By Professor Thomas Cuckston, Professor of Accounting and Ecology – Birmingham Business School
Climate change and nature loss are urgent global crises threatening our societies. Humanity must find a way to transition from a global economy that drives climate change and nature loss to one that stabilises the climate and drives nature recovery. International initiatives like the Taskforce on Climate-related Financial Disclosures (TCFD) and the Taskforce on Nature-related Financial Disclosures (TNFD) are promoting risk-based approaches to addressing these crises, shifting global financial flows towards business activities that are ‘net-zero’ carbon and ‘nature-positive’.
These initiatives aim to bring climate and nature “into account” in corporate reporting and financial market decision-making. The goal is for investors to recognise climate and nature breakdown as systemic risks to the global economy and to their investment portfolios. This should then compel companies to act to mitigate their negative climate and nature impacts, and perhaps even undertake positive actions like carbon sequestration and nature restoration projects.
For accountants, the move towards risk-based approaches on climate and nature will have major implications:
New forms of corporate reporting
Companies will need to report how climate and nature link to their financial and business risks. This is a big evolution from most current sustainability reporting, which is largely based on compliance with standards. Accountants will need to develop new skills, particularly in dealing with climate/nature-related datasets and analytics.
Rethinking materiality
Risk-based approaches reframe climate and nature as financially material for investors. This will transform how companies determine what they will report. Rather than being seen as a side-issue, or part of corporate social responsibility, climate and nature become central concerns of a company’s relationship with its investors.
New assurance demands
With climate and nature risks seen as financially material, demand will likely grow for assurance and audit of sustainability disclosures. New auditing standards covering climate/nature-related risks will need to be developed and implemented.
Advising clients on risks
Accountants must become proactive in advising clients on assessing and disclosing climate/nature-related risks, rather than waiting for regulation. TNFD reporting is currently voluntary in most jurisdictions, but early action will likely provide strategic advantages.
Developing ecological literacy
To properly analyse climate/nature-related risks, a grounding in ecology is essential. Accountants will need to build new internal capabilities and expertise by engaging with professional ecologists, conservationists, and ecology academics. Professional training and university programmes must integrate ecological literacy into accountancy education.
Pressure to act
As investors increasingly demand climate and nature risk analyses, accountants will likely face pressure to curb advisory services that support activities seen as high-risk for causing damaging impacts on climate and nature. Accountants need to take a stand on the kinds of activities they will facilitate and how the application of their expertise will impact the climate and nature crises.
The accounting profession is a vital part of the global financial system. The advisory and assurance services provided by accountants are crucial to the supply of robust corporate disclosures that support investment decision-making. Strong and informed engagement by the accounting profession with initiatives like TCFD and TNFD will be critical to the work of integrating climate and nature risks into financial markets, enabling a ‘net-zero’ and ‘nature-positive’ future for everyone.
Accountants can and must show leadership in accelerating risk-based reporting and action on the climate and nature crises.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.