What COP26 commitments mean for accounting and finance

The high-profile UN climate change conference wrapped up earlier this month with commitments and announcements to avert catastrophic effects of climate change that, if followed through, will have widespread implications for businesses and organisations.

Countries agreed to adopt the Glasgow Climate Pact, and key decisions include halting fossil-fuel subsidies, agreeing to “phase down” coal use, setting rules to regulate global carbon markets, and acknowledging that more needs to be done to help poorer countries adapt and mitigate the effects of climate change.

Along with the climate pact, countries also vowed to end deforestation, cut methane emissions, and develop green shipping routes, among other actions. There were notable announcements from businesses and investors. The Glasgow Financial Alliance for Net Zero (GFANZ) — a group of 450 financial institutions with $130 trillion of assets — pledged to provide financing to enable a transition to a net-zero global economy. Other groups of businesses committed to increase the demand and supply of green hydrogen and to decarbonise the built environment in their portfolio and operations.

“I think COP26 allows businesses to get an early insight on what is coming and where the regulation will be heading,” said Rishi Kalra, managing director and group CFO of Olam Food Ingredients, a Singapore-based business that supplies food ingredients such as cocoa and coffee to the world’s largest food companies. “There’s been enough wake-up calls; this is the largest of them all. Businesses will have to start focusing on what this means for them.”

Delivering on commitments

For finance professionals working in companies with climate commitments or that supply such companies, the next key step is to help draw out a strategy with comprehensive and detailed plans.

It’s one thing to promise and quite another to deliver on them, said Maura Hodge, CPA, an audit partner in the US who is the KPMG IMPACT audit leader.

“What’s absolutely critical is that then there is a clear operational plan behind all these commitments,” Hodge said. “It’s great to make a statement and say you’re going to do something, but you also need the actions to back it up.”

She added that partnerships and alliances between the public and private sector are crucial to meet such commitments. Companies may also have to work with other players within the industry or in adjacent industries to deliver on their net-zero targets.

“It’s great for an organisation to say, we’re going to move to 100% electric vehicle fleet. But if you don’t have the automotive industry producing those automobiles, that commitment can’t actually be met,” Hodge explained. “Regulators and government must step in to open those doors and unlock the ability to move forward.”

Companies should also understand the difference between a decarbonisation strategy and a transition strategy. Decarbonisation focuses on reducing greenhouse gas emissions, whereas a transition strategy focuses on shifting from a fossil-fuel-reliant business to a new model that operates within planetary boundaries. An example of a transition strategy would be fossil-fuel companies’ investment into renewable energy and low-carbon technologies.

Having a transition strategy is especially critical for companies in Asia where most goods are manufactured, said Sunita Rajakumar, an independent board director of multiple companies, and the founder of the Malaysia chapter of the World Economic Forum’s Climate Governance Initiative.

“As more consumers recognise this as an existential crisis, there is going to be demand for goods and services that meet the needs of society and allow us to live more sustainably,” Rajakumar said.

Even before a product is created, companies should ask if the product needs to exist. In creating a product, companies should also source sustainable materials and know where the product will end up at the end of its lifecycle, she added.

“Can it neatly go back into the environment? What is the amount of chemicals and aerosols produced so that it is aligning with planetary boundaries?” Rajakumar said. “It requires a wholesale rethinking of how we’re developing products and solutions.”

Watershed moment for sustainability reporting

Following a strategy, organisations will need to report on actions taken and how they are progressing in their commitments.

For the accounting and finance profession, the most significant development was the IFRS Foundation’s announcement of the creation of the International Sustainability Standards Board (ISSB) and the IFRS Foundation’s planned consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF), which houses the Integrated Reporting Framework and the Sustainability Accounting Standards Board standards, by June 2022. At the same time, two prototypes were released, offering an early look at the focus areas of the upcoming global standard for sustainability reporting.

“It was clearly a huge watershed moment for sustainability reporting standards,” Hodge said. “Everybody had anticipated the announcement of the ISSB, but having it announced with the consolidation of VRF and CDSB, as well as the release of the prototypes, was really exciting.”

The prototypes address a common complaint that there are too many sustainability reporting frameworks in the market. Hodge said that with the new sustainability board, sustainability reporting is inching towards a common language that can help organisations tell a consistent and connected story that drives management decisions.

“The good news is that ISSB is building upon reporting standards and frameworks that had been around for a while,” Hodge said. “The challenge is how do we take the best thinking from each [framework] … to create one cohesive story about enterprise value creation. I’m looking forward to the due process in the coming months that really hones in on where the value is going to be in this reporting standard.”

Kalra of Olam Food Ingredients said that CFOs should start thinking of getting data from the source and measure, manage, and report on relevant metrics. An important element in getting started is in training the finance team.

“I see a big risk that there aren’t enough finance professionals existing today who understand and know this [sustainability reporting],” he said. “It cannot be greenwashing where you have made a commitment, but you don’t know how you’ll make it happen. Goals have to be underpinned by actual systems, processes, and data. Lastly, it’s about giving and getting assurance on a sustainability report.”

Kalra added that companies that get sustainability reporting right will see better communication with investors, which can lead to a greater access to capital.

“If sustainability reporting continues to evolve, multicapital accounting might become the future,” he said.

Opportunity for accountants to take the lead

Companies’ recognition of the climate crisis is an opportunity for accountants to take the lead in supporting business decisions, said Rohit Selvaratnam, FCMA, CGMA, the CFO of Celsus, a public-private entity that is responsible for the commercial operations of the Royal Adelaide Hospital in Australia.

“This is an opportunity for accountants and CFOs to take the lead versus being led,” he said. “We as accountants and finance people need to recognise that individuals are placing greater emphasis on their responsibility toward the environment and the community.”

He added that while there’s a lot of emphasis on the environment, it’s also about the social and governance aspects in the environmental, social, and governance (ESG) framework.

“It is our responsibility to ensure that within our business and supply chains, we are doing the right thing, and at the board level to strive to and meet the commitments that the firm is making. It’s not just the environment; our responsibilities are wider than that,” he said.

— Alexis See Tho ([email protected]) is an FM magazine associate editor. Ken Tysiac, FM magazine’s editorial director, contributed to this report.