Comment

Developments at the United Nation’s 27th climate conference will have far-reaching implications for financial professionals and businesses worldwide. Susan Rossney digs into the details COP27, the international climate summit, concluded on 20 November after two weeks of negotiations. While last year’s COP saw the International Financial Reporting Standards (IFRS) Foundation announce an International Sustainability Standards Board (ISSB), this year had less reporting-specific news.  One headline was the commitment by CDP (formerly the Carbon Disclosure Project) to incorporate ISSB’s IFRS S2 Climate-related Disclosures Standard into its global environmental disclosure platform—another step towards greater comparability and coherence of global standards and reporting. On a macro level, though, COPs have a huge importance for businesses worldwide. ‘COPs’—Conferences of the Parties—are summits attended by the nearly 200 countries which have signed the United Nations Framework Convention on Climate Change (UNFCCC).  At COPs, these countries discuss their existing efforts and future plans to deal with climate change and its effects. Any new agreements made at COP tend to be named after the host city, e.g. the ‘Paris Agreement’ (2015), the ‘Glasgow Climate Pact’ (2021). This year we have the ‘Sharm el-Sheikh Implementation Plan’, named after the Egyptian city in which it took place. This plan set up a new loss and damage fund for vulnerable countries most severely impacted by the effects of unpreventable climate change (floods, drought, desertification, and land loss due to rising sea-levels). The inclusion was a landmark moment in global climate politics as it acknowledged that the world’s richer countries—and biggest carbon emitters—are responsible to the developing world for the harm caused by global warming. How to finance this loss and damage, specifically how finance would be channelled to the developing world, was a dominant and contentious topic at COP27. The scale of the finance required is truly enormous. At least $2 trillion a year will be needed by developing countries to enable them to transition from fossil fuels, invest in renewable energy and other low-carbon technology, and cope with the impacts of extreme weather. The final figure is likely to be multiples of that. Although COPs have been criticised as political talking shops, divorced from the lived experience of most citizens and businesses, they have a considerable impact. Close to 200 countries gathering to debate a global response to climate change keeps alive an issue that affects all citizens, albeit not equally.  It restates the importance of holding global warming to the levels agreed upon at the Paris Agreement—i.e. well below 2°C and preferably 1.5°C above pre-industrial levels (we are currently at 1.1–1.2°C). What is decided at COP filters down to organisations through legislation and policy, like Europe’s ‘Fit for 55’ package, Ireland’s Climate Action Plans and sectoral targets, and through investors’ continued demands for projects that are aligned to climate targets to meet their own portfolio requirements.  Ireland will come under continued pressure from the EU to act on measures such as developing our renewable energy and tackling our carbon emissions. Changes are required across all sectors, and all businesses, including SMEs, will have to make changes. Accountants, as their trusted advisers, will need the knowledge to help businesses adapt and thrive in this new reality.   Susan Rossney is Sustainability Officer at Chartered Accountants Ireland

Irish Government finances are in surplus and Ireland’s debt-to-GDP ratio has stabilised, so why are there calls for higher taxes? asks Dr Brian Keegan It’s hard to avoid concern fatigue setting in. What with the war in Ukraine, the cost-of-living crisis, the continued Northern political stalemate, multiple dire warnings amplified at COP27 over climate change and another possible COVID-19 surge—the list of concerns seems particularly endless at the moment.   Some time ago, the commentator Marc Coleman projected that population growth—and, by implication, skills growth—would drive prosperity in Ireland. Coleman’s ideas have been given additional credence by the current situation in the UK. Chancellor Jeremy Hunt’s November budget looks towards an extended period of economic stagnation. British productivity has not grown in line with government spending in recent years. In the moribund British economy, there is a record low level of people out of work while the number of job vacancies is at a record high.   There is a straightforward, one-to-one relationship between economic growth and the growth in tax yield, which permits more government spending without further borrowing. When the growth in gross domestic product (GDP) stalls, so too do the tax figures.   In his book The Best is Yet to Come, Coleman pointed out some of the links between more workers, growth and greater resources for public services and benefits. Though the timing was unfortunate (the book was published just months before the 2008 financial crisis), Ireland is now indeed in a better place, at least economically, than it has been for many years. Government finances are in surplus and the debt-to-GDP ratio, at around 50 percent, is back under control.   Unlike the British situation where a Budget bordering on the austere was required to meet existing public spending commitments, without an intolerably high borrowing requirement, the recent Irish Budget took a cost-of-living crisis in its stride, with grant aid against soaring energy bills for households and businesses alike being met through current tax receipts. Nevertheless, a narrative has emerged that the burden of taxation in Ireland will have to increase.   Why this should be the case is not always specified. There are unquestionably problems with housing, health, and education, but it does not automatically follow that these problems arise from underinvestment. At the time of writing, close to half a billion euros set aside in 2022 for local authority housing remains unspent. This points to management or capacity problems, not funding challenges.   The much-heralded report of the Commission on Taxation and Welfare has not had a huge impact on the political debate. This may be because it presents solutions in search of a problem. As research from the Irish Fiscal Advisory Council has pointed out, “its work was not framed around any specific shortfall in funding that needed to be filled. Instead, it was guided by a broad intention to generate additional revenue”.   Even government politicians, who are rarely scathing about the output of an expert group, which the government itself commissioned, were dismissive of the recommendations. Clearly, there are some areas of the economy where additional tax funding will be required, if not immediately, in the medium-term.   Unless there is an unforeseen level of immigration of people of working age, the ratio of workers to pensioners is going in the wrong direction. Climate change management, ironically being driven more by energy security concerns than global altruism, will come with a price tag. The sustained high corporation tax take may have peaked. In Britain, the urgent need for higher taxation has been unanswerable. In Ireland, there needs to be a clear business case for any form of new or additional taxation. We have enough to be concerned about without the prospect of unnecessary taxes. Dr Brian Keegan is Director of Advocacy and Voice at Chartered Accountants Ireland

Russia’s invasion of Ukraine has created an energy crisis across the European Union. Now is the time for European governments to radically restructure their energy sectors, writes Judy Dempsey As autumn kicks in, there’s hardly a household or company in Europe that has not been affected by the huge hikes in energy prices. Now that Russia has stopped supplying gas to Germany via the Nord Stream gas pipelines, governments are rushing to buy expensive gas, attempting to fill their storage facilities ahead of the winter. The last thing they want are price-hike demonstrations and to lose support for Ukraine’s determination to defeat the Russian military. There are several lessons in these price hikes and shortages that must be learned by all EU member states, and the first is the price of dependency. Successive German governments and companies believed gas contracts with Russia were reliable and stable, but how many times did experts warn that Russia could one day use energy exports as a geopolitical instrument? By cutting off energy supplies, Russian President Vladimir Putin is punishing the European opposition to Russia’s invasion of Ukraine in the form of sanctions and curtailed weapon supplies to Kyiv. Putin’s goal hasn’t changed. He wants to divide the EU and give succour to populist movements that are often pro-Russian, anti-NATO and anti-American. That is why the West must stay the course over Ukraine. A Russian victory in Ukraine is a defeat for European security and stability. The second lesson here is how the European Commission, despite its best intentions, did not liberalise energy markets enough to ensure that energy could, like the single market, flow across the EU. The third concerns the failure to link up electricity and gas grids, from north to south—and to link the Baltic states to their western neighbours just as Russian gas transmissions had for decades been designed to flow westwards to Europe via Germany. Fourth is the issue of solidarity, always a thorny issue if you recall the absence of solidarity during the 2015 refugee crisis. With regards to the energy crisis, EU member states have been trying to find their own national responses. Yet, Germany—whose household energy prices are sky-rocketing—actually sells gas to France. Why? Because France, which uses nuclear energy as one of its main energy sources, has neglected the maintenance of its plants. Meanwhile, Denmark has a surplus of energy, but the grids to export this energy are not compatible with other EU member states. The fifth lesson is that this energy crisis should be the catalyst for pushing forward renewable energy. Yet, in a bid to get through this winter, Germany’s Social Democrat-Green-Free coalition is re-opening coal faces. While the Greens support this very ‘un-Green’ development, the party is divided over whether the remaining nuclear power stations former Chancellor Angela Merkel vowed to close by this year should be kept open. In short, Europe’s backing for reducing carbon emissions will be a challenge. In June 2021, the EU adopted a European Climate Law aimed at reaching net zero greenhouse gas emissions (GHG) across the bloc by 2050, with an intermediate target of 55 percent by 2040. This commitment will be tested unless there is massive up-front investment and political commitment to forge ahead with making renewable energy the priority. If not, Europe will be unable to break out of the dependency trap, unable to cope with another energy crisis, and unable to take another big step towards integration and embracing climate by connecting the different energy sectors. Judy Dempsey is a Non-Resident Senior Fellow at Carnegie Europe and Editor-in-Chief of Strategic Europe

Investors are asking if it’s safe to invest again. Cormac Lucey explains why they might want to hold off for now “Is it safe?” That was the question asked of Dustin Hoffman in the movie “Marathon Man” as he was being interrogated while strapped into a dentist’s chair by Laurence Olivier (playing the role of an on-the-run Nazi war criminal), expertly reimagining our worst dentist nightmares. Much like Hoffman’s position, equity markets have become a nightmare. Investors keep asking themselves whether it is safe to invest again or whether this bear market has longer to run. Jeremy Grantham, the veteran investor, wrote an article on GMO.com in late August warning that the “current super-bubble features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing, and stocks all critically overpriced and now rapidly losing momentum), commodity shock, and Fed hawkishness.” He concluded that we haven’t yet seen the bottom. Having pumped vast amounts of liquidity into the world economy to stave off the deflationary effects of the pandemic in 2020, central bankers were shocked by the firm inflationary response. They responded by tightening monetary policy – the usual precursor of recessions. It’s important to note that this move pre-dated the Russian invasion of Ukraine with its resultant economic disruption, and even more important to note that the conflict in Ukraine has fundamentally changed the rules of the economic game we had become used to. Zoltan Pozsar of Credit Suisse has written that, in recent decades, “the EU paid euros for cheap Russian gas, the US paid US dollars for cheap Chinese imports, and Russia and China dutifully recycled their earnings into G7 claims.” The problem is that global supply chains work only in peacetime, “but not when the world is at war,” Pozsar notes. While Russia is currently being forcibly disentangled from trade with the west, China may decide to voluntarily and slowly remove itself to avoid the shock of aggressive disentanglement should its cold war with Taiwan ever turn hot. Key monetary indicators remain recessionary. In the US, money supply is growing at a slower pace than inflation, meaning the real quantity of money in the economy is falling. The yield curve has just inverted, meaning short-term (two-year) rates of interest exceed long-term (10-year) rates. For several decades, this has been an unerringly accurate harbinger of recession. Unfortunately, central banks remain in tightening mode for those wanting equity markets to lift as inflationary pressures prove to be more than just “transitory.” They say, “Don’t fight the Fed” (the Federal Reserve) and with good reason. Caution is warranted. There are other challenges facing equities. On previous occasions over the last two decades, the depth of downturns has been eased by the fact that not all large economic blocs have been in recession at the same time. In the wake of the Global Financial Crisis, when the western world was in deep recession, strong growth in China helped ameliorate the global impact of the recession and accelerate its ending. Today, all major economic blocs are simultaneously threatened by recession, which risks making this recession deeper and longer. What might signal an equity market bottom? I’ll be looking for a combination of value, investor sentiment, and a change in central bank behaviour. Share prices would need to drop sufficiently to be reasonable value. In 2000 and 2007, this required price drops of the order of 50 percent or greater. Speculative sentiment among investors would need to be replaced by the cold fear that characterises true market bottoms and central banks would need to replace tightening with easing. A halting of central bank tightening would certainly trigger considerable euphoria. But, having been too slow to tighten, central bankers cannot risk their diminished credibility by taking their feet off the monetary brake before inflationary pressures have been well and truly suppressed. Remember: the Nasdaq crash kept deepening two decades ago, even after the Fed had started aggressively cutting interest rates. So, is it safe? I don’t think so. Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland

The absence of a global baseline for reporting sustainability-related information is a concern for many, as the number of signatories to a global call-to-action on the matter demonstrates, writes Fiona Gaskin In late August, 65 companies, investors, and professional accounting firms from around the world added their voices to the call for standard-setting efforts to more closely support a global baseline for reporting sustainability-related information. All were signatories to a statement issued jointly by the International Federation of Accountants, World Business Council for Sustainable Development, and Principles for Responsible Investment, seeking to establish greater compatibility between the concepts, terminologies, and metrics in use in current draft standards for sustainability reporting. The statement acknowledged the important work of the International Sustainability Standards Board, US Securities and Exchange Commission, and the European Commission, together with the European Financial Reporting Advisory Group, in their efforts to advance sustainability reporting. The number of organisations supporting the call for the convergence of standards demonstrates, however, that the absence of a global baseline for reporting sustainability-related information is a concern for many corporates, financial institutions, and professional services organisations. The problem is very real. When various jurisdictions and standard-setters issue concurrent, but differing, standards, the users of those standards are left with varying frameworks, which can be costly and inefficient to interpret and implement. These efforts, while well-intentioned, can create confusion by adding more noise as reporting multiplies, but with different standards and objectives. A fundamental question for those setting standards and regulations is the question of whether or not reporting should be focused on information useful to investors (i.e. the enterprise value), or information useful to a wider group of stakeholders (i.e. the impact value). Enterprise value primarily focuses on the impact of environmental, social and governance (ESG) issues on business—in other words, how does the world affect the organisation? Impact value focuses more on the impact the organisation has on the world around it. Both enterprise and impact value offer information that can help to hold companies accountable for their actions—whether that is to maintain or create value, or to minimise negative impacts on the planet and society. Indeed, it is possible to argue that there is really no practical difference between these two values, and that the exposure draft of the International Sustainability Standards Board’s general disclosure requirements standard already provides a few good examples. This is because it is reasonable to expect that a business operating in a way that has a negative impact on the planet and its people will—in the short-, medium- and long-term—have a negative impact on the business itself and, therefore, on its enterprise value. In the long run, which is where sustainability standards focus, enterprise value and impact align. We can see first-hand that the proposed range of emerging standards are already proving to be a challenge for corporates. To start, there is the difficulty in simply gaining clarity on the reporting landscape—what has to be reported on, and by when. Once this has been established, the need arises for an exercise in understanding the crossover between reporting obligations—in the area of metrics, for example. These requirements then need to be assessed against what the organisation is actually doing and reporting. This last step typically results in an action plan which requires time and resources to address the underlying actions. While the statement calling for stronger alignment of regulatory and standard-setting efforts around sustainability disclosure has wide-ranging support, those creating the regulations and standards will ultimately need to continue to collaborate and respond to the call to action. Given that we are at the infancy stage of sustainability reporting when compared to financial reporting, it would seem like such a wasted opportunity to create complexity when standardisation and transparency are what is needed. Fiona Gaskin is Environmental, Social and Governance Leader for Assurance and Reporting at PwC Ireland

The negativity directed at numerous high-profile politicians in recent months calls into question their role in governing professional conduct, but who should guard the guards themselves? asks Dr Brian Keegan There is an old saying from classical wisdom that you should only speak good of the dead, and Boris Johnson probably knows the Latin translation. Of course, the former British Prime Minister is happily anything but dead, even though his political career might be. One of the more surprising aspects of Johnson’s political demise has been the extent to which the normally moderate commentariat turned, not just on his premiership, but also on the individual. Calm reputable voices like The Economist (“he lacked the moral fibre”) and the Financial Times (“a wanton disregard for rules and for the truth”) delivered scathing editorials castigating the man and his morals to an extent typically reserved for the tabloid response to sex offenders. Ordinarily, it is the dignity of the office that protects the incumbent from the worst slings and arrows. Once their office has been lost, however, they become fair game, as Donald Trump and Nicolas Sarkozy, both former presidents of their respective countries, know well, having shared the ignominy of rigorous investigations into their conduct while in office. You do not need to hold a particularly exalted position, as the former Irish Minister of State Robert Troy will attest, to be a casualty of public concern over your actions. There can also be public unease where former office holders have used their previous positions in a manner perceived to be abusive. EU ombudsman Emily O’Reilly has called this the “revolving door of influence.” Despite all the regulation and governance guiding so many aspects of life (and Chartered Accountants are particularly sensitised to this), we don’t seem to be able to ensure good behaviour among our elected representatives, public officials and expert advisors. So, who regulates the regulators? Chartered Accountants will be familiar with the activities of the Institute’s Professional Standards department, but perhaps less so of the extent to which the Institute itself is under the scrutiny of the Irish Auditing and Accounting Supervisory Authority (IAASA), the Financial Reporting Council (FRC) and so on. Nor might they be aware of organisations such as the Monitoring Group, an international consortium of the great and the good, scrutinising the development of the auditing and ethical standards to which accountants must adhere. All of these regulators and meta-regulators are creations of the political system. The star of government regulation can fall as well as rise. The FRC is currently being reconstituted as the Audit, Reporting and Governance Authority in the UK. In Ireland, the Corporate Enforcement Authority has replaced the Office of the Director of Corporate Enforcement. In both instances, these authorities are granted additional powers and autonomy at the behest of politicians. There is also the sin of political omission. Where is the Northern Ireland Assembly to ensure that devolved regulation is appropriate to the needs of Northern Ireland? This is why there should be no sympathy for any politician caught in breach of standards or regulatory compliance. They are directly responsible for the regulatory environment in which Chartered Accountants and other financial professionals earn their living. It is intolerable that their conduct be in breach of the kind of standards they require us to observe. Another Latin tag for this, with which Boris Johnson may also be familiar, is “Quis Custodiet Ipsos Custodes?” — “Who Guards the Guards Themselves?” It cannot be left to journalists from the Financial Times, Handelsblatt, or The Economist to do the guarding. All of the negative attention garnered by politicians over the summer might not change the future behaviour of elected representatives holding a duty of care over professional conduct. Dr Brian Keegan is Director of Advocacy and Voice at Chartered Accountants Ireland