GAIL Annual Summit 2024

Session recap: GAIL Annual Summit, 23 April 2024

at the London School of Economics and Political Science

Climate and Market Integrity – Accounting for the Environment in Financial Architecture

Introduction

Clare Hierons introduces the session, representing both the Porticus Foundation and the Laudes Foundation. 

Overview

  • Accounting for the Environment in Financial Architecture falls within Porticus and Laudes Foundations’ focus on early-stage, philanthropic funding for innovative ideas.
  • Jeremy Nicholls from Social Value International discusses true and fair value, and Oliver Morriss from Aviva talks about macro stewardship and legal duties of investors.

True and Fair Value (Jeremy Nicholls)

  • Social Value International aims to standardise accounting for a broader sense of value.
  • Directors must ensure accounts reflect a true and fair view, possibly including social costs like carbon.
  • Legal opinions support directors’ responsibility to account for the broader impact of their operations.

Macro Stewardship (Oliver Morriss)

  • Macro stewardship involves engaging with policymakers to address systemic financial failures.
  • Climate change represents a significant market failure that needs regulatory and policy intervention.
  • Investors should promote market integrity by holding market participants accountable.

Interconnection Between a True and Fair View and Market Integrity

  • Directors can include sustainability commitments in financial statements, influencing decision-making and addressing market failures.
  • Legal opinions suggest that integrating sustainability into financial accounts is essential for market efficiency and accountability.

Audience Interaction

  • Questions about director liability and fiduciary duty highlight the importance of integrating sustainability considerations into legal frameworks.
  • Comments on market efficiency suggest that comprehensive information, including externalities, is crucial for effective markets and regulatory interventions.

Closing Remarks

  • Emphasis on the need for integrated financial and non-financial reporting.
  • Encouragement for continued exploration of these ideas to drive meaningful change in financial systems.

Summary and Analysis

1. Integration of Financial and Non-Financial Reporting

  • Aligning Section 172 of the UK Companies Act with true and fair financial reporting to include sustainability and stakeholder considerations.
  • Expanding accounting standards to cover non-financial metrics for greater transparency and accountability.

2. Corporate Social Responsibility and Financial Disclosure

  • Standardising sustainability reporting through European regulations like CSRD and CSDDD.
  • Integrating sustainability information into financial statements for better decision-making and accountability.

3. Transition Plans and Investment

  • Emphasising detailed and financially quantified transition plans for achieving sustainability goals.
  • Balancing penalties for high-carbon activities with incentives for low-carbon investments to support a smooth transition.

4. Collaboration Between Governments and Markets

  • Advocating for a balanced regulatory approach where governments and markets collaborate to promote sustainable practices.

5. Legal and Structural Changes

  • Exploring the role of benefit corporations and mandatory reporting requirements to enforce sustainability considerations.
  • Encouraging auditors to ensure financial statements reflect a true and fair view, including sustainability impacts.

Key Actions for Legal and Financial Professions

1. Mobilising the Legal Profession

  • Lawyers should advise clients on integrating sustainability into fiduciary duties and corporate practices.
  • Consistent legal interpretations supporting sustainable practices are essential.

2. Enhancing Director Accountability

  • Directors should consider sustainability information in their reporting to fulfil true and fair requirements.
  • Informing directors about their duties and the importance of sustainability in decision-making.

3. Addressing Systemic Risks

  • Recognising and managing systemic risks within the financial system.
  • Better measurement and reporting of systemic risks for informed decision-making.

4. Promoting Sustainable Practices

  • Encouraging financial institutions to develop credible transition plans and integrate sustainability into financial statements.
  • Supporting policy measures that incentivise low-carbon investments and balance carbon costs.

Conclusion

  • Collaboration within the financial ecosystem and between market participants and regulators is crucial for managing systemic risks and promoting long-term sustainability.
  • The session highlights the need for an integrated approach to financial and non-financial reporting to ensure accountability and drive sustainable market behaviour.