How can accountants support transition finance and planning for businesses?

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Pat Woo, Anthony Lin and Christine Loh

Experts chime in on the latest topics in accountancy and business

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Author
Pat Woo, Anthony Lin and Christine Loh

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Pat Woo, Partner, Head of ESG, Hong Kong at KPMG China and a member of the Institute’s Sustainability Committee

The United Nations Climate Change Conference (COP28) concluded in December 2023. The result of which was an agreement by the nation representatives to phase out fossil fuels and aim at reducing carbon emissions to limit global warming to the target of 1.5°C, in accordance with the Paris Agreement.

As part of the discussions, it was agreed that climate finance, and transition finance in particular, will play a critical role, with an aim of directing at least US$100 billion per year towards achieving the emission reduction goals. This will lead to increasing reporting and assurance requirements to ensure that the financing is well spent, and any risk of greenwashing is minimized. The accounting profession will therefore play a critical role to give the capital markets confidence in these transition finance transactions.

With the introduction of the International Sustainability Standards Board (ISSB) IFRS S1 and S2 standards in mid-2023, these standards will be the benchmark upon which many organizations will be doing their reporting. ISSB is, of course, also the sister organization of the International Accounting Standards Board (IASB), and it has been made very clear that the two organizations will collaborate to ensure that the financial and non-financial reporting are developing in tandem. As such, the accounting profession is best placed to connect the developments of IASB and ISSB going forward, and there are already expectations in the market that accountants will play a major role in the implementation and the development of ISSB standards.

“Accountants and auditors will have an integral role to play in collaborating with sustainability professionals to begin the process of improving the non-financial data quality to the level of financial data.”

Accountants, and internal and external auditors are gatekeepers making sure that sufficient systems and controls are in place with regards to data integrity. Many organizations are still using manual excel-based methods to collect ESG data, which includes climate-related data. With so much money changing hands for transition finance, there will be limited margin for error in the climate data that supports these transactions. As such, accountants and auditors will have an integral role to play in collaborating with sustainability professionals to begin the process of improving the non-financial data quality to the level of financial data.

The area of ESG data assurance is a fast-changing space. With the expected increase in climate and transition finance in the market, the level of assurance required on the climate-related data will need to increase. With the International Standard on Sustainability Assurance 5000 being finalized, accountants and auditors will need to prepare for the issuance of this new standard, which is expected to be the go-to standard for ESG assurance going forward. The accounting profession will have a critical role to play as the world grapples with the climate issues we are facing. Let’s all embrace this challenge and do our part to help solve one of the major issues of our time.

Anthony Lin, Financial Controller at the Hong Kong Jockey Club and Deputy Chairman of the Institute’s PAIB Committee

At COP28, it was confirmed that the planet is still struggling to limit global warming. With ESG increasingly gaining more traction worldwide, companies – particularly high-emitting ones – are taking action to fight climate change challenges and related systemic risks. One of the essential elements that facilitates companies in doing so is transition finance, which is defined by the Glasgow Financial Alliance for Net Zero as “investment, financing, insurance, and related products and services that are necessary to support an orderly, real-economy transition to net zero.”

Accountants in business, usually seen as one of the key strategic partners for senior stakeholders, can play a vital role in the company to support the transition journey. One role accountants can play is in formulating strategies and establishing corporate governance. Many corporates have yet to disclose their transition plans with transparency and sufficient details. Accountants can step up to help these companies define and establish a transition strategy on how it can achieve decarbonization. In addition, we commonly act as an advisor to senior management and can help to embed appropriate mechanisms, including reporting requirements, regularly reviewing processes in the company’s operating model and activities.

“With the right level of support by finance professionals, I have no doubt that companies will be able to strive for a balance on the path to net zero.”

Another role is as a data custodian. As a custodian of external and internal financial data, accountants can help the company to ensure relevant data is transparent for decision making. This also requires allocation of company resources to invest in internal processes and technologies that enable automated collection, tracking, modelling, and presentation of information. Analytics is also crucial. A critical success factor in identifying the most beneficial financial arrangement that supports transition of a company is the capability to understand the risks and quantify the cost and benefits of different finance options.

Accountants can also support businesses through budgeting and forecasting, which is seen by some as their bread-and-butter. But let’s not forget to incorporate sustainability priorities into the company’s business plan. An appropriate budget and projection can facilitate the company not only to estimate expenses caused by sustainability risks, but also potential opportunities that may arise. Accountants can also help to set up relevant financial and non-financial targets and key performance indicators that align with the company’s sustainability goals.

The demand for transition finance is ever-increasing. With the right level of support by finance professionals, I have no doubt that companies will be able to strive for a balance on the path to net zero.

Christine Loh, Chief Development Strategist, Institute for the Environment, Hong Kong University of Science and Technology

To decarbonize the global economy requires not only an industrial and technological revolution but also a policy and management revolution, which necessarily involve professionals of many fields, including accountants.

Currently, more than 80 percent of the world’s energy still comes from fossil fuels – coal, oil, and natural gas. These fuels have served us well to provide the energy that has powered our lives through the 19th century till today. Yet, we need to change because the combustion of these fuels to generate energy also produces greenhouse gases (most of which is carbon) that warm the atmosphere, causing global warming.

Professional training helps to make things work in economies. The accountants’ role is to provide accurate and reliable financial information for the proper functioning of organizations that make up economic activities.

Just as accountants have helped to create the financial reporting system of today, they are needed to help with the transition away from fossil fuels by around mid-century. Through the Paris Agreement, the multilateral treaty, governments have signed up to the goal of achieving carbon neutrality by 2050-2070.

“Accountants play an important role in the establishing of a new accounting system that fits the revolutionary era of climate change and decarbonization.”

Accountants are developing “carbon accounting” skills to enable the disclosure of an organization’s carbon emissions so that stakeholders, such as managers, investors and financiers, could discern how the organization is doing to decarbonize its activities.

Carbon accounting is by no means easy because there is a lot of new data to collect and make sense of. Measuring carbon and other greenhouse gas emissions requires accurate data to be collected and compiled for all sorts of activities. Moreover, an organization’s efforts to decarbonize also needs to be estimated so that stakeholders can assess whether the efforts are sufficient.

Yet, there is a lack of a universally accepted standard for the methodologies involved, although a lot of work is being done by a variety of professional bodies cooperating with each other to develop a robust system. Another major challenge is how to conduct the valuation of the relevant activities and outcomes.

One day, carbon accounting will be standardized. Accountants play an important role in the establishing of a new accounting system that fits the revolutionary era of climate change and decarbonization. Indeed, not only that but systems are being created to reflect the increasing importance of environmental sustainability for the 21st century.

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