John Christensen ■ What’s your SCORE? The case for Sustainable Cost Reporting

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We recently published a two part Tax Justice Focus special on climate crisis and tax justice. This blog reproduces the article by Richard Murphy, in which he outlines how radical changes to accounting rules would require companies to comprehensively disclose their carbon emissions. Sustainable Cost Reporting, Richard argues, would put company directors into a position where they must accept responsibility for the harm caused by ‘externalities’. Click here to download the first and second parts of our Tax Justice Focus special.

by Richard Murphy *

Accountancy was established to protect investors from fraudulent managers. As the activities of companies now exceed planetary limits accountants must think much more carefully about their public interest responsibilities. Here one of the discipline’s most original and influential thinkers sets out the role new reporting standards could play in aiding a swift and just transition away from fossil fuel dependence.

The climate crisis is real: it is settled science that we must take immediate action to address its consequences. Across the world there has been a response that few in any activist community can ignore. There have been demands for a Green New Deal. Extinction Rebellion has led protests that have revealed the power of civil disobedience. Greta Thunberg has become a global figurehead for creating school strike protests.

The demands have, however, been primarily aimed at governments, which is reasonable given their responsibility for setting environmental policy.  Governments will also be responsible for delivering the new public infrastructure needed to support the different types of economic activity that we now require. But we should not ignore the fact that as few as twenty oil and coal companies may ultimately account for one third of greenhouse gas emissions,[1] and just one hundred companies may account for seventy per cent of these emissions.[2]

What does this have to do with tax justice? In practice, quite a lot, since one of the possible reactions to the climate crisis is to tax the use of carbon-based fuels and another is to provide tax incentives to business to change their behaviour. Both might have a

significant impact on corporate tax bases and we need to understand what this might mean. However, we have almost no reliable data from most businesses on their carbon emissions; nor do we know enough about the economic impacts of any major policy proposals to be in a position to take decisions on such matters . As significantly, when it comes to the corporate tax base, we have almost no idea about which businesses might survive the transition to a net-zero carbon world, and which might not.

That said, moves are underway to address this issue.  Former Governor of the Bank of England, Mark Carney, is promoting voluntary accounting standards created by a Bank for International Settlements initiative called the Task Force on Climate-related Financial Disclosures (TCFD).[3] Carney is to be commended for getting this ball rolling, but what he proposes is inadequate. The TCFD standards are voluntary and current rates of compliance are lamentably low.[4] Worse, TCFD standards do not require businesses to account for the carbon emissions that the products they create or sell give rise to when used by a customer, which means that the downstream environmental externalities businesses create in pursuit of their profits will go unreported.  Given that the climate crisis has arisen because of businesses failing to take responsibility for the externalities of their activities, it is unacceptable for the TCFD standards to omit these downstream externalities.

For this reason the Corporate Accountability Network is developing what it calls sustainable cost reporting (SCORE), a new, mandatory accounting standard which will require businesses to disclose their greenhouse gas emissions (GHG) under four categories:

  • Scope 1: The GHGs the reporting entity creates itself;
  • Scope 2: The GHGs produced when generating the electricity the reporting entity consumes – the upstream externalities;
  • Scope 3: The GHGs arising from the manufacture and use of products and services over which the reporting entity has some contractual control e.g. within outsourced manufacturing processes (incorporating both upstream and downstream externalities);
  • Scope 4: The GHGs arising from the manufacture and use of products and services which the reporting entity buys in for resale essentially in the state in which they acquired them (also incorporating upstream and downstream externalities).

As is apparent, remoteness from control increases as the Scope number rises, but in each case the reporting entity facilitates the emission. In Scopes 3 and 4 the disclosure has to be split between upstream supply and downstream customer chains so that these can be fully understood. All disclosure will be on a country-by-country reporting basis to both reveal the geographic spread of the impact and to curtail carbon dumping.

Once this information has been disclosed, the reporting entity has to prepare a plan to become net carbon zero, as is necessary if the impact of climate change is to be managed. Crucially, SCORE requires that this plan be published and the cost to the reporting entity of its achievement must be estimated.

The most radical requirement of SCORE is that this cost has then to be included in the accounts of the reporting entity – in full – at the time of adoption of the SCORE standard. The logic is simple: SCORE recognises that the cost to the business of tackling climate change increases if action is deferred, therefore recognition of this cost in the accounts will encourage early action to minimise the final cost to the business of eliminating carbon emissions from its production and consumption chains. That this reverses the traditional accounting approach of discounting future costs is beside the point: nothing is normal about climate change and its impact.

Some important issues should be noted. The first is that SCORE does not put a cost on carbon usage: it covers the cost of removing it, making it far more robust than any alternative approach. SCORE also enables appraisal of each reporting entity on its own terms.

Second, the cost must be based on known technology: a precautionary principle must be applied, meaning that unproven technology cannot be assumed to deliver net-zero carbon, although investment in such technology to reduce the cost provision required (and so, in effect, declare a carbon cost reduction profit) is encouraged.

Third, the provision for costs will need to be reappraised annually and reported upon as a key accounting issue, thus enabling stakeholders to appraise companies’ commitment to their plans, and whether or not those commitments are being delivered on within the cost target. This will allow investors to identify companies that are best able to eliminate GHG emissions.

Crucially, SCORE will reveal that some companies might not be able to make this transition. They are carbon insolvent because they either cannot adapt their processes or will not be able to raise sufficient capital to do so. SCORE will allow for early identification of these entities, providing more time for them to be wound up in an orderly fashion.

All of this feeds into tax justice. The wise use of subsidies, tax allowances and reliefs can be appraised. Indeed, they can be designed to encourage companies with a good SCORE. And if carbon tax is to be used, then its impact – and how to manage the risks within it – will also be capable of appraisal using better data than any we have currently available.

Accounting may have the reputation of being boring. However, counting the right thing, in the right way, at the right time is now key to social, economic, tax and environmental justice. SCORE is designed to help achieve this goal.

* Richard Murphy FCA is the Director of the Corporate Accountability Network and Professor of Practice in International Political Economy, City University, London. His books include The Joy of Tax and The Courageous State.


[1] https://www.theguardian.com/environment/2019/oct/09/revealed-20-firms-third-carbon-emissions

[2] https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/002/327/original/Carbon-Majors-Report-2017.pdf?1499691240

[3]https://www.fsb-tcfd.org/

[4] https://www.fsb-tcfd.org/publications/tcfd-2019-status-report/

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