The Importance of Credible Reporting
The collapse of Silicon Valley Bank (SVB) recently has shaken the start-up and technology eco-systems. Just a few weeks prior to the collapse, SVB was named on a list of America’s best banks by Forbes and was seen as a trusted stalwart of the technology scene. At that time, the impending collapse of the institution clearly wasn’t something stakeholders even had on their radars. While the US financial reporting and banking frameworks are likely much more robust than they were going into the 2008 global financial crisis, questions will be asked in upcoming weeks about how this most recent collapse could have happened so quickly, and what are the shortfalls in the reporting regulations that should have identified a risk such as this much earlier.
Despite those potential shortfalls in the reporting framework which may have provided earlier public clarity around liquidity concerns, the quick response by US regulators in placing the institution into receivership on the Friday and facilitating immediate access to funds the following week, appears to have salvaged a workable outcome from what could otherwise have started a very, very bad catalyst of events.
We all love to criticize our big banks. If they make too large a profit the media is quick to label them greedy corporates. If their profits are down the media is quick to imply a shortfall in senior management capability. Many economists joke that bank bashing is one of our favorite pastimes. However the quality of regulatory requirements for banks in countries such as the US, UK and Australia is something these countries are very lucky to have. While no financial system is perfect, many countries don’t have the luxury of a largely credible and transparent financial regulatory system - this is often a key differentiator between first and third world countries. The quick action of US regulators last week is an excellent example of this in action.
What about Non-financial Reporting?
It’s interesting to compare the quality of financial regulatory reporting requirements with non-financial reporting requirements, such as climate reporting. Climate reporting is obviously a very popular topic in recent years, with real effects of climate change becoming apparent and the sheer scale of the climate emergency becoming all too obvious. Unlike the financial regulatory system, we don’t have the benefit of past experience to learn from with climate change like we do with financial downturns and financial crises. And if we don’t handle the climate emergency correctly, it’s possible we won’t get a second chance.
Similar to the financial reporting expected of companies, stakeholders (and in particular, consumers) are now starting to expect and demand clarity around the climate and sustainability impact of businesses they interact with. And rightfully so - consumers should have the ability to buy from businesses with the lowest negative or highest positive environmental impact. After all, everyone is affected by this metric - the impacts are not just limited to certain stakeholders which is often the case with financial outcomes.
A key problem is the immaturity of current climate reporting frameworks. The credibility and quality of greenhouse gas assessments produced in accordance with the minimum requirements of these frameworks isn’t even comparable to financial reports prepared under the various financial regulations. Even under the most established and widely used carbon accounting framework, the Greenhouse Gas Protocol, there is an enormous amount of discretion as to which emissions get included in an assessment. Scope 3 emissions, which will typically comprise around 80% of the overall emissions attributable to the goods and services produced by a business, are often excluded from operational assessment boundaries altogether.
A Common Story - Quick Estimation and Buy Offsets
Many organizations will take this partial assessment and acquire some form of carbon credit to offset against their limited emissions estimation so they can make a claim of carbon neutrality. Many software products even build their business model around this - promoting a quick or instant carbon assessment or estimation, before brokering various carbon credits to the business to be used as offsets. The quality of these carbon credits can vary significantly. Some carbon credit projects are of reasonable quality, and no doubt do sometimes result in carbon being locked up in some form (such as in forestry or other carbon sinks) for a certain timeframe, or even better they might result in permanent carbon removal. However the practice of purchasing cheap credits from less regulated jurisdictions is unfortunately all too common and there is considerable doubt around how genuine some of these credits are. Even in Australia, there is a question of credibility around some projects established under the Australian Carbon Credit Unit (ACCU) framework.
Fortunately, many consumers and other stakeholders are becoming much more aware of this. Like in some overseas jurisdictions with further evolved climate regulations, the shortfalls of carbon credits are now starting to be understood in Australia. There is also an increasing understanding that we will not be able to offset our way out of the climate emergency - in the absence of huge technological advancements, we simply don’t have the capability on a macro level to remove or sequester enough carbon to offset our current emissions. And importantly, organizations making misleading statements about their environmental impact are starting to be called out for it. Due to this many organizations are wary of perceived greenwashing and starting to take the credibility of their climate accounting much more seriously.
Many businesses also want to do the right thing - they’re not purposefully setting out to greenwash but they don’t fully understand the evolving frameworks and risks. It’s an unfortunate reality that there’ll always be some organizations that will try to mislead stakeholders or do the bare minimum required from an environmental regulatory perspective. However there are a significant number of businesses who want to do the right thing, but are overwhelmed by the complexity.
The Future of Robust Climate Frameworks
I’d like to live in a world where we take climate reporting just as seriously as financial reporting. After all, the potential repercussions of this climate emergency are more severe than anything a financial downturn could ever cause, and we’ll only have one chance to get this right. Governments are increasingly expanding climate reporting requirements and also starting to take regulatory action in extreme instances of greenwashing by large corporates. With increasing regulations, the complexities around carbon accounting will become more understood, and the accounting profession will have more robust climate frameworks to work with (I’m a big advocate for accountants saving the world!). However, it’s taking time to formulate and establish credible climate regulations. It’s a politically charged subject with strong opposing views.
The good news is that, in the meantime, businesses don’t have to do the bare minimum to comply with regulations. They can choose to account for their impact under a more credible and comprehensive framework (such as the science based initiatives framework that sumday promotes), they can choose to include all appropriate emissions within their assessment boundary, and they can choose to be transparent around assumptions they have had to make which might cause the assessment to be less accurate than it ideally should be.
The world needs climate action now and we don’t have the luxury of waiting for regulations to mandate it. Companies can make a strong statement by demanding credible climate reporting from their suppliers. Both SMBs and large organizations have an opportunity to pioneer in the climate space, and to win market share by providing transparency and credible climate credentials to their customers.
The accounting profession has an opportunity to drive highly impactful change and help develop an increasingly credible climate accounting framework. This shouldn’t be a chicken and egg situation, where businesses wait for the perfect framework before they start climate accounting. Businesses should be striving to provide complete and credible climate information to stakeholders, and where they have to make assumptions or don’t yet have access to highly credible data they should just be transparent about this. More accurate emission factors (and more importantly, primary emission factors specific to suppliers and their products) will come.
Make Sumday Today
At sumday, we’re building the platform every business and their accountant needs to accurately prepare and share carbon data with stakeholders. Our customers range from micro businesses through to large corporate enterprises. There are amazing accountants behind them every step of the way too. Our business customers and sumday certified advisors are proving everyday that carbon accounting to an auditable standard is possible for every business.