Accounting for carbon weighing on businesses
ROSS Garnaut’s blueprint for a carbon- constrained economy and growing global consensus on climate change science have focused corporate Australia’s attention on the enormous challenges ahead.
While the substance of the Garnaut review is still up for discussion and the Government’s response is by no means set in stone, it is clear that corporations will have to significantly alter accounting and reporting processes as environmental management rises to the top of the economic agenda.
Corporations will almost certainly face obligations to audit their carbon output as progressively more stringent caps on greenhouse gas emissions turn the size of a company’s carbon footprint into a significant cost of doing business.
It is not just smokestack industries that are focused on the issue. Stringent carbon accounting will apply to all sectors of business, not just primary emitters, according to John Taberner, a partner at Freehills.
No wonder, then, that the compliance burden, higher input costs and changes to business patterns this will bring are engaging Australia’s best corporate governance minds.
The challenge is heightened by the fact that everybody is to some extent working in the dark. Details of the actual caps that will form the basis of a national trading scheme are yet to be formulated, and the uncertainty is creating an obstacle to investment.
The broad parameters under which business will operate in a carbon- constrained environment, however, are already known. In his interim report in February, Garnaut stated firmly that it was neither desirable nor feasible to seek to remove ( climate change) pressures ( by reducing) the aspirations of the world’s people for higher material standards of living.’’
This premise lays the ground for a carbon price signal that will lead to market- driven initiatives for lower carbon emissions, for demand- led reform rather than commandled reform that will rely on the corporate world for the heavy lifting.
Surprisingly perhaps, the central legislative challenge does not lie in an absence of regulation but in the need to harmonise and streamline existing legislation. A plethora of regulations have been passed by federal, state and territory governments in relation to climate change, creating a significant compliance burden for companies.
Last year the Howard Government introduced comprehensive legislation in the form of the National Greenhouse and Energy Reporting Act which required a broad range of entities to report each year on their carbon emissions, and their production and consumption of energy. Further regulations and guidelines under this legislation are in the pipeline. Corporations face the prospect of mandatory greenhouse and energy monitoring from July 1 and will have to report their carbon consumption and output for the 2008- 09 financial year by October 2009.
The knee- jerk commercial response to the prospect of the carbon- constrained regulatory environment has prompted corporations to boost their environmentally friendly credentials with green claims about their products and working practices, some more firmly grounded than others.
But these are likely to come under much closer scrutiny from both regulators and consumers, putting pressure on corporations to make sure their green bragging rhetoric stands up to more sophisticated analysis.
While the politics surrounding the ratification of the Kyoto Protocol has in many ways been a distraction from the real challenges, Australia’s delay in boarding the Kyoto bus has left Australian corporations struggling to catch up in the global market in emission credits. To some extent they have been excluded from the technologies and expertise needed to deal in the world of offsets.
Growing investor concern, however, has provided a pressing reason for corporations to come to terms with the need to address the effects of climate change on markets. Boards have come to realise that they are not immune from the kind of shareholder demands faced by some directors in the US, where investors want information about the economic risks associated with past, present and future emissions of greenhouse gas.
Since July 2004, publicly listed companies in Australia have also had to comply with section 299A of the Corporations Act, which obliges directors to include in their annual report anything which might reasonably be seen to affect the financial position of the company, its strategies and future prospects which, in the current climate, might well include environmental matters.
The extra reporting requirements filter through to other arenas, such as the Australian Stock Exchange’s Listing Rule 3.1 and section 674( 2) of the Corporations Act requiring public companies to disclose information which would affect share price.
A company failing to disclose environmentally important information could lay itself open to a claim of misleading and deceptive conduct under the Trade Practices Act. And there is the ever- present threat of class action against companies and directors accused of poor corporate behaviour.
Like so much else about the climate change debate, the long- term implications of these and overseas measures are not immediately clear. But the onus is on corporate Australia to lay the groundwork for domestic and global changes over the next few years that could fundamentally change the way they do business.