Understanding Climate Change And Its Impact On Businesses - Importance For Accountants (essay).

Climate Change: Definition and Main Drivers

Climate change can be referred to as the long-term shifts in the patterns of weather and temperatures. It is the change in the normal weather that can be found in a place. This could be an alteration in the how much rain a place usually receives in a year, or it can be the alteration in the normal temperature of a place for a season or month. Climate change can also be regarded as the change in Earth’s climate. This could be an alteration in the usual temperate of Earth, or it could be an alteration in whether snow and rain usually fall on Earth. Just a few hours can be taken for weather to change, but it takes hundreds or even millions of years for climate to change. Shifts in the weather and temperature patterns may be natural, such as due to the variations in the solar cycle. Distance of Earth from the sun can lead to climate change, as more or less energy can be sent out by the sun. The climate can be changed due to the eruption of volcano (nasa.gov 2022).

However since the 1800s, the main driver of climate change has been the human activities, primarily because of the burning of fossil fuels such as gas, coal and oil. Greenhouse gas emissions are generated from the burning of fossil fuels, and it acts like a blanket covered around the Earth, trapping the heat of sun which leads to increase in temperature. The greenhouse gas emissions that are the main cause of climate change include methane and carbon dioxide (un.org 2022). For instance, use of gasoline for driving cars or using coal for heating buildings leads to the generation of methane and carbon dioxide. A major source of the emission of methane is the landfills for garbage, and a major source of carbon dioxide is the clearing of lands and forests. The main emitters include the land use, agriculture, transport, buildings, industry and energy. Therefore, the rapid change in climate is mainly the outcome of the excessive use of oil, gas and coal for the purposes like transport, factories, and homes. Such rapid climate change is contributing to dangerous weather events that are already more intense, and threatening lives and livelihoods (bbc.com 2022).

There are numerous effects of climate change on the companies and therefore, the company should be concerned about climate change. Different types of business risks are created by climate change. Above and beyond the most evident physical risks presented by climate change such as the operational impact of life-threatening weather events, or deficiency in supply due to the scarcity of water, the company is largely exposed to transition risks which are developed from the response of the society to climate change, like technological, market and regulatory changes which lead to increased costs to conduct business, weaken the feasibility of current products or services, or adverse impact on the value of assets. Another risk presented by climate change to the company is the potential obligation for the emission of greenhouse gases. There is an increasing number of legal cases which have directly been lodged against the fossil fuel companies in the recent years by holding them responsible for the harmful impact of climate change (deloitte.com 2022).

Business Risks Associated with Climate Change

According to the Deloitte Global’s report, more than 1 in 4 organizations worldwide are affected by climate change (deloitte.com 2022). The survey indicates towards the top five ways in which the companies are being largely affected by climate change. First, the operational impact of climate-related disasters is prominent on the companies in the forms of workforce disruption and damage of facilities. Second, there is a major risk related to the resources like energy, water and food because of both human and eironmenal causes, with the greatest impacts are reported by the consume and energy industries (forbes.com 2022). Third, it is mentioned by over a quarter of company executives that major shift in regulatory and political environment is a major area of wary. This is overwhelmingly cited by the banking, healthcare and life science companies as their sustainability effects are being largely impacted by this issue (forbes.com 2022). Fourth, it is a major area of concern for the business executives that there has been a significant increase in insurance costs due to the climate-related events. Fifth, efforts on environmental sustainability are becoming the core doctrines of the cultures and brand identity of the organizations (forbes.com 2022). All these indicate that climate change has key negative impacts on the business activities and thus, the company should be concerned about this issue.

The skills of the accountant have a vital role to play in advising the directors on how to respond to the issues related to climate change. The accountant has a specific skill of providing better corporate information as the accountant can assist enhance how the directors communicate the initiatives taken to address climate change with the company’s key stakeholders. For example, such communication can be undertaken through the use of the Integrated Reporting <IR> framework (ifac.org 2022). The accountant can assist the directors in selecting the specific financial and non-financial information which should be include in the corporate reports. After that, independent assurance is regarded as a key for ensuring whether the dislocated climate change related information is trustworthy.

The accountant possesses a skill of auditing the company independently in order to provide assurance on its sustainability initiatives and procedures. As a result, the internal decision-making process of the company is enhanced leading to better attainment of the sustainability objectives (ey.com 2022). Furthermore, the accountant has a skill of assisting the directors in embedding sustainability from the development of climate change related strategies to enhance sustainability processes and performance measurement. The need of the accountant to comply with the international standards for the ethical behaviour consists of professional competence and due care, integrity and objectivity.

The accountant has the skill of assigning costs to the negative impacts of the company’s operations on the society and environment. As a result, the directors get assistance in evaluating the real cost of their corporate activities on climate change. The accountant has the skill to assist the directors in complying with the present laws and regulations related to climate change. Hence, the directors become able in considering the climate change related factors more. In addition, the accountant has the skill of supporting the directors with the enhanced business processes and ensuring that a long-term view is taken by the directors in addressing the issues related to climate change. It takes into account assessing and auditing the existing processes to ensure avoiding short-termism. Lastly, the accountant can ensure that the directors are advantageous from the improved climate change related practices which ultimately can lead to increased employee retention, customer satisfaction, stakeholder satisfaction, and others (cimaglobal.com 2022).

Impact of Climate Change on Businesses

On the overall basis, the accountant of the company possesses all the required skills in order to advise the directors on different aspects of climate change, such as inclusion of appropriate information, enhanced disclosure through reporting, and others.

In Australia, there is not any current requirement which apply to the company and requires to have a public statement in climate change. However, in order to assist the ASX-listed companies in developing voluntary climate related financial risk disclosures, the Taskforce on Climate-related Financial Disclosure (TCFD) was set up by the Financial Stability Board (FSB) in 2015. Eleven disclosure recommendations were released by the TCFD across four pillars, which are Governance, Strategy, Risk Management, and Metrics and Targets (deloitte.com 2022). The company is needed to follow these recommendations for disclosing the climate risk related information of the business. These recommendations are discussed below:

Governance – The company needs to disclose its governance around the risks and opportunities related to climate change. The first recommendation is to disclose the description of the oversight of the board of risk and opportunities associated with climate change. The second recommendation is the disclosure of the role of the company’s management to evaluate and manage risks and opportunities related to climate change (assets.bbhub.io 2022).

Strategy – This recommendation requires the disclosing the actual and possible impacts of the risks and opportunities of climate-change on the business strategy of the company and financial planning. The first recommended disclosure includes describing the climate-related risks and opportunities which have been identified by the company over the short, medium and long-term. The second recommendation include describing how the climate-related risks and opportunities impact the company’s strategy over the short, medium and long-term. The third recommendation includes providing description of the company’s strategies’ resilience by considering different scenarios of climate change, including a 2^OC or lower scenario (assets.bbhub.io 2022).

Risk Management – This recommendation requires the company to disclose how he climate-related risks are recognised, evaluated and managed by it. The first recommendation requires disclosing the description of the employed processes of the company to identify and assess the climate-related risks. The second recommendation requires the company to disclose its processes for the management of climate-related risks. The third recommendation requires the company in disclosing how it integrates the processes to identify, assess and manage climate-related risks into the overall risk management (assets.bbhub.io 2022).

Metrics and Targets – This recommendation requires disclosing the metric and targets which the company use for assessing and managing the climate-related risks and opportunities where such information is material. The first recommendation to the company is the disclosure of the metrics it used for assessing the climate-related risks and opportunities as per the strategy and risk management framework. The second recommendation is the disclosure of greenhouse gas emission and related risks as per Scope 1, Scope 2 and if appropriate, Scope 3. The third recommendation is the disclosure of the description of the targets which the company used for managing the risks and opportunities of climate change and performance against the targets (download.asic.gov.au 2022).

In future, the company will be required to involve in briefing its board on climate change and climate risk and the TCFD requirements. It will be needed to integrate climate change into the major processes of governance to improve board-level oversight. It will be required to bring together sustainability, governance, compliance and finance for agreeing on the roles to address the climate change issue (asx.com.au 2022). The company will be needed to look specifically on how climate change creates financial impact on the business’s revenue, expenses, assets, and liabilities. It will be required for the company to undertake assessment of the business’s position against alt least two scenarios related to climate change. At the same time, the present enterprise-level and other risk management processes will need to be adapted for taking climate risk into account.

The company will be needed to pbtain feedback from the key investors about the information they require on the risks and opportunities related to climate risk. It will be required to use the CDP Questionnaire, CDSB Framework, and SASB Standards (asx.com.au 2022). It will be needed to use the same quality assurance and compliance methods for climate-related financial information as for the disclosures of finance, management and governance. The company will be needed to prepare the information in such a manner as if the company was going to assure them. The existing structure of the annual report will need to be revised for incorporating the climate change related information and recommendation (asx.com.au 2022).

References

Accountants, It's Time to Take the Driver's Seat to Mitigate Climate Change 2020. Available at: https://www.ifac.org/knowledge-gateway/preparing-future-ready-professionals/discussion/accountants-its-time-take-drivers-seat-mitigate-climate-change (Accessed: 14 January 2022).

Assets.bbhub.io. 2022. Recommendations of the Task Force on Climate-related Financial Disclosures. Available at: https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf (Accessed: 14 January 2022).

Asx.com.au. 2022. Climate change risk disclosure: A practical guide to reporting against ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. Available at: https://www.asx.com.au/documents/asx-compliance/gia-climate-change-guide.pdf (Accessed: 14 January 2022).

Building the resilient organization 2022. Available at: https://www2.deloitte.com/global/en/insights/topics/strategy/characteristics-resilient-organizations.html?id=gx:2el:3forbes:4diUS114083:5awa:6di:012521:&pkid=1007575 (Accessed: 14 January 2022).

Cimaglobal.com. 2022. Accounting for climate change. Available at: https://www.cimaglobal.com/Documents/Thought_leadership_docs/cid_accounting_for_climate_change_feb10.pdf (Accessed: 14 January 2022).

Contributor, D. 2022 Deloitte BrandVoice: Organizations Are Feeling The Pain Of Climate Change: Here Are Five Ways It’s Affecting Their Business, Forbes. Available at: https://www.forbes.com/sites/deloitte/2021/04/16/organizations-are-feeling-the-pain-of-climate-change-here-are-five-ways-its-affecting-their-business/?sh=5f09d6154e0c (Accessed: 14 January 2022).

Download.asic.gov.au. 2022. Climate risk disclosure by Australia’s listed companies. Available at: https://download.asic.gov.au/media/4871341/rep593-published-20-september-2018.pdf (Accessed: 14 January 2022).

Ey.com. 2022. Three ways accountants will lead on climate action. [online] Available at: <https://www.ey.com/en_gl/sustainability/three-ways-accountants-will-lead-on-climate-action> [Accessed 14 January 2022].

Feeling the heat? 2022. Available at: https://www2.deloitte.com/us/en/insights/topics/strategy/impact-and-opportunities-of-climate-change-on-business.html (Accessed: 14 January 2022).

Nations, U. 2022 What Is Climate Change? | United Nations, United Nations. Available at: https://www.un.org/en/climatechange/what-is-climate-change (Accessed: 14 January 2022).

What is climate change? A really simple guide 2022. Available at: https://www.bbc.com/news/science-environment-24021772 (Accessed: 14 January 2022).

What Is Climate Change? 2022. Available at: https://www.nasa.gov/audience/forstudents/k-4/stories/nasa-knows/what-is-climate-change-k4.html (Accessed: 14 January 2022).

Www2.deloitte.com. 2022. Clarity in financial reporting Disclosure of climate-related risks. Available at: https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-clarity-disclosure-climate-related-risks-070220.pdf (Accessed: 14 January 2022).