Accountability key for sustainable finance and the path to net zero
For organizations, failing to demonstrate accountability through their reporting could potentially be very problematic (Getty Images/Thomas Barwick)
The move to a low-carbon economy has become a top priority for governments, organizations and investors worldwide. But there are many complexities involved in the transition, as those involved in the area can attest.
At the Public Policy Forum’s Canada Growth Summit, an economic policy conference held in Toronto in April, FCPA Gord Beal, CPA Canada’s vice-president of research, guidance and support and leader of its Foresight initiative, shared his insights on the role of sustainable finance in achieving net-zero emissions. Here are some highlights.*
Q: We understand that money and how it’s managed will play a significant role in addressing the climate crisis. But what exactly is sustainable finance and why does it matter?
GORD BEAL (GB): Sustainable finance is effectively the allocation of finances or financial decision-making in the context of sustainability. By sustainability, we mean issues relating to environmental, social and governance matters, known as ESG, including climate change and the transition to net zero. Sustainable finance is how capital is moved and mobilized to achieve certain goals within that context.
When we look at the net-zero transition, we can see many commitments being made by governments, corporations and business leaders. Estimates of the future cost of the transition over the next decade are broad, ranging from just under $2 trillion to over $9 trillion annually.
With so much capital to be mobilized, governments around the world won’t be the sole source of financing. Hence, the importance of private investment.
Q: How do we balance the need to aggressively reduce emissions with the reality that we rely on fossil fuels as consumers, workers and as part of our economy?
GB: We hear a lot about the E, the environmental side of ESG, but the S—the social side, the people side—is also critical.
Fossil fuels are a reliable source of energy for a relatively low cost. Simply turning off the sector is not only impractical; it’s unfeasible when you consider the number of people who would be negatively impacted.
We need to find a balanced approach, where we consider the issue more holistically. That’s where the notion of a “just” transition comes in. This would mean considering how people are going to be retrained and re-skilled, and incorporating those considerations into the necessary investments to ensure that those people will have an opportunity to move into this future state, whatever it may look like.
Q: There are fears and allegations of greenwashing because of a lack of consistency in reporting standards. What accountability tools exist now?
GB: Investment instruments may be labelled as sustainable finance but, right now, it’s difficult to tell the difference between vehicles.
It comes down to issues as fundamental as language and messaging, or the taxonomy of these vehicles. Is the language consistent? Accountability is crucial in this process.
There’s work being done in Canada and internationally but developing a common language for something so complex is not easy. An important development at the international level is the establishment of an International Sustainability Standards Board, or ISSB, to develop international standards for comparability around climate-related disclosure. Those tools will help in this process. But, in the end, it will be a matter of looking at how organizations use these instruments, how investors look at them and whether they are really accomplishing what they’re meant to accomplish.
Q: Canada has a centre of the ISSB in Montreal. What does this mean for Canada in terms of having our unique economic needs voiced on the international stage when it comes to a transition taxonomy?
GB: Hosting an ISSB centre in Canada is big win for us.
Right across the country, across various sectors, financial institutions, governments, cities and corporations, we saw a long list of leaders come forward and say, “Canada can make a difference in this space.”
We have a unique economy that is based extensively on natural resources. Our extractive sector—including oil and gas and mining--is leading in responsible business practices, and other countries around the world can learn from that. Adding to that is our knowledge of and focus on Indigenous matters. We can use our uniqueness to make a major contribution to those standards.
Q: How can private-sector players prepare for what will be a shift from a voluntary to a mandatory system for reporting climate risk?
GB: Regulation is definitely coming. What’s now voluntary will become mandatory. Organizations need to be aware of what’s ahead and educate themselves.
Coming back to greenwashing, it can’t be a public-relations activity. Organizations are going to have to disclose the risks and realities they’re facing. They are going to need to make changes to internal processes in terms of how they pull together the information. They cannot just make these commitments and not live up to them. Failing to demonstrate accountability through their reporting could potentially be very problematic.
Q: How should private companies, which may not be directly targeted by regulations or standards, be thinking about this transition?
GB: As large public companies look across their supply chain and change their business models, we are going to see new expectations start to filter down to the private companies they deal with. That means private companies are going to play a role in the transition, even if they join in a bit later. But I’ve also seen many private companies that are demonstrating great leadership in this area and letting people know the value they are getting from their low-carbon transition. In that sense, they can be a great model for other organizations to follow.
KEEP THE CONVERSATION GOING
Navigating the sustainable debt market is challenging, no matter whether you’re an investor, issuer or an interested individual. CPA Canada and the International Federation of Accountants (IFAC) collaborated to provide clarity in the report: Navigating the sustainable debt market: enhancing credibility in an evolving market.
Plus, find out how CPAs can use ESG to enhance business opportunities for their organizations. And check out these practical resources for CPAs who want to lead ESG initiatives.