It is very welcome that Mark Carney has, as director of the Bank of England, acknowledged that $20 trillion (£16 trillion) of the world’s financial assets might be at risk from climate change. It is also good that he has said “disclosure by companies of the risks posed by climate change to their business was key to a smooth transition to a zero-carbon world as it enabled investors to back winners”. Despite this, however, the world’s accounting standards setters have not, as yet, tackled this issue. That task has instead fallen to the Mark Carney-led Bank of International Settlements-promoted Task Force on Climate-related Financial Disclosures (TCFD), who have suggested “voluntary, consistent climate-related financial disclosures that would be useful to investors, lenders, and insurance underwriters in understanding material risks”.
I direct the Corporate Accountability Network (CAN), which thinks that this approach inadequate. That’s because this issue is too important to be considered outside the framework for financial accounting, which the TCFD necessarily does; too significant to be voluntary; and of interest to a much wider range of stakeholders than the TCFD approach addresses. Why the climate change reporting needs of civil society, regulators and governments are, for example, ignored by the TCFD, is incomprehensible to us. As a result the Corporate Accountability Network thinks that a different approach is required.
Sustainable cost accounting
The Corporate Accountability Network suggests that we need a mandatory approach to climate change accounting. It calls this approach sustainable cost accounting (SCA). To achieve this goal sustainable cost accounting would have to be an accounting standard that all large companies would, ideally, have to comply with, but it could be introduced by countries in isolation if they so wished.
The essence of sustainable cost accounting is simple. It would require that every large business prepare a plan to show how it will manage the consequences of climate change. This plan would have to state how it might become net carbon-neutral by a specified date, both within its own business and within its supply chain.
That plan would have to be specific as to what the business must do to achieve this goal, or alternatively state that this is not yet known. A precautionary principle would apply: in other words, the plan could only rely on those technologies now known to exist and that have been proven to work. In addition, the plan would have to show where the impact of the changes would arise geographically: it would be unacceptable to solve the problem in some countries and not others, or to export carbon risk to developing countries.
That plan would then have to be costed. The requirement of sustainable cost accounting would then be that the full cost of the change to being net-zero carbon emitter should be provided for in the accounts of the companies to which sustainable cost accounting would apply at the time that it was adopted, which could be by 2022 if sufficient urgency was applied to this task.
If this provision resulted in a company being shown to be insolvent then the company would have then have to show how their solvency might be restored. This could, for example, be by raising new money for investment in the company, but they would have to convince their auditors that this was We need climate change accounting now possible. We stress: we think that all the sustainable cost accounting data would require financial audit since the intention is to include it in financial statements.
And, if a company could not show how it could fund the cost of the transition, or it could not estimate the cost of completing that process, or it concluded that it simply could not make the transition, then we suggested that it would have to be declared ‘carbon insolvent’. This would not mean that it was financially bankrupt. But it would make clear that the company was not going to survive into the era that we are going to have to live in. As a result an orderly winding up of its affairs would be required, and carbon insolvency administrators would have to be appointed to achieve that goal.
Benefits of sustainable cost accounting
Sustainable cost accounting will achieve four goals. It will bring the biggest issue facing companies today into financial reporting. As such it will make clear which businesses can and cannot survive into an era of sustainability. It will as a result redirect capital to those best able to use it. And by providing data geographically it will enable all the stakeholders of a business to plan their future relationships with the companies with which they engage. Sustainable cost accounting is the accounting for the climate crisis that we now need. There is no other issue more important in accounting.
• Richard Murphy FCA
Richard Murphy is:
• Professor of Practice in International Political Economy, City, University of London
• Visiting Professor, Anglia Ruskin University Global Sustainability Institute
• Director, Corporate Accountability Network
• Co-Founder, The Green New Deal