Download Climate Change: Risk Management/Internal Audit

Climate Change: Mitigating Risks to your Business
Kyoto Mechanisms Seminar for the
Manitoba Business Sector
March 14, 2003
February 25, 2003
Investors and Climate Change

Growing Investor Interest:
 Carbon Disclosure Project (CDP)
 2002 Proxy season
 Rise in shareowner action on climate change;
19 climate change resolutions were filed in the
2002 proxy season, twice as many as in any
previous year
 Friends Ivory Sime
Financial Disclosure is a key investor need
•Accounting
•Tax treatment
•Assurance
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Integrated Carbon Risk Management
Regulatory
environment
GHG inventory
Now to 2012
Marginal cost
of abatement
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Motivations:

Scenario planning
Understanding
exposure / asset value

Market Response

Accounting
Tax
Financial analysis
Acquisition and
Divestitures
Hedging risk: Inexpensive (in
relation to marginal cost of
compliance) credits to offset
future obligations
Realize potential appreciation
of value
Capture arbitrage profits
Internal
abatement
Emissions
trading
Compliance Risk Management Implementation
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
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Current strengths: scenario
planning and understanding
exposure
Current challenges: resources
allocation (staffing, skills)
Accounting Treatment
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In GHG constrained economy, companies still assessed on financial
performance
Financial implications of emissions obligations not presently captured in financial
reporting as early stage of the market
Analysts, investors and shareholders are increasingly expecting more
transparency in reporting
Accounting Guidance becoming increasingly important but no guidance
currently exists
 Not starting from ‘scratch’: variety of previously developed standards may
apply
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Existing Financial Accounting Policies and Guidelines

United Kingdom
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International Accounting Standards Board

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Accounting for Carbon under the UK Emissions trading
scheme – Discussion Paper (IETA/Deloitte & Touche)
AG9 – ETG Advisory Group Financial Accounting for Carbon
UK Accounting Standards Board :Urgent Issues Task Force
(UITF) considering the issue as part of convergence with
International Accounting Standards (Meeting late February)
International Financial Reporting Interpretations Committee
(IFRIC) Agenda Paper (July 2002)
Other Accounting Bodies, including Canada

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No country has accounting standards, interpretations or other
guidance
However, several are addressing the issues or expect to do
so in the near future
 Canadian Institute of Chartered Accountants/IETA
hosted a meeting in October 2002 to address accounting
for carbon
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Main Accounting Issues: Recognition
Recognition - when to record the information?
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When should allowances/credits be recognised as an asset?
Should revenue be recognized and in what manner?
When should a liability be recognised for the obligation to deliver allowances or
credits
 Should emissions be recognised as a liability as they occur or upfront on entry
into a scheme?
When should expenditures undertaken to reduce emissions be accounted for?
Current direction...
Trading Activity:

Allowances could be accounted for in the same manner as financial assets under IAS 39,
Financial Instruments: Recognition and Measurement (FAS 133 in the US)
Business Activity:

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Allowances could be recognized when rights and rewards have been transferred
An obligation to deliver allowances only arises as the company emits and could be recognised at
the fair value of meeting the obligation (IAS 37)
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Main Accounting Issues: Valuation
Valuation - at what price?

How should allowances or credits be measured both at initial recognition and
subsequently?
 Record credits at the same value they were purchased at
Current direction...
Trading Activity:

Measurement could be in accordance with IAS 39, Financial Instruments (FAS 133 in the US)
Business Activity:

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Allowances could be an intangible asset that fall within IAS 38, Intangible Assets (or CICA
Handbook Section 3062)
 Allowances could allocated by government for less than fair value give rise to a government
grant in accordance with IAS 20, Accounting for Government Grants and Disclosure of
Government Assistance (or CICA Handbook Section 3250 and other)
Allowances could be recorded at the lower or cost or market in accordance with other inventory
(CICA Handbook 3030)
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Main Accounting Issues: Disclosure
Disclosure - how shall the information be described?
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Disclosure would likely be dependent on the eventual accounting treatment given to
the asset and liability
Should additional disclosure be given to reflect the complexities of the emissions
trading regime?
Should disclosure be required in both the MD&A and the financial statements?
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Carbon Shadow Pricing

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Shadow pricing used to guide investment and
operating decisions in portfolio context
Price of carbon:
 Use of market price of carbon vs. marginal cost
of abatement
 Perspective on price of carbon
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Tax Implications
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Goal: Optimize tax efficiency of assets
Impact on cash flow from operations
Issue is when do you get tax savings from your investment
Same questions, different answers as accounting guidance
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Need for Assurance
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Evolving standards for GHG reporting and verification
GHG Protocol:
Reporting:
Boundary issues, Sources, Data calculations
(e.g. emission factors), Baselines, Expansions / closures
Verification: « Verification involves testing certain
assertions of the GHG inventory, such as accuracy and
completeness. Verification also requires evaluating and
testing the ‘supporting’ evidence (in the form of an audit
trail) of how the GHG inventory was generated,
compiled/aggregated and reported. »

Verification of technology:

Verification standards
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Climate Change and the Environmental Professional

Identifying climate change risk management plan: an action checklist
 Strategic issue?
 Focus on GHG emissions
and emission reduction
opportunities
 Partnering Opportunity with
Accounting and Tax
functions, as well as Risk /
Internal Audit
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Climate Change: Risk Management/Internal Audit

Overlap with a number of risk areas considered by Risk Management
and Internal Audit functions:
 Financial Risk
 Governance Risk
 Operational Risk
 Disclosure Risk
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Climate Change: Financial Institutions

Credit and Investment Risk Management:
 Development of screening criteria for investment/lending portfolio
 Disclosure: is enough information available to perform screening

Opportunity:
 Does your overall credit risk management/investment criteria for overlook
opportunities?
 Criteria should also be able to identify projects with minimal or no GHG
impacts
 Financial Institution Disclosure:
 Are you disclosing the carbon exposure of your investment portfolio to your
shareholder/unit holders
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003
Contact Information
Valerie Chort
Suite 1900, 79 Wellington Street West
Toronto, ON, Canada, M5K 1B9
Telephone: 416.601.6147
Facsimile: 416.601.6390
Email:
[email protected]
Website:
www.deloitte.ca
Jeff Collins
Suite 1900, 79 Wellington Street West
Toronto, ON, Canada, M5K 1B9
Telephone: 416.601.6150 x7338
Facsimile: 416.601.6390
Email:
[email protected]
Website:
www.deloitte.ca
Shannon Glenn
Suite 1900, 79 Wellington Street West
Toronto, ON, Canada, M5K 1B9
Telephone: 416.601.6454
Facsimile: 416.601.6390
Email:
[email protected]
Website:
www.deloitte.ca
Jay Pon
North York City Centre,
5140 Yonge Street,
North York, ON M2N 6L7
Telephone: 416-643-8982
Facsimile: 416.601.6151
Email:
[email protected]
Website:
www.deloitte.ca
IISD Kyoto Mechanisms Seminar for the Manitoba Business Sector - March 14 2003