Climate Change Reporting: A Catalyst for Change

The following is a speech given on Tuesday, April 2 by Hans Hoogervorst, chair of the International Accounting Standards Board, at the Climate-Related Financial Reporting Conference in Cambridge, U.K. 

I spent a long time in politics. As a liberal, free-market-oriented politician, I started out being skeptical about climate change. It did not sit well with me that so many people in the environmental movement at that time had a strong anti-market and anti-globalization agenda. It made the climate-change issue suspicious by association.

Over the years, I gradually changed my mind. I do not believe just in markets, but also in science, and I could simply no longer ignore the growing numbers of Nobel Prize winners warning against climate change.

Moreover, while I still believe that free-market policies generally deliver the best results, I also acknowledge that public policy is needed to counteract market failures.

Climate change is a massive example of such market failure. Just look at aviation. It is one of the fastest-growing sources of greenhouse gas emissions and the most climate-intensive form of transport. Yet the price of international airline tickets in no way reflects the negative externalities of flying.

Substantial taxes would be necessary to adequately price in its negative environmental impact, but instead, aviation is not subject to fuel tax or VAT. It is heavily subsidized compared to other sectors of the economy.

As a result, a gas-guzzling flight from London to Amsterdam can be cheaper than the eco-friendly hybrid taxi to the airport! The economics of the aviation industry is a market failure, compounded by a public policy failure.

In an ideal world, there would be no need for sustainability reporting. Negative externalities, such as pollution, would be adequately taxed so that the price of a product would reflect the cost it imposes on the environment. A realistic carbon tax would cause the financial statements of smokestack industries to reflect the true costs of their products.

Should these costs make an economic activity unfeasible, the financial statements would show the impairment of its related assets. Financial reporting and sustainability reporting would be one and the same.

This is the reason why many people see climate-change reporting, or more broadly sustainability reporting, as an important catalyst for change.

*To read the full article, click here.

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Deb McNamara