Assuring COP26 Initiatives: A Call for Refining Accounting Practices
By Eric Israel, Skytop Contributor / December 14th, 2021
Eric is the world’s first sustainability chartered accountant. He was the independent assurance leader for Royal Dutch Shell’s first global Sustainability Report in 1997. Eric is the co-founder of KPMG’s Global Sustainability Practice and PwC’s Conflict Minerals Practice. He was the U.S. Director for the Global Reporting Initiative (GRI) and is passionate about coaching the new generation of professional accountants on applying integrated thinking within new and emerging reporting frameworks.
Life Sacrifices, Technology and Artificial Intelligence
In his New York Times opinion column, Thomas Friedman summarized the U.N. climate summit in Glasgow well by saying that he was very afraid. He compared the lifestyle sacrifices needed to dampen the increasingly destructive effects of global warming with how hard it is to implement lifestyle changes to protect humanity from being harmed or killed by COVID-19. At the end of his column, he argues that now would be a good time to start praying that technology and artificial intelligence can save our souls.
Good Intentions
‘The road to hell is paved with good intentions’, is a well-known phrase to say that there is no merit in good intentions unless they are acted upon. And plenty of good intentions were mentioned at COP26 such as:
The signing of a statement by 44 countries and 32 companies on transitioning from coal to clean power.
The ‘Race to Zero’ power producers’ aim to reach over 750GW of renewable energy by 2030.
The Glasgow Financial Alliance for Net Zero that has committed over $130 trillion of private capital to transform the economy for net zero.
And the announcement of the International Financial Reporting Standards Foundation to a new International Sustainability Standards Board to develop globally consistent climate and broader sustainability disclosure standards for the financial markets.
Accounting Part of the Solution
For professional accountants it feels good that the financial language of accounting is being seen as part of the solution. After all, who else than accountants can translate the complexities of finance into information that the public can understand. However, we should also realize that the groundwork of modern accounting was laid 500 years ago by a monk named Luca Pacioli. Surely, technology has changed accounting and accountants can now report more accurately and much quickly. But it is fair to ask if our current accounting system still provides us with new and emerging insights to make the right decisions.
Wisdom, A Whistleblower and Frippery
Recently I read an article that included the following quote: “Naïveté is doing the same thing over and over, and always expecting the same result”. The author, Frank Wilczek, a physicist, mathematician, and a Nobel laureate, was reflecting on Einstein’s parable of quantum insanity and I couldn’t help thinking about the current euphoria of corporate responsibility reporting. Is this kind of reporting really making a difference? Or is it more of the same to support the status quo?
Some red flags that corporate responsibility reporting may not help are coming from whistleblowers like Tariq Fancy, who was the sustainability investment chief at the largest money manager in the world, BlackRock. In that role he was an advocate for using capitalism to save humanity from global warming. It took him only two years to realize this was not only a sham but also that his work “only made matters worse by leading the world into a dangerous mirage… burning valuable time”. His insider insights make clear that the threat of corporate ESG/greenwashing is real and misleading sustainability claims are already spreading online at an alarming rate. National consumer protection authorities had reason to believe that in 42% (!) of cases the claims were exaggerated, false or deceptive.
Gaslighting and Accounting Systems
Others, like Mark McElroy, founding director of the Center for Sustainable Organizations, are focusing on what is missing in the current thinking of standard setters for corporate disclosures on sustainability reporting that includes climate risk. McElroy claims that “mainstream performance accounting systems are no longer fit for purpose and deprive us of precisely the kind of information we need to effectively manage for sustainability.” His concern is that prominent financial standard setters and initiatives are only benefiting the financial community, in particular investors, and that they don’t take the interests of other groups (i.e., other stakeholders) into account. He warns that “we are literally gaslighting ourselves to death with our own accounting systems.”
Outdated Legacy Business Models
Despite these concerns, enormous progress was made in voluntary corporate responsibility reporting during the last decade. Currently 90% of the largest corporations are issuing a sustainability report. However, regardless of all this progress there is no evidence that this has helped stop the harm.
Most sustainability reports are from companies with legacy business models, which implies that their business success is inherited from strategies and assets from previous times and not taking into account the changes that occur over time. An example of a business with an outdated legacy business model is the automotive industry.
This year it became clear that this industry was involved in one of the most shocking sustainability frauds that is now transforming that entire industry. According to the European Union’s Competition Commission “for over five years the car manufacturers deliberately avoided to compete on cleaning better than what was required by E.U. emission standards… and they did it despite the relevant technology being available”.
This fraud was based on the iconic ‘Fraud Triangle’ where there was (1) pressure to maintain the status quo, (2) the opportunity to maximize economic growth, and (3) a ‘Tone-at-the-Top’ where senior management supports a company’s purpose that conflicts with the interests of society. All companies involved issued sustainability reports and Volkswagen alone has since paid well over $30 billion in fines and legal settlements related to emissions cheating, a.k.a. Dieselgate.
The Great Compromise
As expected, the result of COP26 is a global compromise. The objective of the COP negotiations was to cut emissions fast enough to keep the world within the crucial limit of 1.5 degrees Celsius by 2100. Instead, based on what countries are currently doing, we are headed towards 2.7 degrees Celsius of warming. Therefore, there is no compromise, and the COP process demonstrates that the global ‘Tone-at-the-Top’ is compromised, impacting business, since goals are ambiguous and oversight is missing.
Unfiltered Analysis and A Call for Solutions that Work
In these tumultuous times more of the same is clearly not going to help us further. In his book “Fundamentals: Ten Keys to Reality”, Nobel laureate Frank Wilczek describes the deep harmony between the universe of beautiful ideas and the universe of physical behavior. Wilczek suggests that people may take a cue from the way babies learn through an unbiased, open outlook. He writes: “The process of being born again can be disorienting. But, like a roller- coaster ride, it can also be exhilarating.”
For new ideas we should not rely on business-as-usual. We need to involve Gen Z, for example people like Greta Thunberg, and ask for help. This generation has a direct stake in our future and are on track to be the best-educated generation yet. Finding solutions to our present dilemmas will require input from all possible angles. Creative thinkers are needed now more than ever and they may not be accountants.
We have spent decades mobilizing to become sustainable. It seems green is the color in the vanguard. Action, however, has yet to be counted, meaningfully.