Accounting For Climate Change

The threat of climate change on the global economy could not be more glaring as climate and weather-related disasters surge. According to the United Nations, greenhouse gas concentrations are at record levels and the planet is on a path to overheating.

Heavy rainfall in China and India resulted in many fatalities, mass evacuations and major crop damage. Extreme heatwaves across the U.S devastated its ecosystems and infrastructure leading to adverse impacts on agricultural commodities. Southern Madagascar is experiencing the worst drought in decades with more than one million Madagascans being left without sufficient, safe, and nutritious food.

The seriousness of the matter was addressed by global leaders and climate change activists at the recent COP26 in Glasgow with attention given to private financers, insurers, banks, and asset managers with around $130 trillion in capital, committing to cancel out all carbon emissions in their portfolios by mid-century with expected major reductions in emissions by 2030.

Cue the need for professional accountants to develop, implement and monitor relevant standards to ensure that the commitment to net-zero global greenhouse gas emissions is realized.

Improved disclosure will assist in facilitating efficient allocation of capital to companies best positioned to transition to net zero business models along with providing investors and the public with a means to hold executives accountable for meeting goals.

The International Federation of Accountants (IFAC) issued a statement on the impact of climate change and the 2021 reporting cycle highlighting the critical role and responsibilities of professional accountants as follows:

1. Aligning and integrating climate-related information and disclosures with company climate commitments, targets, and strategic decisions thereby ensuring that senior management, boards of directors, and investors have confidence that internal accounting and external reporting is rooted to the reality of the company’s climate commitments, strategy, business model and operations.

2. Quantifying, wherever appropriate, financial impacts of climate issues through climate scenario analysis and risk assessment helping translate risk and opportunities into numbers.

3. Ensuring climate-related reporting complies with reporting requirements without material omissions or misstatements, based on a company-specific materiality determination.

4. Supporting global initiatives to enhance climate and broader sustainability-related reporting through standards set by a new International Sustainability Standards Board (ISSB) that will address material impacts on a company’s enterprise value thus enhancing the quality of climate-related and overall sustainability-related information for all stakeholders.

It is going to be vital for professional accountants to maintain the heightened level of awareness around climate change so that promises are met and our planet has the best chance of survival.

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