DEVELOPMENT OF PROFESSIONAL PRACTICE FOR THE FINANCIAL ACCOUNTING OF CARBON
Submitting Institution
University of EdinburghUnit of Assessment
Earth Systems and Environmental SciencesSummary Impact Type
PoliticalResearch Subject Area(s)
Economics: Applied Economics
Commerce, Management, Tourism and Services: Accounting, Auditing and Accountability, Business and Management
Summary of the impact
Impact: Improved awareness and development of professional
practice related to the financial accounting of carbon, including: its
addition to the Climate Disclosure Standards Board (CDSB) work programme
and its designation by the International Accounting Standards Board (IASB)
as a priority research project (both during 2012).
Significance and reach: The CDSB is a consortium of eight
business/environmental organisations (including the World Economic Forum
and the World Resources Institute). The IASB is the independent
standard-setting body of the International Financial Reporting Standards
Foundation.
Underpinned by: Research into corporate carbon accounting
practices, undertaken at the University of Edinburgh (2008 onwards).
Underpinning research
Numbered references relate to research outputs in Section 3.
Key researcher
The key researcher is Lovell, Reader in Human Dimensions of Environmental
Change at the School of GeoSciences, University of Edinburgh. Lovell has
been continuously employed in the School of GeoSciences since 2007.
Research overview and context
Research by Lovell at Edinburgh has sought to better understand how
financial accountants classify and disclose greenhouse gas emission
allowances, why there has been so much variation in how they do this, and
where they seek advice and guidance in the absence of an existing
international financial accounting standard. The research centres around
two inter-related projects. Firstly, `Fungible Carbon' a Nuffield
Fellowship (2008 - 2013) held by Lovell with Prof. Mackenzie (School of
Social and Political Science), which involved 20 expert interviews plus
documentary and pod-cast analysis of the International Accounting
Standards Board (IASB) Board Meetings and reports of professional
accountancy bodies. Secondly, `Accounting for Carbon' (2009 -
2010), which was funded by Association of Chartered Certified Accountants
(ACCA) and the International Emissions Trading Association (IETA) and led
by Lovell with project partners in the UK and Spain. This project
principally involved a survey of major European companies participating in
the European Union Emissions Trading System (EU ETS). Across these two
projects, Lovell has established an international reputation for
pioneering research on the financial accounting of carbon, exemplified by
the 2010 publication of a high-profile report of the Accounting for
Carbon project [1].
Key research findings that underpin the subsequent impact
The research identified six important new findings, as described in four
peer-reviewed studies published over the period 2011 - 2013.
- There is significant variation in European financial accounting
practices for emission allowances and that this diversity hampers the
effective functioning of the EU ETS because market-relevant information
is not being disclosed by companies [2].
- There are low levels of corporate disclosure of emission allowances
amongst the companies surveyed in Europe (ranging from 23% to 77%
non-disclosure across different accounting categories), despite the fact
that such differences are material (i.e. financially significant) to
these companies — with emission allowances calculated as worth between
14% and 85% of profit/loss before tax for a subset of eight European
companies [2].
- In the continued absence of an international standard for carbon
financial accounting, accountants are seeking advice and guidance from a
number of different sources — specialist industry groups, national
accounting standard setters, and auditors. The proliferation of regional
and sectoral standards has the potential to undermine the authority of
the IASB and makes international standardisation difficult [3].
- There has been limited engagement by financial accounting
professionals in the early years of carbon market design and operation [4].
- There has been little communication between the professional sectors
of financial accounting and carbon markets and that this has been shown
to be a key explanation for the lack of progress towards the development
of a workable international carbon financial accounting standard [4].
References to the research
Comments in bold on individual outputs give information on the quality of
the underpinning research and may include the number of citations (Scopus,
up to September 2013) and/or the 2012 Thomson Reuters Journal Impact
Factor (JIF). The starred outputs best indicate this quality
[1]* Peer- and practitioner-reviewed report summarising the Accounting
for Carbon project, launched in London in 2010 and again in Brussels in
2011
Lovell, H., Sales de Aguiar, T, Bebbington, J. and Larringa-Gonzalez, C.
(2010). Accounting for Carbon. ACCA and IETA Research Report 122.
London, The Association of Chartered Certified Accountants (ACCA) and the
International Emissions Trading Association (IETA), ISBN:
978-1-85908-469-4, http://tinyurl.com/B7-11-S3-1B
[2]* Peer-reviewed journal article, Lovell as lead author with project
partners from the Accounting for Carbon project
Lovell, H., de Aguiar, T., Bebbington, J., Larringa-Gonzalez, C. (2013)
`Putting carbon markets into practice: a case study of financial
accounting in Europe', Environment and Planning C: Government
and Policy, 31(4), 741-757, DOI: 10.1068/c1275
[3] Peer-reviewed journal article
Lovell, H. (2013) 'Climate change, markets and standards: the case of
financial accounting', Economy and Society (publication pending),
available upon request.
[4]* Peer-reviewed journal article, >10 citations in two years,
JIF: 2.4
Lovell, H. and MacKenzie, D (2011) `Accounting for Carbon: the role of
accounting professional organisations in governing climate change', Antipode
43 (3), 704-30, DOI: 10.1111/j.1467-8330.2011.00883.x
A further metric of research quality is given by the peer-reviewed grants
that have contributed to the preceding outputs, which include:
• Fungible Carbon (2008 - 2013), sponsor: Nuffield New Career
Development Fellowship, value £167k, awarded to Lovell with support from
Mackenzie.
• Accounting for Carbon (2009 - 2010), sponsor: ACCA and IETA,
value £20k, awarded to Lovell with J. Bebbington (St. Andrews), C.
Larrinaga (Burgos, Spain), T. de Aguiar (Herriot-Watt).
Details of the impact
Lettered references relate to corroboration sources in Section 5.
Improved professional practice related to the financial accounting of
carbon
Pathway: The underpinning research findings have had major
implications for regulatory practice, audit and common agreement on how
carbon accounting is to proceed in governmental and industrial contexts.
Pathways to impact were generated through interactions with stakeholder
institutions, development of international standards and policy, and
through facilitating communication between financial accounting sectors
and the carbon markets. These include:
- The interview research on the Fungible Carbon project led to
an invitation in 2009 for Lovell to join the Climate Disclosure
Standards Board (CDSB) Technical Working Group, an international group
of accounting and climate change experts drawn from industry,
accountancy firms and academia [A]. In the aftermath of the Accounting
for Carbon report, the Executive Director of the CDSB notified
Lovell that they were interested in formally adding financial accounting
issues to their agenda. A factual statement provided by the Executive
Director states that the subsequent (2012) incorporation of financial
accounting into their work programme was directly underpinned by the
Edinburgh research [B].
- Lovell has been instrumentally involved in bringing together key
stakeholders across the CDSB, IETA and IASB over the period 2009 - 2013,
to resolve the confusing diversity of financial accounting practices and
to agree best practice standards in the future. Following interest
within CDSB for developing a voluntary carbon financial accounting
standard, Lovell contacted the Emission Trading Schemes (ETS) project
leader at the IASB and in December 2011 led meetings between the IASB
and the CDSB to discuss such a standard. Lovell also led the submission
from the CDSB to the 2011 IASB Agenda Consultation, providing
research-led evidence from the Accounting for Carbon project of
significant (material) diversity in carbon financial accountancy
practice and reporting [C]. Following this consultation, in May
2012 the IASB signalled its renewed support for the ETS project,
identifying it as a `priority research project' [D]. Further
corroboration of the underpinning role of the Edinburgh research can be
provided by the IASB Project Manager [E].
- Lovell also coordinated an Expert Workshop in Edinburgh, held in
January 2013, for the first time bringing together representatives from
CDSB and the IETA and also attended by one of the sixteen IASB Board
Members, as evidenced in the meeting schedule and list of attendees [F].
The workshop discussed objectives in carbon financial accounting, with
the aim of resolving uncertainty in standards for carbon financial
accounting. The workshop led to the notification of the European
Financial Reporting Advisory Group (EFRAG) of the importance of
variability in carbon financial accounting. Corroboration of this
interaction and the influence of the Edinburgh workshop can be seen in
the May 2013 joint response of the CDSB and IETA to an EFRAG draft
comment paper on ETS, an output agreed at the Expert Workshop [G].
Significance and reach:
The organisations impacted by the research are of international reach and
great significance for professional practice in the field of carbon
accounting. In particular:
- The incorporation of carbon financial accounting into the CDSB work
programme influences its eight consortium members (drawn from
international business and environmental organisations and including the
World Economic Forum, World Resources Institute, The Climate Registry
and the CERES investment group) and beyond, as the CDSB has a growing
international presence. A factual statement provided by the Executive
Director of the CDSB states that Lovell played a "key role in
facilitating impact via institutional take up of issues associated with
the financial accounting of carbon" [B].
- The IASB is the independent standard-setting body of the International
Financial Reporting Standards Foundation and consists of sixteen
international experts. The IASB Board Member who attended the Edinburgh
workshop noted in their summary/reflections that the evidence presented
points to a standard being required. The IASB also requested digital
recordings of the workshop to use for their Emissions Trading Schemes
research for standard development [E].
- The European Financial Reporting Advisory Group provides technical
advice to the European Commission on accounting matters and is highly
influential (for example advice from EFRAG in 2004 led to the withdrawal
of the first IASB guidance on carbon financial accounting, called
'IFRIC-3'").
Sources to corroborate the impact
Where two web-links are given, the first is the primary source and the
second an archived version.
[A] CDSB Technical Working Group web-page
http://tinyurl.com/B7-11-S5-XA1
or http://tinyurl.com/B7-11-S5-A1
Provides corroboration that Lovell is a member of the Group, with
influence on professional standards and guidelines, including authorship
of the CDSB Reporting Framework (v1.1, October 2012): http://tinyurl.com/B7-11-S5-XA3
or http://tinyurl.com/B7-11-S5-A2
[B] Factual Statement from the Executive Director of the CDSB
Provides corroboration that: I) Lovell played a key role in facilitating
impact via institutional take-up, and II) the 2012 incorporation of
financial accounting of carbon into the CDSB work programme was
underpinned by the Edinburgh research.
[C] CDSB submission to the IASB Agenda Consultation process (November
2011)
http://tinyurl.com/B7-11-S5-XC1
or http://tinyurl.com/B7-11-S5-C1
Provides corroboration of the citation of the 'Accounting for Carbon'
report (Page 2) in the CDSB submission to the 2011 IASB consultation
process.
[D] IASB web-page on Emissions Trading Scheme (Research Project)
http://tinyurl.com/B7-11-S5-XD1
or http://tinyurl.com/B7-11-S5-D1
Provides corroboration that in May 2012, the IASB decided to add Emission
Trading Schemes to its agenda as a research project, following the
stakeholder input phase of the Agenda Consultation.
[E] Emissions Trading Project Manager, IASB
Can provide corroboration that: I) the Edinburgh research contributed to
the IASB consultation process, through the CDSB submission and that the
decision to add Emission Trading Schemes to its agenda as a research
project arose from this consultation, and II) the IASB requested digital
recordings of the 2013 Edinburgh workshop to use for input into their ETS
project.
[F] Programme and List of Attendees for January 2013 Edinburgh Expert
Workshop
http://tinyurl.com/B7-11-S5-F
The list of registered participants (Page 3) provides corroboration of the
attendance of representatives of the IETA, CDSB, IASB and the European
Commission. The Schedule information (Pages 1-2) provides corroboration of
the scope of the Workshop and Lovell's organising role is evidenced by
delivery of the 'Welcome and Introduction' to the event (Page 1).
[G] CDSB and IETA Response to EFRAG Emission Trading Schemes Draft
Comment Paper, co-authored by Lovell (May 2013)
http://tinyurl.com/B7-11-S5-XG1A
or http://tinyurl.com/B7-11-S5-G1
Provides evidence of the use of I) the material discussed in the Expert
Workshop in Edinburgh (January 2013) (Pages 2-4), and II) the Accounting
for Carbon report specifically (cited on Page 2) in the notification of
the EFRAG of the importance of variability in carbon finance accounting.
The response is directed to a Draft Comment Paper on EFRAG ETS (April
2001, which highlights the IASB project on ETS: http://tinyurl.com/B7-11-S5-XG2
or http://tinyurl.com/B7-11-S5-G2