Chief non-financial officer: an emerging C-suite role?
Consistent and stringent sustainability-related financial reporting is key as fighting green-washing and meeting emission targets starts to put more pressure on CFOs
With as many as 1,700 ESG-related regulations and standards existing globally in 2019, according to The Reporting Exchange, calls to simplify international sustainability disclosure standards are hardly surprising.
What could make last year’s COP26 a breakthrough in simplifying sustainability reporting, though, is the urgency and unity its participants have pledged to tackle the problem of a fragmented and chaotic regulatory landscape that has proved a fertile breeding ground for greenwashing.
The fact that just any ESG or climate reporting won’t suffice has also been pointed out by Kenneth P Pucker in a HBR article, where he contrasts the exponential growth between 2000 and 2015 in CSR reports based on the Global Reporting Initiative (GRI) – the most established and widely used standard – with the steady increase in carbon emissions in the same period. This chart, he suggests, can be proof that the seemingly heightened attention to the environmental impact of business operations by itself won’t necessarily make a detectable dent in emissions.
COP26 was also where the International Sustainability Standard Board (ISSB) was set up to become the main co-ordinator of the alignment of major ESG reporting standards. Although the creation of a single, unified reporting system is still not in sight, there are several signs of collaboration and consolidation between ISSB and the five major framework and standard-setting organisations dominating the field.
ISSB and GRI are intending to join each other’s consultative bodies, while the industry-based disclosure standards of SASB – one of the group of five – are to become part of ISSB’s standards too. The recommendations of TCFD, a G20 initiative, are also incorporated into ISSB’s Climate Exposure Draft on consultation until 29 July this year.
As Ravi Abeywardana, Chair of ISSB, emphasised in a panel discussion at the Net Zero Delivery Summit in London, ISSB has no ambition to reinvent the wheel. The aim is to establish a global baseline of sustainability-related disclosure standards that provide investors with information about companies’ sustainability-related risks, and opportunities to help them make informed decisions.
National jurisdictions will ideally incorporate these baselines into their sustainability disclosure legislation, thus ensuring connectivity and comparability between the ESG performance of companies across the globe.
In the UK’s case, ISSB's International Sustainability Disclosure Standards (ISDS) are expected to form a key component of the UK’s Sustainability Disclosure Requirements (SDR) framework – a new integrated regime for the disclosure of climate and other sustainability issues for UK companies, the financial sector and creators of investment products.
How much can CFOs have on their plate?
The growing importance of sustainability and climate reporting is well illustrated by how these responsibilities have shifted from the CMO to the CFO. And indeed, as standardised non-financial reporting is meant to be modelled on established financial and accounting standards to assess the financial impact of the business’s exposure to sustainability and climate risk, it stands to reason that CFOs preside over it. Trained accountants are likely to have the right mindset and attention to regulations and detail that the job of sustainability reporting requires.
However, professionals overseeing this emerging responsibility will also need a fair amount of knowledge of carbon emissions and climate change, which a degree in accounting fails to offer.
Having identified this skills gap, some forward-looking universities either incorporate sustainability into accounting curricula or offer post-graduate programmes in sustainability for graduates in accounting and finance.
Another approach, as Hywel Ball, UK Chair and UK&I Managing Partner of EY has pointed out, is to find young talent drawn to sustainability issues and activism by an ambition to make a difference, and channel their drive into earning degrees in sustainable accounting.
The demand for sustainability accountants will most probably be further enhanced by shaping consensus on the need for mandatory business transition plans. To transition the global economy into a more sustainable model, individual companies will need their own strategies to align themselves with Net Zero targets, wean themselves off fossil fuels and replace their high-emitting activities with green ones.
Once these transition plans become regulatory obligations, the monitoring of delivery at regular milestones against standardised metrics will further increase the ballooning workload of the finance function. Whether CFOs will be able to straddle the overlapping, albeit often conflicting, remits of finance and sustainability, or whether C-suites will soon require a new addition in the form of a CnFO or sustainability CFO, remains to be seen.
To read the two exposure drafts for the disclosure of sustainability-related financial information (IFRS S1) and climate-related disclosure (IFRS S2), click here.
Zita Goldman
A central bank digital euro could save the eurozone – here’s how
The European Central Bank and its counterparts in the UK, US, China and India are exploring a new form of state-backed money built on similar online ledger technology to cryptocurrencies such as bitcoin and ethereum. So-called central bank digital currencies (CBDCs) envision a future where we’ll all have our own digital wallets and transfer money between them at the touch of a button, with no need for high-street banks to be involved because it all happens on a blockchain.
But CBDCs also present an opportunity that has gone unnoticed – to vastly reduce the exorbitant levels of public debt weighing down many countries. Let us explain.
The idea behind CBDCs is that individuals and firms would be issued with digital wallets by their central bank with which to make payments, pay taxes and buy shares or other securities. Whereas with today’s bank accounts, there is always the outside possibility that customers are unable to withdraw money because of a bank run, that can’t happen with CBDCs because all deposits would be 100 per cent backed by reserves.
Today’s retail banks are required to keep little or no deposits in reserve, though they do have to hold a proportion of their capital (meaning easily sold assets) as protection in case their lending books run into trouble. For example, eurozone banks’ minimum requirement is 15.1 per cent, meaning if they have capital of €1 billion (£852 million), their lending book cannot exceed €6.6 billion (that’s 6.6 times deposits).
In an era of CBDCs, we assume that people will still have bank accounts – to have their money invested by a fund manager, for instance, or to make a return by having it loaned out to someone else on the first person’s behalf. Our idea is that the 100 per cent reserve protection in central bank wallets should extend to these retail bank accounts.
That would mean that if a person put 1,000 digital euros into a retail bank account, the bank could not multiply that deposit by opening more accounts than they could pay upon request. The bank would have to make money from its other services instead.
At present, the ECB holds about 25 per cent of EU members’ government debt. Imagine that after transitioning to a digital euro, it decided to increase this holding to 30 per cent by buying new sovereign bonds issued by member states.
To pay for this, it would create new digital euros – just like what happens today when quantitative easing (QE) is used to prop up the economy. Crucially, for each unit of central bank money created in this way, the money circulating in the wider economy increases by a lot more: in the eurozone, it roughly triples. This is essentially because QE drives up the value of bonds and other assets, and as a result, retail banks are more willing to lend to people and firms. This increase in the money supply is why QE can cause inflation.
If there was a 100 per cent reserve requirement on retail banks, however, you wouldn’t get this multiplication effect. The money created by the ECB would be that amount and nothing more. Consequently, QE would be much less inflationary than today.
The debt benefit
So where does national debt fit in? The high national debt levels in many countries are predominantly the result of the global financial crisis of 2007-09, the eurozone crisis of the 2010s and the Covid pandemic. In the eurozone, countries with very high debt as a proportion of GDP include Belgium (100 per cent), France (99 per cent), Spain (96 per cent), Portugal (119 per cent), Italy (133 per cent) and Greece (174 per cent).
One way to deal with high debt is to create a lot of inflation to make the value of the debt smaller, but that also makes citizens poorer and is liable to eventually cause unrest. But by taking advantage of the shift to CBDCs to change the rules around retail bank reserves, governments can go a different route.
The opportunity is during the transition phase, by reversing the process in which creating money to buy bonds adds three times as much money to the real economy. By selling bonds in exchange for today’s euros, every one euro removed by the central bank leads to three disappearing from the economy.
Indeed, this is how digital euros would be introduced into the economy. The ECB would gradually sell sovereign bonds to take the old euros out of circulation, while creating new digital euros to buy bonds back again. Because the 100 per cent reserve requirement only applies to the new euros, selling bonds worth €5 million euros takes €15 million out of the economy but buying bonds for the same amount only adds €5 million to the economy.
However, you wouldn’t just buy the same amount of bonds as you sold. Because the multiplier doesn’t apply to the bonds being bought, you can triple the amount of purchases and the total amount of money in the economy stays the same – in other words, there’s no extra inflation.
For example, the ECB could increase its holdings of sovereign debt of EU member states from 25 per cent to 75 per cent. Unlike the sovereign bonds in private hands, member states don’t have to pay interest to the ECB on such bonds. So EU taxpayers would now only need to pay interest on 25 per cent of their bonds rather than the 75 per cent on which they are paying interest now.
Interest rates and other questions
An added reason for doing this is interest rates. While interest rates payable on bonds have been meagre for years, they could hugely increase on future issuances due to inflationary pressures and central banks beginning to raise short-term interest rates in response. The chart below shows how the yields (meaning rates of interest) on the closely watched 10-year sovereign bonds for Spain, Greece, Italy and Portugal have already increased between three and fivefold in the past few months.
Mediterranean 10-year bond yields
Following several years of immense shocks from the pandemic, the energy crisis and war emergency, there’s a risk that the markets start to think that Europe’s most indebted countries can’t cover their debts. This could lead to widespread bond selling and push interest rates up to unmanageable levels. In other words, our approach might even save the eurozone.
The ECB could indeed achieve all this without introducing a digital euro, simply by imposing a tougher reserve requirement within the current system. But by moving to a CBDC, there is a strong argument that because it’s safer than bank deposits, retail banks should have to guarantee that safety by following a 100 per cent reserve rule.
Note that we can only take this medicine once, however. As a result, EU states will still have to be disciplined about their budgets.
Instead of completely ending fractional reserve banking in this way, there’s also a halfway house where you make reserve requirements more stringent (say a 50 per cent rule) and enjoy a reduced version of the benefits from our proposed system. Alternatively, after the CBDC transition ends, the reserve requirement could be progressively relaxed to stimulate the economy, subject to GDP growth, inflation and so on.
What if other central banks do not take the same approach? Certainly, some coordination would help to minimise disruption, but reserve requirements do differ between countries today without significant problems. Also, many countries would probably be tempted to take the same approach. For example, the Bank of England holds over one-third of British government debt, and UK public debt as a proportion of GDP currently stands at 95 per cent.
Guido Cozzi, Professor of Macroeconomics, University of St.Gallen and Leonardo Becchetti, Professor of Political Economy, University of Rome Tor Vergata
This article is republished from The Conversation under a Creative Commons license. Read the original article.
Four ways pensions still fail to support staff who are young, low paid and part time
Financial advisers often say it’s never too early to start thinking about your pension. And with good reason. As recently as ten years ago, less than half of all UK employees were saving into a workplace scheme, leaving many at risk of poverty in retirement.
Then in 2012, automatic enrolment was introduced. This meant employers were obliged to enrol eligible employees (aged over 22 and earning more than £10,000 a year) into a pension plan, with contributions from both sides.
Since then, pension savings have boomed, with 78 per cent of employees (19.4 million people) actively saving in 2020, up from 47 per cent in 2012.
But the vast majority of those new savers are still doing so at levels unlikely to provide an adequate income later in life. While income needs vary, evidence suggests that up to 12 million people are currently not saving enough for their retirement.
And because pension entitlements are accumulated through the workplace, they tend to mirror the continuing inequalities of the labour market. Here are four ways in which workplace pensions are not as fair as they could be.
1. Earnings and status
Many people are excluded from workplace pension saving because they do not meet the criteria for automatic enrolment. Recent data found that in 2020, full-time employees earning between £100 to £199 a week had the lowest workplace pension coverage at 41 per cent, compared with 65 per cent of those earning £200 to £299 a week.
Overall, women, ethnic minority groups, people with disabilities, carers and service workers are less likely to have access to workplace pensions due to underemployment and low wages.
Part-time employees were also disadvantaged compared to full-time workers, who were 1.5 times more likely to be part of a pension scheme. People with multiple part-time, low-paid jobs are likely to miss out on access to workplace pensions, even if they earn more than the £10,000 threshold in total.
2. Costly breaks
For most workplace pension savers, retirement income depends on the level of contributions made, as well as the investment returns over the lifetime of the pension. Not making regular contributions forgoes not just the amount in the pot, but the cumulative investment gains.
This means any breaks from work will have a significant affect on pension pot size at retirement. Research has found that not participating in a pension between the ages of 30 and 40 can reduce that pot by up to 32 per cent.
Women are particularly affected. Not only do they take breaks to have children, but also a lack of affordable childcare often reduces their opportunities to return to work, which affects their eligibility for automatic enrolment. In 2019, almost 30 per cent of mothers said they had reduced their working hours because of childcare, compared with just 5 per cent of fathers.
Even where they are eligible for automatic enrolment, many women opt out because of high childcare costs. My research argues for better financial solutions that account for all experiences of employment and caring responsibilities.
3. Regressive tax relief
Workplace pension savers benefit from tax relief on contributions made by themselves and their employer. They also benefit from a tax-free lump sum of up to a quarter of their pension pot. These tax breaks are widely held to be an incentive to encourage people to save.
But these forms of tax relief are regressive, as those with higher salaries benefit to a greater extent. About half of all tax relief on workplace pensions goes to those in the top 10 per cent of earners; a tenth of that relief goes to the bottom 50 per cent of earners.
The tax regime for workplace pensions is effectively subsidising retirement security for those who are already well off. Given that the cost of foregone tax on workplace pensions is estimated to be worth over £20 billion, the money could be better targeted to those who need it.
4. Challenges for young people
As automatic enrolment only applies to people aged 22 and over, many young people are excluded from workplace pension saving. In 2020, only 20 per cent of those aged 16-21 had a workplace pension compared with 80 per cent among those aged 22-29.
Despite the positive effect of automatic enrolment on participation rates among the 22-29 age group, the lack of defined benefit coverage among younger groups means they need to save more or save for longer than older groups to provide for an adequate retirement. Up to 36 per cent of younger groups are thought to be under-saving for their retirement needs.
My research shows that many young people decide to opt out of pension saving – or save at minimum levels – to focus on other essential financial goals such as paying off debts and bills or saving to buy a house.
Only after achieving these goals do they feel ready to invest in pensions. Yet again, certain groups are more likely to get to this point, usually when they are able to rely on family support (financial or otherwise). And because they are able to think about pensions earlier, they are also more likely to achieve an adequate income in retirement – projecting present-day inequalities into the future.
Hayley Louise James, Postdoctoral Research Fellow, University College Dublin
This article is republished from The Conversation under a Creative Commons license. Read the original article.