Background
With the advent of corporate governance and sustainability reporting, the expectation of the stakeholders have shifted from financial and profit aspects to the non-financial aspects as well. The stakeholders, both internal as well as external expect the company to address all the environmental, social and human issues along with the financial issues in the reporting. The internal stakeholders are in the form of employees, management, debtors and creditors of the company whereas the external stakeholders are in the form of government authorities, banks, financial institutions, the prospective investors and the tax authorities. All these stakeholders are concerned with corporate governance, the sustainability approach being followed by company, what is the impact of the climate change on the business, and so the theories like triple bottom line approach, which considers social, economic and environmental performance of the company, have evolved over time. Several other theories like those of Legitimacy theory, the Stakeholders Theory and the Institutional Theory have all been evolved to meet the changing requirements of the investors and other stakeholders (Werner, 2017).
The effect and the impact of climate change on the business is being captured in the environmental reporting and it forms part of the corporate sustainability reporting and it gives information on various aspects of the company like sourcing policy of the company as to whether they are procuring from the local vendors or from the international vendors (Solicitors, 2016). It also highlights aspects such as whether the company has been involved in the waste management and minimisation and recycling of the wastes, what are the levels of carbon emissions and other effluents, what is the energy and water usage of the company and does the company complies with the environmental regulations which have been stated by the law and the ministry of environment and natural resources (Haque, et al., 2016). How the company does contributes to the protection of ecological resources and biodiversity and what is the use and impact of the transportation.
As per the Bruntland Report, sustainability has been defined as development of the present needs without compromising on the needs of the future generation. It specially focuses on the responsibility of the businesses towards the environment and how the company should focus on sustainability accounting and positive accounting theories. Off late there has been a huge impact of the climate change on the businesses as well as the ecosystem in which the companies work. As per the report of one of the global agencies, the global temperature has increased by 2% in the past 10 years and it has badly affected the growth and sustainability of the businesses (Bromwich & Scapens, 2016). If the same trend continues, then it might have a huge impact on the costs of the companies to control and maintain the same and thereby their profitability and growth may be impacted heavily. All this has been extensively discussed in the given article.
Impact of Climate Change on Business
Some of the key disclosures that the stakeholders expect with respect to climate change in the annual accounts are as follows:
- Integrated Reporting is one of the new concepts in the corporate reporting environment and many organizations have adopted the same such as those of Carbon Disclosure Project, which has been initiated by BHP Billiton, which is one of the initial companies to report this information in the annual report. The users of financial statements are concerned with what are the risks and opportunities that is posed by the climate change, what is the company’s strategy going forward, what are the governance measures and the performance of the company in this regard and other greenhouse gas emissions(Alexander, 2016).
- How the company is getting affected by climate change as well as all the other related factors (integrated reporting), the way the company is planning to change is operations and practices to accommodate the same, what are the other financial and non-financial parameters that can be related to climate change and what is the metrics of the company. Metrics here means usage of energy, water and other resources on absolute and intensity basis(Chron, 2017).
- Under Integrated Reporting, companies are required to provide disclosures and information to the stakeholders with respect to three things namely, the capital aspect, the organization’s business model and the creation of value in the given time period.
- Capital:
- Financial Capital: Revenue may be one of the most critical things to be impacted and disrupted such as sales may be disrupted due to flooding and negative perception in consumers, the productive capacity may be lowered. The natural resources at disposal of business gets reduced as well as there is a perceived risk to the capital access in the market as the investors tend to be pessimistic due to high risk. On the other hand, this might also create opportunities for those who sell or produce climate sensitive products and services(Choy, 2018).
- Manufactured Capital: The physical objects, which are very critical to the existence of the business, may also get critically affected like those of buildings, plant and machinery, infrastructure and equipment’s. Some of the industries which may be heavily impacted in the wake of climate change is those of manufacturing industries and the telecommunication companies where a fixed temperature is required for equipment’s(Dichev, 2017).
- Human capital: The human resources of the company also gets affected heavily in the form of infectious diseases, reduced nutrition and environmental degradation. The livelihood of people and the standard of living gets affected and the motivation and morale of the employees goes down(Heminway, 2017).
- Intellectual capital: the impact of climate changes, in case if it is high may lead to risks to business continuity and the businesses, which are able to thrive and adjust fast, are the ones, which are able to survive.
- Natural Capital: The natural capital assets including those of land, water, minerals and forests and the natural ecosystem and biodiversity are the ones, which are severely affected, and the companies like those of Wesfarmers and BHP Billiton, which depends a lot on the natural resources, would be heavily affected. The budget gets heavily affected in the scarcity of resources(Raiborn, et al., 2016).
- Social and relationship capital: It erodes the social capital of the companies and if the company is not quick, enough to respond to the environmental changes, then it may affect the relationship with the employees, suppliers, customer and government authorities at large.
- The Business Model: It is expected that the business model would be robust and resilient enough to battle against the changes in the climate and reporting companies are expected to highlight how the quality and the availability of the input and the output would be affected by the changes in external environment. The stakeholders expect the companies to reflect the change in the overall strategy and the value chain to guard against the adversities of nature. All this may affect the overall costs and the supply chain management and the company is expected to reflect the information on revised business model in the annual report(Tanaka, et al., 2018).
- Creation of value in the given time period: the product designs and the ways and processes used by the companies may become obsolete due to acts of nature and thus, these are expected to be identified and mitigated as early as possible.
The above matrix shows the impact of climate change through the intensity of impact on business and how the same concerns to the various group of shareholders. Ford identified 14 such issues for the company and arranged them in concern and impact matrix (Sithole, et al., 2017).
The research paper also focuses on the fact that the Australian Corporations have not been efficient enough to disclose all the information that the stakeholders expect in spite of several laws and regulations. It shows what are the best practices in the disclosure of climate change related business practices. Off late it has been observed that the Australian companies do make less disclosure due to a number of factors. Some of these include lack of stakeholder engagement, excessive focus on the financial targets and performance towards the shareholder’s interest, failure by the business managers to accept accountability and responsibility with respect to spreading information and highlighting the risk on business. This is ultimately affecting the transparency of the information and thus affecting the decision of the stakeholders and investors (Kuhn & Morris, 2016). A number of accounting bodies over the world have suggested a plethora of theories in order to enhance and upgrade the disclosure norms, some of which includes triple bottom line approach and reporting in annual report, Global reporting initiatives, integrated reporting and Carbon Disclosure project. An index was also being developed by Haque and Deegan in 2010 to measure the efficiency and completeness in reporting of climate change information and it was found that most of the companies did not adhered to the minimum levels of requirement.
In the given research study, some of the most critical questions posted to the respondents were:
- Does the organization has a board committee to look after the environmental affairs?
- Does the board conduct periodic reviews on the climate change performance
- Does the CEO/Chairman of the company articulates the views of the organization through publicly listed or available documents like sustainability report and in website?
- Whether the senior executives in the company are placed with specific responsibility for having relationship with the government, community and the media with specific focus on climate change.
- Does the organization have any specific performance measurement tool to identify the gaps in GSG emissions and to plan the steps ahead?
- How the emission accounting is being done and does the organization calculate the savings and offsets from the project(Kewell & Linsley, 2017).
- Is there any third party verification which is being done for GSG emission and does organization have any policy in place to develop or purchase the renewable sources of energy
- Does the organization has the policy and mandate in place to invest in the research and development of finding out ways to reduce the emission impact and support energy efficient projects?
- Does the company complies with GHG Guidelines or TBL guidelines while reporting or showing the trend(Haque, et al., 2016)?
Besides all this, the study paper has discussed extensively on possible issues of low levels of reporting, the notion of expectation gap and what is the cost benefit consideration being taken by companies while coming out with any measure.
Conclusion
From the above discussion and analysis on the research paper and the view of the experts on disclosure index by companies, we have come to know what are the information requirements of the various stakeholder groups and for what reasons, what are the best practices and how the level of transparency be improved upon in the publicly available documents. Though it shows that the Australian companies have been far behind in disclosing this information but it also highlighted the main reasons for the same and how the same can be corrected a regularised going forward.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
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Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.
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Tanaka, K., Lund, M., Aamaas, B. & Berntsen, T., 2018. Climate effects of non-compliant Volkswagen diesel cars. Environmental Research Letters, Volume 13(4).
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