Greenwash will not do: proper accounting for the impact of the climate crisis is what we need now

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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


[3] Based on