the year, public policy developments in 2012 seem likely to make the future direction of travel more certain. Already 95 per cent of Global 250 companies report on sustainability issues, up from 45 per cent in 2002.

With a well-advertised political will, stemming from the antipathy towards short-termism engendered by the global financial crisis, to elongate the investment time horizon, the future for accountants, their employers and the profession in general seems likely to have sustainability issues at its heart.

CFOs and financial directors will have to assess the financial impacts and risks associated with the required changes. They must communicate their findings to their companies’ audit committees. They must reflect them – and the action the organisation is taking to mitigate them – in their public disclosures to investors.

And above all they must play a part in the creation of value by being core members of the teams that design long-term low-carbon business strategies and business models.

After all, the financing of all that is the crux of the CFO’s and financial director’s role.

John Davies is head of technical at ACCA.