This is an FT headline this morning:
The article makes three things clear. The first is that business feels good about itself. The second is that NGOs do not share the optimism of business. And third, the reason is that the commitments made by businesses are too limited, too deferred, and too dependent on offsets rather than any real cut in carbon emissions from the activities businesses are really undertaking. In other words, greenwash is still the talk of the town.
I am on the NGO side. I am not as yet convinced of almost any claim by business that it is really transforming in the face of the climate stress. Most particularly, the claims for offset made by businesses are, in my opinion unfounded, whilst far too many businesses are claiming they will be green on the basis of technologies that still do not exist. The biggest corporate emission at Glasgow was hot air backed by no substance.
Holding business to account on this issue has always been my motivation for working on sustainable cost accounting. I am all too aware that the pro-business lobby turns up on this blog the moment I say that offsetting should not be allowed unless the benefit can be proven and the economic resources to undertake that offset are already under the control of the business claiming to undertake it. The same happens when I say that reliance on carbon capture and storage should not be permitted when no one has a clue as to how this might really work at scale. It's as if there is (heaven forbid) an army of trolls who can be called upon to oppose me and others making such claims.
This is not putting me off. This week I have been concentrating all my work on writing a draft of what could be an International Financial Reporting Standard on sustainable cost accounting. I suspect this will roll over into next week as well: writing with the brevity and precision that these standards use is challenging.
The aim is straightforward. If the International Financial Reporting Standard Foundation is to now have control of climate accounting standards through the new International Sustainability Standards Board (ISSB) then it has to be shown that it is possible to introduce a financial standard to secure the aim that business be held to account for what it is really doing. Only by writing such a standard is this shown to be possible. I know of no one else who has tried to do this, and so I am doing so as part of the joint Time Mirror project on which I am engaged by Copenhagen Business School and Sheffield University Management School.
The biggest challenge is to build into the standard the concept of double materiality. This idea expands on something called a double reasonableness test, with which I first became familiar when working on the development of the UK's General Anti-Abuse Rule for tax, and a test in the EU's new corporate non-financial disclosure standard.
The concept of materiality suggests that “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”[1] What is material is determined by the reporting entity. Materiality can be appraised by a single reasonableness test[2] i.e. a matter is material if there is a substantial likelihood that a reasonable person would consider it important.
The concept of double materiality expands the concept of materiality to include both climate-related impacts on the company as well as the impacts of a company on the climate. As a consequence the reporting entity is required to consider the impact of its behaviour on the users of its financial statements, making explicit that there exists a relationship with them that extends beyond contractual obligation. Double materiality uses a double reasonableness test. A 'double reasonableness' test sets a high threshold by asking whether a reasonable person might hold the view that disclosure was reasonably required to meet the need of a user [3]. The test of materiality is, therefore, moved outside the comopany.
The consequence of using the concept of double materiality is that the reporting entity cannot presume that it is preparing financial statements solely for the benefit of those considered the primary users of financial statements, who are said by the IFRS Foundation to be its suppliers of capital. It does instead have obligations to all users of financial statements, whether they be those suppliers of capital, its trading partners, employees, regulators, tax authorities and civil society. The result is somewhat different financial reporting from that with which we have been familiar, but that is what a new era is demanding.
__________
[1] IAS 1.7
[2] https://www.sec.gov/interps/account/sab99.htm
[3] Based on https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/396179/gaar-part-abc.pdf
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Might not be putting you off but anyone with half a brain who reads through your SCA proposal is immediately put off by the lack of detail, contradictions and general lack of thought process behind it.
For example. Others have previously asked you to provide worked example of SCA in practice – which you have thus far totally failed to do.
You never answer how you aim to calculate Scope 3 emissions over the entire life of a company, it’s supply chains and their products, despite this being a major part of SCA. You always give a stupid answer about “eliminating them” instead. Which does not solve the problem, as you need to know the quantum of emissions before you can eliminate them.
Nor do you ever answer how you solve the Scope 3 double counting issue.
You then have made this rule about offsetting only within a company – which once again makes no sense at all. Offsetting outside or inside a company has exactly the same effect for the environment, but almost certainly it will be more effective and at lower cost when done by specialists.
Or how do you deal with the scientific fact that many process can simply never be net zero, so trying to force companies in those areas to be net zero (especially without offsetting) simply mean shutting them down.
You don’t give a proper answer to why only large companies are going to be bound by these rules. Which is important when almost 50% of company emissions are from SMEs. Or why government, public sector and private individuals are not responsible for their emissions when you are intent on forcing companies to be. If you were truly intent on net zero, these sectors cause far more emissions than corporates. It is almost as if you don’t want to tackle that issue in general and are avoiding small companies because you know full well your own would never be carbon neutral – instantly marking you as a hypocrite.
So to summarise:
SCA has major conceptual flaws and it’s creator is totally unwilling to address them. When someone asks him to answer the above questions he responds either with rhetoric, avoiding the questions, or by labeling people asking perfectly valid questions – which would certainly get asked well before SCA came anywhere near to being an accounting standard – trolls.
My impression is that you thought this up in a hurry to try and jump on the green accounting bandwagon and fill your own pockets with grant money.
I doubt there is any standards body actually looking or reviewing it and it seems you have done no work past the initial paper on it.
If nothing else – you are already far too late – IFRS has already had it’s consultation and is far ahead in terms of ESG accounting standards.
All of these issues have been addressed before, so I will not do so again.
But what really shows your ignorance of this issue is your last comment.
The IFRS has only consulted on whether to do the ISSB, which was confirmed last week. Ahead of the game? Hardly, I would suggest.
I also suggest you stop wasting my time.
You haven’t addressed these issues, which is why people keep asking you to do so. Unless by addressing you mean “studiously avoiding”.
If you have addressed these points though, I’m sure you can point us to where we can see a fully worked practical example of SCA, including how all emissions of all scopes are measured, how future emissions (as required by SCA) are estimated and how double counting of Scope 3 emissions is managed.
I would bet a small fortune such a document does not exist though. Meaning you’ve never bothered to check how your accounting rules would actually work on the basis of a real company.
IFRS have more than consulted on “whether to do the ISSB” as you call it. They’ve already produced prototype accounting and reporting standards. You also seem to be behind existing reporting standards. such as GRI, SASB, CDP and even TCFD. Shocked none of the reporting standards seem to involve you or SCA.
Takes a certain type of person to believe they in isolation can develop a reporting standard in an afternoon (though it looks like you’ve mostly just copy pasted it from Full Cost Accounting and changed the name), not run any testing on said framework then deem it better than existing or emerging standards developed by large teams of professionals with far more knowledge and experience than yourself.
Mind blown.
“ Takes a certain type of person to believe they in isolation can develop a reporting standard in an afternoon“
True
The only person who has done it in the world right now
But no doubt unlike the OECD you’ll deny I created country-by-country reporting
“you’ll deny I created country-by-country reporting”
To be fair, if he did make that claim, he wouldn’t be the only one. The TJN’s 2017 report “The Long and Arduous Path of Country-by-Country Reporting” states that
“Initial advances towards CBCR begun as early as 1977 within the United Nations’ response to the involvement of a US multinational in an early, yet unsuccessful coup against the government of Salvador Allende in Chile.”
and that
“the UN established upon request by Chile of 1972 and after long and intense negotiations a UN Commission for Transnational Corporations in 1975. Within this commission, a Group of Experts on International Standards of Accounting and Reporting (GEISAR) was convened to increase financial transparency of transnational corporations… Their first advances towards CBCR
were made in 1977. GEISAR proposed a set of concrete recommendations which required the publishing of detailed financial reports for each company within a multinational corporation, including information on intra-group trade”
And that
“In March 1980, not even two years after the OECD countries introduced the principle of consensus in the UN, the IASC presented a draft for a standard (IAS 14) for financial segment reporting per geographic area, which resembled CBCR, at least in principle.”
Which all suggests the idea of concept of CBCR has been around for over 40 years, long before you produced your version.
Why you can’t just accept that you produced a version of CBCR, the recommendations of which have been largely ignored by the OECD (you yourself have criticised the OECD’s version of CBCR as being worthless and a missed opportunity) and that you have been campaigning for a better version since then, I can’t imagine.
That TJN report was the beginning of a campaign to undermine my credibility
The author – Markus Meinzer – claimed he did not know of my role. I think he lied. He can sue me if he likes. It is now very apparent there was a concerted effort of abuse already underway.
And no one seriously considers the 70s and 80s work – of which I was wholly unaware – is in any way related to my work
CBCR only happened because I created it in the form used now, and tirelessly promoted it. There are many defences to that fact, for fact it is.
And what have you done in life, apart from pass snide comments?
“of which I was wholly unaware”
You were wholly unaware of International Accounting Standard 14 and its 2006 replacement IFRS 8?
I thought you were an accountant?
Besides, even if you were unaware, they existed. I expect the vast majority of the accounting profession would have been aware of them. You can’t claim to have ‘created’ something the accountancy profession had been working on for 30 years before your supposed creation.
IAS 14 was not country-by-country reporting
I was behind the campaign to make IFRS 8 into country-by-country reporting – which was widely reported at the time and has been written up in academic journals
If you think either related to what was being done in the 70s or to the CBCR I proposed you really are wasting my time and my readers
It bis you who knows nothing about the issues
The accounting profession was working on nothing like my vision – and fought it tooth and nail – proving all your claims wrong
Quite a lot to take in here. It is good that you can counter obvious trolls.
The crux of tackling climate change is to get the huge corporations mainly responsible, to identify properly what their emissions levels are, and to analyze accurately whatever ameliorating action they are committed to taking. The UN Secretary-General Antonio Guterres has stated at COP26 today he wants to establish a: ” High-Level Expert Group to measure and analyze net-zero commitments for non-state actors. We need action if commitments are to pass the credibility test”. It seems what you are working on with the Copenhagen Business School and Sheffield University Management School to produce an international financial reporting standard and sustainability accounting should be brought to the UN’s attention especially as you are the only experts at the moment working in this field.
We will do as you suggest