Humans can slow or reverse climate change. A majority of Americans (89%) agree with this statement according to a 2022 Ipsos poll. But according to the same poll, less than half of Americans say they are likely to make changes in the next year to help limit climate change. Ipsos cites several activities that could have far-reaching consequences in mitigating environmental impacts if individuals embarked on them collectively. But the number of people doing disparate activities with little consistency reveals a society that has not made addressing the climate crisis a priority. Ipsos paints a picture where some people may be recycling their plastic and reducing their food waste, but they are also printing single-sided documents, ordering Uber Eats take-out, and purchasing fast fashion.
Individual people are inconsistent in their willingness and ability to tackle climate change, so it should not be surprising that businesses’ attempts to curb their greenhouse gas emissions or implement ESG reporting is equally inconsistent. CFOs have a mixed record in addressing this issue even though they are in the best position to spearhead sustainable business information and management within their organizations. While some are wholeheartedly embracing sustainability and taking responsibility for the short-term and long-term risks climate issues pose to their organizations, others do not see it as their responsibility. According to IMA’s 2020 C-Suite report, “CFO as Value Creator: Finance Function Partnering for the Integration of Sustainability in Business,” some CFOs may consider sustainable business initiatives and reporting as outside the scope of their external reporting responsibilities and as being too burdensome (they believe this work should be done by a separate sustainable business or corporate responsibility team outside the CFO function).
But as the IMA report points out, “Members of the finance function have unique and critical skills to contribute to make the work of the sustainable business team more complete, accurate, and business-relevant.” CFOs own strategy, planning, performance, governance, internal controls, risk management, data analytics, external reporting, and technology (competencies all found within IMA’s Management Accounting Competency Framework) and therefore have the right skill sets to implement sustainable business management practices. IMA champions CFOs taking the lead on sustainability. In 2022, IMA formed a Sustainable Business Management Global Task Force which issued a Statement of Position on Sustainable Business Information and Management, a series of nine principles that can help CFOs build a successful and sustainable accounting ecosystem within an ever-changing landscape. The principles can be applied to a changing regulatory and standard-setting environment and evolving circumstances in the global economy.
To date, what progress have CFOs and their finance and accounting teams made in sustainable business management? According to a new green paper from IMA, not much. The green paper, “Climate Risk and Strategies: Financial Team Readiness to Meet Accelerating Demands” shows how companies that are part of the broader economy, as represented by the IMA constituency, have not made great progress in responding to climate and other sustainable business risks. Therefore, they are not ready to meet the demands of regulators that are seeking this disclosure. IMA found a disconnect between the demands for disclosure and the lack of risk management processes, governance, and controls.
This disconnect may prove untenable as the Securities and Exchange Commission (SEC) looks to finalize proposed rules to enhance and standardize climate-related disclosures for investors in 2023. At a September 2022 Fortune CFO Collaborative event, Kristina Wyatt, deputy general counsel and SVP of Persefoni and former SEC senior counsel for climate and ESG (environmental, social, and governance), discussed how an organization’s finance operation and CFO will lie at the center of the need for enhanced reporting to the SEC. Wyatt elaborated:
"These are disclosures that are going into the company’s filings… There will have to be some cross-functional collaboration necessary. But the proposals are built on something called the Task Force on Climate-Related Financial Disclosures (TCFD). The key there is financial disclosure."
Organizations will expect their finance and accounting teams to support both external reporting and internal management of sustainability for decision-making. Management accountants will need to become champions of sustainable business information management within their organizations. In addition to identifying, assessing, and managing relevant climate-related financial risks, these practitioners must also find opportunities for efficiencies and implement innovative strategies.
This is a complex and challenging task for management accountants, but IMA (as part of a multi-organizational team endorsed by the Committee of Sponsoring Organizations of the Treadway Commission or COSO) is addressing the application of an updated framework (Internal Control – Integrated Framework or ICIF-2013), which incorporates a risk-based approach to designing, assessing, and reporting on internal controls. Shari Littan, J.D., CPA, director of corporate reporting research and policy at IMA, recently authored a Strategic Finance article discussing how management accountants can apply the updated framework which is expected to be published in Q1 2023.
CFOs and the teams they lead welcome greater clarity on what has until recently, been the ambiguous task of disclosing climate-related risks. Reliable and verifiable information is the gold standard for any financial disclosure and climate-related risks are no exception. Organizations are on a continuum in terms of their maturity in this process. But with so much focus by investors, consumers, boards, employees, regulators, and standard setters on the environmental impact of business, the stakes have never been higher. In the U.S., addressing climate change is one of the few things Americans can agree on (87% of Americans are in favor of companies reporting their climate-related risks according to JUST Capital and SSRS). So now, the question for CFOs is not should we disclose our climate-related risks, but rather how and where can IMA help?