Radical Accountancy – the most impactful climate actions might come from unexpected places

Planting trees, phasing out petrol and diesel cars and banning fracking got all the attention at the Liberal Democrat climate policy debate earlier this week. But changing accountancy rules might be the most impactful thing we plan to do for the climate!

When I stepped up to the microphone promising to talk about a radical policy at a green liberal democrat fringe last Sunday evening, no one quite expected me to talk about accountancy rules!

Fortunately there were not quite enough people in the room for it to be polite to leave!

I was speaking about the policy which was adopted the next day adopted in the main conference hall:

[To create] A legal requirement on companies to set targets consistent with the targets set in the Paris Agreement, and to report on their implementation.…backed up by new climate accountancy rules so that auditors are required to produce Paris-compliant accounts (including writing down non-compliant assets and activities and reporting the cost and value implications of reducing emissions to zero in line with the required pathway).

Bit of a mouthful. But this would be a major breakthrough in our race to a Net Zero world.

Because almost every emission reduction in the world will be enabled, or disabled, by business. Business are the energy suppliers, the producers of our cars, railways, buses. They build and retrofit our homes. They produce our food and supply our water. They fly us and our products around the world. Business produce what we wear, the devices in our homes and they decide whether these products can be reused or recycled easily.

But many of the businesses which are responsible for the greatest volume of emissions are currently operating completely at odds with the global goal of staying within 1.5C of warming.

Some, like the airlines have their head in the sand. Others, in the oil industry deliberately choose to interpret the Paris goal as only applying to their operations without acknowledging the use of their products; oil and gas, is the key driver of the climate emergency. A more foolish long term business strategy is pretty hard to find.

So if we want to meet our Net Zero target, it is necessary for business to also meet this goal. In fact we need the goal to be taken as seriously as meeting shareholder needs.

It makes sense therefore to ask all big business to make an explicit plan to meet the net zero target and to outline the financial impact this will have upon the business in the audited annual report and accounts.

Of course, the Lib Dem climate change policy contains many ways to support business to meet the climate challenge. Meaning that for many companies, like Ovo Energy, set to become UKs second biggest energy supplier, this legal requirement would be a doddle. Having just announced plans to be Net Zero by 2030 for its own operations AND to help its soon to be 5 million strong customer base to do the same. Their annual submission would tell investors to keep calm and carry on investing in a company fit for the future.

There may be many other companies who have to adjust their business plan. Perhaps reducing their dividend for a period to reinvest in the transformation or to ask their investors to support new investment in zero carbon products, operations or innovation.

But for some companies, this requirement will flush out the stark choice for society – us or them.

Those businesses with no credible financial plan to transition to Zero Carbon by 2050 will only succeed if we fail to meet the Paris Agreement. These companies present our society with an existential threat and would be declared Carbon Insolvent.

From here they would be forced into a process of managed decline overseen by the regulator.

The clearest example of this will be some, not all, of the hundreds of fossil fuel and high carbon businesses which are listed on the FTSE. In total, we believe that business financing in London is responsible for nearly 15% of global emissions – 15 times the scale of emissions which come directly from UK.

The savvy fossil fuel companies will run their oil and gas reserves down and plough any free cash into whatever zero carbon business the board deems best aligned with their business strategy. Those unwilling or unable to transition fast enough will be forced into insolvency procedures, working with government to sure up short term energy supplies, to manage a just transition for their workers and to return remaining funds to investors.

All of this could be required by changes to UK Companies Act 2006 for those companies incorporated in the UK and through listing rules for those on the stock exchange. It may also be possible to pass on this requirement to all companies financing in London through action from the financial regulators on regulated banks.

Before concluding that this all sounds a bit hard or far fetched, consider for a moment the alternative.

In 2008 a predictable mortgage derivatives bubble of around ￡650bn burst and precipitated a global financial crisis. Some of the worlds largest banks, whose executives had been making large bonuses for decades were bailed out by the tax payer. Those that suffered were the most vulnerable in society who endured a decade of austerity.

Today, the governor of the Bank of England, along with counterparts in other central banks all over the world have repeatedly warned of a ￡2tn carbon bubble, more than double the size of the last. Overvalued fossil assets and mis-priced climate risk plaguing our market. This time the consequences of failing to responsibly deflate rather this this bubble would be another even larger global financial crisis, pension savings wiped out, thousands of jobs at risk with no managed transition and to top it off we’d also be more likely to be facing irreversible climate change due to lack of the type of action this policy requires.

As many of us step out to protest today, we must think bigger and better about how we urgently create a system which works for people and planet. I'll look forward to waving my banner today, but the climate activists of tomorrow might come from the places we least expect!