Over the past 25 years, the push toward mandatory carbon reporting requirements has intensified. However, the lack of a solid carbon accounting ecosystem leaves too much room for misinformation and fraud. A strong carbon accounting ecosystem necessitates bold standards for measuring progress, plain reporting language, and independent professionals who can verify the information.
Current carbon reporting rules create a hodgepodge which results in little usable information and thus, mostly ineffective for capital markets. The few qualified professionals who can churn out reports that link climate risk to enterprise risk also pose a potential danger to effective carbon reporting. This problem could be further exacerbated considering that many companies, while increasingly providing voluntary carbon disclosures in their financial or sustainability reports, find themselves ill-equipped for an audit of these reports. See report
United Nations Secretary-General António Guterres in 2022 accused governments and businesses of misdirecting their climate efforts. This raises pressing questions about the reliability and authenticity of stories on climate risk initiatives and the faith in government efforts to bring about meaningful climate changes aligning with long-term market growth. It also casts doubts on the capability of auditors to guide investors, especially when they lack training in linking carbon accounting to financial performance. More on this issue
There have been instances of corporations indicating continued demand for high-carbon products, even beyond 2030. However, this came with an elevated risk of litigation related to a corporation’s climate strategies. For instance, ExxonMobil was sued by California over climate change reporting. Here’s an example
On the other side, many corporations have perennially underestimated their climate risk challenges. Moreover, their reactions to carbon disclosures have been reactive rather than proactive. Hence, companies that offer unbiased truths about climate risk can enhance their market credibility. Link to the report
The lack of experts in the field of carbon accounting has major implications on the capital markets. In order to address this problem, regulators are contemplating on allowing non-traditional assurance providers to this field, similar to the approach applied to conflict minerals issues. More information here
Last year, advocacy group ClientEarth warned Big Four accounting firms that they were not adhering to audit standards and their core legal duties by ignoring climate risks. The organization concluded that 80% of auditors show no clear indication of whether or how they evaluated substantial climate-associated matters in their reporting, thereby, threatening market integrity. Read more about it
In conclusion, the consequences of the lack of reliable carbon accounting integrated with financial information are too high to rest on traditional financial accounting solutions. Both accounting and audit professionals should enhance their advocacy for meaningful carbon accounting standards, steer standard-setters towards generating rules-based guidance, drive university and post-graduate training programs, while building in-house coursework to prepare auditors to link climate risk along with environmental, social, and governance practices with an organization’s future financial performance and viability.