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Climate Action Cost Accounting Standard Proposed

Climate change skyline

(Gerd Altmann, Pixabay)

23 Dec. 2019. A new paper proposes an accounting standard that would require private companies to spell out their costs of meeting net-zero greenhouse gas emissions. Economists Richard Murphy at City University of London and Leonard Seabrooke at Copenhagen Business School in Denmark describe their proposal in today’s issue of the Danish journal Samfundsøkonomen (Society’s Economist).

Murphy, also a chartered accountant — or certified public accountant in the U.S. — and Seabrooke are seeking a feasible and standard method for companies to report the costs they expect to face in meeting the impending climate crisis. The authors note that the debate over mitigating the effects of climate change often revolves around actions by government, such as the so-called Green New Deal, with little discussion given to the impact on businesses of transitioning to a net-zero emissions economy.

To make companies better aware of the costs they face from the climate crisis, as well as financial institutions supporting these enterprises, Murphy and Seabrooke propose a sustainable cost accounting standard. This standard would report to financiers and other corporate stakeholders — employees, trading partners, regulators, tax authorities, and civil society as a whole — the issues imposed by climate change on the company and geographic locations where those issues affect the company. In addition, the standard calls for detailing the impacts of climate change at those company locations, response in each community to those challenges, and time schedule for addressing those issues.

Up to now, costs of climate change on corporations are largely proposed in terms of government-imposed taxes or fees. The sustainable cost accounting standard, or SCA, however would be built into a company’s accounting practice. “As a standard,” say the authors, “SCA would build on existing accounting principles to require commercial organizations to report on how they will manage the costs of becoming net carbon-zero compliant. SCA does not include carbon pricing or the cost of offsets. It would require the commercial organization to establish the costs of the transition to carbon neutrality.”

The authors note that other international groups, including the Task Force on Climate-Related Financial Disclosures, issued financial reporting guidelines for costs of climate change, beginning in 2017. But while 80 percent of the world’s largest corporations endorse the guidelines, a review of their implementation shows fewer than a quarter of the enterprises do any meaningful reporting on costs imposed by climate change. As a result, say the authors, sustainable cost accounting standards need to be fully integrated into routine audited financial reporting requirements, and not be an add-on feature.

Murphy and Seabrooke say that the implementation of a sustainable cost accounting standard would for many large companies be a straightforward exercise, adapting current accounting measures and techniques to a different target: costs of reaching zero-net emissions of greenhouse gases. The sustainable cost accounting standard would also apply to suppliers to large companies, which would encourage implementation by smaller businesses. And calculating costs of meeting net-zero emissions would assume use of existing technologies, say the authors, which would also encourage development of new more productive technologies.

If by applying a sustainable cost accounting standard, a company finds it cannot meet the goal of net-zero emissions, it would declare itself in a state of carbon insolvency, requiring a plan to structure its finances accordingly. This restructuring, say Murphy and Seabrooke, may require reducing dividend payments or raising additional capital. Continued carbon insolvency would call into question whether the company meets the definition of a going concern, raising alarms about its future economic viability.

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