Businesses turn to accountants to assess climate risks

The floods ravaging California and washing away roads are a perfect example of the sort of climate-change-related risks that organizations need to do more to address — and they may need accountants to help tally the potential damages they can face to their finances.

Accountants are increasingly being asked to help companies figure out these potential risks, and not just from missing a tax deadline. (The IRS recently announced relief for storm victims in California — see our story.) Last month, the Institute of Management Accountants released a green paper based on a survey of its international membership of finance and accounting professionals, offering insights on how to develop risk management and accounting processes around climate and sustainability risks.

The survey found a lack of preparedness around climate risk, but also recommended some steps organizations can take to address those shortcomings and even capitalize on potential opportunities. The IMA has long been encouraging accountants to get more involved in sustainability efforts at companies, and in 2021 issued a Statement of Position on Sustainable Business Information and Management outlining nine principles for building a successful and sustainable accounting ecosystem, with an emphasis on disclosure rules being integrated, not overly burdening companies and ultimately adding value to organizations. 

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"The nine principles have held up incredibly well over the past year because they speak to the factors that are important, almost critical to think about in building a new accounting and reporting paradigm," said Shari Littan, director of research and corporate reporting at the IMA, when interviewed in November. "Those include the things around small businesses, the use of technology, reducing burden on preparers from the fragmentation, but it's also about the concept of actionability."

The National Oceanic and Atmospheric Administration released its annual national climate assessment Tuesday and reported that last year, the U.S. experienced 18 separate billion-dollar weather and climate disasters, leading to the deaths of at least 474 people. The 18 events put 2022 in third place (tied with 2011 and 2017) for the highest number of disasters recorded in a calendar year, behind 2021 — with 20 events — and 2020, with a record 22 separate billion-dollar events, including wildfires, tornado outbreaks, cyclones, flooding, winter storms, heat waves and droughts. Damages from the disasters totaled approximately $165.0 billion for all 18 events. That surpassed 2021 ($155.3 billion on an inflation-adjusted basis) in total costs, making 2022 the third most costly year on record, behind 2017 and 2005.

The IMA has a Sustainable Business Task Force, which is transitioning into an ongoing technical committee. "Something we speak about quite a bit with our task force members is that reporting is not beneficial only to speak to external users, but management itself is a user," said Littan. "We're hopeful that what gets reported on can be actionable, that we're not spending excessive resources just accounting for things, because the accounting team and the finance team and all of your people are working so hard, and what they put their attention to is limited. Accounting team and finance function team resources are limited, so choices need to be made, and we really need to focus on decision usefulness."

The IMA is in the process of co-authoring a new publication with the Committee of Sponsoring Organizations of the Treadway Commission that's due out in the first quarter of the year on the application of COSO's internal control framework to sustainable business and reporting on environmental, social and governance matters. 

"It's really critical that the systems are in place that support external reporting and decision making," said Littan. "Overall, the concept that we keep to is the idea of trust. transparency and accountability. Whatever we do in this emerging ecosystem has to be reliable."

Regulators are increasingly asking for companies to assess their climate risks. The Securities and Exchange Commission is in the process of poring over the thousands of comments it received last year on its proposed rule for climate-related disclosures by public companies, while the IFRS Foundation's International Sustainability Standards Board has also been weighing the feedback it received on its proposed standards for climate-related disclosures and sustainability-related financial information. In the European Union, the Corporate Sustainability Reporting Directive was finalized last November. The United Nations' COP27 climate change conference in Egypt last November, however, revealed the lack of progress by many governments and companies on meeting their net zero emissions reduction targets.

"The loudest voices and most of the oxygen in the sustainability, accounting and reporting world is on what's happening at the standard-setters and regulators such as the SEC, the CSRD in Europe and the ISSB and what they're going to do, but that doesn't necessarily directly affect a good portion of the economy, which is small and medium-sized businesses," said Littan. "The question becomes, how do we reach them? And the second question goes to that thought around controls. Our publication in the spring is going to show that achieving something like net zero targets requires an enterprise-wide mindset. It requires everyone to understand the objectives and the risks to meeting those objectives, and then the reporting follows. It's very holistic. Without the process, oversight and systems, those need to be in place in order to achieve those objectives and fulfill a purpose."

One challenge for accountants involves looking at what's happening on the regulatory front on the national and international level, and trying to determine how it translates into what's happening at the individual business.

"What it speaks loudly to is the need to consider transformation risks, where we know that the market is going to move from fossil fuel-based to renewable to just an entirely different paradigm for sourcing energy and emissions," said Littan. "Companies may be holding a lot of assets, investments and operations that are going to be impaired or nonproductive at some point due to this transformation. The question becomes timing. It's the stranded asset question."

Even individual consumers need to worry about whether their cars and homes will lose value if they aren't using electric vehicles or renewable energy sources. For businesses too, they need accountants to look ahead and see if the value of their assets will hold up in the future, given market pressures and risks from climate change, as well as auditors to provide assurance that the numbers make sense.

"In order to have external assurance, that information value chain needs to be robust," said Littan.