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Sustainability

By Gordon Hewitt, sustainability advisor, ACCA

UN climate talks opened in Doha this week, marking the 18th Conference of the parties (COP18) to the UN Framework Convention on Climate Change (UNFCCC). The Convention came into force in 1994 with the ultimate objective of ‘stabilising greenhouse gas (GHG) concentrations at a level that will prevent dangerous human interference with the climate system.’ Since 1995, parties to the Convention have met annually to assess progress in dealing with climate change. The meetings have made limited progress over the years and have been fraught with challenges. The most significant challenges are arguably the dynamic between developed and developing counties, and how climate change can be addressed is a manner that is equitable. This is an important point, considering that much of the CO2 that is causing global warming was emitted by developed countries over the past 150 years and that the impacts of climate change are hitting developing countries hardest. Other major challenges include getting governments to turn the reduction targets set at climate negotiations into concrete actions and streamline the fragmented approach to this global issue by national governments.

Progress towards a legally binding agreement on GHG emissions has been slow, but made a step in the right direction last year in South Africa. COP17 ended with 195 countries pledging to negotiate a new international climate treaty by 2015, known as the ‘Durban Platform’. Whilst this does put governments on track to reach a legally binding deal, some argue that the timeframe is too long and that much more urgency is needed if we are going to limit global warming to 2oC (the commonly regarded limit to avoid dangerous climate change).

This point has been demonstrated well by a recent report by the accountancy firm, Pricewaterhouse Coopers, which concluded that current governments’ ambitions to limit warming to 2oC appear highly unrealistic. The 2012 Low Carbon Economy Index has demonstrated that global carbon intensity (the average emission rate per unit of output) decreased between 2000 and 2011 by around 0.8% per year. Such a level of reduction has meant that governments need to cut carbon intensity by 5.1% every year, from now until 2050 to avoid dangerous climate change – a rate that seems unattainable considering the lack of commitment made by governments to date. The current rate of emissions cuts has put the world on track for an estimated 6oC of warming, a level that would have unthinkable implications for humanity.

The slow progress demonstrated by governments is also reflected by the corporate sector. In 2012, 81% of corporations from the Global 500 responded to the Carbon Disclosure Project (CDP) questionnaire. Their responses have provided a valuable insight into how companies are addressing the risks and opportunities associated with climate change. It is clear that some companies are aware of the need to act on climate change, but only a few leading companies are setting the necessary targets and required to ensure long term resilience against the negative impacts of climate change.

Accountants and finance professionals are very important stakeholders when looking to increase corporate action on climate change. This is due to their role within corporate risk assessment, as well as within corporate reporting. There is evidence that CFOs are becoming more aware of the need for greater action on the part of corporates. The accountancy firm, Deloitte Touche Tohmatsu, surveyed 250 CFOs of large companies (firms with annual revenues of at least $1 billion), and found that 49% saw a significant link between sustainability performance and financial performance. The greatest risks highlighted by the CFOs surveys related to energy prices, commodity prices and carbon regulations, so it is clear that climate related issues are rising up the corporate agenda. Accountants and finance professionals need to ensure that the risks posed by climate change are addressed with concrete actions.

As the effects of climate change are becoming ever more apparent, such as the increased incidence of extreme weather events, both governments and corporates need to switch on to the urgent need for action. In October this year, Hurricane Sandy swept up through the Caribbean, causing devastation across a number of island nations, before heading west into the US and Canada. The storm resulted in an estimated $71 billion worth of damage. Images of scores of people left homeless in Haiti – as well as flooded subway stations and blackouts across Lower Manhattan – show how vulnerable both rich and poor nations are to the effects of such massive storms, and provide a glimpse of the future if action is not taken soon.

On the right track?

aksaroya —  26 November 2012 — Leave a comment

By Peter Williams, Accounting and Business journalist and accountant

As well as highlighting the DfT’s poor record on bidding processes, the West Coast Main Line franchise debacle poses deep questions about the accounting profession’s ability to model risk. 

In May 2011, the Department for Transport (DfT) published a mercifully short document, A Guide to the Railway Franchise Procurement Process, which I read, prompted by the debacle over the West Coast franchise. When all hell broke loose over the flaws in the model, a team of consultants from PwC – previously let go to save money – found the errors in the spreadsheet within half an hour.

The DfT admitted that significant flaws had been discovered in the way the bidding process had been conducted. The risk assessment was messed up as a result of mistakes in the way inflation and passenger numbers were taken into account, and how much money bidders were then asked to guarantee as a result.

The track record on these processes is not good. The Transport Select Committee heard from Virgin boss, Richard Branson, at the beginning of September, weeks before the DfT ditched the franchise process. According to Branson’s evidence, on four recent occasions companies which won bids subsequently admitted to several financial difficulties or went bust.

You may think that the Department may be scarred by those experiences by now. We all need to be sceptical of forecasts that predict high growth right at the end of the period. And to be fair to the civil servants, that May 2011 guide is clear the biggest money bid won’t win unless everything else appears in order. The Department promises it will assess the cost and revenues set out in bids. If this assessment indicates a significant risk that costs of revenues will not be delivered or identifies other reasons why the franchise is likely to be financially unstable, the Department can rule out those bids from the competition on the grounds that they are financially high risk.

Aside from all the clever technical and academic input to investment appraisal, it boils down to one technical question: would I rather receive some money from that person now or much more in five years time? If you cannot see from a common-sense perspective where those big numbers are coming from, then perhaps it is time to say thanks, but no thanks.

The West Coast example should raise some awkward questions for how good accountants are at creating and understanding these models. They are in a good position to do the number crunching, but in building models what are their drivers? What pressures do they face in stressful commercial situations? They need to take a more independent, strategic position on the risk and reward that governments should ask for and private companies should be prepared to shoulder.

Maybe competent and honest professional accountants have become too wedded to the all-pervading efficacy of spreadsheets. As well as quantifiable risk which can be modelled, the accountancy profession needs to start looking at the impact of human psychology and behaviour in difficult and complex accounting and business contexts. We need to ask ourselves questions which we have barely started to think about: if we want to achieve a certain commercial result, how does that impact on the way we behave?

This post first appeared in Accounting and Business UK November 2012.