Accounting for Everything: Finance’s Pivotal Role in Climate Action

Welcome to the inaugural post of the CorEST blog, where we explore the dynamic intersection of finance and climate action. Our journey begins with a clarification: accounting and financial planning, while related, are not the same. Understanding this distinction is key to grasping how each contributes to tackling climate-related challenges.

The Enduring Legacy of Accounting

Accounting, a practice dating back to the 15th century, has always been about looking backward. It’s the art of recording past transactions, painting a picture of an organisation’s financial history. This historical perspective is crucial for external stakeholders, such as investors and regulators, who rely on accurate, compliant financial reporting. Medieval merchants in Italy, for instance, adopted the double-entry bookkeeping system, laying the groundwork for modern accounting practices. This focus on historical data and external reporting has remained the cornerstone of accounting through the ages.

The Advent of Financial Planning

In contrast, financial planning is a relatively new player in the financial arena, emerging in the late 20th century. This evolution was spurred by the growing complexity of the business world. As organisations navigated new challenges like globalisation, traditional accounting methods fell short. Financial planning emerged to fill this gap, driven by the advent of computational and digital technologies such as TM1. Unlike accounting, financial planning is inherently forward-looking. It concentrates on the future, serving an internal audience with strategic planning, scenario analysis, and decision support. This shift marks a transition from a historical focus to a forward-thinking, strategic approach.

Emissions Accounting: A Reflection of Traditional Accounting

Emissions accounting, mirroring traditional accounting, is past-facing and externally focused. It emerged as a response to the growing need for environmental accountability, measuring historical emissions and ensuring compliance with standards like the GHGP and ISO 14067:2018. This form of accounting, although a newer development, holds the same principles as financial accounting, focusing on historical data and external reporting.

The Increasing Complexity of the Emissions Environment

Despite its importance, emissions accounting faces limitations, much like traditional accounting. The rapid changes and complexities in the emissions environment, underscored by factors like mandated reductions, demand more than just historical data analysis. Organisations are realising that to effectively navigate this landscape, a more proactive, strategic approach is necessary.

The Way Forward: Climate Action Planning

So, what should organisations do in the face of these challenges? At CorEST, we propose a solution: Climate Action Planning. This approach leverages the principles and tools of financial planning to address climate challenges. It’s about using the forward-looking, strategic, and internal focus of financial planning to navigate the complexities of climate action.

Climate Action Planning involves more than just understanding emissions data; it’s about preparing for the future, anticipating changes, and making informed decisions to mitigate climate risks. This approach enables organisations to proactively manage their impact on the environment, aligning financial strategies with climate goals.

At CorEST, we believe that the finance department is ideally positioned to lead this charge. The skills, tools, and strategic thinking inherent in financial planning are directly applicable to climate action. By adapting these resources, organisations can develop comprehensive strategies that address the multifaceted nature of climate change.

Conclusion and Look Ahead

This exploration into the roles of accounting and financial planning reveals a clear path forward for organisations looking to make a meaningful impact in the realm of climate action. By leveraging the strategic, future-facing aspects of financial planning, organisations can effectively address the complexities of the emissions environment.

In our next thought piece, we will delve deeper into the best practices of Climate Action Planning. We’ll explore how organisations can harness the power of financial planning tools and strategies to create effective, comprehensive plans for climate action which are aligned and integrated with overall organisational business planning. Stay tuned for insightful discussions on navigating this crucial aspect of organisational strategy in the era of climate change.