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Climate change

Climate change

Climate change

Climate change mitigation is now one of the key global risk issues identified by organisations such as the UN, the World Economic Forum and the EU, and its importance was embodied in the 2015 Paris Agreement and the UN Sustainable Development Goals.

Following these and other initiatives, the reality is that national governments have no choice but to take much more concrete and decisive action to deal with the imminent threat of climate change and the impact it will have on our economies and, not least, the global financial system. This in turn will have an impact for corporations large and small.

There are many different ways of tackling climate change, including the accelerated adoption of low carbon technologies, such as renewables. Other ways include greater take-up of energy efficiency solutions and also, the adoption of a more realistic carbon tax regime.

In this writer’s view, the global response to climate change is going to have far-reaching implications for the accounting profession and the way we do our work and interact with clients. The key point to understand is that clients will be forced to take actions arising from the response of national and multinational government agencies and investors to this agenda. I have illustrated this with a number of examples below.

Energy transition

Much of the focus on climate change centres on the need to move from fossil fuel sources of energy to low carbon sources, hence the continued growth and deployment of renewable energy to help achieve this. However, this transition to low carbon energy sources is having a dramatic impact on corporations in a number of ways:

  • Companies that are part of the supply change for traditional fuel sources, such as oil and gas companies, are now rethinking their long-term energy strategy and are fully aware that dramatic changes to their traditional business model are necessary;
  • Financial institutions are rethinking their whole strategy around what type of business should receive financing in the future. Some of the major international banks such as BNP Paribas and HSBC consider the long-term sustainability of a business to be one of the critical judgement factors in determining whether to provide finance or not; and
  • Corporates all over the world (best example is the RE100 organisation) are now working out how to transition to 100% renewables for their own energy needs.

From the perspective of an accounting firm, this is going to have a profound impact on all our clients and we need to think very seriously about how to help them through this transition, as some of the changes will be transformative. In addition to all the core services we now offer to clients, assistance with the transition to a low-carbon economy is becoming a much more sought-after service. This transition is going to impact all corporations and not just the large global companies.

TCFD initiative

While the global response to climate change potentially yields many new opportunities, accounting firms also needs to be aware of the flip side – risk. We will no longer be able to ignore climate change risk when conducting audits, valuations or other similar exercises with clients. This is now becoming a reality due to the Task Force on Climate – Related Financial Disclosures (TCFD) initiative launched by Financial Stability Board Chairman and Bank of England Governor, Mark Carney.

Under this initiative, corporations have been asked to identify and quantify the financial impact of climate-related risks in their organisation and to outline the potential threats and opportunities to their own stakeholders through appropriate financial disclosure. At present, this is mostly a voluntary requirement but in time, these regulations will become obligatory. A number of countries, including France, have already moved to make this type of disclosure mandatory and it is this writer’s strong view that this will ultimately become commonplace.

Investor pressure

The growing emphasis around responsible investment is driven by the recognition that environmental, social and governance factors play a key role in determining risk and return while also supporting the investor’s fiduciary duty to their clients. Corporations without a clear vision or roadmap to a sustainable future will no longer be regarded as winners in the long-run. Accounting firms are increasingly being called upon to provide the necessary services to the investment community to help determine long-term sustainability of potential investment targets.

Conclusion

In this article, I have touched on just some of the implications of the global reaction to climate change for accounting firms. It should be clear that there is much more to follow and accounting firms can no longer afford to ignore the climate change agenda, as it will have dramatic consequences for many of our clients over the next 10 to 20 years.

This article originally appeared in the August 2018 edition of Accountancy Ireland and is reproduced here with their kind permission.

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