INTHEBLACK December 2021 - Magazine - Page 27
Clockwise from top
left: Cherine Fok,
KPMG Singapore,
Terence Jeyaretnam,
EY Oceania and
Natasha Landell-Mills,
Sarasin & Partners
BEYOND IASB
GUIDANCE
Above: Lawyer Roger Cox
(R) and Donald Pols, director
of Milieudefensie (Dutch for
“environmental defence”)
speak to the media after the
court decision against Royal
Dutch Shell in the
Netherlands in May 2021.
PARIS-ALIGNED FINANCIAL
ACCOUNTING BOILS DOWN THE
C O M P L E X I T Y O F T H E C L I M AT E
D E B AT E T O O N E K E Y Q U E S T I O N
– HOW WOULD YOUR BUSINESS
FA R E I F T H E E N T I R E W O R L D
MOVED TO LIMITING OVERALL
CARBON EMISSIONS TO NET
ZERO BY 2050?
C O M P A N I E S M U S T FA C T O R
D I F F E R E N T VA R I A B L E S I N T O
THEIR FINANCIAL ACCOUNTS,
INCLUDING:
n estimate of the prices a
• acompany’s
emissions-intensive
products would command if
demand fell
an analysis of increased
depreciation if the viable
economic life of an asset
were shortened
an estimate of the costs (for
example, of buying carbon credits
or of carbon capture and
sequestration) if strict global
regulations mandated net zero
carbon emissions by 2050
an estimate of the impairment
costs involved due to the effects
of extreme weather events or sea
level rises
•
•
CLICK HERE
TO READ
an INTHEBLACK
article on integrated
reporting
•
The 2015 Paris Agreement did
not specify “net zero by 2050”.
However, this approach is called
“Paris-aligned accounting” because
it is required in order to meet the
Paris Agreement targets, according
to the 2018 Intergovernmental
Panel on Climate Change.
Sarasin & Partners, a UK-based
asset management company, has
been working to offer shareholders
better visibility of the financial
benefits of a low-carbon world.
“We were concerned, because we
thought the financial accounts of
the big oil and gas producers were
ignoring the economic reality of
decarbonisation,” says Natasha
Landell-Mills, Sarasin & Partners’
head of stewardship.
In 2017, the company made a
complaint to the UK’s Financial
Reporting Council that Royal Dutch
Shell was not disclosing its long-term
commodity price assumptions. “And
then they did,” says Landell-Mills.
“Since then, I think oil and gas
companies have realised it’s not
tenable to be making very
aggressive assumptions in their
accounts, and they need to start
bringing that down. In fact, this
year BP has brought their
assumption down from US$75
[A$104] a barrel to US$55 [A$76].
“Oil and gas aren’t the only sectors
of concern,” says Landell-Mills.
“There are questions about vehicles
linked to the production of internal
combustion engines. They’ll also
have commodity price assumptions,
alongside other judgements linked
to property, plant and equipment
assets that may need to be revised.
Also, for instance, cement
companies – are they leaving out
the cost of carbon capture and
storage, which they are likely to
require to implement in order to
achieve net zero?”
Companies don’t have to
subscribe to the theory that severe
measures to constrain carbon
emissions are inevitable. However,
they should still provide “net zero
by 2050” sensitivity analysis in the
notes to their financial accounts,
Landell-Mills believes.
“In my view, if a sufficient
number of investors are saying,
‘You need to tell us the impact of
a net zero scenario for your
financials’, that makes it material.
“You can make lots of narrative
disclosures in the front half of the
annual report,” says Landell-Mills,
“but unless the numbers properly
reflect that net zero pathway, then
the key driver of how capital is
allocated will not be in line with
your narrative. And it should be
consistent.”
intheblack.com December 2021 27