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I have to admit to being at a loss as what Net Zero is about. I listen to Nico on his podcast but I am now finding myself more confused than ever.
Byron’s comment on this blog puts my concern better than I can
Under IFRS, specifically IAS 37 “Provisions, Contingent Liabilities and Contingent Assets,” a company’s net-zero commitment may only be recognised as a liability on its balance sheet if it creates a “constructive obligation,” meaning a public statement that generates a valid expectation that the company will fulfill its commitment to reduce emissions, and meets the criteria for recognising a provision (such as being probable and reliably estimable) based on the specific facts and circumstances; simply announcing a net-zero target without concrete actions does not automatically trigger a liability recognition.
Do any of us have valid expectations that companies or pension schemes will fulfil the commitments we hear/read about them making?
It’s good to see Mike Clark having a go on the Pension PlayPen webcast on Tuesday. So far I’ve found myself exasperated by actuaries (Byron accepted).
I know that some of you will be at the PMI conference so I’ll be posting the video in due course but it’s much better to be on the call. I’ve missed a lot recently and having listened to the debate and read the comments on my blogs, I’m sorry.
I tried to log on to this meeting but was unable to get any sound or vision, although I was listed as attending. There did not seem to be anyone managing the meeting who I could contact (eg by phone) to let me in.
This is the second time this has happened. Last time I just had to give up.
My takeaways from today’s webinar include the following challenges:
For well-meaning trustees, consider whether passive investing may be allocating capital to the status quo rather than to climate transition.
For legal advisers, challenge directors or trustees and other management about whether net zero policy statements are consistent with decision making and other governance practices.
For journalists, report and inform on relevant climate transition actions or inactions, the good, the bad and the ugly.
For accountants and auditors, consider whether recognition-of-obligations criteria in IAS 37 and FRS 102 apply to climate transition policy statements.
In accounting parlance, a ‘provision’ is a liability of uncertain timing or amount and should only be booked when three criteria have been met:
1. A reporting entity has an obligation at the reporting date as a result of a past event.
2. It is probable (ie more likely than not) that the entity will be required to transfer economic benefits in settlement.
3. The amount of the obligation can be estimated reliably.
I’ve always considered the smaller profession of actuaries to be better at estimating certain liabilities (eg pensions, insurance) than the larger profession of accountants, so perhaps actuaries should help auditors towards more reliable estimates!
Mike Clark drew attention to a collaboration between the Institute & Faculty of Actuaries and University of Exeter which produced last month’s Planetary Solvency report.
Even if all three recognition criteria in IAS/FRS are not met, better disclosure of contingent liabilities may inform users of entity reports a lot better than the current piecemeal reporting of annual emissions etc.
Apologies for dwelling on the challenges for accountants rather more than for the others, but I used to be one …