Can accounting save the world and your company? | Mike Mahoney, CEO E-liability Institute

The Better Boards Podcast Series

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Environmental risks make up half the Top 10 risks over the next ten years. Climate change remains one of the most urgent challenges confronting boards in their oversight capacity. How can boards improve their oversight of climate-related risks? And what does accounting have to do with it?

In this podcast, Dr Sabine Dembkowski, Founder and Managing Director of Better Boards, discusses how boards can improve their oversight of climate-related risks with Mike Mahoney. Mike is the CEO of the E-liability Institute, a global non-profit organisation advancing accounting upgrades to drive green innovation and reduce carbon emissions. In November 2021, Professor Bob Kaplan of Harvard Business School and Professor Karthik Ramanna from the University of Oxford published a prize-winning paper, Accounting for Climate Change, which is the foundation of the E-liability concept.

"Let's focus on the fact that investors say climate change poses one of the largest sources of financial risk to companies and their asset owners"
Climate change has been discussed for years in the context of ESG and sustainability, but Mike says it remains a top risk for boards. Of course, risk is often the flip side of opportunity. Mike feels companies can develop and sustain advantages in how they effectively mitigate these risks or in how they help customers mitigate these risks. These are important strategic issues for management and boards alike.

"As emissions continue to grow around the world, the current system simply isn't working"
Mostcompanies use approaches to carbon accounting based on carbon disclosure requirements that aren't fit for purpose. To appropriately analyse and mitigate climate risk, companies need to precisely understand the carbon intensity of their operations and that of their suppliers. Instead, firms are leaning on estimates and industry averages, which can be highly inaccurate and introduce so much distortion as to render carbon disclosures useless.

"There are six questions to answer about how the company and management are thinking about measurement and accounting of climate-related and emissions data"
Listen to the podcast and add the questions to your repertoire.
"With e-liability, instead of accounting for costs, we're accounting for carbon"
E-liability is an accounting algorithm that allows organisations to produce real-time accurate and auditable data on their total direct and supplier emissions and those of any of its products and services. It is a simple, open-source, free-to-use set of principles that can create an accurate and auditable total "cradle to grave" carbon footprint number.

The three top takeaways from our conversation are:
1. Climate risk is financial risk, and companies and their boards should manage it as such. Climate risk can be quantified, measured, and mitigated. It can represent a strategic opportunity for competitive differentiation as long as the company's claims for differentiation can be audited and are meaningful to its customers.
2. It matters how a company does its carbon accounting. Management and the board need rigorous emissions accounting to understand and mitigate risks and seize opportunities.
3. Everyone should learn more about how companies can improve their carbon accounting by visiting the E-Liability Institute (https://e-liability.institute/). The site has a wealth of information, including the original papers published Bob Kaplan and Karthik Ramana, and a chance to connect with the company to learn more and explore pilot adoption of this approach.