Can Accounting and Finance save the world? A climate change perspective.
Asking whether disciplines such as Accounting and Finance contribute to saving the world sounds rather absurd. When most people think of Accounting and Finance, other things come to mind first. Finance triggers, for example, thoughts on the financial crisis of 2007-2008 which was partially caused by excessive risk-taking by banks and which led to an international banking crisis and a major recession. Accounting, on the other hand, has traditionally been considered as a dry, technical, but rather “reliable” discipline. However, external shocks have also altered this perception to the involvement in creative accounting, tax avoidance, and corporate and public sector financial scandals. Taken together, the obvious answer to the question stated above would thus have to be “no”. But is it really as easy as that? Let us consider the case of climate change to come to a more nuanced answer.
Fighting against climate change makes us think of Swedish environmental activist Greta Thunbergh and the school climate strike movement “Fridays for Future” which she co-initiated. Greta Thunbergh also participated, for example, in the 2019 UN Climate Action Summit where she held her famous "how dare you" speech. A key element of this summit and other international climate conferences was the debate around the development of the so-called Paris Agreement of the 2015 United Nations Conference of the Parties (COP21) in Paris, France. This agreement delivered a very clear message: Global carbon emissions need to be reduced to keep the global average temperature rise below 2°C. The Paris Agreement actually takes us one step closer to identifying aspects where the Finance and Accounting disciplines can contribute to fighting climate change.
Financial markets, for example, can act as a catalyst in the transition to a low-carbon economy (https://www.nature.com/articles/d41586-019-02029-1). While long being bounded by neoclassical economic thinking, it has become common agreement that financial markets can only flourish within and as part of an overall functioning ecological system. Investors, for example, increasingly consider climate change-related financial risk when evaluating their investments. The Principles for Responsible Investment, the world’s leading proponent of responsible investment supported by the United Nations, has more than 3.000 signatories and US$103.4 trillion of so-called assets under management (see https://www.unpri.org/annual-report-2020/foreword). Consequentially, for-profit companies – the main carbon emitters – have started to measure and manage their carbon footprints. While all this sounds very promising, the reality sometimes is more disillusioning. Many institutional investors such as pension funds still heavily invest in carbon-intensive sectors, probably because they still expect more attractive risk-return profiles. We thus need a clearer policy supporting investments into low-carbon sectors. A carbon-pricing system with a fair and economically justified carbon price could be a cornerstone of such endeavors.
Another cornerstone could be a comprehensive and transparent (self-)reporting of companies’ efforts and performance regarding their carbon and other greenhouse gas (GHG) emissions. This is where the accounting discipline comes into play. The reporting of corporate information to external stakeholders has always been a central purpose of accounting. Traditionally, however, this reporting simply focused on the financial transactions pertaining to a business. This logic has changed dramatically and managers face the challenge to create, manage, and report financial value while at the same time effectively addressing and communicating pressing issues such as climate change. Companies can actually benefit in many ways from the recording and subsequent disclosure of their GHG emissions, for example through improving the company’s image, but also through an improved carbon management and lower energy costs. However, many companies are still hesitant to transparently report on their GHG emissions. Consequentially, voluntary initiatives, such as the nonprofit CDP (formerly: Carbon Disclosure Project), have emerged on the international level and put pressure on companies to report their efforts. Furthermore, we can observe more and more mandatory initiatives at the national level that aim to increase carbon emission transparency. Scientific evidence actually indicates that mandatory disclosure initiatives set better incentives for the reporting companies to reduce their emission than their voluntary counterparts. While the accounting discipline can thus offer reporting frameworks and accounting techniques to support transparent disclosure, it is again up to the governments and policy-makers to enforce suitable programs.
Let us now conclude: Can Accounting and Finance save the world? Of course they cannot. However, they can offer important pieces within concerted actions of policy-makers with the overall goal to fight climate change. Hopefully, Greta would agree.
Once a month there will be published an article written by one of our teachers economics at the Radboud University. We really appreciate the contribution of the economics department a lot. This month we may thank Daniel Reimsbach, associate professor of Business Economics, for his article about a climate change perspective and accounting and finance.