Green audits are coming for a company near you
February 29, 2024
American companies are trying to head off the introduction of strict rules like those imposed in the EU
Green activists never used to attack accountants. No wonder: bean counters’ work seems dull compared with oil drillers or flamboyant bankers.
But last week the IFRS, a doughty global accounting standards body, experienced a “first”: protesters stormed its New York meeting as Brian Moynihan, chief executive of Bank of America, was opining on green audit rules. Yes, really.
And while that particular drama was shortlived, it highlights a wider fight now hanging over corporate boards. For even as right-wing politicians, such as former US president Donald Trump, decry “woke” activists, some regulators are tightening green reporting rules.
This creates challenges for executives such as Moynihan. But it also highlights an oft-ignored point about our 21st-century world: as big companies increasingly straddle borders, globalisation is not always synonymous with a “race to the bottom” and a loosening of rules.
On the contrary, in the green audit world the tale is more of a regulatory “squeeze to the top” now: as reforms are unleashed in one jurisdiction, they are spreading to other regions in surprising ways, threatening to hit unwary companies.
To understand this, we need some history. In recent decades, several frameworks have emerged to enable companies to report their environmental impact. These include the Global Reporting Initiative, Task-Force for Climate-Related Financial Disclosures, Sustainable Accounting Standards Board and most recently an umbrella initiative called the International Sustainability Standards Board.
Many companies welcomed the ISSB when it emerged two years ago, as it was initially billed as a voluntary system to introduce some badly needed streamlining. However, regulators in places including the UK and Australia now want to make parts of its standards mandatory.
And the EU is now introducing a new Corporate Sustainability Reporting Directive that is arguably even tougher. This demands disclosure about emissions from companies’ core operations and energy suppliers (so-called scope 1 and scope 2 emissions) and wider supply chain (so-called scope 3 reports).
Since few companies provide such details now, the new directive “will significantly expand the scope of ESG disclosure required of us”, as Goldman Sachs noted this month, echoing a widely held sentiment.
The US Securities and Exchanges Commission is now slated to produce its own rules. Unsurprisingly, groups such as the Chamber of Commerce are pleading for it to avoid the EU approach. There is particular horror of scope 3 rules, since executives complain that data about supply chains is often poor. They have a point — at least for now.
This lobbying has partly worked: reports suggest that Gary Gensler, SEC chair, has indeed removed scope 3 rules from the looming framework. He fears it would be defeated in court.
This might imply there will be a future transatlantic audit split. But last autumn, Gavin Newsom, California governor, signed a bill requiring all companies with more than $500mn in annual revenues to provide extensive climate reports by 2026, and those with more than $1bn revenues to offer scope 3 reports by 2027 too.
Since most large American entities touch the Golden State, this will suck 8,000 companies into the net, according to Crunchbase estimates. So Newsom has partly gazumped Gensler — and the next US president.
This has at least four implications. First, it leaves executives such as Moynihan walking a political tightrope inside the US, since “Red” and “Blue” states are adopting opposite policies on green.
Second, large companies have to discreetly prepare their internal reporting systems to cope with tough rules, including scope 3, irrespective of what they might say in public. It is expensive to run different systems for different regions. The Denton law group recently told clients they should “prepare to start tracking your scope 1, 2 and 3 emissions and/or your climate-related risk and mitigation measure as early as 2025”. Walmart is a case in point: even though it is headquartered in Republican-dominated Arkansas, it is developing scope 3 reports.
Third, as corporate boards navigate this maze, an entrepreneurial thicket of legal, reporting and data services is springing up. This is welcome, since it should eventually make scope 3 data more credible.
And that leads to a fourth point: although green activists often love to hate globalisation, the phenomenon is helping their cause as reforms boomerang across borders.
We have seen this pattern before. When California tightened its auto emission rules a decade ago, German carmakers had to change their systems — even at home. And when Brussels introduced the Global Data Protection Reporting rules in 2016, it prompted American tech giants to overhaul practices in the US.
What makes the green audit saga so fascinating is that it affects a vastly wider swath of businesses. And while industry groups are now suing Newsom to block scope 3 rules, it would be foolish for any corporate board to assume they will win, even if Trump prevails. America’s federalism is powerful.
The not-so-boring world of accountants should brace themselves for plenty more protests — and drama.
[The Financial Times]
