Finance professionals
As demand from stakeholders increase for more climate-related organisational data, it follows that finance professionals must become more familiar with and understand climate change opportunities and risks. Our role is not to takes sides in any political debate, but to properly assess risk and provide reliable information on the commitment and measurable impact organisation make on climate change.
As accountants, we are the trusted advisers and not only bring credibility to carbon accounting information, but also insight, influence, and impact. This will help to support the efficient and informed capital allocations for organisations in the transition to a lower-carbon economy. It will also help organisations make more informed decisions in building resilient structures for the future.
Carbon accounting requires engaging with all stakeholders, both internal and externally, and broadening your network of climate policy experts is a must. The author, Roland Kupers advises that, ‘Psychologists, political scientists, sociologists, anthropologists and complexity scientists must take their rightful place beside climate scientists and economists.’ 54
The accounting for GHG emissions and net-zero carbon targets are wrapped in many shades of grey, but they will become clearer as the science evolves. The key here is to experiment with the data you have and use it to facilitate debate and change within your organisation. It is also important to build your carbon knowledge, but be prepared to learn, unlearn, and relearn as the different methodologies coalesce into a global standard.
Finance functions
The first struggle for a finance function embarking on their carbon accounting journey is finding the knowledge and expertise in climate change and GHG emissions. This may not be available in-house and will require some internal upskilling and use of external consultants to fill the knowledge gaps.
Thomson and Bates emphasise the need to refocus ‘the best sustainability reports require company accountants to be more than just collators of numbers and engage in more storytelling around the non-financial impact of the business.’ 55
The use of a third party to help initiate your carbon accounting journey can help build best practice and provide some independent transparent verification in your organisation GHG emission calculations and targets.
It is important for the finance function that any carbon accounting activity is not carried out in isolation. As Kupers points out, ‘Solutions to the climate crisis are not environmental, or even primarily environmental. It is in the interconnection with other systems that the solutions can be found. Inequality is a climate problem.’ 56 Climate change does not stand in isolation, it is part of an underlying system, and part of grand challenges that require the engagement of a diverse range of stakeholders to participate in an organisation’s carbon accounting.
Here a systems thinking approach helps in the breaking down of information silos within an organisation, and embedding interdisciplinary conversations externally with supply chains, scientists, policymakers and local communities. This will be especially important when considering scope 3 emissions across your organisation’s supply chains.
One way of demonstrating to stakeholders how an organisation’s carbon accounting contributes to society is to identify and quantify impact pathways (e.g., inputs, activities, outputs, outcomes, and impacts) through the business and link them to the climate transition plan.
Once published, an organisation’s carbon accounting journey and climate transition plan may become part of a much wider narrative struggle. As already discussed, carbon accounting can lead to polarisation between different groups that are ultimately working towards the same shared goals. Finance functions must be aware of the possible narrative struggles and use transparency by showing methods and calculations that were the foundations of targets and transition plans. This will build stakeholder trust in a world of potential social media disinformation.
A remit of the finance function, once net-zero targets have been agreed and a climate transition plan has been published, will be ongoing and regular disclosure of progress to multiple stakeholders. The Task Force on Climate-related Disclosure created a set of Principles for Effective Disclosures to guide those preparing reporting (see table 4).
These principles will help drive finance functions to produce high-quality, insightful disclosures that influence decision-making when understanding the impact of climate change on their organisations. The resulting GHG emission insights must become a core component of business decisions and embedded into an organisation’s control systems, such as strategic planning, budgeting, performance measures and performance reviews.
Organisations
Carbon accounting needs to be integrated into the DNA of an organisation and decision-making. Greta Thunberg provides a vision of where organisations need to move towards (overleaf).
We should no longer only ask: ‘Have we got enough money to go through with this?’ But also: ’Have we got enough of the carbon budget to spare to go through with this?’ That should and must become the centre of our new currency.58
This requires organisations to update their thinking and needs real cultural change. Carbon accounting is not a back-office activity that can be just left to a few individuals within the finance function to produce some numbers regularly. To make a difference it must be taken seriously and not undertaken as an annual reporting process. Organisations must make sure that carbon accounting is embedded in their governance, strategy, and risk management.
Governance: Climate-related metrics enable an organization’s board and management to more effectively direct the business by measuring and describing the impacts of climate-related risks and opportunities on the organization.
Strategy: Climate-related metrics are critical to measuring and describing the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
Risk management: Climate-related metrics support the measurement of risk exposures and levels as part of an organization’s broader risk management processes. In conjunction with risk tolerances, risk appetites, and risk thresholds, climate-related metrics inform the degree of risk that the organization is prepared to accept and its risk responses.59
There should also be a carbon accounting feedback loop over time to impact key performance indicators and inform the management of business processes.
Furthermore, in setting performance criteria, organisations need to ensure that employee compensation and incentives are consistent with net-zero targets and linked to long-term achievement of the stated climate transition plan. The remuneration focus needs to be on the long-term success and sustainability of an organisation, rather than purely on short-term objectives.
The SME community impact
The TCFD recommendations ask organisations to understand their scope 3 emissions. Scope 3 emissions are all indirect emissions that occur in the supply chain of the reporting company, including upstream and downstream. As scope 3 emissions are built into mandatory reporting these are likely to impact the SME community. Many of these scope 3 requirements for large corporations to disclose more will be passed on to smaller businesses through the supply chain. There is also a trend in leading businesses around developing systems that gather information on GHG emissions of the goods and services they purchase from their supply chains and are incorporating GHG emissions into tendering or procurement processes.
Finally, for all organisations on their carbon journeys, transparency is paramount. Once an organisations’ net-zero target and climate transition plan are communicated more widely, it is important to understand that it will not be then taken at face value in the wider ecosystem. Stakeholders have access to other sources of data and information to compare against. To be viewed as authentic the low carbon journey must align with organisational stated purpose, be built into its strategy and at its business model core.
