In the current business landscape, American corporations are gearing up for imminent climate disclosure requirements in Europe and California. This shift has led corporate accountants to integrate carbon accounting into their repertoire, balancing the management of greenhouse gas emissions with traditional financial metrics such as revenue and assets.
As of 2024, with the European Union’s new regulations set to take effect, corporate accountants are meticulously examining environmental data previously published on a voluntary basis. Their goal is to identify and address any discrepancies to comply with these upcoming mandates, which require companies to report significant climate change risks and their environmental impact. This European directive, with its extensive reach, will also encompass U.S. companies operating within the EU. Additionally, California’s latest emissions reporting law targets firms generating over $1 billion in revenue within the state.
The U.S. Securities and Exchange Commission (SEC) is also refining a more focused proposal on climate risk reporting, which is expected to be finalized in the coming year. Billy Scherba, Vice President of Regulated Reporting Solutions at Persefoni, emphasizes the critical need for reliable and comparable carbon data, alongside traditional financial information. ESG certified finance professionals and accountants are now tasked with the responsibility of managing this publicly available information, integrating environmental, social, and governance considerations into their traditional roles.
The significant stakes involve a company’s reputation. New climate-related figures could potentially impact valuations or earnings, as investors and creditors reassess the company’s standing based on these disclosures.
The essence of carbon accounting lies in translating various business activities, such as manufacturing or electricity consumption, into metrics that reflect a company’s carbon footprint. This process includes accounting for indirect emissions from suppliers and customers, following the Greenhouse Gas Protocol. This protocol serves as a framework for measuring a company’s contribution to climate-warming pollutants, including carbon dioxide, methane, nitrous oxide, and other heat-trapping gases.
Carbon accounting is a means of creating accountability. It involves a comprehensive understanding of a company’s business activities, energy consumption, and procurement practices. Despite some resistance from business advocates and lawmakers who have urged the SEC to exempt public companies from disclosing emissions from suppliers, the European Commission has faced similar challenges and has offered more flexibility in reporting requirements.
Lauren Riley, Chief Sustainability Officer at United Airlines, views emissions reporting and other environmental indicators as a new metric for evaluating a company’s performance. This perspective requires the expertise of accountants to determine which figures are significant to the business and to assign a monetary value to climate risks.
Accounting for carbon emissions, akin to traditional accounting metrics like revenue or depreciation, involves complex estimations. Shari Littan, Director of Corporate Reporting Research at the Institute of Management Accountants, highlights the emergence of the environmental, social, governance (ESG) controller role. This role is pivotal in ensuring the reliability of carbon emission figures, which are transitioning from voluntary reports to mandatory securities filings. Major corporations like Google and Bank of America have established dedicated controllerships to comply with incoming ESG reporting mandates, which will also require third-party verification.
Accountants must discern which data are crucial for their business and locate the underlying information, such as travel receipts or utility bills. They also need to be familiar with the methods used to estimate a company’s carbon footprint, which may involve formulas based on company spending to estimate indirect emissions.
Scherba underscores the importance of consistency, traceability, and control over these metrics, aligning them with the traditional role of Certified Public Accountants (CPAs). Ensuring fair presentation of this information to investors falls squarely within the accountant’s domain.
Developing metrics for emissions related to financial activities, such as bank financing for fossil fuel projects, presents additional complexities. This challenge has led the Partnership for Carbon Accounting Financials to establish a learning academy aimed at accountants, consultants, and advisors to financial institutions. This partnership, comprising over 400 financial institutions globally, is committed to disclosing emissions from portfolios, including loans and insurance products.
Angélica Afanador, Executive Director of the organization, emphasizes the broader role of accountants in linking climate reporting with traditional corporate accounting. Achieving alignment between non-financial and financial disclosures requires accountants to understand the interplay between the balance sheet and climate impact in the real economy.
In summary, the evolving landscape of corporate accounting is increasingly intertwining with environmental considerations. Accountants are at the forefront of this transformation, navigating the complexities of carbon accounting and playing a crucial role in aligning financial disclosures with environmental impacts. This shift not only reflects a change in accounting practices but also signifies a broader movement towards integrating sustainability into the core of corporate strategy and reporting.
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