The business case for addressing climate change is increasingly clear to companies. But it may be harder for them to assess the scale and urgency of the task that faces us all. A recent article in The Economist neatly captures the challenge – and what a challenge!
‘Reversing the 20-fold increase in emissions the 20th century set in train, and doing so at twice the speed. Replacing everything that burns gas or coal or oil to heat a home or drive a generator or turn a wheel. Rebuilding all the steelworks; refashioning the cement works; recycling or replacing the plastics; transforming farms on all continents. And doing it all while expanding the economy enough to meet the needs and desires of a population which may well be half again as large by 2100 as it is today.’ (21 September 2019)
There are good examples of corporate leadership. For example, I was really pleased to announce four examples of climate leadership at the recent Finance for the Future awards: Ecology Building Society, SSE plc, Stora Enso and Imperial College Business School.
The awards recognise that leadership may take a number of forms. It can be seen in new or purpose-led enterprise providing innovative solutions. But it can also be seen in large, carbon-intensive companies making clear commitments and putting in place plans and targets to support the transition to low-carbon business. Together, these examples are accelerating the response by sectors to climate change and providing solutions to enable the transition. And these companies show that thinking on climate change should be embedded within the strategy and business model of the organisation and not seen as a separate silo.
Corporate leadership is not enough on its own, of course. We also need to direct capital to sustainable enterprise. Many investors are showing leadership, especially through groups committed to ensure action on climate change is taken by companies that they invest in. For example, the Climate Action 100+ group of investors has written in its 2019 Progress Report: ‘Climate change requires that companies we engage with undertake demanding shifts in strategy, capital allocation and technological deployment.’
As a result, transparent and clear climate and broader ESG information is critical. This is the way that investors understand how resilient business models might be in light of the complex and interconnected risks that companies face. It is also essential for companies to develop high-quality measurement in order to manage their businesses effectively.
The accounting profession is in a unique and critically important position to support this goal - not only as trusted advisors to the boards of companies, but also as auditors that challenge the information that companies report.
But it is also becoming clear that we need to develop a more connected system for standard-setting that includes climate change and ESG. For example, a group of investor bodies have written that, ‘it is incumbent on the standard-setting organizations to present a coherent vision of how these standards can and should fit together1. And standard-setters themselves have heard this call. Feedback received as part of the Corporate Reporting Dialogue’s alignment project suggests stakeholders believe that, ‘what is really needed is one strong, internationally-recognised and used set of standards for environmental, social and governance (ESG) reporting’. The case for action to develop a global solution for standard-setting in this area is now approaching a tipping point.
We need political and regulatory leadership to promote transparency and action. A good example of leadership is the European Green Deal that aims to make Europe the first climate-neutral continent by 2050. In the UK, we can point to the UK government’s Green Finance Strategy, and its expectation that companies will be reporting using the TCFD recommendations by 2022. Regulators such as the FRC have welcomed the strategy and made clear their own expectations of companies and auditors. And the FCA has said it will consult on further climate-related disclosures by certain firms.
Leadership on multiple fronts can help to address the urgent challenge we face. Leadership by business, policy makers and regulators, and action to ensure consistent information is available to direct capital to sustainable enterprise, will be important drivers of the global transition to a low-carbon economy.
See our learning programme produced in collaboration with the ICAEW here.