Climate change is no longer a distant possibility but an urgent and growing reality. Rising global temperatures lead to more frequent and severe weather events, rising sea levels, and ecosystem disruptions. To mitigate these impacts, the global target is to limit warming to
Sulochana Dissanayake
5°C by reducing per capita carbon emissions to around 2 to 2.5 metric tons by 2030. The world average is 4.8 metric tons, with many developed nations exceeding this figure. If we fail to meet these targets, we risk facing more extreme weather, resource scarcity, and economic instability.
Being highly vulnerable to climate change, Sri Lanka is already experiencing these adverse effects. The country focuses on enhancing resilience across key sectors such as agriculture, fisheries, livestock, health, water, biodiversity, coastal and marine environments, tourism, urban planning, and human settlements. Sri Lanka aims to achieve carbon neutrality by 2050, underscoring its commitment to climate action despite its lower emissions than more developed nations.
However, many developing countries, including Sri Lanka, often face challenges balancing immediate economic development with long-term sustainability goals. This can result in a slower response to reducing carbon emissions, even though climate change disproportionately affects these regions.
In this context, businesses are increasingly pressured to adopt sustainable practices. Accounting and auditing, traditionally seen as financial oversight tools, are now emerging as vital contributors to this effort. They are crucial in ensuring accurate environmental reporting, compliance with regulations, and adopting sustainable practices, thereby supporting broader climate goals.
Though we discuss the roles of accounting and auditing in sustainability and climate financial disclosure reporting, the question remains: how exactly do they contribute to addressing climate change?
This article explores how accounting and auditing are evolving to play an integral role in the climate fight, from improving environmental reporting to driving compliance and sustainable business practices.
Research methodology
This study employed a qualitative research design to investigate the evolving role of accounting and auditing in addressing climate change, particularly in Sri Lanka. In-depth interviews were conducted with auditors from public accounting firms, specifically selected based on their experience with environmental reporting and familiarity with local and international regulations, even without established sustainability audits.
A semi-structured interview format was used to encourage open-ended responses while ensuring coverage of key topics, including current practices in environmental reporting, compliance with existing sustainability regulations, and the auditors’ perceptions of their roles in promoting sustainable business practices. The interviews were audio-recorded, transcribed, and subjected to thematic analysis to identify common themes and insights regarding the contributions of auditing to climate action.
Findings
The findings reveal key themes concerning the role of auditors in addressing climate change. Auditors consistently underscored the critical importance of accurate environmental reporting, stating that their validation processes greatly enhance the reliability of carbon emissions, water usage, and waste management disclosures. Participants highlighted that adherence to international frameworks, such as IFRS S1 and S2, is essential for fostering transparency and building stakeholder trust.
Moreover, auditors expressed an increasing responsibility to ensure compliance with local and international climate regulations. Many described how their roles have evolved to evaluate companies’ adherence to national policies, such as Sri Lanka’s National Environmental Act and the National Climate Change Policy.
These responsibilities have prompted organisations to enhance their sustainability practices. Additionally, the interviews revealed that auditors assume a significant advisory role, guiding companies in implementing best practices and integrating sustainability into their operations.
Respondents noted that benchmarking against industry standards is a vital tool for driving continuous improvement in environmental performance. Overall, the insights gathered from auditors indicate a substantial shift in their roles from traditional financial oversight to becoming crucial players in advancing sustainability and tackling climate challenges.
Enhancing environmental reporting accuracy
Accurate environmental reporting is crucial for understanding and managing a company’s impact on the climate. Auditors are instrumental in this process by validating the accuracy of ecological disclosures, including data on carbon emissions, water usage, and waste management. Their independent verification ensures the reported information is reliable and complies with established standards. In this context, the IFRS S1 and S2 standards, issued by the International Financial Reporting Standards (IFRS) Foundation, provide essential frameworks for sustainability reporting.
IFRS S1 outlines a general framework for sustainability disclosures, stressing the importance of reporting information relevant to a company’s sustainability performance and impact.
IFRS S2, on the other hand, focuses specifically on climate-related disclosures, requiring companies to report on climate-related risks and opportunities in alignment with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
These standards enhance transparency and comparability in sustainability reporting, making auditors’ role even more critical. Byensuring adherence to IFRS S1 and S2, auditors help build trust with stakeholders and support informed decision-making, driving progress towards effective climate management and accountability.
Driving compliance with climate regulations
With the rise of stringent climate regulations, auditors are increasingly tasked with ensuring that companies comply with environmental laws and standards. Regulations such as the EU Green Deal and the Paris Agreement set ambitious targets for reducing carbon emissions and promoting sustainability. In Sri Lanka, national laws are crucial in addressing climate change. The National Environmental Act (NEA) provides a framework for environmental management, including environmental impact assessments and pollution control provisions.
The National Climate Change Policy (NCCP) outlines the country’s strategy for reducing greenhouse gas emissions and enhancing climate resilience. Sri Lanka’s Intended Nationally Determined Contribution (INDC) and National Adaptation Plan (NAP) further specify targets and measures for climate action.
Auditors review companies’ adherence to these regulations, including both international standards and local requirements. They ensure that companies meet their carbon reduction targets, comply with reporting standards, and adjust their practices. This compliance is critical for driving systemic change, achieving broader climate goals, and ensuring that companies contribute effectively to global and national climate commitments.
Improving Quality of Sustainability Reports
The quality of sustainability reports directly impacts how stakeholders perceive a company’s environmentalperformance.Auditorsenhancethisqualitybyidentifyinggaps,inconsistencies, and areas for improvement in ecological disclosures, leading to more accurate and comprehensivereporting.Thisisessentialforstakeholders,includinginvestors,customers,and regulators, who rely on this information to assess a company’s environmental impact and sustainability efforts.
Additionally, the International Standard on Sustainability Assurance (ISSA) 5000, issued by the InternationalAuditing andAssurance Standards Board (IAASB), provides guidance on the assurance of sustainability reports. ISSA 5000 sets out the requirements for auditors to assess and report on the reliability of sustainability information, including environmental disclosures. It emphasises the need for rigorous assurance processes to ensure that sustainability reports are accurate, complete, and compliant with relevant reportingstandards.Byadheringtothesestandards,auditorscontributetogreatertransparency and accountability in environmental reporting. This transparency builds trust with stakeholders and helps companies make informed decisions about their ecologicalstrategies.
Enhancing Sustainability Practices and Risk Management
Inrecent years,the landscape for environmental reporting has expanded with newregulations andframeworksemphasisingthefinancialimpactofclimaterisks.
TheTaskForceonClimate-related Financial Disclosures (TCFD) guides firms in disclosing climate-related risks across governance,strategy,riskmanagement,andmetrics. This shifthasledtoagreateremphasison the role of auditors in assessing and ensuring the accuracy of these disclosures.
Auditors now play a significant role in encouraging sustainable practices within companies. By evaluating environmental policies and suggesting improvements such as energy efficiency and waste reduction, auditors help companies lower their carbon footprint and meet sustainability goals. In Sri Lanka, where sustainability audits are still in their infancy, it becomes crucial to select auditorsbasedontheirexperienceandcommitmenttosustainabilityprinciples.
Althoughthere are currently no established sustainability audits, selecting auditors who proactively engage with sustainability initiatives and possess a strong understanding of relevant environmental regulations will be essential. Criteria for selection could include the auditors’ familiarity with best practices in sustainability reporting, involvement in continuous professional development, and ability to guide companies in integrating sustainability intotheiroverall business strategies.Auditorsare also crucialinriskmanagement byassessinghow companieshandleenvironmentalrisks.Theyidentifyvulnerabilitiessuchas
Regulatory fines or reputational damage and provide recommendations to address these risks, ensuring sustainable practices are effectively integrated into risk management strategies.
Enhancing sustainability through benchmarking and expert advisory support
Benchmarking is avaluable tool fordriving continuous improvement in sustainability efforts. Auditors compare companies’ environmental practices with industry standards and peers, helping organisations understand their relative performance. This comparative analysis motivates companies to enhance their sustainability efforts to align with or exceed industry norms, fostering a competitive spirit and prioritising environmental responsibility.
Beyond traditional roles, auditors provide advisory support and collaborate with environmental specialists. They may recommend consulting with experts or adopting proven best practices from other sectors. Internationally, research has identified the importance of auditor-client compatibilityincarbonemissiondisclosures,whichcansignificantlyimpacttheeffectiveness of sustainability reporting. Many global audit firms have also established separate units dedicated to environmental and sustainability issues, ensuring specialised focus and expertise in this area.
This advisory role helps companies navigate complex environmental challenges and implement effective solutions tailored to their needs. By integrating expert knowledge and leveraging specialised units, auditors ensure companies adopt the most effective strategies for reducing their environmental impact.
Conclusion
The evolving role of accounting and auditing highlights their critical contribution to addressing climate change. Auditors have transformed from financial overseers to key drivers of environmental accountability. They enhance the accuracy of climate-related reporting, ensure regulatory compliance, and improve sustainability practices. By facilitating effective risk management and supporting businesses in their environmental efforts, auditors play a vital role in advancing global climate goals and promoting a sustainable future.
By Sulochana Dissanayake
Senior Lecturer of Rajarata University
PhD Candidate of Queens land University of Technology
