September 2, 2021
By: Kevin Dancey, Chief Executive Officer, IFAC
On December 11, 1997, nearly 200 countries signed the Kyoto Protocol, extending the 1992 United Nations Framework Convention on Climate Change (UNFCCC). It was a modest attempt to commit state parties to combat global warming driven by human-made CO2 emissions.
Despite the intent, many countries did not meet their targets or withdrew from the agreement. Global emissions continued to grow, and climate change persisted—largely unabated.
Nearly a decade later, in 2015, all UN Member States adopted the 2030 Agenda for Sustainable Development, including the 17 Sustainable Development Goals (SDGs). Shortly after that, the Paris Agreement was signed on April 22, 2016. Again, almost 200 countries were signatories, committed to keeping the mean global temperature increase to well below 2°C and reducing emissions as soon as possible to reach net-zero in the second half of this century.
Nevertheless, this July, the International Energy Agency forecast that global emissions are about to surge to new highs. Meanwhile, a new report released in August by the Intergovernmental Panel on Climate Change (IPCC) states that climate change is “unequivocally” caused by humans and that temperatures may rise more than 1.5°C above pre-industrial levels by 2050, if not sooner, even in a best-case scenario of deep cuts in greenhouse gas emissions.
The question is: Will we heed this last-ditch warning with the societal, economic, and political fervor it demands even when so many prior attempts have fallen flat? I believe we will, and here’s why.
A New Point in History
Addressing climate change is a mammoth undertaking. It requires action from all stakeholders, not just governments. That was why the Kyoto Protocol failed. Governments were committed to various degrees, but most businesses, consumers, and citizens were not. This time they are.
Consider CEOs who are assessing the current landscape as they think about their organizations’ go-forward strategies. They don’t know how the world will unfold, but what they do know is that they must make choices so that regardless of what happens, they are positioned to succeed.
Historically, that success has been focused on investors and regulators and, of course, consumers. Today, however, companies are aware of larger sustainability forces at play. At the macro level, governments and regulators are debating action and public opinion is evolving. But only when these issues affect companies at the micro, organizational level, will sustainability be more than just another issue on the horizon, and that moment is happening now.
Three Key Factors Seizing the Attention of Every CEO:
Market share and consumers
This generation of consumers is different. An organization’s position on sustainability directly affects the market for the organization’s products and services. Providing low- or zero-carbon products and solutions is a clear competitive advantage, and commerce is reorganizing around new expectations. When I was growing up, for instance, labeling on packages was nearly non-existent. Today, we are advised of calorie, fat, sodium, and sugar content as a standard practice. In the near future, these labels will include carbon content as well, and CEOs must be ready for that inevitability.
Investors are increasingly demanding more and better sustainability information. But the sustainability issues are deeper and more fundamental than just better reporting. Investors are now undertaking both negative Environmental Social and Governance (ESG) screening (e.g., excluding certain industries from an investment portfolio) or positive screening (where the scope is restricted to highly rated ESG companies). We know availability (supply) affects cost, and ignoring sustainability will only increase the organization’s cost of capital. Research proves that companies reporting on sustainability information and receiving assurance on it see both lower costs of capital and less capital constraint.
Attracting and retaining talent
Upcoming generations make career choices based on the sustainability approach of an organization. In fact, the Cone Communications Millennial Employee Study found that 64% of Millennials won’t take a job if their employer doesn’t have a strong CSR policy. A study by WeSpire found that Gen-Z is, “The first generation to prioritize purpose over salary.” No CEO can achieve their company’s mission without a pipeline of talent to support it. There is no doubt that incorporating sustainability at the organization’s core increases the likelihood of attracting today’s best talent.
This Time It’s Different
The mandate for CEOs is pretty simple: Ignore sustainability at your own peril. It’s not enough for organizations to continue with humble sustainability initiatives; we need far-reaching and urgent action to adequately respond to the severity of the threat posed by climate change. As businesses embrace the outsized influence they have to impart positive change within society, sustainability strategies must be built into core business models—not only for the good of organizations that wish to remain profitable and innovative, but also for the people and the planet.
This operationalization of sustainable business practices at scale will be a major change management moment for all organizations and, as a result, a huge opportunity for professional accountants to use their skills and competencies to significantly contribute in many roles. IFAC, as the global voice of the accountancy profession representing more than 3 million professional accountants worldwide, believes accountants can:
· Play a key role in establishing processes, systems and controls for identifying and measuring sustainability information and connecting it to existing financial information;
· Support public policy decisions and Governments as they endeavor to comply with their Paris Agreement targets;
· Provide a range of advisory services to help clients become aware of these changes and opportunities, as well as providing assurance on new reporting obligations.
This time is different because all stakeholders are engaged. This is not a top-down government and regulator-driven initiative. With businesses and their stakeholders engaged, sustainability goals and climate action have the support they need to succeed.