Building a better future

Apr 01, 2021
Dee Moran, Professional Accountancy Leader at Chartered Accountants Ireland, speaks to Accounting for Sustainability’s Jessica Fries about the role Chartered Accountants can play in mitigating the worst impacts of the climate change crisis and making sustainable business synonymous with business as usual.

Dee Moran (DM): Can you briefly explain the economic risk facing the business community regarding sustainability and the climate crisis?

Jessica Fries (JF): Since Accounting for Sustainability (A4S) was first established in 2004, we have seen an increasing awareness of environmental and social risks and just how important they are from an economic, financial and business perspective. In the last couple of years, in particular, we have seen a significant shift in tracking these issues.

The World Economic Forum publishes a global risk report each year. Environmental and social risks feature consistently in the top 10, which underlines just how focused businesses are on those risks. In response to those trends, we also see more businesses taking action and more investors and regulators focusing on identifying the risks and possible responses.

This time last year, when the pandemic started to hit, people were concerned that environmental and other sustainable business issues would be forgotten due to the urgent need to respond to the human and economic crisis and the pandemic’s impact on wellbeing and livelihoods. If anything, however, the understanding of climate and the climate crisis has continued to grow.

This year, COP26 – the major UN climate conference – will be hosted by the UK in Glasgow in November. This will be a vital meeting. Over five years ago, in 2015, at the Paris COP, governments around the world committed to keeping the average increase in global temperatures to well below two degrees with the ambition to limit warming to 1.5 degrees. Science tells us that this is needed to mitigate the worst impacts of the climate crisis and maintain a habitable world. A key part of the agreement was a ‘ratchet’ mechanism with governments committing to set increasingly ambitious targets every five years, recognising that the initial commitments made at the time of the Paris agreement were not sufficient. COP26 is the conference at which these updated commitments will be made. Of course, in addition to the human impact, the economic consequences of failing to act at the pace and scale demanded by the science are enormous; the Economist Intelligence Unit has estimated that the direct costs by mid-century will be $7.9 trillion. 

As well as a continued focus on climate, the pandemic also reinforced business responsibility in relation to social issues and the need to think about how businesses support communities and employees. These issues are interconnected, so you cannot look at either the climate crisis or the COVID-19 pandemic in isolation. The pandemic has also forced everyone in the world to pause, reflect on the kind of recovery we want, and ask whether we can create a more equitable, more resilient, and more sustainable world. On that note, businesses are thinking about the kind of shift there might be and how they can be best positioned to respond. Accountants have played a vital role in helping their organisations navigate challenging conditions thus far, of course, but there is also a massive opportunity for accountants to help shape a sustainable future.

DM: It is widely acknowledged that if we are to avoid the worst impacts of the climate crisis, global greenhouse gas emissions need to halve by 2030 and reach net-zero by mid-century. You alluded to it there, but how can the finance community drive efforts as we work towards that goal?

JF: Your question highlights the dramatic nature of the transition needed to achieve those goals. Accountants are at the heart of the organisation in terms of measuring, tracking, setting targets, and planning the necessary investment. To that end, they analyse the external risks and identify the information their organisations need to assess the impact of the transition on their business. More and more organisations are also setting what are called science-based targets, which, as you say, are needed to avoid the worst impacts of the climate crisis. Accountants can help set those goals, but also embed them throughout the whole organisation.

Accountants also direct flows of money and financing, and investors are increasingly interested in these issues. This is a significant opportunity to access different sources of funding with the growing interest in environmental, social and governance (ESG) investing which, at the moment, is critical for some businesses. 

The other thing that we see is accountants’ ability to influence others, including engaging new employees. We often hear about the newer generations of accountants having a clear sense of purpose, and that is true – but it is equally true throughout the whole organisation. This provides a dual opportunity for accountants to play to the finance team’s skillset and that softer cultural engagement, which is an essential driver of business success.

From large companies to small accountancy practitioners, climate change will affect us all. There is, therefore, a role for everyone to play. It doesn’t have to be something individuals think about in terms of home life alone; we can also have a powerful impact through our professional lives.

DM: The Irish Minister for Finance, Paschal Donohoe TD, added his support to the TCFD (Task Force on Climate-related Financial Disclosures) last November. What should accountants expect in the future in terms of sustainability reporting? And how can they help their organisations prepare?

JF: TCFD is gaining global momentum. It started as an industry-led group endorsed by the regulatory community. As a result, it has always had a regulatory hue, but it was very much investors, companies, and other key representatives coming together to create a framework.

We are now several years into its adoption, and we can see a shift to mandatory reporting. A4S has done quite a lot of work globally with organisations to apply its principles in practice, and they find a few areas particularly challenging – one of which is scenario analysis. But this is an area of significant interest to investors. It links back to the kind of targets companies need to set, whether that is a net-zero target or a science-based target. In the build-up to COP26, you will see more and more organisations making that kind of commitment. You will also see investors come together to focus on what companies are reporting and the concept of a transition plan – does the business have a credible strategy to respond to the change in the global economy as we transition from fossil fuel use and work to halve global emissions by 2030?

We also know that businesses have to account for the physical impacts arising from climate change, such as flooding. We can already see changing patterns and the impact this is having on business. Building resilience into any response while trying to reduce the risk is therefore crucial.

This all fits into the broader reporting landscape where regulators and standard setters are now asking for improved reporting on climate-related issues. Most recently, the IFRS Foundation announced its intention to establish a sustainability standards board, providing a potential ‘home’ for the TCFD as part of a recognised standard setter. So there is much momentum – not just in terms of what should be reported on from a climate perspective and convergence with the TCFD framework, but also how that plays into the broader sustainability reporting landscape.

Companies need to think this through, and accountants can help their companies whether they are within the organisation or providing that advice as a third-party. And finally, because sustainability reporting is becoming increasingly mandatory and there is a focus on the robustness of the information needed to support investors in their decisions, assurance comes into play. Therefore, accountancy firms must consider how to adapt assurance services to assure climate and other sustainability information.

Sustainability reporting is important, but the impact of sustainability trends on financial reporting is also key. The heads of the accounting bodies are collaborating to reinforce this point, but it can often get lost in the discussion around sustainability standards: auditors and accountants in business should already be thinking about the impact of climate risk on the financial statements. More sustainability-related information might go in the front half of the annual report but if you look at the existing requirements under financial reporting, organisations should consider how some of these issues impact the financial statements. That is another critical area to consider – and one that few organisations have started to analyse in the kind of depth that will be demanded in the next few years.

DM: On that point, do you think the accountancy profession is sufficiently equipped with the skills necessary to ensure that their businesses are sustainable and to report on those issues?

JF: There is undoubtedly a considerable capacity gap. One of the significant challenges we all face is how all professions can upskill to respond to this massive task. When we set up the Accounting Bodies Network in 2008, that was one of the five principles – how do you embed sustainability into professional training and education? We are starting to see the tools, techniques, and approaches become embedded into syllabi, but most professionals did their qualification quite a long time ago. Continuous professional development (CPD) therefore needs to be an acute focus.

Reporting is one of those important areas, but many finance professionals spend the majority of their time looking at other areas such as management accounting, supporting the strategic planning process, capital investment decisions, preparing management information, raising finance, engaging with the capital markets and many other areas. We have developed an A4S Essential Guide series that covers all these accountancy and finance areas in a very practical way and is free to access for all from our website, www.accountingforsustainability.org. Last year we launched the A4S Academy, which is our way of helping finance professionals dig deeper into the issues and equip themselves with the necessary skills.

DM: Certainly, the guidance and data that A4S has produced have been really useful for Chartered Accountants Ireland’s membership. To follow on from that point, we will likely be grappling with the impact of COVID-19 for years to come. For those working in finance, how can we better address environmental and social risks, both now and into the future?

JF: We have done research over the past year to understand the role finance has played in responding to the COVID-19 pandemic and how the different parts of the finance system can work together to start building a better future.

Three themes came through from our work with the accounting community, the first of which I already discussed – setting ambitious targets. The second area is accountability through reporting. Again, I touched on that earlier in the discussion, and it plays to the heart of what accountants can do to support their organisations. And finally, there is the theme of collaboration – how do we come together across different sectors and different stakeholder groups to innovate and find solutions?

Throughout the pandemic, we have witnessed some fantastic and inspiring examples of organisations thinking creatively to find solutions to pandemic-related challenges. That same kind of thinking and collaboration will be vital in our fight against climate change.

DM: Technology-enabled communication platforms are a game-changer in this context, aren’t they?

JF: Absolutely. I am sure most of us are keen to return to some form of human interaction and in-person events, but that ability to connect globally is here to stay. It provides some exciting opportunities for the future. As we look ahead to COP26, we will focus on bringing finance teams to that conference in a virtual way and delivering insights and messages from the summit back to the finance community.

Accountants and finance professionals around the world can play a significant role in tackling climate change. We will need to consider how we mobilise that commitment to action and support accountants in what will be a vital year in terms of having a chance of achieving those ambitious global targets in the decade ahead.

DM: With COP26 due to take place in Glasgow in November of this year, do you see it as a ‘make or break’ moment in the fight against climate change?

JF: Absolutely. Time is running out, and a decade is an incredibly short amount of time. To halve the emissions globally over the next decade, we need to see action every year.
COP26 is just one event, but the focus is not solely on governments coming together to ratchet up their commitments. It is also a call to action to every other corner of the economy, and we can all contribute by making a vocal, visible commitment.

Our role is to enable governments to take the kind of action needed, which provides the context within which businesses and individuals can take action.

DM: And what are your hopes for the COP26 summit?

JF: I hope that we see a commitment to action from all parts of the global community. Of course, thinking of the work that A4S does, I would particularly like to see accountants worldwide commit to playing a role in accelerating that transition to a net-zero economy.
I would also love for all of your members to signal their commitment, sign up, raise the ambition and – most importantly – take tangible action. Look out for more ways to get involved in the coming month. It’s one thing to commit, but it’s quite another thing to act.
What we need to focus on now is action.

DM: Finally, you led a workshop at the 20th World Congress of Accountants entitled “Can accountants save the world?” Over two years have passed since then, so what is your answer to that question today?

JF: Yes, I think they can. I hope that the discussion we’ve had today will convince accountants that they have a critically important role in turning climate change around and, ultimately, saving the world.