What gets measured, gets managed

Ask any sustainability professional about their biggest day-to-day challenge and most will answer one single thing... data. More specifically, the accessibility, credibility, and comparability of sustainability information reported (or often not reported) each year.

Compare company scores across the major sustainability data providers and the correlation between those ratings is weak at best, and diametrically opposed at worst. However, perform the same analysis over the major credit rating agencies and the correlation is near perfect. This is perhaps why many describe Environmental Social and Governance (ESG) data as remaining at the same level of disclosure as financial accounting before the financial crash of 1929.

Following the Great Depression, it took over 50 years to sort out financial accounting, but unfortunately, we don’t have that long to fix sustainability accounting.

The looming threat from environmental challenges such as climate change require action over decades, not centuries. Unless we stop the accumulation of greenhouse gas (GHG) emissions in the atmosphere and reach net zero GHG emissions by 2050, the world will end up more than 1.5°C warmer.

A warmer world brings with it the predictable consequences of increasing heatwaves, rising seas, and the growing frequency and intensity of extreme weather. But a warmer world also drives the increased probability of unpredictable tipping points in the Earth’s systems. This could include a breakdown of ocean circulation currents, dieback of the Amazon (whereby rising temperatures stop the rainforest from recycling its own water supply through evapotranspiration, increasing the chance of drought and forest dieback, and turning the rainforest into a savannah, releasing billions of tons of stored carbon), and rapidly changing monsoon seasons. Breach 1.5-2°C and we risk unknowable damage – the Precautionary Principle tells us we need to act fast.

Certainly, the world has woken up to the threat of climate change with the scientific voice growing ever louder as global activism escalates and over 130 countries around the world (covering 60% of the population and 80% of emissions) pledging to reach net zero by the middle of this century. But as the famous business adage goes, ‘what gets measured, gets managed’; and without the data to act upon, these pledges are no more than hot air.

Alphabet soup and climate croutons

Ask the same sustainability professional how to collect and report that data and they might reel off a veritable ‘alphabet soup’ of acronyms, each detailing climate-related standards, principles, initiatives, or alliances across governments, corporates, finance, and civil society. The last time I tried to add up these frameworks, I counted fifty and gave up – and this was just the tip of the (rapidly melting) iceberg.

But a consensus is emerging as a handful of ‘climate croutons’ rise to the top of the alphabet soup: The Green House Gas Protocol (GHGp) has established the go to global framework to measure emissions; the Science Based Targets Initiative (SBTi) is emerging as the gold standard in decarbonisation target setting and verification; and Michael Bloomberg’s Taskforce on Climate-related Financial Disclosures (TCFD) has become the leading standard on climate related governance, strategy, and risk analysis.

And thanks to the work of the Better Alignment Project, the five major non-financial reporting organisations (GRI, SASB, IIRC, CDSB and CDP) are aligning around this climate troika – eventually these frameworks could be united by the IFRS and its newly announced Sustainability Standards Board (launched at COP26 in Glasgow) into one sustainability standard to rule them all.

When combined, these standards not only provide a pathway for direct emission reductions aligned with the Ambitions of the Paris accord, but they also create a network effect to push broad climate action through supplier engagement, customer alignment, and engaging financial markets with climate risk. As this network of climate action grows, its efficacy should grow too, and once the network reaches critical mass it should create a self-sustaining ‘bandwagon effect’ with the power to reallocate the world’s financial, and social capital from brown to green. Coupled with government pledges, civil uprising, and technological innovation, you may be forgiven for thinking decisive climate action is all but assured? Well not quite so fast…

Avoiding the carbon crunch

Currently, less than 1% of managed assets are aligned with the ambitions of the Paris accord; it is estimated that less than 10% of large companies comprehensively measure and report emissions and, despite the increasing ambition of policies and commitments following COP26 taking place this week in Glasgow, the world is still heading for over 2°C warming by the end of this century.

Studies in social dynamics suggest that to reach critical mass for a new idea, technology, or policy, requires more than 25% penetration - corporate climate disclosure needs a big push to reach this level of uptake.

Following the Wall Street Crash in 1929, President Roosevelt signed the US Securities Actwhich served as the springboard for modern corporate financial disclosure and accounting. The Act was based upon the five guiding principles of comparability, accessibility, consistency, external verification, and standardisation – the ultimate wish list for our sustainability professional today.

All publicly traded companies eventually became required to publicly disclose financial information according to Corporate Accounting Standards. But therein lies the rub - carbon disclosures are currently voluntary, plus just 20% of direct emissions (scope 1) and 40% of direct and indirect emissions (scopes 1-3) come from listed companies. If we are to reach critical mass, drive meaningful action, and avoid potentially disastrous outcomes, then mandatory reporting of both public and private disclosure is necessary.

Imagine for a moment a situation where significant action is delayed, where physical change and tipping points create accelerated or unexpected global disruption. Suddenly the timeline to transition away from fossil fuels becomes years, not decades, placing much of the world’s financial and physical capital at risk. The think-tank Carbon Tracker calculates this risk in the trillions of dollars for oil and gas reserves, over $30 trillion for fossil fuel industrial assets and, if you also include domestic fossil fuel equipment, the total moves up to more than $70 trillion of potential stranded assets.

During his time as Governor of the bank of England, Mark Carney wrote that we must “avoid a climate-driven ‘Minsky moment’ – the term used to refer to a sudden collapse in asset prices”. But if climate disclosure and action fails to improve, then we risk blindly walking into a climate-driven collapse of global wealth, a so-called Carbon Crunch, which could prove ten times worse than the Credit Crunch.

How can the accounting and related professions make a difference?

The level of regulated disclosure required to drive meaningful change on climate is badly lacking, but some hopeful signs are emerging.

The EU has the Non-Financial Reporting Directive which currently requires listed companies with over 500 employees to report on emissions and climate risks. The proposed Corporate Sustainability Reporting Directive (CSRD) should extend this to all public-private companies with over 500 employees plus listed SMEs in late 2022.

The US Greenhouse Gas Reporting Program (GHGRP) requires that facilities emitting or supplying fuel that produces over 25,000 tonnes of CO2 per year must report emissions to the EPA each year. The SEC taskforce on climate disclosure has indicated that alongside material climate risks, the future filings for listed companies may require quantifying scope 1-3 emissions and analysis of climate risks and opportunity aligned with TCFD.

In 2014 China’s National Development and Reform Commission (NDRC) mandated GHG reporting for more than 20,000 companies based on GHGp guidelines. And more recently, according to Bloomberg Green, China central bank Governor Yi Gang stated that “Our goal is to make a uniformed disclosure standard, and in the future, we will go in the direction of mandatory disclosure of climate-related information”.

Nearly one decade ago, CEO of the World Business Council for Sustainable Development, Peter Bakker raised a few eyebrows at the United Nations Conference on Sustainable Development when he asserted that “accountants would save the world”. The comment was tongue-in-cheek perhaps, but the idea was solid: that without measuring a company’s social or natural capital, the business in question can’t be rewarded, or held accountable, for its actions.

With appropriate mandating, relevant accounting, and careful auditing, sustainable disclosure can be elevated to the quality of financial reporting over the coming years, not decades.

This will help to avoid corporate greenwashing and to deliver the carbon measurement and management required to drive accelerated change. So, although accountants might not save the world alone, the climate challenge is certainly lost without them.

Dr Mathew Hampshire-Waugh is the author of bestselling book ‘CLIMATE CHANGE and the road to NET-ZERO’. A former investment banker, Mathew is now Director of Climate Change for Enzo Advisors LLC, a female- and minority-led ESG boutique. The views expressed here are his own.