Hugh Wheelan: All I want for Christmas is a serious push by auditors and regulators on getting climate reporting into international accounting standards.

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Financial journalists like me write strange letters to Santa. Mine this year went as follows:

Dear Santa, what a year it’s been: who could have predicted Covid-19 and its huge societal and economic damage? 

And closer to my sustainable finance home, who could have hoped for the enormous shifts in the importance of ESG data in regulatory, corporate and investment decisions?

But something has been bothering me…

Despite all the incredible activity around homogenising sustainability reporting and organisations, green taxonomies and incentives, climate scenario calculations and standards, I – and quite a few others – have become increasingly worried that working all of this out will take a huge amount of time, which, of course, we don’t have if we are to meaningfully shift the needle quickly on dramatically reducing C02 emissions in line with the Paris Agreement. 

I don’t need to tell you about melting ice caps Santa! 

We’re worried that a lot of this activity – while well meaning and important – is akin to tinkering at the edges, or just too easy to sign up to without bringing about real change.

There are many sustainability issues that require our attention (we’re working on our corporate naughty and nice exclusion lists, don’t worry!) but we feel that climate change is one where we can and need to make progress quickly. 

We already have international scientific and political consensus on the problem and a global framework for policy action. We also have clear evidence of the potential financial impact of ensuing regulatory activity on company assets, but also of the economics already at play; just look at the huge recent asset write downs at oil majors, BP and Shell, or in the coal sector.

And incredibly, we also have a clear mechanism for getting companies to think clearly about these kinds of dangers in their financial reporting, and for warning shareholders, which includes you and I Santa via our pension funds. 

Even more interestingly, following a push by investors representing over $100 trillion in assets, we also now have advice from one of the main global regulatory bodies, the International Accounting Standard Board (IASB), which oversees International Financial Reporting Standards (IFRS). They say material climate factors should be considered by companies when drawing up their accounts and calculating profits and solvency, and that any ‘material’ assumptions should be declared.

They’re even showing companies how it should be done here.

These standards are long established, mandatory in 140 countries, and apply to all companies, not just publicly quoted ones. Getting this taken seriously would be a massive change to the way companies and investors think about CO2 emissions data, regulatory developments and pricing. 

As the IASB notes, applying these assumptions to accounts would impact asset impairment calculations, including goodwill, changes in the useful life of assets and their fair valuation, changes in provisions for onerous contracts or contingent liabilities from fines and penalties, or any expected credit losses for loans and other financial assets. 

That’s serious business in our financial markets Santa!

Now all we need is for auditors and regulators to get on board. They are the last organisations needed to drive the current activity into meaningful practice. 

Helpfully, the International Auditing and Assurance Standards Board (IAASB) has published similar guidance to the IASB on how accounts are audited. Again, they say, if material, climate assumptions must be part of the audit!

Santa, if you can work your magic this Christmas on both Covid vaccine roll out and getting the big audit firms and country regulators to roll in behind what I’ve outlined above, you will be changing the face of 2021…just wait until you see what could happen to company reporting on climate as a result!

Happy Christmas to you and the reindeer from all the team at Responsible Investor, and good luck!