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ESG accounting needs to cut through the greenwash



The writer is professor of business and public policy at Oxford’s Blavatnik School of Government

For investors seeking more focus on environmental, social, and governance issues, 2020 might have felt like a good year as numerous CEOs embraced ‘ESG-speak’. But much of this, I suspect, was to dress up the disappointment of Covid-19-induced losses. And their posturing only seemed real because accountants and standard setters got in on the act.

Before investors take any ESG claims seriously, though, the accounting has to become a lot more serious. That means incorporating the features of high-quality accounting rules — and here are three that I believe could make a difference.

First, prudence. In accounting parlance, that means having a higher threshold for recognising positive claims than for negative ones. As companies laud themselves for wins on the environment or on meeting social responsibilities, the ESG accounting rules should impute scepticism.

To date, however, I have not encountered a single set of ESG standards that requires prudence. UK-based fashion retailer Boohoo waxed eloquent in its 2019 report about its “zero-tolerance approach to modern slavery”, and scored highly on several ESG indices — only to be exposed for using suppliers that paid workers less than the UK’s minimum wage.

Second, dual reporting. If a firm is reporting on its greenhouse gas emissions in a given period — what accountants call a “flow” — then this figure should be contextualised against the corresponding “stock” in accounting terms: ie, cumulative greenhouse emissions over prior periods and, if relevant, any pollution credits for future emissions. After all, It is an accepted principle that a company’s financial reporting should encompass both the flows and stocks of the item being reported on.

Reporting on flows gives users a picture of current-period performance, while reporting on stocks allows users to examine how sustainable that performance has been over time. But, again, I am not aware of any ESG standards that mandate both flow and stock reporting in the unit being reported.

Third, “matching”. This is how accountants set current investments against future benefits. For example, £1bn building cost of a new factory is not simply recorded as an expense on the income statement but held on the balance sheet and gradually recognised in the income statement as depreciation during the asset’s life. ESG accounting needs benefits matching, too.

This matters because it encourages investments in the future. If managers had to take large current losses on capital expenditures, they might think twice about them — especially if the benefits were very long-term, and only enjoyed after their tenure. Accounting rules that set out the matching of ESG investments and their benefits would moderate this problem.

At the same time, if we want corporate managers to make costly pro-social investments in the environment or in community welfare, we need matching rules to assess their impacts in the future. Recently, Nestlé announced that it was investing €3bn over five years to cut greenhouse emissions as part of its 2050 “net zero” commitment. But how do we know this is enough and will make any meaningful difference to the environment? ESG accounting standards should require Nestlé to state more precisely what ESG value it expects its investment to generate and over what period. The investment could then be “matched” to any realised benefits over that period.

These three principles — prudence, dual reporting and matching — are all fairly basic in financial reporting, but virtually unheard of in ESG accounting standards, As the accounting authorities and the auditing firms push for more environmental and social reporting, this situation has to change.

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Wall Street stocks waver as traders weigh stimulus progress




Wall Street’s main stock indices wavered within a tight range on Monday, steadying after large swings last week, as traders weighed the Senate’s passage of Joe Biden’s $1.9tn stimulus bill.

The blue-chip S&P 500 index gained 0.6 per cent at lunchtime in New York while the Nasdaq Composite slipped 0.2 per cent, following a turbulent spell of trading that pushed the tech-focused index down 2 per cent last week.

The recent market volatility has come as rising expectations for economic growth and inflation have sparked a sharp sell-off in US government debt. The selling continued on Monday, with the yield on the benchmark 10-year Treasury rising 0.05 percentage points to 1.6 per cent — close to its highest level in a year after starting 2021 near 0.9 per cent.

Higher borrowing costs are typically considered to be bearish for expensive portions of the equity market because they reduce the value of future cash flows. This has had a particularly sharp effect on the biggest gainers since the trough last March as many now trade at elevated levels compared with their earnings and revenues expectations.

Monday’s bond market decline comes after the Senate at the weekend passed the US president’s huge stimulus package, which includes $1,400 payments to many Americans. The measures put through by the upper chamber represented slightly more than 8 per cent of US economic output, according to Goldman Sachs.

“If it does make it through the House relatively unscathed then you may see another round of US growth upgrades and probably more concerns about yields and inflation,” said Jim Reid, research strategist at Deutsche Bank. “The battle royale will continue.”

In Europe, the region-wide Stoxx 600 index closed up 2.1 per cent, London’s FTSE 100 added 1.3 per cent and Frankfurt’s Xetra Dax climbed 3.3 per cent to a record high. But in China stocks tumbled, pushing the CSI 300 into “correction” territory after the index of Shanghai and Shenzhen-listed shares closed down 3.5 per cent. Hong Kong’s Hang Seng sank 1.9 per cent.

Closely watched data from the European Central Bank showed it had added €11.9bn of bonds to its holdings under the pandemic emergency purchase programme in the week to last Wednesday — down from €12bn the previous week and below the €18.1bn weekly average since the programme started last March.

Antoine Bouvet, senior rates strategist at ING, said the data would “come as another disappointment to the market”, which has been looking for signs that the ECB would take action to combat rising bond yields.

The low headline figure, coupled with an ECB statement about the report’s artificially small number owing to temporary factors, would “confuse the market over the degree of urgency” from policymakers, he added. 

Market reaction to the PEPP data was muted as traders awaited more details on the ECB’s stance at Thursday’s monetary policy meeting. The yield on the benchmark 10-year German Bund was little changed at minus 0.28 per cent after the release.

Elsewhere, the price of commodities continued to rise after a main Saudi Arabian oil site was attacked over the weekend.

US marker West Texas Intermediate rose 1.6 per cent earlier to $67.17 a barrel, but later stabilised at $65.18. International benchmark Brent traded higher than $70 for the first time since the market tumult following the start of the pandemic, but pared back its gains to $68.37.

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Oil price jumps above $70 after attacks aimed at Saudi oil facilities




Oil prices jumped above $70 a barrel for the first time in 14 months after Saudi Arabia, the world’s top oil exporter, said its energy facilities had been attacked on Sunday, targeting “the security and stability” of global supplies.

A drone attack from the sea on a petroleum storage tank at Ras Tanura, one of the largest oil shipping ports in the world, took place on Sunday morning, the kingdom said.

In the evening, shrapnel from a ballistic missile fell in Dhahran, where state oil company Saudi Aramco has its headquarters and near where thousands of employees and their families live.

While Saudi Arabia’s ministry of energy said the attacks “did not result in any injury or loss of life or property”, and a person familiar with the matter said no production had been affected, the attacks have still unsettled oil markets that have rebounded strongly in recent months.

Brent crude, the international benchmark, rose 2 per cent to a high of $71.16 a barrel while West Texas Intermediate, the US benchmark, rose by a similar amount to a high of $67.86 a barrel.

Yemen’s Iran-allied Houthi fighters claimed responsibility for the attacks and said they had also focused on military targets in the Saudi cities of Dammam, Asir and Jazan.

A Houthi military spokesperson said the group had fired 14 bomb-laden drones and eight ballistic missiles in a “wide operation in the heart of Saudi Arabia”.

Amrita Sen at Energy Aspects emphasised that while a direct hit on oil supplies appeared to have been avoided, the threat to the market would still be taken seriously by oil traders.

“The oil price was already on a strong footing after Saudi Arabia and Opec’s decision last week to keep restricting production,” she said.

Brent crude, the international oil benchmark, has risen close to $70 a barrel since the cartel and allies outside the group, including Russia, decided not to unleash a flood of crude on to the market.

Amid uncertainty about the oil market outlook as the coronavirus crisis continues to have an impact on crude demand, the group decided against raising production by 1.5m barrels a day from April.

Given the supply curbs, while the kingdom has the extra production capacity to tap into, “geopolitical threats to supply will add a premium to the price”, Sen added.

The kingdom’s state media outlet said earlier in the day that the Saudi-led military coalition confronting the Houthis had intercepted missiles and drones aimed at “civilian targets” without indicating their location.

The Eastern Province, where Dhahran is located, is where much of Saudi Aramco’s oil facilities are located. The attack is the most severe since September 2019.

At that time the kingdom was rocked by missile and drone fire that hit an important processing facility and two oilfields, temporarily shutting off more than half of the country’s crude output.

The Houthis have ramped up assaults on Saudi Arabia through airborne attacks and explosive-laden boats and mines in the Red Sea, laying bare the vulnerability of the country’s energy infrastructure despite the kingdom’s production prowess and its hold over the oil market.

“The frequency of these attacks is rising, even if the impact on energy infrastructure appears limited,” said Bill Farren-Price, a director at research company Enverus. “We know the capacity to cause serious damage exists, so this will boost the risk premium for oil.”

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Rio Tinto set to start negotiations over Mongolian mine




Rio Tinto is set to start face-to-face negotiations with the government of Mongolia as its seeks to complete the $6.75bn expansion of a huge copper project in the Gobi desert. 

The Anglo-Australian group is sending a team of senior executives to the capital Ulaanbaatar to try and hammer out a new financing agreement so that the development timeline can be maintained and underground caving operations can start later this year.

The discussions will focus on a number of issues including tax, a new power agreement and benefit sharing, according to people with knowledge of the situation.

Some government officials want Rio to pay more than $300m of withholding taxes on income it has received from Oyu Tolgoi LLC, the Mongolian holding company that owns the mine. 

Rio receives a management service fee for running Oyu Tolgoi’s existing open pit and the underground project as well as interest on money it has lent the government to fund its share of the development costs.

However, the officials say it is “very difficult, if not impossible” to engage constructively on the issue because the payments are the subject of arbitration in London.

For its part, Rio believes the issue of withholding taxes is dealt with in the separate investment and shareholder agreements that cover its operations in the country.

The underground expansion of Oyu Tolgoi ranks as Rio’s most important growth project. At peak production it will be one of the world’s biggest copper mines, producing almost 500,000 tonnes a year.

Although Rio runs the existing operations and is in charge of the underground expansion project it does not have a direct stake in the mine.

It’s exposure comes through a 51 per cent stake in Turquoise Hill Resources, a Toronto-listed company. TRQ in turns owns 66 per cent of Oyu Tolgoi LLC, with the rest controlled by the government of Mongolia. 

The project has been beset by difficulties and is already two years late and $1.5bn over budget. The government said earlier this year that if the expansion is not economically beneficial to the country it would be necessary to “review and evaluate” whether it can proceed.

To that end the ruling Mongolian People’s party and its new prime minister Luvsannamsrain Oyun-Erdene are trying to replace the Underground Development Plan with an improved agreement.

Signed in 2015, this sets out the fees that Rio receives for managing the project as well as the interest rates on the cash Mongolia has borrowed to finance its share of construction costs.

However, it was never approved by Mongolia’s parliament and has become a focal point for critics who say the country should receive a greater share of the financial benefits.

Rio, which recently appointed a new chief executive, has told the government it is prepared to “explore” a reduction of its project management fees and loan interest rates as well as discuss tax.

However, analysts are sceptical that the two sides will be able to put a new agreement in place by June when a decision on whether to start caving operations must be taken if Oyu Tolgoi is to meet a new target for first production in October 2022.

Rio is also at loggerheads with TRQ on how to fund the cost overruns at Oyu Tolgoi. Last week, TRQ’s chief executive resigned after Rio said it planned to vote against his re-election at its annual shareholders’ meeting.

In a statement, Rio said it was committed to working with TRQ and the government of Mongolia to enable the successful delivery of the Oyu Tolgoi Project

“Aligning and co-ordinating our joint efforts to resolve the concerns of the Government . . . going forward is of the highest priority,” it said.

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