Paul Druckman addresses Task Force on Climate-related Financial Disclosures

Posted
11 February, 2016

Paul Druckman, CEO, IIRC address to the first plenary meeting of the Task Force on Climate-related Financial Disclosures, London, 9 February 2016

Thank you for inviting me to present to this Task Force and audience. I am delighted that we have been asked and can assure you all of our intent to make your outcomes a resounding success.

The IIRC is global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. The coalition is promoting communication about value creation as the next step in the evolution of corporate reporting. Our vision is to align capital allocation and corporate behaviour to wider goals of financial stability and sustainable development through the cycle of integrated reporting and thinking.

Mark Carney has recognized the potential of Integrated Reporting in achieving this vision when he said, “By improving reporting requirements for organizations, Integrated Reporting can bring additional information, in particular about the longer-term costs of climate change, to feed into markets and inform decision-making and policy-formulation by institutions. If achieved, it will lead to better-informed and more sustainable long-term investment, for the benefit of society.”

As an accountant by training I recognize that the profession have been the designers of the reporting system for centuries right up until recent decades. Something I call for which is entitled “moving from Pacioli to King” is the return of the system design to the market, perhaps something to discuss but not for now. The accountancy profession is based on judgement and opinions. But judgement and opinions are only as good as the information and context used to inform them. Wider information sets, better context and greater insights are needed and this cannot be provided by just financial information.

Financial capital has been put on a pedestal and corporate behaviour has been dictated within this narrow boundary of financial capital, which is primarily backward looking and short term by nature. The ‘tragedy of the horizon’ – about which Mark Carney has spoken so powerfully – cannot be resolved in a system that revolves around such backward looking financial information. The judgement of the accounting profession has also been developed within this narrow remit of financial transactions. And the problem is that the role of accounting regulators has been to strengthen the quality of standards focused on this financial information alone. The reporting system has not developed to view finance as part of a much bigger system of decisions, behaviours and transactions. This has led to the rigid system we find ourselves with today, as well as the incentive structures underpinning it, which has fixed a behaviour that is now recognized as unsustainable. The Canadian ice hockey player Wayne Gretzky once said, “I skate to where the puck is going to be, not where it has been” and the same should be true of an organization’s approach to risks such as climate change.

Evidence shows that investors require information and data from companies at two levels:

  • At a strategic level, where the International <IR> Framework can help is to focus board thinking and decision making on strategy. In particular in answering Mark Carney’s question: it is not just about what is your strategy for dealing with climate change, but how does climate change impact your strategy and value creation?

<IR> provides a framework for formalising this process and dealing with the issue. It is a shift from reporting impacts alone, to understanding how climate impacts strategy and value creation. By ensuring organizations focus on strategy we can not only reduce climate risk, but also improve how prepared businesses are, thereby increasing the resilience of capital markets and contributing to financial stability.  Disclosure principles must start from the position of strategy: how do climate risks impact my strategy over the short, medium and long term?

  • Detailed data and information, where this Task Force creates the opportunity to build the bridge between frameworks and standards and deliver something cohesive. We believe that corporate reporting is a silo, disconnected from board decisions on risk or consideration of the business model. This needs to change. Reporting should be viewed as a system, rather than as individual silos, a catalyst for internalising external factors that pose a risk to the business model. We need an explicit recognition that reporting connects to the capital markets and economic system.

In 2014 we initiated the Corporate Reporting Dialogue, which brings together the eight leading Framework and Standards developers in the corporate reporting field, many of which you will also be hearing from today. Integrated Reporting is an umbrella for the other standards and frameworks – they offer metrics and detail on the data investors need over the various capitals an organization uses and affects – whilst Integrated Reporting provides the overarching strategic framework.

Let me tell you of the key change I saw in 2015 specifically within the financial reporting and accounting community. In 2015 there was a real breakthrough as they realized they are a part of this wider corporate reporting system, rather than as the whole thing with some add-ons. That difference may seem small but in my view is so significant as to be game changing.

Our recommendations for the Task Force are:

  • Embed the principle of connectivity of information. Information must flow through a business – this means ending the silo culture and putting in place cross-cutting themes to consider climate issues and how they impact the business model.
  • Start with strategy. This puts boards in control and means data and information flows from – and to – strategic decision-making.
  • Seek explanations. This forces consideration by the board. How does climate impact our business model?
  • Extend the disclosure horizon over material climate change information. How does climate change impact our business model over the short, medium and long term?
  • Underpin corporate governance and stewardship codes. Signal the intention that climate-related issues should form part of the key consideration of risks by boards and investors as they undertake their governance and stewardship obligations.

We must reassert again for this generation that information is the lifeblood of capital markets. But we must define that information in order to serve the wider public interest goals of financial stability and sustainable development. It must be strategic, enabling data to be seen in context. This Task Force has the opportunity to connect the corporate reporting system to the capital market system in a way that has never been achieved before. For this you have our full support.