February 19, 2021
By Richard Barker
Few film directors would cast an accountant in the role of planetary savior. But accountants across the world must now take a pivotal role in tackling the climate emergency, while guiding businesses through an age of unprecedented change. This is because adaptation of zero-carbon business practices is now quite literally a do-or-die imperative for business and the planet alike, and these new ways of working will differ significantly from those of the past.
Past financial performance is therefore no longer a sufficient guide to economic viability, and additional information is needed to understand environmental and social impact. And that’s where accountants come in.
Sustainability data is no longer going to be merely a “nice to have,” or something to make shareholders feel better about their investments. It will be central to a corporation’s long-term license to operate and thus inseparable from prospective financial return and risk.
But first, accountants like myself have some work to do. We must agree and implement a set of global sustainability standards. The voluntary frameworks currently adopted by some corporations are insufficient as they do not lend themselves to complete, comparable disclosures. Regional solutions, such as those floated by the European Union, while well intentioned, are also a non-starter. Business in the 21stcentury is global, and different and potentially conflicting standards between regions would hamper our efforts to tackle this crisis. Instead, these regions must throw their weight behind a global approach.
Two questions then remain: Who should set these standards, and what should they cover? My own view, and that of my colleagues, is crystal clear. The IFRS Foundation and the International Accounting Standards Board currently provide global investors with mandatory, rigorous and comparable financial accounting information. As I and seven other colleagues recently set out in a letter to the IFRS Foundation, they have the relationships, authority and expertise to take on this additional role and create a Sustainability Standards Board, which would then set the sustainability reporting standards.
To be viable, these reporting standards should be focused solely on sustainability-related financial disclosure tailored to the investor’s needs. They must relate to the economic value creation of the business. However, their impact would be much broader.
For example, the standardized reporting of carbon emissions would show investors how companies were dealing with the challenge of transitioning to net zero. At the same time, it would serve the broader public interest by making corporate environmental impact more transparent, leading to significant behavioural changes along the way. However, the core purpose of IFRS — to inform capital markets — would remain intact.
The benefits would be threefold: First, we would see better-informed dialogue between investors and companies. Research by a Said Business School colleague, Amir Amel-Zadeh, has already shown how companies with higher sustainability ratings receive 15 percent more investment. At the same time, the agreed standards would lead to better alignment between the license to operate and the demands of sustainable development. Finally, they would allow businesses to see and reflect on their performance in a new and radical business environment, while keeping accountancy relevant in the 21stcentury.