The pace economies decarbonise is set to pick up in the years ahead. Corporate success will increasingly depend on companies’ ability to articulate to all stakeholders how they are adapting to the new business model coming down the track. It means finance and treasury teams will need to publish corporate accounting models and balance sheets that put financial numbers on their sustainability data and information.
“Companies should prepare for the same legislative and regulatory overhaul in corporate accounting ushered in after the 1930s US stock market crash,” says Leon Saunders Calvert, Head of Research & Portfolio Analytics at London Stock Exchange Group (LSEG). “Back then, reporting via balance sheets and cash flows was challenging. Eighty years on, public companies face another drive in transparency because decarbonising is financially material.”
Of course, sustainable corporate reporting has been growing steadily over the last ten years with some 80% of global companies now reporting on sustainability, according to KPMG. Of this cohort leaders have emerged, already integrating their financial performance with their sustainability performance in a single, annual report. However, it is the pace of this convergence that is about to pick up, as standard setters increasingly eye ESG reporting as financially material, and financial statements no longer giving the full picture. “There are developments towards a more integrated form of reporting,” says Arjan de Draaijer, Global Co-lead, Impact, ESG and Sustainability at KPMG in the Netherlands. “Financial reporting standard setters and sustainability reporting standard setters like GRI (Global Reporting Initiative) and SASB (Sustainability Accounting Standards Board) are increasingly looking at the similarities and connections between financial and sustainable reporting. It all points towards a more integrated perspective on reporting that caters to all stakeholders.”
However, de Draaijer doesn’t believe this means companies will produce one document. “I expect there will be a portfolio of different reports,” he says, predicting a myriad spanning human rights in the supply chain to the financial impact of climate change and, going forward, the impact of biodiversity and inequality on financial statements as well.
According to KPMG, currently only around one quarter of companies at high or medium risk from biodiversity loss currently disclose that risk in their corporate reporting. “This is another element that should be on a treasurer’s mind in the future,” he says. As for the reporting burden, he believes digital publishing and linking reports from corporate websites will make the process easier. “Stakeholders will just be able to search for the information they need.”
Another important shift in reporting is also under way. Companies have traditionally approached disclosure and reporting from an inside-out perspective. This typically involves measuring and reporting a firm’s impact on the outside world – like its carbon emissions. Increasingly, companies are using new disclosure requirements (namely the Task Force on Climate-related Financial Disclosures, TCFD) which focus on disclosure through a different, outside in-lens that reports on how climate change will impact the company’s financial performance.
This could entail disclosure on how rising temperatures could impact suppliers in developing nations, or how changing consumer behaviour will impact demand for a core product. “The indicators that are related to this type of reporting are of a different nature,” says de Draaijer. “A carbon footprint is still useful information in terms of detailing the carbon intensity of a product and its vulnerability to a low carbon economy, but this new type of information and data is increasingly appearing,” he says.
Treasury and finance departments need to be able to articulate how sustainability data and numbers are integrated into the company’s business strategy to investors and lender banks. The best way to do this is to make externalities directly financially material and view them as a liability on the balance sheet, urges Saunders Calvert.
Most companies have only just begun. Positively, Saunders Calvert estimates around 41% of the 10,000 companies LSEG covers already report their Scope 1 and Scope 2 carbon emissions associated with energy consumption in their own operations. “There is a demand for this kind of information from investors,” he says. “Investors are telling companies that this is financially material information regarding their cost of capital.”
In contrast however, he says a much smaller proportion of companies have a cost of carbon internally that they manage to; deploy a liability to the balance sheet and seek to offset emissions by, say, paying carbon credits. “Only a small proportion of companies recognise the cost of carbon in the way they manage their financials.”
Nevertheless, he is convinced this is the direction of travel and it matters more that firms have embarked on the journey than their position en route. “If treasury actually have this information on the balance sheet; if they have it as a proxy, or even if they can just show they are on a journey to treating carbon as a cost to the organisation, it will demonstrate to investors they are somewhere on the road to internally quantifying and internalising these externalities,” he says. “Data points around carbon emissions will make their way in time, into actual corporate liabilities. It won’t be a separate statement; it will just sit there as financially material next to other liabilities.”