Introduction
Mr President, members of Chartered Accountants Ireland, distinguished guests, ladies and gentlemen; it is a pleasure for me to be here with you this evening. More than that, it is an honour that you Mr President invited me to be the keynote speaker at your 2019 annual dinner.
We meet in Croke Park, this iconic place where the echoes of our history speak to us in this decade of centenaries, where the GAA sporting heroes of Ireland men and women, schoolboys and schoolgirls aspire to play on this field of dreams. This is the headquarters of the largest volunteer organisation in this state with few contemporary parallels anywhere else in the world. I take my inspiration for my remarks tonight from Croke Park but not for any of these perfectly valid reasons.
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We are gathered in the first stadium in the world to obtain ISO 14001 certification for environmental standards and a winner in recent years of multiple awards recognising its commitment to excellence. Last year was Croke Park’s fifth in a row marking zero per cent of its stadium waste going to landfill. 2017 saw the elimination here of single use plastics. Data analytics through machine learning algorithms and multiple sensor systems monitor pitch maintenance, measure noise, wind speeds, flood risk, crowd management and athlete performance. In addition to assisting coaches and players, this helps to improve safety, reduce carbon footprint and drive efficiencies and cost-effectiveness in stadium management. This is excellence by design, by operational management, by green procurement policies. The energy, water conservation and waste management sustainability imperatives and best practices are communicated to and expected from contractors and supply chain partners. Croke Park embodies what smart and green looks like and acts like. It reminds us of what Ireland is capable of achieving when we have leadership, values and vision combined with a determination to act. This stadium through its values in action is a microcosm of what our country could be and in time must be to meet competitive challenges and to fulfil our obligations in the decades ahead.
Irish hesitancy
Croke Park less than three weeks ago also was the venue for a recent high-level consultative forum on an ‘All of Government Plan for Climate Disruption’ hosted by the Minister for Communications, Climate Action and Environment, Richard Bruton, TD. The Government approved the development of this plan in November 2018 with a view to adopting a final report in March of this year. The aim is to prioritise its actions from 2019 onwards to ensure that Ireland can become a leading player in responding to climate change. Last Saturday, just two weeks later, it was reported as the lead story in the Irish Times that the Government might postpone the implementation of this plan in the event of a no-deal Brexit. Planning continues but action may be paused. The newspaper article reported that ‘it was also argued that an economic slowdown would mean Ireland’s emissions would reduce due to decreased economic activity’. A shrinking economy admittedly is one formula for reducing greenhouse gas emissions but most assuredly not a strategic policy direction calculated to make us a leading player.
The urgent displacing the necessary is nothing new in political life. Pausing some things may be justifiable in the circumstances, pausing everything would be a dereliction of our national responsibilities to ourselves, our rising and future generations, to the wider world and the pledges we have made consistent with the Paris Climate Accord of 2015. How ironic that we might be about to freeze our response to the actions necessitated by the United Nations Framework Convention on Climate Change and to some of the UN’s key sustainable developments goals while simultaneously seeking a non-permanent seat on the Security Council to be voted in June 2020. Getting to grips with the climate change challenge may need to be calibrated by political prudence and will need to be informed by public consultation but Ireland will not be well served by political procrastination.
The latest Environmental Protection Agency data on Ireland’s greenhouse gas emissions (published in December 2018) shows an excess of 3 million tonnes of CO2 equivalent over the pathway required to meet EU targets (to reduce 2005 emission levels by 20% by 2020). This will expose Ireland to EU fines. The EPA report notes that some of the modest decrease in 2017 of 0.9% in emissions is better explained by circumstance than deliberate policy, such as a fall in cross border fuel tourism due to currency fluctuations and lower household emissions reflecting a warmer year. This necessitated less heating requirements in winter months. The Taoiseach has acknowledged this, admitting that greenhouse gas emissions is an area where ‘we’re laggard and falling way behind.’ Agreed EU 2030 targets are even more ambitious (proposing a 40% greenhouse gas cut on 1990 levels) suggesting a requirement for transformative and not just incremental policy change in the next decade.
On the same day as Ireland’s climate policy hesitancy was reported the Irish Times also carried two inside stories on weather events. One referred to the record-breaking cold snap over the Great Lakes and the Midwest in the USA caused by changing air currents that exposed the region to the polar vortex, an air mass that usually swirls over the North Pole. The other reported that, simultaneously, Australia endured its hottest January on record and several states their driest on record.
Increasing frequency and intensity of extreme weather events
These are not isolated events but form part of a bigger picture. While no individual weather episode can be linked to climate change the pattern is consistent with the predictions of climate science and is set to grow in frequency and intensity with the rise in global warming. Regarding event frequency – compared to 1950 – floods are up by a factor of fifteen, deaths from droughts by ten, deaths from wildfires by seven and extreme temperature events, both hot and cold, have increased since then by a factor of twenty.
Regarding event intensity consider the following – hurricane Harvey for four consecutive days in 2017 dumped an unprecedented 40 inches of rain on Houston. Southwestern Japan in 2018 experienced historically high levels of rain and associated landslides resulting in several hundred killed and up to eight million advised to evacuate. One area incredibly suffered 23 inches of rainfall in a single day. 2018 also witnessed the deadliest, costliest and most destructive wildfire season on record in California.
2018, with three exceptions, was the hottest year ever since 1850, the base year for widescale reliable temperature data. It was slightly cooler than 2015, 2016 and 2017. These are the four hottest years ever recorded, building on similar but surpassed records over the previous two decades.
According to the IPCC (Intergovernmental Panel on Climate Change) physical risks will intensify as CO2 levels rise, causing air and ocean temperatures to rise and ice caps to melt at an accelerating pace. Physical risks, liability risks and transition risks are the three risk categories linked to climate change analytics.
Apart from climate change denial, which I find as convincing as early cigarette industry denials of the link between smoking and lung cancer, sometimes there is a tendency to engage in dismissive stereotyping of climate evangelists as bearded, sandal-wearing tree huggers, in what might be described as ‘locker room talk’ to quote one prominent denier.
When the world’s biggest reinsurance company, Munich Re, in its 2018 geo-risk report puts some numbers on the issue, if it was not already the case, it is time to sit up and take notice. Analysing 2017 it reported total losses arising from 710 natural catastrophes, including those not insured, at $330 billion, of which 97% were weather related. Insurers paid out $135 billion for such losses in 2017. The data reveals more frequent high-loss events since 2000 than in the two preceding decades. This is not fringe. It is mainstream. As Mark Carney, Governor of the Bank of England, observed as regards the lessons for insurance companies ‘ yesterday’s tail risk is closer to today’s central scenario.’
The race is on
Antonio Guterres, Secretary General of the United Nations has observed that ‘Climate change is running faster than we are.’ But the race to respond is on. Technological developments, transformative corporate leadership, shareholder activism and the rules-based policy environment also are changing and at an accelerating pace. These green shoots prompt hope, if not yet optimism, as evidence of climate mitigation, adaptation and resilience grows.
Technology
The most dramatic technology changes have been in wind and solar. Through technical and operational improvements wind turbine productivity on-shore and off-shore from 2009 to 2017 has seen an eight year percentage decrease in cost per MWh (Mega Watt hour) of 67%. Solar costs per MWh have declined even more dramatically over the same period by 87%. These trends in cost reduction are continuing. For new electricity generating capacity wind and solar in many countries are now displacing conventional generation on the grounds both of driving emissions and costs down. The problem of intermittency, when the wind is not blowing or at night when the sun is not shining is being addressed by battery technology which itself is undergoing a revolution in terms of increasing scale and reducing cost.
Corporate response
There is emerging evidence also of corporate determination to accelerate the pace of transformative change. VW will spend €30 billion on electric cars in the next five years specifically on a new chassis designed solely for electric vehicles. This is not just a design principle. It will impact the whole organisation from supply chain to production to vehicle sales and will open a whole new revenue stream of after sales cloud-based apps and mobility services. Think of the new chassis as a connected mobile phone on wheels. Eight factories on three continents are scheduled to use the platform by 2022 with the aim by 2025 of selling three million units.
Maersk, the world’s largest container shipping company, accounting for almost one third of global container traffic, has pledged to cut net carbon emissions to zero by 2050. This will challenge an industry that is both one of the main transporters of global trade and one of the biggest polluters to come up with radical solutions in the next decade. The company has informed its entire supply chain from engine makers and shipbuilders to new technology providers to come up with carbon-free ships by 2030 to meet the goal. The Maersk COO explained to the Financial Times in December 2018 “We will have to abandon fossil fuels. We will have to find a different type of fuel or a different way to power our assets. This is not just another cost-cutting exercise. It’s far from that. It’s an existential exercise, where we as a company need to set ourselves apart,”
What the VW and Maersk stories reveal is the power and influence that large corporations can and will exert on their upstream supply chain and their downstream clients to drive the decarbonisation agenda.
Shareholder activism
Shareholder activism on ESG (Environmental Social and Governance) and impact investing is set to play an increasing role in forcing disclosure from fossil fuel intensive corporates. ‘BP,’ according to the Financial Times last week, ‘has agreed to disclose how its spending plans, emissions policies and broader business strategy align with the Paris climate agreement amid mounting investor pressure on oil and gas companies to take responsibility for their contribution to global warming.’ Leading asset managing shareholders are planning to file a shareholder resolution at BP’s annual general meeting in May, demanding more transparency. BP’s board of directors has agreed to support the proposal an acknowledgment that energy majors need to take a more proactive and open approach in the climate debate.
Mainstreaming the climate change imperative
There is an accelerating institutional gearshift to mainstream the climate change imperative in which your profession of accountancy will be front and centre. In the past eighteen months there have been initiatives by the G20 – led by the Michael Bloomberg-chaired ‘Taskforce on Climate-related Financial Disclosures’ which issued its final report in June 2017; by the EU through its – ‘Action Plan for Sustainable Finance’, published in March 2018 and by the UK Prudential Regulation Authority whose – ‘Draft Supervisory Statement’ was released in October 2018. These emphasise risk management, disclosure, governance, strategy and scenario analysis. So far these rely on voluntary and not mandatory compliance but should not be regarded as optional extras.
Rules-based environment
While there are uncertainties concerning the timing and scale of adjustment the right information combined with transparent disclosure will prepare asset managers, pension funds, insurers, banks and Public Interest Entities to better measure, report and disclose their emissions exposures and decarbonisation planning. By extension this will engage their supply chains and clients.What is needed is to establish consistent, unbiased and comparable metrics regarding the decarbonisation and sustainability challenges foreseen. Better information can build understanding of future risks, offer better pricing for investors and assist better decisions by policymakers in the transition to a more sustainable society.
The latest Bank of England report found a majority of banks beginning to treat climate change risk like other financial risks, with some escalating these considerations to board level. The mortgage book exposure to flood risk, the impact of extreme weather events on sovereign risk and transition risks through exposure to carbon intensive sectors have been among the considerations. Lloyds of London underwriters are obliged explicitly to consider climate change in their business plans and underwriting models to mitigate risk in terms of their liabilities. However, insurers have been accused of cognitive dissonance by failing, to date, to subject their asset management and investment portfolios to similarly rigorous climate risk analysis.
A wide array of initiatives focused on impact and reporting already exist.[1] There is a veritable jungle of classification systems and standards’ definitions. Some of their outputs are substantial in mainstreaming climate related measurement and non-financial disclosure. Others are sometimes abused by green-washing corporate disclosure where good news is publically paraded under bright lights but the dirty linen is hidden from public view. Some reflect EU environmental objectives. Others fail to do so. This has led to the EU’s Action Plan.
Permit me to concentrate for a moment on this plan since it will constitute the regulatory foundation for Ireland as an EU member state. The Action Plan for Sustainable Growth published last year and informed by the G 20 Task Force on Climate-related Disclosures. It is based on three objectives:
– to reorient capital flows towards sustainable investments and growth
– to manage financial risks stemming from climate change, natural disasters and environmental degradation
– to foster transparency and a long term outlook.
A unified classification system – a Taxonomy – will be built around six EU environmental objectives.[2] New carbon related indices will be created.
This exercise in standard setting is designed to overcome fragmentation and divergent classifications and to confront greenwashing. It will develop metrics that sufficiently reflect EU environmental priorities and standards. Rollout will commence in Q2 2019 with the aim of adopting the first Delegated Act by the end of 2019, a second Act in mid-2021 and a third one in mid-2022.
The EU will publish its fitness check on public corporate reporting this year and proposes to amend the non-binding guidelines on non-financial reporting. This is a space for the Chartered Accountants Ireland and its members to watch closely. You are policy takers in this regard but through government and the European Parliament you also can contribute to this policy making process as its evolves.
Angst to opportunity
Like every coin the climate change challenge has two sides. If one is transition angst, the other is boundless opportunity especially in the transition from fossil fuels. The European Commission estimates that to meet its 2030 targets additional investment of €180 billion per annum will need to be spent on energy efficiency and renewable energy. Globally the International Energy Agency has estimated that to meet the 2ºC scenario €45 trillion of investment would be needed in power supply and end use efficiency.
These numbers may appear to be improbably large but recall that the TCFD report delivered by Michael Bloomberg has been supported by three quarters of globally systemic banks, by eight of the top ten global asset managers, the world’s leading pension funds and insurers, together with the Big 4 accounting firms. Taken together these are responsible for managing nearly $100 trillion in assets, close to 20% of global GDP. Mobilising more of this capital for decarbonisation and sustainable growth will demand determined leadership, regulatory and policy certainty, not hesitancy, from governments and consistent investment grade green reporting than can reveal materiality in exposures to climate risk. This is not mission impossible.
Green bond markets are growing. The NTMA (National Treasury Management Agency) was oversubscribed when it launched Ireland’s first ever national green bond worth €3 billion last October.
Investment on this grand scale, in the words of Mark Carney, ‘is a major opportunity for long term investors and macroeconomic policy makers seeking to jump start growth.’ For the world and the European Union going green and going big could be the antidote to the fear of secular stagnation.
Off-shore wind
Ireland’s offshore wind, with among the highest wind speeds in Europe, is an inexhaustible resource sitting idle off our coast waiting to be harvested. The EU is crying out for a non-fossil renewable transition. Every TWh (Terawatt hour) exported from Ireland would be worth €50/60 million. Were the EU, for example, to shift over time to completely decarbonise electricity generation it would need an estimated 7,800 TWh of green power. We can and should grasp these opportunities building a whole on-shore sub-supply industry that could help re-skill and absorb workers displaced by the closure of high emission combustion plants. This offshore abundance cannot be harvested by onshore caution.
I understand that estimates are being prepared of Ireland’s off shore wind generation potential for government that are in the 15-25 GW(Giga Watts) range. The generation and export to end users in other states of 5 GW would be enough of a carbon offset to cover the entire carbon footprint of Irish agriculture.
Public procurement
Public procurement represents a significant share of EU and Irish GDP. It is by scale and consistency capable of moving the supply chain of goods and services in a more sustainable and innovative direction. The Office of Government Procurement (OGP) is the responsible agency for a large part of Irish public procurement. Last October it published its 2016 report.[3] It runs to 62 pages but as regards green procurement metrics or comment it is silent. Here in Croke Park Minister Bruton promised a Green procurement plan by March of this year. This is welcome and it should not be postponed. However, it begs the question what ever happened to the 70-page Green Tenders Action Plan on Green Public Procurement published in January 2012 by Ministers Brendan Howlin and Phil Hogan targeting eight sectors? This may have been a great or modest success or perhaps even a failure but there is no public data to permit evaluation. Two years after its launch one supplier survey in 2014 reported that 87% of suppliers never heard about the guidance on green public procurement. As well as action plans we need actions, delivery and transparent data on outcomes. The essential point is that for Irish SMEs this could be a real sustainability-driven repeatable business opportunity created and driven by public policy.
Managing the transition
Managing the transition is a key dimension which requires detailed attention. There is no one-size-fits-all solution. The government needs to give clear leadership in setting out the vision and headline goals and in identifying the available policy toolkit to fulfil them. The tone at the top matters. But more and more, communities of interest, whether sectoral or territorial, household, farmer or corporate, need to be consulted in terms of agreeing how best to animate the big picture targets in a more complex but ultimately more grounded mutually-valued vision and process. Some analysts refer to this process as policy co-creation.
The Port of Rotterdam is the largest port in Europe. Its CEO has initiated a consultation process with all its stakeholders including trades unions to spend time working out together how to realise its sustainability goals. It is early days but suggests a way forward. Since change involves both potential winners and losers seeking to deconflict and calibrate the dynamics of adjustment makes sense.
Conclusion
What counts has to be measured. What is measured has to be relevant. What is measured and relevant has to be validated. These are your professional strengths. From the farm gate, to SMEs to large cap corporations, from small practices to the Big 4, from internal to external auditors – accounting for sustainability is fast becoming a non-optional mainstream core activity, not just a corporate social responsibility frill.
For audit committees the inclusion of realistic CO2 shadow pricing in Capex evaluations in the light of the probable introduction of a carbon tax which will increase over time could help future-proof investments.
For EU-related reporting and disclosure reasons, assisted by external advice and audit, firms will need to know their environmental footprint and the physical, liability and transition risks of their balance sheet, both assets and liabilities.
In larger enterprises remuneration committees should base a quantified part of variable executive remuneration on targeted improvements in the firm’s environmental footprint.
Reversing these practices into the supply chain through green procurement and green logistics practices should be encouraged.
This is what good governance requires. These things can make a big difference over time through learning by doing. I know because for several years I was the sustainability defence point on the board of Michelin, the French global tyre company.
These are key points where corporate policy and accountancy intersect, whether you are an internal or external auditor, a CFO or a member of an audit or remuneration committee. I would commend this roadmap to your attention. Efforts to promote responsible governance should not be limited only to large cap enterprises.
My request to you individually and collectively tonight is to get with the programme and bring your professional competence, values in action and civic consciousness to bear on this great policy and moral challenge of our times.
I urge you to believe in the power of one, of one person, of one accountancy practice, of one profession, yours, to make a real difference.
We need to find a response proportionate to the dangers which threaten us.
We must act with foresight and not regret with hindsight.
We are engaged in an existential exercise. We may stumble. We must not falter.
‘We are the first generation to know we are destroying our planet and the last that can do anything about it.’[4]
Thank you for your attention.
Pat Cox
Chartered Accountants Ireland President’s Dinner,
Croke Park
7 February 2019
[1] Among these are CDP (formerly the Carbon Disclosure Project), the Dow Jones Sustainability Index and the Global Initiative for Sustainability Ratings. These provide ratings to measure environmental impact. The Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board (SASB) in their turn set standards for corporate sustainability disclosure and reporting. These represent a considerable body of work both in terms of design and delivery.
[2] – climate change and mitigation
– climate adaptation
– the sustainable use and protection of water and marine resources
– transition to a circular economy, waste prevention and recycling
– pollution prevention and control
– and the protection of healthy ecosystems.
[3] It covers 3,934 tenders over 77 public bodies. 53% of the tenders were won by SME’s and 94% were won within the state. It reports on detailed spend and tender data.
[4] In the words of the CEO of the World Wildlife Fund