Professor Paolo Quattrone of Alliance Manchester Business School says accountants can play a key role in addressing nature risks, including biodiversity loss.
At the UN Biodiversity Conference (COP 15), held in December in Montreal, leaders agreed a global deal to protect the ecosystems that support the world economy, and prevent the further loss of already severely damaged plant and animal populations – including what many have termed the “insect apocalypse”.
The deal was reached in large part thanks to pressure from the Chinese presidency and the Canadian host government and despite an objection from the Democratic Republic of Congo, which contains many acres of rainforest.
The main headline of the COP15 deal was ‘30-by-30’. This is the commitment to protect 30% of land and 30% of coastal and marine areas by 2030. Beneath this headline policy, COP15 also challenged companies around the world to analyse and report how their operations affect and are affected by biodiversity issues.
The parties agreed to large companies and financial institutions being subject to “requirements” to make disclosures regarding their operations, supply chains and portfolios. Such reporting is intended to give biodiversity harms more visibility. This clarity will increase boardroom focus and lead to a reduction and reverse the damage business has inflicted on the natural world and encourage sustainable and, in time, net positive production.
Voluntary vs mandatory
On 5 December 2022, before the start of COP15, public consultation got underway on the draft GRI (Global Reporting Initiative) Biodiversity Standard (approved by the Global Sustainability Standards Board (GSSB)). The consultation ends on 28 February 2023.
The new draft GRI Biodiversity Standard seeks to apportion responsibility and accountability for the impact organisations have on the natural world, informing the global response to the deepening biodiversity crisis.
Crucially, whatever the outcome of the consultation, after it ends on the last day of February, the new GRI Biodiversity Standard will be voluntary. Many of us pushing for reforms to protect and revive the natural world, worry that, because it will be voluntary, it will not have the positive effect necessary on its own. Human nature being what it is, and noting the current global pressures on the price of goods and services, the risk is that many firms will not apply the standard, or will do it in a way that serves their interest, rather than the public one. Such measures need to be mandatory and legally binding to have the rapid meaningful change the world needs.
In parallel, and not by coincidence, the UK has begun a programme of making it mandatory for a range of entities to report on their climate-related risk in line with the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD). This is joint action by the UK government and financial regulators, rolling out TCFD-aligned reporting for asset managers and owners, including pension funds.
In February 2022, the UK Department for Business, Energy and Industrial Strategy published guidance to companies regarding mandatory TCFD-aligned disclosures. As the UK is making reporting on the climate risk associated with their activity mandatory, this should have a positive impact. The roll out started with listed companies: firms with a UK premium listing became subject to TCFD-aligned reporting for accounting periods beginning on or after 1 January 2021 and the first annual reports including mandatory TCFD disclosures were published in the spring of 2022.
The roll out was then extended to issuers of standard listed shares and global depositary receipts representing equity shares, for accounting periods beginning on or after 1 January 2022 and so we will see their first annual reports with TCFD disclosures this spring. The next phase of roll out was for large businesses and LLPs, employing 250 people or more, applying for accounting periods beginning on or after 6 April 2022.
The UK’s Financial Conduct Authority (FCA) published its consultation on Sustainability Disclosure Requirements (SDR) and investment labels, in October 2022. Essentially, these are proposed requirements around labelling and disclosure rules for UK-based funds (or funds marketing to UK-based investors) that are marketed as having sustainable characteristics.
Also in April 2022, the UK’s HM Treasury launched the Transition Plan Taskforce (TPT) which seeks to develop the ‘gold standard’ for the private sector to transition zero. It aims to inform and build on international disclosure standards. The TPT should be viewed as a UK jurisdictional initiative to apply and build on the International Sustainability Standards Board (ISSB)’s baseline. Along with the UK, many countries are expected to adopt the ISSB’s global baseline and build on it.
Silent exploitation of nature
We and others behind these various draft new disclosure rules are concerned that nature is a stakeholder that has long been neglected when it comes to returns, remuneration and plain visibility in filed accounts. And so it has been silently exploited for longer than accounting has existed. COP15 shone a welcome light on the seriously detrimental impact this approach is having on our planet and the plants and animals which inhabit it.
To make good on all the promises made by corporations large and small, we need to reframe nature’s place at the boardroom table. No longer a silent and exploited victim of commercial success, but instead viewed as a body in the room who, like all other vested stakeholders, expects a beneficial return.
The UK’s mandatory TCFD-aligned disclosures and other initiatives are a good start. But they need to be global and, crucially, mandatory. The two draft global frameworks in this area – the GRI Biodiversity Standard and the Taskforce on Nature-related Financial Disclosures’ (TNFD) risk management and disclosure framework, which aims to enable organisations to report and act on evolving nature-related risks – need to be made mandatory as soon as possible.
If companies the world over were mandated to include nature as a line on income statements and balance sheets, then it would be given as much prominence and profile as any other stakeholder. This addition to companies’ annual financial accounts could be the straightforward yet potent change if we are to give nature a voice and make progress on the transition to net zero. It would allow greater focus to the consumption of natural resources, and the regeneration of natural capital – and human activity would move decisively and permanently to net positive.
At present, global financial structures are not built to recognise nature within financial reporting and accounts. Rooted in the first industrial revolution, with Adam Smith, who reduced value to utility, and in turn market price, the current accounting system recognises only the production of financial values and capital assets. As a result, it does not detail how natural capital is exploited by this production and regenerated through the distribution of resources generated in such a process.
We are now in the fourth industrial revolution, so is it not time for accounting to reflect this? Could the transparent collection and publishing of digital data, with sophisticated algorithms and real time updates give us a laser-like focus on this issue? Such data and a spotlight may lead us to changing our behaviour accordingly.
Currently, nature has neither voice nor value and it is not considered to be tangibly affected – so it is left out of financial reporting. However, if we reframe corporate thinking to view nature as a core stakeholder then we elevate its status and importance – crucial steps towards affecting real and tangible change.
A provision for nature
Adding a ‘Provision for Nature’ in a newly designed the Value-Added for Nature Income Statement (VAN) will force corporations to disclose its activities that adversely affect Nature, to account for it and put money aside to repair and revive it. Such an approach would encourage firms to consciously consider the means and not just the ends.
If governments and companies support and enforce this simple but effective change to accounting, they are essentially empowering accountants to become one of the biggest advocates and drivers for biodiversity safeguarding, repair and revival and define the firm as the locus where all of this happens.
However, structural change takes time and time is running out if we are to halt global temperature rises. Companies which are serious about doing their part to recognise, repair and ‘renumerate’ nature can act now. Creating a voluntary Fund for Nature on the balance sheet would enable companies to start increasing the visibility and credibility of nature as a stakeholder – which will help normalise the practice. And then who knows, perhaps accounting and accountants can and will save the world…
This article was co-authored by Ariela Caglio, Associate Professor of Management Accounting at Bocconi University and Director of ESSEC-Bocconi Double Degree (Master of Science in Management) since 2019.
Professors Quattrone’s and Caglio’s work in this area has kindly been funded by the Chartered Institute of Management Accountants (CIMA) in the UK and assisted by Ms Sarah Russo.
 Department for Business, Energy and Industrial Strategy, Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs, Non-binding guidance, February 2022
 Seeking transparency makes one blind: how to rethink disclosure, account for nature and make corporations sustainable, September 2021, by Professors Paolo Quattrone and Ariela Caglio. To access a free copy of the full research paper, please go to: https://www.researchgate.net/publication/354635392_Seeking_transparency_makes_one_blind_how_to_rethink_disclosure_account_for_nature_and_make_corporations_sustainable