Sustainablecostaccounting 1

Sustainablecostaccounting

Thecaseforbuildingclimatereportingintofinancialaccounting

October2019

________________1. Summary

Thispaperrecognisesthatthereisacrisiscreatedbyglobalwarming1.Itrecognisesthatthishasbeencreatedbyhumanactivity.Anditnecessarilyrecognisesasaconsequencethatthisisprimarilytheresultoftheburningoffossilfuels,muchofwhichwillhavebeenundertakeninthecourseofcommercialeconomicactivities.Asaresultitisarguedthatitisnowapparentthattheintegrationofclimatechangereportingintothefinancialstatementsofmajorcommercialorganisationsisanimperativeiftheconsequencesforthosecorporations,theirsuppliersofcapitalandalltheirotherstakeholdersistobeproperlyunderstood.Atpresentalmostnocommercialorganisationsrecognisethecostofglobalheatingintheirfinancialstatements.Inaddition,almostallthereportingthatdoestakeplaceonthisissueisvoluntary,unregulated,andlackscomparability.ThelatestandnowmostwidespreadformofreportingonclimateissueshasbeenpromotedbytheTaskForceonClimate-relatedFinancialDisclosures(TCFD)i.LaunchedasaninitiativepromotedbytheFinancialStabilityBoardoftheBankforInternationalSettlementsin2017,around80%ofworld'slargestcorporationshavenowsigneduptoitsstandards,althoughlessthan25%oftheseprovideanymeaningfulrangeofreporting,asyetii.Thisstandardisusedasthebasisforappraisalofexistingdisclosurerequirementsinthiscommentarybecauseofthescopeofitsuseandthepowerfulandwidespreadnatureofitsbacking.

1Thetermsclimatechange,globalwarmingandglobalheatingareusedinterchangeablyinthispaper,recognisingthatthereisasyetnoconsistencyintheiruse.

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Itisstressedthatinthispaperwearenotseekingtodiscussthemeasurementofclimatechange,carbonemissions,changesinbiodiversityorotherrelatedissues.Otherstacklethoseissues.Whatweareseekingtoaddressistheimpactthattheseissueshaveuponcommercialorganisationsandhowthatimpactmightbereflectedintheirfinancialreporting.Tothebestofourknowledgethereisnoothercivilsocietyorganisation(CSO)addressingthatissue.InthispapertheCorporateAccountabilityNetwork2(CAN)suggeststhat:• ThatthecurrentworkprogrammeoftheTaskForceonClimate-relatedFinancial

Disclosures(TCFD)isunlikelytoresultinclimatedisclosurethatwillmeettheneedsofthestakeholdersoftheworld’smajorcorporations,includingtheirsuppliersofcapital;

• Thatitistheneedsofallthestakeholdersofthosecorporations,andnotjusttherequirementsoftheirsuppliersofcapitalthatmustbemetbyclimaterelateddisclosures;

• Thatmandatoryclimaterelateddisclosureisnowrequiredfromthosecorporations;• Thatmandatorydisclosuremustnotbeadditionaltothefinancialreportingofthose

companiesbutmustinsteadbeembeddedinthatreporting;• ThatwhattheCANdescribesassustainablecostaccounting(SCA)canmeetthe

needsofstakeholdersforclimatereporting;• ThatSCAhastheseadvantages:

o Itdoesnotrequirethatcarbonbepriced;o Thedecisionprocessesthatareimplicitwithinitareentirelywithinthe

reportingentity’scontrol,andthereforearecapableofbeingreporteduponbyit;

o Theinformationcanbeaudited;o Itdoesindicatewhichcompanieswill,andwillnotbe,efficientusersof

capitalinaperiodofglobalheating;o Itdoesprovideotherstakeholdersofthereportingentitywiththe

informationthattheyrequiretoappraiseitsimpactonglobalwarmingandhowitintendstoaddresstheissue;

o Itprovidesapathwayformanagingtheaffairsofthosecompaniesthatcannotbecomecarbonnet-neutral.

2. Introduction–theTCFDclimatedisclosurestandardandits

weaknesses

MarkCarney,GovernoroftheBankofEngland,madeaspeechinJapanon8Octoberonprogressmadetodatewiththe2017launchedTaskForceonClimate-relatedFinancial

2CorporateAccountabilityNetworkLimited33KingsleyWalk,Ely,Cambridgeshire,CB63BZwww.corporateaccountabilitynet.workRegisteredattheaboveaddress.Registerednumber11791864

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Disclosures(TCFD)entitled‘Strengtheningthefoundationsofsustainablefinance’iii.InthiscontextitshouldbenotedthatMarkCarneyisnotonlyGovernoroftheBankofEngland;heisalsoChairmanoftheFinancialStabilityBoardoftheBankforInternationalSettlements,whichisaprinciplesponsoroftheTCFD.TheTCFDprogrammewasestablishedin2017withtheaimofencouragingclimateandenvironmentalreportingbymajorcorporations.Asummaryoftherequirementsisattachedasanappendix.AsMarkCarneysaidinhisspeech:

Overthepastfiveyears,globalcarbonemissionshaverisenby20%andsealevelsbyover3.3mmperyear.Globaltemperaturesareoncoursetoincreaseby3.4°Cby2100.

Heacknowledgedthatthisisunsustainableandthatmajoractionisrequiredtodeliverchange.Muchofthatchangerequiredwillhavetotakeplaceinthebusinesscommunity.AsCarneynoted:

GPIF,theworld’slargestpensionfund,calculatesthatitsportfolioisalignedtoa3.5degreeworld.Allianzassessesthatitison3.7degreepathandhascommittedtogetto1.5degreesby2050.AXAestimatesthatitsassetsarecurrentlyconsistentwitha3.7degreepath.

Carneypublishedthischarttoillustratehowfarfromdesirablesuchportfoliosare:

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Asisapparent,existingbroadlybasedshareportfoliossuggestthatbusinessisalongwayfrompreparednessfortheactionsrequiredtodeliver1.5otemperaturechange,whichisthemaximumthatitisbelievedcanbetoleratedifhumanlifeonearthistobesustained.InthatcaseithastobeaskedwhethertheTCFDobjective,whichisasfollows,remainsappropriateiv:

[To]developvoluntary,consistentclimate-relatedfinancialdisclosuresthatwouldbeusefultoinvestors,lenders,andinsuranceunderwritersinunderstandingmaterialrisks

Thisismostespeciallytruewhen,asMarkCarneyacknowledged,compliancewiththeTCFD’sstandardshasbeenbothvariableandlimitedtodate:ChangesinTCDFdisclosuresbyrecommendation2016–2018

Innoareahasvoluntarycompliancereached50%asyet.Insomecriticalareas,suchasresilienceofthereportingentity’sstrategy,whichdisclosurewouldsuggestwhetherornotthereportingentityremainsagoingconcerninthefaceofthechallengesitfaces,thevoluntarydisclosureratehasyettoreach10%andtherateofgrowthsuggestsitwilltakeaconsiderableperiodoftimebeforemeaningfulcomplianceisachieved,evenamongstthosewhoclaimtobecommittedtotheseguidelines.Concernonthisissueisexacerbatedwhenitisnotedinwhichsectorsnon-disclosureonthisissueoftheresilienceofthereportingentity’sstrategyformanagingclimatechangeisweakest:RatesofdisclosureagainsteachoftheTCFDrecommendationsbyindustry

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Thetransport,agricultureandfoodsectorsareamongstthosewhereconcernaboutemissionsmanagementismostacute:theirnon-complianceisunlikelytoarisebychanceandisevidencethatavoluntaryapproachtodisclosureonthisissueisnotappropriate.ForthesereasonsalonethereisdoubtastowhetherthevoluntarynatureoftheTCFDguidelinesisadequate.Makingthemmandatorymaynot,however,addresstheconcernsthatwehave.

3. WhytheTCFDdisclosuresareinsufficientinscope

InouropiniontheTCFDsuggestionthatitsstandardsaredesignedtomeettheneedsofthesuppliersofcapitaltoacompany,implicitthroughoutitsinitialreportv,isinappropriate.MarkCarneynotedinhisspeechon8October2019that:

Althoughtheprivatesectorhasmaderapidprogressonreportingandriskmanagement,moreisrequired.Overthenextfewyears,companies,theirbanks,insurersandinvestorsmust:

1. Increasethequantityandqualityofdisclosures;2. Refinedisclosuremetricstodeterminewhichonesaremostdecision-useful;3. Spreadknowledgeonhowtoassessstrategicresilience;and4. Considerhowtodisclosetheextenttowhichportfoliosarereadyforthe

transitiontonetzero.TheimplicationisclearfromthiscommentandallcommentaryfromtheTCFDitselfthatthefocusoftheTCFDdisclosureframeworkisonprovidinginformationtothemanagersofshare,loanandbondportfolios.Carneymadethatclearinhisclosingcommentinthespeechalreadynoted:

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Withourcitizens–ledbytheyoung–demandingclimateaction,itisbecomingessentialforassetownerstodisclosetheextenttowhichtheirclients’moneyisbeinginvestedinlinewiththeirvalues

Followingwhichheadded:

TheTCFDprovidesthenecessaryfoundationforthefinancialsector’sroleinthetransitiontonetzerothatourplanetneedsandourcitizens(sic)demand.

WhatMarkCarneyfailedtodowasmaketheobviousleap,whichwasthatifcitizens,andmostespeciallytheyoung,areconcernedaboutclimatechangetheyarenotdoingsojustasassetowners,butmuchmoregenerically.Inotherwords,theyhaveinterestinthisissuenotjustwithregardtowhetherornotassetvaluationisimpactedbutforitsownsakebecauseoftheimpactithasontheirshortandlong-termwell-being.DespitethisatnopointdidMarkCarney,ortheTCFD,thinkthatthismightrequirethatthereportingthattheypropose,andwhichtheyareawaremightbecomemandatory,beextendedsothatitmeettheinformationneedsofthoseotherstakeholdersthateveryreportingentityhas.InthissensetheTCFDapproachfailstofulfillapublicpurposemandate.

4. Thestakeholdersforclimatechangedisclosure

TheCorporateAccountabilityNetwork,buildingontheopinionoftheUKbasedAccountingStandardsSteeringCommitteepublishedviin1975,suggestsviithatthereareatleastsixclearlyidentifiablegroupofstakeholderswithinterestinthefinancialreportingofeveryreportingentityviii:

1. Thesuppliersofcapitaltoareportingentity;2. Thereportingentity’stradingpartners;3. Itsemployees;4. Itsregulators;5. Itstaxauthorities6. Allwithincivilsocietywithwhomitinteracts.

WebelievethattheTCFDshouldembracethisidea.Inotherwords,inouropinionthereportingthatitproposesshouldnotbeintendedtojustsupplythedataneededforthesakeofportfolioassetmanagement,asMarkCarneyandtheTCFDsuggest,butshouldinsteadbeintendedtomeettheneedsofallthestakeholdersgroupnoted.Thiswould,inparticularrequireadditionalreportinginthecaseofclimatechangerelatedissueson:

a. Whattheissuesthattheentityisfacingare;b. Where,geographically,thoseissuesarise;c. Howtheyimpactthecommunitiesthathostthereportingentity’sactivitiesin

thelocationsinquestion;d. Howthereportingentitywillrespondtothoseissues,bylocation;

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e. Howthatresponsewillimpactthosecommunities;f. Whenthatimpactmightarise.

TheentitywideapproachthattheTCFDproposesisinadequateforthesepurposes.Justasithasbeenappreciated,asaresultofcivilsocietypressureixandx,thatconventionalconsolidatedfinancialstatementsproducedusingInternationalFinancialReportingStandardsdonotprovidesufficientinformationtomeetstakeholders’needsontaxreporting,requiringvariousresponsesfromtheOrganisationforEconomicCooperationandDevelopmentxi,EuropeanUnionxiiandothersxiii,sotooisthisnowtrueforclimatechangereporting.Theconcernofmanyofthestakeholderspreviouslynotedisnotwiththeoverallimpactofclimatechangeontheentitythatisreporting,butisinsteadwiththeimpactthattheemissionsthatthereportingentityiscreatinginthelocalitywheretheyarebased.Thematerialissueformoststakeholdersofmostreportingentitiesis,then,geographicandlocal.Mandatoryfinancialreportingonclimatechangewhenundertakeninthepublicinterest(asisnecessarilythecaseforthepublished,auditedfinancialstatementsofacorporation)must,then,inouropinion,takethisfactintoaccount.

5. Therequirementsofstakeholdersfromfinancialclimatechangedisclosure

InthiscontextwesuggestthatthefourpillarsforreportingthattheTCFDproposesaretoonarrow.Wedonotdenytheimportanceofreportingongovernance,strategy,riskmanagementandappropriatemetricsandtargetswithregardtoclimaterelatedissues,butwhatallthestakeholdergroupsthatwenoteabovedoreallyneed,wesuggest,arethesethreethings:

1. Hardevidenceastothecostthereportingentitywillincurinbecominganet-zerocarbonproducerbyanagreeddate(weprefer2030,butknowthatthisisnotuniversallyagreed);

2. Auditedconfirmationthattheentitywillremainagoingconcerninthefaceofthesecosts;

3. Amechanismfortheorderlywindingupoftheaffairsofthosecompaniesthatarenotgoingtosurviveintotheneweconomythatweneed.

6. TheSustainableCostAccountingrequirementforclimatechangedisclosure

AttheinvitationofProfAledJonesofAngliaRuskinUniversityandDrRupertReadofUniversityofEastAnglia,whohavebeenworkingwiththeInstituteofCharteredAccountantsinEnglandandWalesontheESRCfundedCentrefortheUnderstandingofSustainableProsperity(CUSP)project,CANsetitselfthetaskofseekingtointegrateclimatechangethinkingintofinancialreportingitself.TheresultistheCorporate

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AccountabilityNetwork’ssuggestedalternativeapproach,whichwecallsustainablecostaccounting(SCA)xiv.

SCAwouldmakeaccountingforthecostsofclimatechangemandatory.ToachievethisgoalwearesuggestingthatSCAbeanaccountingstandardakinto,oractually,anInternationalFinancialReportingStandard.Theessenceofsustainablecostaccountingissimple.Itwouldrequirethateverylargebusinessprepareaplantoshowhowitwouldmanagetheconsequencesofclimatechange.Thatplanwouldhavetostatehowitmightbecomenetcarbon-neutralbyaspecifieddate,bothwithinitsownbusinessandwithinitssupplychain.Theplanwouldhavetobespecificastowhatthebusinessmustdotoachievethisgoal,oralternativelystatethatthisisnotyetknown.Aprecautionaryprinciplewouldapply:inotherwords,theplancouldonlyrelyuponthosetechnologiesnowknowntoexistandthathavebeenproventowork.Inaddition,theplanwouldhavetoshowwheretheimpactofthechangeswouldarisegeographically:itwouldbeunacceptabletosolvetheprobleminsomecountriesandnotothers,ortoexportcarbonrisktodevelopingcountries.Thatplanwouldthenhavetobecosted.Therequirementofsustainablecostaccountingwouldthenbethatthefullcostofthechangetobeinganet-zerocarbonemittershouldbeprovidedforintheaccountsofthecompaniestowhichsustainablecostaccountingwouldapplyatthetimethatitwasadopted,whichcouldbeby2022ifsufficienturgencywasappliedtothistask.Annualreappraisalwouldthenberequiredthereaftertoshowprogress.Iftheinclusionofthiscostintheaccountsofacompanyresultedinitbeingshowntobeinsolventthenthecompanywouldhavetoaddressthatissuesothattheirsolvencymightberestored.Forexample,itcouldenddividendpaymentstoshareholdersandretainprofitsovertimetofundthechangetobeingnetcarbon-neutral.Alternatively,solvencycouldbeachievedbyraisingadditionalcapital.Ineithercasetheplanwouldhavetobedeemedcrediblebythecompany’sauditors.Westress:wethinkthatallthesustainablecostaccountingdatawouldrequirefinancialauditsincetheintentionistoincludeitinfinancialstatements.And,ifacompanycouldnotshowhowitcouldfundthecostofthetransition,oritcouldnotestimatethecostofcompletingthatprocess,oritconcludedthatitsimplycouldnotmakethetransition,thenitissuggestedthatitwouldhavetobedeclared‘carboninsolvent’.Thiswouldnotmeanthatitwasfinanciallybankrupt.Butitwouldmakeclearthatthecompanywasnotgoingtosurviveintotheerathatwearegoingtohavetolivein.Asaresultanorderlywindingupofitsaffairswouldberequired,andcarboninsolvencyadministratorswouldhavetobeappointedtoachievethatgoal.Butitisstressed:thisisnotaboutanimmediatewindingupofthereportingentity’saffairs:itis

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insteadaboutmanaginganorderlytransitionforallinvolvedincluding,mostespecially,itsemployees.

7. WhySustainableCostAccountingisconsistentwithfinancialreporting

Westressthatwethinkthattheimpactofclimatechangeisentirelyappropriatelyafinancialaccountingissueofconcern.Thereturntofinancialcapitalisnotnowtheissuethatmattersinthisworld,includingthatofbusiness,astherecentdecisionoftheUSbasedBusinessRoundtabletoredefinethepurposeofthecorporationindicatedxv.Theabilitytosupplygoodsandservicesinawayconsistentwithsustaininglifehereonearthiswhatmattersnow.Thisiswhysustainablecostaccountingmatters,andiswhyitshouldbemandatoryandsubjecttoaudit.Itshowswhichcompaniesarelikelytosurviveintothisnewbusinessera,ornot.Theconsequenceisthatitshouldresultinthereallocationofcapitalfromthosebusinessesthatcannotsurvivetothosethatcan.ThisisexactlywhatthepurposeofaccountingshouldbeaccordingtotheInternationalFinancialReportingStandardsFoundation.Theaccountingconceptswithinsustainablecostaccountingarealsonoteitherradicalorevenunusual.ManyarealreadyinherentinwhatiscalledInternationalAccountingStandard36(IAS36),whichconcernsimpairmentofthevalueofassets.IAS36saysthatimpairmentofthevalueofanassetmayberequiredwhen:

significantchangeswithanadverseeffectontheentityhavetakenplaceduringtheperiod,orwilltakeplaceinthenearfuture,inthetechnological,market,economicorlegalenvironmentinwhichtheentityoperatesorinthemarkettowhichanassetisdedicated.

Itisourargumentthattheclimatecrisiscreatesthis‘significantchange’(towhichweaddedtheemphasis)foreverycompanyandrequiresallentitiestoconsiderthisapproachasaconsequence.Whatwegoontosuggestisthatimpairingthecostofexistingassetsisnot,however,enoughtoaddressthesituationthathasnowarisen.OuradditionalthinkingisbasedontheprovisionsofInternationalAccountingStandard1(IAS1).IAS1relatestothepresentationoffinancialstatementsandsaysthat:

Whenpreparingfinancialstatements,managementshallmakeanassessmentofanentity’sabilitytocontinueasagoingconcern.Anentityshallpreparefinancialstatementsonagoingconcernbasisunlessmanagementeitherintendstoliquidatetheentityortoceasetrading,orhasnorealisticalternativebuttodoso.

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We,again,addedtheemphasis.Whatwearesuggestingisthatunlessanentitycansuggesthowitcanmeetthecostsofbecomingnetcarbonzerocompliantthenitfollowsthatthecurrenttechnological,market,economicandlegalenvironmentmeansthatithasnorealisticalternativebuttoceasetotrade.Sustainablecostaccountingrequiresthatittestthishypothesis,andpublishtheresultsinanauditedform.This,inessence,isallthatSustainableCostAccountingis,withtheaddedtwistthat:

1. Thespecificbehaviourtowhichitappliesistheabilityofthereportingentitytolimititscarbonemissions;

2. Wesuggestthataspecificdateforachievingnetzerocarbonemissionsbeimposed;ourwishbeingthatthisbeby2030;

3. Theconceptofcarboninsolvencyiscreatedforthosecompaniesthatcannotmeetthisobjective.

8. TheconsequencesofSustainableCostAccounting

Accountingshouldbethelensthroughwhichweviewthecommercialworld.Itis,ofcourseacompany’sright(withinthelimitsofregulation)toprojecttheirownimageofthecontributionthattheyclaimtomaketotheworldthatwelivein.Butthewholereasonforrequiringauditedaccountsfromthoseentitiesisthatitisknownthatcompaniesmight,ifgivenafreehand,representmattersinawaythatisnotthewholetruth.Thisiswhyoneofthetraditionalunderpinningsofaccountingwaswhatwascalledthestewardshipconceptxvi:thedirectorsofacompanywererequiredbyaccountingregulationtoprepareatrueandfairreportoftheirmanagementoftheassetsentrustedtotheircare,whichhadtobesubjecttoaudittosubstantiateitsveracity.Onceitwassufficienttothinkthatthisissueonlyrelatedtothefinancialassetsoverwhichthosedirectorsmightcommandcontrol.Mostcompaniesweresmall.Theirreachwaslimited.Theirpowertoinfluencemacroeconomiceventswasnegligible.Theirimpactontheworldbeyondtheirownenterprise’s(literal)gatesappearedtobesmall.Butthatisnolongertrue.Thenumberoflargecompaniesintheworldhasshrunkconsiderablyinsizexvii,buteachofthemisverymuchlargerthanthosetheymightbecomparedwithinthepast.Manyofthemtrade,quiteliterally,aroundtheglobe.Theirsalesfrequentlydwarftheentireincomesofthecountriesinwhichtheytradexviii.Theydohavesignificantmacroeconomicpower,notleasttodeterminetheincomeofgovernmentsthroughthetaxesthattheydecidetopay,ornot,bylocationxix.Andtheircommandofresourcesstretchesfarbeyondnationalboundaries.Inthissituationasystemoffinancialaccountingfirstimaginedinthelatenineteensixtiesxx,thathascometodeliveralimitedrangeofdataforaverylimitedrangeofstakeholdersxxihasreachedtheendofitsusefullife.Asalreadynotedinthispaper,thetimehascomeforaccountingtorecogniseallthestakeholdersoftheworld’sreportingentitles.Andthoseentitieshavetoaccountforthestewardshiptheyundertakeoverall

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theresourcesthattheycommandinthecourseoftheiractivities.Thisiswhywehaveproposedsustainablecostaccounting.Itisnownecessarythatcorporateaccountingfortheresourcesthatareusedbyareportingentityandtheconsequencesthatflowfromthatusebebroughtwithinthemainstreamoffinancialaccountingandoutoftheghettoofvoluntary,unregulated,unauditedandperipheralreportingthatseekstoemphasisethatthisissueisnotoneofprimaryconcerntomajorreportingentities.Weareawarethatsimpleasitappearstobesustainablecostaccountingwillhavesignificantimpactonthecorporateworld.Thatisitsintention.Itiswellknownthatwhatwemeasureiswhatcomestomattertousxxii.Theenvironmenthastomattermoretothecorporateworldthanitdoesatpresent.Butthereismoretothisdesirethanthat:thefactisthatatpresentthefinancialreportingofmanyoftheworld’smajorcorporationsisincompletebecausetheydonottaketheiruseofnaturalresourcesintoaccount.Theresultistheconsiderablemisallocationofresourceswithintheworld’seconomies.TheBankofEnglandhasestimatedthatuptoUS$20trillionmightbeatstakeasaresultxxiii.So,whilstweknowthattheworldcannotburnmostofitsknownoilreservesitremainsthecasethatitsoilcompaniesareamongstthelargestcorporationsintheworldxxiv.Themanufacturingofcarsremainsamassivelyimportantactivity,attractingenormousresourceswhenitisnowknownthatthosesamecarscannotbeusedifwearetomeettheworld’sclimatetargets.Andthesameifevenmoretrueofaircraftmanufacture,andoftheairlinesthatusethem.Lessimmediateobvious,butasimportant,isthetransformationrequiredintheworld’sagriculturalsystemsandinallthesupportservicesthatmaintainthem.Itis,ofcourse,truethatnoneofthesechangesneedhappen.Butwhatwenowknowisthatclimatescienceissettledonthefactthatifwedonotchangethentherewillbecontinuedglobalheatingxxvwiththeresultantriskofaclimatecatastrophe.Thisisariskthatgovernmentsandmanyincivilsociety,inallitsforms,thinkshouldnotbetaken.Theresultisthatthetimehascomeforbusinesstorecogniseitsresponsibilitiesonthisissue.Thisiswhyweproposetheuseofsustainablecostaccountingandthatitbecomeanaccountingstandard.Weareawareoftheconsequencesofwhatwearesuggesting.Forexample,manycompanieswillhaveconsiderabledifficultyproducingaplantobecomenetzerocarbonemitterswhenlegallyrequiredtodoso,butifthatisthecasethenthatissomethingthattheirstakeholdersneedtoknow.Inaddition,wearealsoawarethatmanycorporationswillhavetoceasepayingdividendstofundtheircarbontransition.Thiswill,inturn,haveanimpactonallthosewhodependuponthatdividendincomeincluding,forexample,pensionfunds.This,however,ispartofthecrisisthatglobalheatingdoes,inanycase,present:ourmanagementoflongtermobligationsonexistingbasesisnolongerpossibleand

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sustainablecostaccountingbothmakesthisclearandsuggestshowcapitalshouldbereallocatedtomeetneeds.Insummary,itisourcontentionthathardastheconsequencesofsustainablecostaccountingwillbeforsomecompaniesandsectors,andforthosewhohavedependeduponthemwhatitdoesisdrawattentiontoanissuethatweallactuallyknowtobetruenow,whichisthattheworld’scorporationsareusingthenaturalresourcesofourplanetinwaysthatareunsustainable.Inthatcaseaccountinghastochangebecauseweneedaclear,audited,enforcedandunambiguousindicatoroftheprocessofchangethatbusinessmustgothroughtosupportcontinuedhumanlifeonthisplanet.Sustainablecostaccountingcandothatbyindicatingwhocan,andcannot,usecapitaltobesteffectinthischangedenvironment.Thatispreciselywhyitisneeded,howeveruncomfortabletheconsequencesmightbe.

9. Sustainablecostaccounting–theissuestoresolve

a. Atwhatdateisnetzero-carbonrequired?2030isdesirable.Thereisthenachancethatthenetzerocarbontargetmightbemet.

b. Howisnetzero-carbontobemeasured?Giventheuniversalapplicationofthestandarditwillnotbepossibletobeprescriptiveonthisissue.Howthisgoalwillbeachievedwillvarybetweensectors.

c. Whyisthesupplychainconsideredwhenthereportingentitieswithinitwillthemselvesberequiredbythestandardtobenetzero-carbonemitters?Therearethreereasonsforthis:

• First,thisemphasisesthatallreportingentitieshavesupplychainchoices;• Second,thisencouragesreportingentitiestore-engineertheirprocesses;• Third,thereportingentitymaynotagreewiththeconfidenceexpressedby

companieswithintheirsupplychains.

d. Whyisaprecautionaryprincipleprescribed?Precautionaryprinciplesarefeatureofsomeaspectsofgreenthinking.Theycanbeequatedtotheprudenceconceptthatwasatonetimeaprominentfeaturewithinaccounting.Theprinciplerequiresthatacompanyundertakeitsappraisalofitsprospectofbecominganetzero-carbonemitterwithintheframeworkofcurrentlyknownandproventechnologies.Itmaynotthen,forexample,assumenuclear

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fusionwillbeavailablewhenitatpresenthasnot.Therearegoodreasonsforthiswithintheframework:

• Itprovidesanunambiguousbaselevelforappraisal;• Itpermitsreappraisalifandwhentechnologyimproves;• Themethodwillencourageinvestmentinthatimprovementintechnology.

e. Willcarboninsolvencyrequirethatcompaniesceasetradingimmediatelythatitis

declared?No,itwillnot.Carboninsolvencywillimplythatareportingentityhasnotatpresentgotaplantohowitwillbecomeanetzero-carbonemitter.Thiswilleitherbebecauseithasnotatpresentgotaccesstothecapitaltoachievethisobjectiveortheyarenotawareastohowtotechnicallyachievethisgoalasyet,atleasttothesatisfactionoftheirauditors.Thismeansthatthewholefocusofthereportingentity’sattentionhastobeonthisissue:ifitcannotresolveitthenitwillhavetoceasetotrade.Thetaskofcarboninsolvencyadministratorswouldbetosupervisethisprocess.Andif,asdeadlinesforbecomingnetcarbonneutralapproachedandnoprogressonthisissuehavebeenmadethenitwouldbecomeapparentthatthecompanywouldneedtobewoundupunlesssomealternativearrangements,tobeputinplacebygovernment,wasmadetopermitsurvival.Critically,theprocessisintendedtomakecleartheimportanceoftheissue.Whenthefutureoftheplanetisatstakeadeclarationofcarboninsolvencyforareportingentitythatcannotplayitspartinthechangethatwemustallmakeisanecessarymeasure.

Appendix1TheTaskForceonClimate-relatedFinancialDisclosuresrecommendations

TheTCFDsummarisesitsrecommendationsasfollowsxxvi:

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Endnotesihttps://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdfiihttps://www.bankofengland.co.uk/-/media/boe/files/speech/2019/tcfd-strengthening-the-foundations-of-sustainable-finance-speech-by-mark-carney.pdf?la=en&hash=D28F6D67BC4B97DDCCDE91AF8111283A39950563iiihttps://bankofengland.us12.list-manage.com/track/click?u=f7bfb4e5984e7fb90467e6fba&id=6e4876404d&e=83911740c0ivhttps://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdfpageiiivhttps://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdfvihttps://www.icaew.com/library/subject-gateways/corporate-reporting/the-corporate-reportviihttp://www.corporateaccountabilitynet.work/what-we-are-about/stakeholders/viiiWeusetheterm‘reportingentity’becausenotalltheorganisationstowhichaccountingstandardsapplyarecorporations.Theyalsodonotneedtobeprofitmotivated.Theterm‘reportingentity’coversthebroaderscopeofthedemandforproperaccountingtoallstakeholdersbyorganisationswithmajorimpactontheirstakeholders’activities.ixhttp://visar.csustan.edu/aaba/ProposedAccstd.pdfxhttps://unctad.org/en/PublicationChapters/diaeia2018d5a2_en.pdfxihttps://www.oecd.org/tax/beps/beps-actions/action13/xiihttps://ec.europa.eu/taxation_customs/business/tax-cooperation-control/administrative-cooperation/enhanced-administrative-cooperation-field-direct-taxation/country-country-reporting_enxiiihttps://www.globalreporting.org/information/news-and-press-center/Pages/Draft-standard-tax-and-payments-to-government-public-comment-2018.aspxxivhttp://www.taxresearch.org.uk/documents/scajune2019.pdfxvhttps://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americansxviTheideahasmovedonsomewhatnow,andislittleemphasised,overallhttps://www.icaew.com/technical/corporate-governance/codes-and-reports/uk-stewardship-codexviihttps://www.ft.com/content/0c9c0b64-9760-11e9-9573-ee5cbb98ed36xviiihttps://www.businessinsider.com/25-giant-companies-that-earn-more-than-entire-countries-2018-7?r=US&IR=Txixhttps://www.oecd.org/tax/beps/xxhttps://www.icaew.com/library/subject-gateways/accounting-standards/knowledge-guide-to-uk-accounting-standardsxxihttps://www.iasplus.com/en/standards/other/frameworkxxiiWeacceptthattherearealsoissuesarisingfrommeasurement–butthatisnotthecasebeingaddressedhereatpresenthttps://medium.com/coffee-and-junk/campbells-law-goodhart-s-law-when-you-are-measuring-to-fail-c6c64923ad7xxiiihttps://www.theguardian.com/environment/2019/apr/17/mark-carney-tells-global-banks-they-cannot-ignore-climate-change-dangersxxivhttps://www.carbontracker.org/terms/stranded-assets/xxvhttps://report.ipcc.ch/sr15/pdf/sr15_spm_final.pdfxxvihttps://www.fsb-tcfd.org/wp-content/uploads/2017/06/TCFD-Recommendations-Overview-062717.pdf