Accounting for Sustainability – What to Expect in 2021

Jan 29, 2021

 

The ‘Davos Agenda’ – the virtual Davos event that took place this week – saw leaders address topics from how to save the planet, to building fairer economies and healthy futures. The changes in 2021 and beyond will be dramatic, not just to the operations of business but across economies’ entire value chains.  In this article we discuss what impact the sustainability agenda will have on businesses, and accountants in 2021. We will explore each of these topics in more detail in the weeks and months ahead.

2020 saw a ramp-up like never before in sustainability-related activity in Ireland and around the world. Company AGMS became battlegrounds for ESG (environmental, social and governance) shareholder activism, with record support for shareholder proposals on environmental, human rights and social justice issues. Countries scrambled to mobilise their climate action plans, pledging to reduce pollution of air, land and oceans and protect biodiversity. While 2020 was dominated by a potential green recovery from COVID-19, companies and markets in 2021 are making climate-change and social justice commitments at pace.

In finance, last year saw a surge of investor demand in ESG funding opportunities, and an escalation in calls for comparable and simplified sustainability reporting standards. These were mirrored by developments in the consolidation of these standards, with announcements of mergers and collaboration between international sustainability standard setters, and consultations on, among others, a review of the EU’s Non-Financial Disclosure Regulation and a proposal on sustainability reporting issued by the IFRS.

2021 will see this momentum accelerate, as the world grapples with the challenge of decarbonising their economies, finding alternatives to rapidly depleting resources, dealing with supply chain disruption and delivering a ‘green recovery’. Governments are set to introduce more policies to meet their sustainability-related pledges, which will impact on businesses. Major global events will include ‘COP 15’ the fifteenth meeting of the ‘Conference of the Parties’ in May which will focus on biodiversity, and the UK-hosted (‘COP 26’), the 26th UN Climate Change Conference of the Parties. Ireland will pass the Climate Action and Low Carbon Development (Amendment) Bill, which will give legal underpinning to the Government’s plans to a commitment to reduce our overall greenhouse gas emissions by a 7 percent year-on-year from 2021–2030.

Last week, the Tánaiste and Minister for Enterprise, Trade and Employment in Ireland, Leo Varadkar called for more Irish companies to engage with the mission to drive sustainability and principled business. Pointing to the role of Irish business in rebuilding a socially just, low-carbon and climate resilient economy and society, Varadkar’s message was clear: the business transformation required to achieve the UN Global Goals goes beyond incremental improvements and adjustments to ‘business-as-usual’. Similarly, the former UK Business and Energy Secretary and COP26 President Alok Sharma announced that tackling climate change “is the one of the most urgent shared endeavours of our lifetimes, demanding bold action from every nation to prevent catastrophic global warming.” The changes required will not be trivial.

The professionals called upon to deliver these changes in businesses will most often be their accountants. As those trusted to make decisions, measure what matters, and acquire the finance to fund change, accountants are expected to identify and mitigate risk, avail of opportunities, and in short, ensure that businesses survive and thrive.

The six major sustainability trends for 2021 milestones of which accountants should be aware are:

  • Decarbonisation

    Decarbonisation is likely to be the most pressing concern for businesses this decade, as businesses work to reduce carbon emissions quickly or face higher taxes. At the time of writing, Ireland has a carbon tax of €26.00 per tonne of carbon dioxide produced. Budget 2021 increased this to €33.50 per tonne. This increase applied to auto fuels from October 2020 and will apply to solid fuels from May 2021.The plan is for carbon tax in Ireland to increase each year this decade, reaching €100 per tonne of CO2 by 2030. The UK has similarly announced ambitious targets, and pledged to reduce its emissions by at least 68% by 2030. With the UK’s departure from the EU, emissions trading, ecodesign and energy labelling have changed, and the introduction of a carbon emissions tax for the UK was the subject of a consultation last year. Under the terms of the Northern Ireland Protocol, however, emissions from electricity generation in Northern Ireland, remain within the EU ETS and would not be subject to this tax.

  • The Circular Economy

    A circular economy is an economic system aimed at eliminating waste and the continual overuse of resources. Applied to business it can be summarised as: reduce, recycle and reuse, use fewer products and use them for longer. Of the 200+ measures across various waste areas in Ireland’s Waste Action Plan for a Circular Economy policy, there are measures on consumer protection and citizen engagement; single-use items will be banned from July 2021, and all packaging will have to be reusable or recyclable by 2030.

  • Sustainable Reporting

    Sustainability reporting will be key to reaching global and European climate and environmental objectives. The need for the disclosure of good quality, reliable and comparable sustainability information continues will see ongoing consolidation of global sustainability reporting standards continuing and even increasing in 2021. The UK announced in November 2020 that TCFD-aligned disclosures will become mandatory for large companies and financial institutions in the UK. This is likely to result in climate-risk reporting becoming obligatory for SMEs which operate in their supply chains. The review of the Non-Financial Reporting Directive (NFRD), expected to be published by the end of March 2021, may change the quality and scope of non-financial information to be disclosed. All companies are advised to consider describing their sustainability-related activities from 2021, either in annual reports or in separate sustainability reports.

  • Sustainable Finance

    European Commissioner Mairead McGuinness was clear in her assessment of the importance of sustainability finance: "The rules of the game must be transformed to fully integrate sustainability at every step of the financial value chain..." Green financial markets are growing rapidly globally, and institutional investors are seek information on ESG issues to better understand risks that could affect companies' performance over time. Businesses looking for finance in 2021 should be aware of these current trends.

  • Biodiversity

    Businesses can expect to hear more about biodiversity in 2021. Biodiversity is the variety and variability of life on earth and, as Business in the Community Ireland recently stated is rapidly rising up the corporate agenda as more and more companies understand both the moral imperative and the business case for protecting the ‘web of life’. Both the Government and businesses in Ireland will come under increasing pressure support the agenda of protecting the country’s three levels of biodiversity. Similarly the UK government, in its 10-point plan for a Green Industrial Revolution, identified ‘protecting our natural environment’ as a key step on its path to achieving a green economy and becoming a global leader in green technologies.

  • New Roles for Accountants
    Accountants have always been part of a global drive to keep our planet comfortably habitable, making the improvements and adjustments required of business to achieve this. New roles, such as Chief Sustainability Officer, ESG Finance Lead and Chief Impact Officer are developing to deliver this change, but in the absence of widely established sustainability-related roles, accountants will be called upon to use their existing stills in ‘measuring what matters’. This will encompass the risks posed by climate change, which includes supply chain risk, transition risk, risk of developing stranded assets and risk of lack of access to finance.

In the coming weeks and months we will publish a series of articles on areas that accountants will have to focus on in 2021. In Chartered Accountants Ireland we will continue to update our  Sustainability Centre with updates for members about news and events in this area. Updates are also published weekly in our Public Policy bulletins in news.