As the FT notes this morning:
As Gillian Tett also noted in her article:
[W]hile the corporate and government pledges emanating from the talks have often provoked as many questions as answers, one issue is already clear: climate change action is about to put corporate auditors under the uncomfortable — and unaccustomed — glare of the spotlight.
Tett is absolutely right. Auditors are not ready for this, and whilst the UK government is trying to make matters easy for business - by, for example, only demanding that UK companies must show how they will become net-zero without actually demanding that they follow through on the plans - they are seemingly unaware of how much this really does impact the audit.
The fact is that auditors have a duty when issuing their report on financial statements to make sure that the hard numbers in the back end of those accounts can be reconciled with the soft, narrative driven, statements made by the directors in the front end of that same financial report. I would rather strongly suspect that ministers have not realised that as a consequence of demanding that a company have a plan to be net-zero they are, in effect, demanding that the numbers of that same company be restated to be consistent with that plan.
Now comes the rub. The reality is that once the company has a plan to be net-zero it has, in effect, agreed to close down its existing business model which is, in the case of every large multinational company currently in existence, carbon driven. In its place, if that company wishes to be a going concern it has to create a new business model. This, in turn, if it is to be considered viable and so be considered a part of a going concern, must require additional investment. These consequences are not just possibilities: they are inevitable.
That inevitability does, however, have further consequences. In particular, once a board of directors has adopted a plan that will involve cost in closing a current activity - and I very strongly suggest that this is what is implicit in the transition to net-zero - then they have no choice but make a provision to reflect that cost in their accounts. The provision in question is their current best estimate of the entire cost, net benefits, of making that transition. The net of benefits points is critical: prudence must apply because plans cannot be guaranteed to deliver. The making of this provision is, of course, at the core of my suggestion for sustainable cost accounting.
I suggest that auditors should welcome that proposal for sustainable cost accounting because what it does is translate the front end commitment to net-zero within any set of financial statements into a back end set of numbers that auditors are familiar with reporting upon. In other words, by requiring the plans be translated into numerical format, with costs that can be firmly identified within the general ledger of any company, and with reporting on progress with these plans then becoming a normal part of financial reporting, auditors can get their heads round an issue which at present confuses them, which is carbon accounting.
I say this for good reason. Carbon accounting is not what is important. It is, to some degree, no more useful than counting covid cases except as an indicator of required action. The value of the indicator is that we know that action is required. But, what saves people in both cases is the resulting action, not the fact that the indicator is 100% reliable. This is precisely why solving carbon accounting issues is not, at present, a priority. Good enough is, in fact, just that when it comes to carbon accounting: so long as we know that the company has a significant problem (and it is likely existing systems can provide good enough indication of this) then matters is what is going to be done about it.
Sustainable cost accounting is not an indicator. It is, instead, the statement of financial commitments to the delivery of a solution. This is what matters in the future of financial reporting with regard to net-zero. The sooner the accounting profession realises this the better it will be for the planet.
Tett concluded:
Green battles are no longer only being waged with placards on the streets or on government podiums, but in corporate committee rooms too. Perhaps it is time for activists to retrain as auditors — this new front in the climate war could yet turn out to be a potent force for change.
This campaigner hap[pens to also be an accountant with real-world audit experience. And I am waiting to talk in any corporate committee room where are those who want to listen.
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“The provision in question is their current best estimate of the entire cost, net benefits, of making that transition. The net of benefits points is critical: prudence must apply because plans cannot be guaranteed to deliver. The making of this provision is, of course, at the core of my suggestion for sustainable cost accounting.”
OK.
Can you give us a worked, numerical example of how this would be applied to a company in practice, including all of it’s scope 1, 2 and 3 emissions for all it’s process over the entire going-forward lifespan of the company?
Rishi Sunak is asking companies to do this
Why not ask him for the details of the plan he has?
Rishi Sunak isn’t proposing a new accounting standard which would force companies into bankruptcy if they can’t meet it’s targets.
You are.
I would hope that you, as the creator of sustainable cost accounting, would be able to give us a worked example of how you would accurately cost or measure all scope 1,2 and 3 emissions for a company, for it’s entire future.
That is what you are demanding in SCA, is it not?
As I keep saying, I do not need to measure all those emissions to deliver SCA
I have to estimate the cost of eliminating them
OK. But to eliminate something you need to be able to measure how much of it there is first.
Anyway, let me rephrase the question:
In that case could you give us a worked example of how you calculate the total cost of eliminating all emissions from a company, including all scope 1, 2 and 3 emissions over the entire future life of a company and it’s products?
I expect that you have such an example ready as you are the creator of SCA and would have had to produce many such worked, practical examples in trial runs and testing for a new accounting standard such as this.
You are clearly trolling and so I am not engaging
Brandolini’s law says that “The amount of energy needed to refute bullshit is an order of magnitude larger than is needed to produce it.” It applies here. You are banned for wasting my time.
Good old Gillian is all I can say.
And I hope that you get taken up on your offer.
Plus also we need get rid of methane by all accounts.
A-hem, PSR. Methane’s chemical formula is CH4, where C represents Carbon… 😉
We need *carbon* accounting, whichever gaseous compound it is hiding in, don’t we?
Fair enough Anne, but its what we (society) associate with carbon and the debate is dominated by coal and oil from what I can see.
It’s not just about coal and oil – there’s also a methane problem too – whether its produced by the meat and milk industry or that really scary defrosting I’m seeing in late night programmes in Alaska and Russia that is releasing frozen methane from the ground and at scary rate.
How would this impact, say, a coal mining company? There is basically no way they can get to net-zero, so effectively would their accounts have to say that in so many years time they will be wound up?
Oil and gas companies – if we really do require them to stop opening up new fields, then all their current booked reserves instantly drop in value to zero, which must bankrupt them?
We do need to get to net-zero in a few decades, but the question I have is whether our current global economic system can actually manage it – it is designed around ever increasing growth, in order to cope with population growth, and interest payments on loans.
We know coal has to stay in the ground
Of course a coal company needs to wing up its affairs unless our children are to die
Richard Kirby says:
“We do need to get to net-zero in a few decades, but the question I have is whether our current global economic system can actually manage it –”
Hmmm…. that’s the whole point in a nutshell, I think. Economic systems are supposed to be our servant not our master. A sustainable future requires a different economic architecture. Yes?
The finance departments in big carbon companies like BP and Shell must be almost in shell shock as to the “cost” of completely shutting down new exploration and refining facilities and investing heavily in renewables. Though the cost worldwide will be many trillions the cost of not doing so will mean certain global ecocide. If sustainable cost accounting can be introduced to make clear what is involved financially this will really speed things up.
The temperature rises as you go deeper underground and especially so in areas with granite rock. Oil companies have a lot of expertise in drilling deep holes, and from fracking, are able to fracture the rock and keep the cracks open for water flow. This is just what is needed to generate heat energy form deep, hot rocks. A trial was done in Cornwall many years ago and it failed as they could not keep the cracks open for the flow of water to pick up the heat. I understand another trial is on going.
The carbon that really does need counting is that in fossil fuel being taken out of the ground. Everything else is worthless unless that number is going down on a path to zero.
But for that to happen, counting carbon elsewhere can hardly be said not to matter. As an example, with Covid more at risk to those of higher BMI my wife felt she should try to drop hers to the “normal” range. That wasn’t really working until she bought some bathroom scales and was able to see the small gains and get the motivation to keep going. I suspect the same should be true of companies seeing the improvement in a balance sheet if your sustainable cost accounting came about (which very definitely does need carbon counting).
And on a personal level, if I knew what steps made the biggest difference – and could balance the pay-off, of for example an overseas holiday but cutting back on other things, I could be sure of making my own contribution to CO2 reduction as could others. I would need a carbon meter!
We need carbon accounting – of c course
My point is that it is not the goal in itself