I spoke at the Local Authority Pension Fund Forum conference yesterday on sustainable cost accounting :
These were my slides:
Sustainable cost accounting
Richard Murphy
Professor of Practice in International Political Economy, City University, London
Director, Corporate Accountability Network
________
Climate change is a fact
- The Intergovernmental Panel on Climate Change says so
- The UK Committee on Climate Change agrees urgent action is required
- The UK has declared a climate crisis
- The requirement is to bet net carbon neutral by 2050 at the very latest
- And so far accountancy has not noticed
How we know accountancy has not noticed
- 46% of UK boards will spend zero hours discussing climate change this year
- 32% feel little or no responsibility for climate issues
- 29 investor groups — led by Sarasin — have not yet got an adequate response to their demand for better climate change reporting and have had to go public on the issue
- Not a single proposal for disclosure puts climate change onto the balance sheet — and so within the scope of mandatory reporting and audit
- Sustainable cost accounting is designed to tackle this last issue by making financial reporting for climate change mandatory
The climate crisis and business
- Two current responses are worth looking at:
- The Task Force on Climate-related Financial Disclosures
- https://www.fsb-tcfd.org/
- EU taxonomy for sustainable activities
- https://ec.europa.eu/info/publications/sustainable-finance-teg-taxonomy_en
The TCFD
- Completely voluntary
- Promoted by the Bank for International Settlements under the direction of Mark Carney, from its Financial Stability Board
- Aimed at investors alone
- Reports outside the accounting framework
- 80% of multinationals claim to be complying according to Mark Carney in 2019
- But for key data indicators disclosure is done by less than 10% of companies
- Carney says they have two years to comply or mandatory action is required
The European Taxonomy
- Driven by the EU
- Intended solely to meet the needs of investors
- Provides a framework for appraising whether a company is likely to become net carbon neutral - and is welcome for that
- And then provides a labeling mechanism for whether financial products are green or not
- But all suggested financial disclosure - and it is only turnover by type of climate emitting activity - is expressly stated to be voluntary
Conclusion
- No one is really doing accounting for climate within the general ledger framework of accounting that leads to inclusion of that recognition in an entity's financial statements
- The Institute of Chartered Accountants in England and Wales has confirmed to me that they agree with that conclusion
Possibilities within IFRS
- The Financial Reporting Council suggests that climate change is within the IASB framework because two standards indicate possible routes to action:
- IAS 36
- Impairment of assets
- IAS 1
- Presentation of financial statements
- Specifically with regards to going concern
IAS 36
- IAS 36 says that impairment of the value of an asset may be required when:
- significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.
- I suggest that the climate crisis creates the significant change with an adverse effect that requires impairment
IAS 1
- IAS 1 says that:
- When preparing financial statements, management shall make an assessment of an entity's ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.
- Is a company that cannot adapt to the climate crisis and the requirement implicit within it that its activities be net carbon neutral really able to trade as a going concern, and for how long?
The need for a better response
- IAS 1 and IAS 36 might be a useful basis from which to work but they are not climate related
- The need is for a specific response
- And given that the climate crisis is the biggest issue facing humankind at present an accounting response that is restricted to the interests of investors alone is wholly inappropriate
- Business has to be accountable to all its stakeholders on this issue
Stakeholder reporting
- This thinking is based on that of ‘The Corporate Report' issued by the UK based Accounting Standards Steering Committee in 1975
- The logic is that business should be accountable to all stakeholders i.e. their
- Suppliers of capital to entities
- Trading partners
- Current, past and potential employees
- Regulators
- Tax authorities
- and those:
- Civil societies that grant them limited liability and a licence to operate
The basis of sustainable cost accounting
- That the cost of transition to a sustainable, net-zero carbon, business model must be provided upfront by all reporting entities
- Upfront provision incentives early action to address the issue
- This cost must be reflected in the accounts
- The obligation to stakeholders requires this to be on a country-by-country reporting basis
- The disclosure must be mandatory
- The data must be audited - which no other framework requires as yet
Sustainable cost accounting - 1
- The reporting entity will prepare a plan to be net zero carbon by a date - we suggest by 2030
- The entity must cost the plan
- That provision is audited
- The cost is then reflected on the balance sheet
- Each year the provision is reappraised
- Costs incurred to achieve the goal are charged against the provision
- Changes in estimate are recorded as gains / income or costs / losses
- The entities progress towards its goal can then be appraised
Sustainable cost accounting -2
- The provision is for the entity itself and its supply chain
- The provision is in two parts:
- The entity's own costs
- The cost the entity imposes through its supply chain —upward and downward - that it could change by altering its business model
- Offsetting is not allowed unless state-sanctioned — i.e. a licence to permit offsetting has to be granted
- A precautionary principle applies — only proven technology can be used
Sustainable cost accounting - 3
- The provision for costs might exceed the net assets of the entity
- If it does then the entity has to say how it will make good the deficiency:
- Dividend cuts
- New capital
- If auditors cannot be satisfied of the plan to raise new capital or the company itself thinks it cannot make the transition then the company becomes ‘carbon insolvent'
- Unless given a licence to continue without being net zero carbon its affairs will have to be wound up before the net zero carbon deadline
What SCA does
- Shows who can, and cannot, use the capital available to transition to net zero carbon
- Shows which entities are at risk
- Properly indicates an entity's ability to pay returns in the current environment
- Puts all parties on notice of risk
- Says where that risk arises because of country-by-country reporting
- Lets the impact on tax revenues be planned
One provision: one massive change for accounting
- SCA will fundamentally change the perception of value of most companies
- And will challenge the wellbeing of those who live on what will be shown to be unsustainable income streams
- It would change almost all investment criteria
- And in the process might radically redirect capital
- Whilst changing the profile of employment in many industries
- But if accounting is to do its real job — and report on what is, and is not, viable business activity in the interests of all stakeholders - then that is exactly what needs to happen
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When I joined the LAP and signed a CONTRACT, it was on the basis of a final salary pension. Now it is scheme based on an average salary. My local authority (where I work now) under a Labour Council decided to take the Tory employer pension contribution breaks it offered a while back because Tory LA budget cuts meant that they had to make savings. The pension fund I belong still has a huge hole in it as result.
The WASPI women who lost their pension – well, I support them unreservedly.
But the way the whole LAPS has been kicked around and reduced over the years is an absolute disgrace in my opinion based on shitty thinking (that we cannot afford it). I remember in your book ‘The Courageous State’ about private pensions received a tax break or support of billions of pounds in 2007, with yet more in 2008 (I have yet to find out what subsequent support they have had). My scheme no longer accepts voluntary contributions and prefers to give you a lump sum to invest – wait for it – in the f***ing market – not the Government.
My view is this: Give me and my colleagues my f***ing pension back as it was. Not only that, back date my pay and restore the unnecessary and punitive cuts you made to my pay from 2010.
As far as I am concerned those are my terms to any political party coming into Government in this godforsaken land. Reverse the wrongs that push people into faulty markets that we can’t be bothered to regulate properly and which is akin to asking a hemophiliac to take a walk in pool full of piranhas.
I hope that expanding pensions into a push for green and using resource accounting to support it enable justice and fairness to be brought back into the LAPF. It is sorely needed as the way in which the fund has been treated is all about dogma and not fact.
Thank you.
Many would agree with you
The company i worked for changed their pension provision for a final salary to a defined benefit due to the expense. Was i happy? of course not, did i understand and accept well i had to. Just move on. By the way, have you seen annuity rates??.. i would be more than happy to accept an average final salary scheme!!
I think you mean they changed to a defined contributions scheme.
You don’t have to be the brains of Britain to work out what is going on in the LAPS.
I’m sorry if your position makes mine look advantageous – maybe you should have chosen to work in the public sector which – before 2008 and all that – paid well under what the private market rates were for a wide range of positions and trades. As I have said before, come June 2020, I would have worked close to the equivalent of 1 years take home pay for free because of austerity – this will also reduce my average salary pension – won’t it?!
Besides, comparing private with public is not my aim here; my aim is (1) to track and comment on forced changes that were made to our contractual arrangements which were not fair and (2) highlight the continuous bollocks about state pensions, state health care and social care being unaffordable.
If they are unaffordable, then so was the QE poured into the private banking sector since 2008 (£300 + billion), the support given to private pensions, the bung to the DUP……………I could go on but I think that I’ve made my point.
@Pilgrim
Your pension is perfectly safe…..at anchor with other billionaire yachts in a nice sunny marina. 🙁
Career Averaging versus Final salary is an interesting debate.
Many, particularly women, with broken service and few promotions benefit from a CARE pension.
On the other hand, if you are in a senior position and get a number of promotions in the last 10 years of your career, which appears to be the career path for senior local government officers, then your pension is being subsidised by those same women.
Unfortunately the move to CARE schemes was used as cover for cost cutting, so we blame the problems on career averaging not cost cutting.
neilL says:
“Career Averaging versus Final salary is an interesting debate.
[….] if you are in a senior position and get a number of promotions in the last 10 years of your career, which appears to be the career path for senior local government officers, ….”
Doubtless there will be the usual crop of Local Government CEOs departing with their pensions enhanced by the bonus of having been remunerated as returning officer ….(?)
It’s not easy to get right, but the system is easy to screw. Especially from a position of some clout.
Make no mistake – I blame the cost cutting based on false notions that we cannot afford it. They haven’t pulled the wool over my eyes.
One of the other factors in all of this is the adoption of private sector thinking into the public sector and more quasi-public formations of delivery where senior managers in particular have been able to uprate their wages to be more in line with the private market sector so that senior pay differentials are now more times above staff pay but they will still draw from the same pension pot. If lower paid women as you say are subsidising me, then we are ALL subsidising higher paid seniors too.
But lets go back to basics here: I am sick to death of this culture in our country that says that we cannot afford things. Any Government knows that in any given year where there is a birth rate spike that there will be a corresponding increase in the elderly x years hence.
So why the manufactured panic about an ‘aged’ population? Why? Because it’s all part of reducing the role of the State and handing opportunity to the markets. It’s a choice – like austerity is a choice – and a bad one.
I had Christmas dinner with colleagues yesterday and we ended up talking about the election. All I said was that I was voting for Labour because although they were not effectively putting back in what the Tories had taken out this last 10 years, they were making some kind of start.
We needed (I said) a Government that wanted to look after its people (what else is Government effing well here for?). Why should they look after us? Well, We – the people – actually make the GDP the Government will crow about; we will fight its wars; we man its police force and fire service that keep us safe; we (the people) are the teachers, shoppers, shop owners, the nurses and doctors who keep society healthy. We, the people ARE the economy (not just The City). We, the people are what will give the UK kudos for new inventions and ideas and dreams – yes – those too.
That is why any Government should look after us. And if they don’t want to look after us at least administer the markets they want us to use, properly. It seems they can’t even be bothered to do that.
And I am not saying anything I believe is any different to what Richard poses in his book The Courageous State.
Anyhow, 6 out of 8 people at my table were voting Labour. Or so they said.
If I was stranded on a desert island with others would I look to the billionaire to buy the island charge me a rent to live there or to others within that community who would benefit me with their expertise, human ingenuity and problem solving acuity that would enable me to have the capacity to live a reasonable life and would enable me to make a contribution within my own level of expertise, however little.. Just a question.
No company should be allowed, be it in public or private sector, to have different pension scheme arrangements for workers and higher echelon staff.
That should include MPs being included in civil service pension scheme, not being able to hatch their own favourable exclusion deals.
What we have now is sick.
May be it is about time that there was some serious consideration given to pension provision.The tax reliefs which are calculated at their highest marginal rate and therefore benefit the better off as the tax paid on their pension is usually a lot less, usually on their lowest marginal rate. The lottery as to whether your employer provides a defined benefit or defined contribution scheme or even any pension at all. The lottery of life itself, where through illness, caring responsibilities and career changes etc which will have an impact on your pension on retirement. The lottery of whom you are employed by who may decide some of that pension fund or just the contributions they make to it could be better employed elsewhere.
May be we should have just one scheme, where all are eligible, as they do, I believe, in the Netherlands.
And the FDutch scheme is incredibly cheap to run
Paul Mayor says:
“May be it is about time that there was some serious consideration given to pension provision.”
That qualifies as an entrant for the award for understatement of the year. And every year for the past several decades.
The Thatcher government wrecked it and no bugger in government has had the guts or wit to approach the problem since.
The same could be said for local taxation in what was thrown up as a substitute for ‘the rates’.
Both have been a three decade no-go area for government. It is negligent beyond belief.