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The business of climate change

Mardi McBrien has no illusions about the cost and complexity of creating a sustainable planet. As Managing Director of the ClimateDisclosure Standards Board, she explains to George W. Russell how she engageswith investors, regulators and accountants to bring about reform of financialreporting to reflect risks to the environment.

In October, when the Intergovernmental Panel on Climate Change (IPCC) issued a worrying report that limiting global warming to 1.5 degrees Celsius would require “rapid, far-reaching and unprecedented changes in all aspects of society,” Mardi McBrien was more determined than disheartened.

The IPCC report gave the Australian-born head of the Climate Disclosure Standards Board (CDSB) more ammunition to spread the warning of climate change to global corporations. “The latest facts published by the IPCC are truly worrying,” she tells A Plus.

For non-governmental organizations (NGOs) involved in environmental awareness and mitigating climate change, the IPCC’s conclusions were no surprise, but business has yet to fully embrace its implications. “The report has increased the urgency within the NGO community, but it has not penetrated into the mainstream regulatory, financial or corporate spheres.”

McBrien’s organization has created the CDSB Climate Change Reporting Framework, a voluntary reporting system designed to publicize climate change-related information of value to investors in standard financial reports. Investors, says CDSB, will be able to make “informed and robust decisions” based on clarity, confidence and trust in climate change-related opportunities and risks disclosed.

“Even though our work is built on mainstream market mechanics and inspired heavily by financial accounting standards,” McBrien adds, “it was often dismissed as an ethical issue. Developments such as these are key to mainstreaming climate change as a key business issue.”

However, McBrien is encouraged by an apparent sea change – and not just rising tides caused by the warming of the oceans – among high-profile names in business and government. One milestone is France’s decision in 2017 requiring asset managers and institutional investors, such as insurance companies and pension funds with a balance sheet above €500 million (HK$4.43 billion), to disclose how their business strategies cover climate change.

Another is the establishment in 2015 of the Financial Stability Board’s Task Force on Climaterelated Financial Disclosures (TCFD) – chaired by Bank of England Governor Mark Carney – to develop voluntary and consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.

“The TCFD has brought a much-needed mainstream perspective to this issue,” says McBrien. Michael Bloomberg, Chief Executive Officer of Bloomberg and a former mayor of New York City, is also a leading member. “Having the operator of the information infrastructure, on which much of the market depends, suggests we should be looking at changed perceptions.”

Bring on the accountants

Enlisting the accounting profession to her cause is a key objective. “CDSB’s efforts have been welcomed and supported by the accounting profession for over 10 years now,” McBrien says. “Just as with any other business issue, accounting skills can be used to help organizations adjust, and even thrive, in a changing environment. Climate change-related reporting is nothing new, but it lacks much of the rigour that financial information has.”

This is where accountants come in, she points out. “They can adapt their existing skills for collecting and consolidating financial data and apply it to climate changerelated information,” she explains. “Financial controllers can challenge the reliability of the data as it is collected, and assurers can provide an independent opinion to build trust with the users of the reported information.”

McBrien cites two major reasons why the profession is solidly behind CDSB’s work. “Firstly, the financial implications of climate-related matters are becoming clearer and more widely understood,” she says. “We are in an age where shareholders want to know how businesses are preparing for the future and securities regulators ask questions if climate change is not discussed when a company experiences weather-related losses to assets.”

The second, she adds, is that accountants and auditors have realized that climate-related reporting is one of the new frontiers in the profession. “With the rise of sophisticated software that takes on some of the conventional roles of accountants, climate changerelated reporting needs the skills of the profession in order to elevate it to the same standard of financial reporting.”

Another advantage of the hard data that accountants can produce and interpret is the improved chances of convincing sceptics. “You can’t argue with numbers,” says McBrien. “Finding the sceptics’ interests and relating how a two-degree temperature change will affect their business interests, hobby or livelihood makes it very real and hard to ignore.”

McBrien exemplifies with Larry Fink, Chief Executive Officer of BlackRock, the American multinational investment management corporation, who penned a 2018 letter to fellow CEOs urging them to understand the “ways that broad, structural trends – from slow wage growth to rising automation to climate change – affect your [organizations’] potential for growth.”

With such people recognizing that climate could be a risk to business, “being sceptical of these issues is increasingly being seen as a sign of not moving with the times and ignoring credible and potentially serious risks,” says McBrien.

An eclectic career

After graduating from the University of Melbourne in Australia with a double degree in forest science and environmental science, McBrien originally pursued a career in international forestry. “In the mid-1990s, a series of events led me to start a career in environmental and climate leadership,” she recalls.

One was a trip to the Philippines in 1994 for a young leaders’ conference, where she met former president Corazon Aquino, who spoke of the global environmental challenges. “She inspired the teenage attendees with solutions and words of hope and change.”

That coincided with a spate of fatal bushfires in her homeland. “Seeing houses and lives lost on my doorstep, and the issue of the growing hole in the ozone layer made me realize there were real consequences for our daily Australian lives.”

Her eclectic career since has included leading an international students’ association, public-private partnership management, stints at environmental group Campaign to Protect Rural England, and managing carbon market policy for the British government’s Department of Energy and Climate Change. “Books such as Jeremy Leggett’s The Carbon War: Global Warming and the End of the Oil Era crystallized the need for me to get involved and strive to make a difference for future generations,” she says.

Today, McBrien sees the need for practical answers to the issue. “Although my passion for addressing climate change stems from a deeply personal place, I realized early on that the solution must be very pragmatic,” she says. “All of our work is aimed at the market and is designed to be practical. Addressing this issue requires a change in existing practices and it needs significant funds.”

“Money doesn’t grow on trees,” she adds, “but if there is a good business proposition, investors will come. We therefore need to present the solution to climate change as a financial opportunity in the language of investors – and financial reporting is the way to do that.”

There is no doubt that climate change is a more pressing issue in boardrooms. A report released in October by the World Economic Forum and Zurich Insurance says that climate change is now the number three concern for businesses in the United States and Canada, coming in behind cyber-attacks and fraud.

Applying technical rigour

McBrien touts increasing success in Asia-Pacific jurisdictions where scepticism about climate change was high until recently. “We have run pilot programmes in South Korea and Japan, working with businesses like Samsung and Mitsubishi to understand how the CDSB framework can be used.”

She notes that China has made significant progress in the sustainable finance arena. “They are on their way to implementing requirements akin to the TCFD’s recommendations in their market in the next few years. Next year, we focus our attention on Japan as they take over presidency of the G20.”

Part of CDSB’s appeal, she notes, is its technical rigour. “We keep our stakeholders at the heart of the organization. CDSB’s Technical Working Group consists of over 40 report preparers, users, standard setters, academia and others. This group steers our work and is consulted on the work we produce.”

The organization also borrows “as much as possible” from financial standard setters. “The CDSB framework, which helps companies integrate climate change and environmental information into their annual reports, has had multiple, extensive consultations to get input and acceptance from all actors.”

Several international organizations have thrown their weight behind the CDSB’s efforts, such as the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which develops frameworks and guidance on enterprise risk management, internal control and fraud deterrence, and the World Business Council for Sustainable Development (WBCSD). “Codifying climate change into risk management standards and the work done by COSO and the WBCSD is a way to truly embed this issue into the business,” says McBrien.

CDSB identifies three priorities for the near future. “We are working tirelessly on supporting businesses and creating the enabling environment for the implementation of the TCFD recommendations. Secondly, we are also working with our financial and sustainability standard-setter counterparts to harmonize the rather confusing landscape of reporting standards under the Corporate Reporting Dialogue.” Finally, she says, “I am especially excited about our work to take what we have learned from climate change and expand it to wider environmental reporting.”

McBrien acknowledges that there is a long way to go before business uniformly accepts the risk aspects of climate change. “The conversations we have are still disconnected from the facts of the environmental system on which our financial system depends, not to mention its potential impacts on our society,” she says. “Our aim is to help businesses communicate these issues to their investors in a factual manner. The market is not a zero-sum game and those who will not act are likely to fall behind.”

This article was originally published in the November 2018 issue of A Plus. You can read the digital edition here.