Companies and people refer to sustainability by different names: corporate citizenship, corporate social responsibility, climate change initiatives or ‘going green’.
‘Sustainability revolves around the idea that, as the human population and demand for food and finite natural resources grow, in order to ensure our own survival and that of future generations, we need to recognise and adapt our behaviours so their impact on our natural environment is minimised,’ says Elaine Conway, senior lecturer in accounting and finance at the University of Derby.
In a business context, sustainability is about better business. ‘Better for society, better for the planet and better for companies’ own long-term growth,’ says Charlie Ashford, senior researcher at global sustainability consultancy Corporate Citizenship.
‘By working to understand and improve their wider economic, social and environmental impacts, businesses around the world can create more resilient growth for the economy and help to find solutions to global issues.’
Some companies now publicly disclose everything from their use of clean technology to energy savings and water consumption, from their local habitat protection efforts to their involvement in local community issues. According to ACCA’s policy paper Sustainability Matters (see 'Related links'), currently over 3,000 companies worldwide – including over two-thirds of the Fortune Global 500 – issue annual sustainability reports.
Although these companies collectively make up the overwhelming majority of worldwide business, they represent only a small fraction of companies globally. Nevertheless, ACCA expects their number to grow.
‘According to the International Accounting Standard Board’s conceptual framework, the objective of financial reporting is to "provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity",’ says Gary Leyshon, tutor at Kaplan.
‘There’s been increasing pressure for organisations to provide information beyond just the financial statements since non-financial information can also be important to users’ decisions,’ he adds.
Increasingly, consumers, employers, governments and local communities also insist that companies are publicly accountable for the impact they have on the environment and the society.
Currently, most companies who disclose their sustainability efforts and results do so voluntarily, in accordance with the framework and methodology issued by the Global Reporting Initiative (GRI), a leading organisation in the sustainability field.
However, the voluntary nature of sustainability reporting is set to change in the future. According to ACCA’s Sustainability Matters paper, a few governments have already made it mandatory:
- in France, the Grenelle Act II requires that companies’ annual reports include information on their environmental and social performance
- in Sweden, all state-owned companies are required to present a sustainability report using GRI guidelines on a ‘comply or explain’ basis
- certain stock exchanges, including the BM&F Bovespa in Brazil and the Johannesburg Stock Exchange in South Africa, are also working to increase levels of corporate sustainability reporting through their listing requirements
- in the UK, all companies headquartered there and listed on the London Stock Exchange are required to report on their global greenhouse gases (GHG) emissions. This now applies to over 1,000 companies and there are suggestions that the GHG reporting scheme may be extended in 2016 to cover all large UK companies.
Use and benefits
According to research by PwC, 73% of investors consider the sustainability performance of organisations to mitigate risk.
‘Others want to know whether the organisations’ values are consistent with their own investment ethos – some investors only wish to invest in "sustainable organisations",’ says Conway.
Organisations themselves benefit from focusing on sustainability issues. ‘It forces them to look and, hopefully, plan further in advance,’ says Jonathan Russell, partner at ReesRussell.
‘So, a manufacturing business will be looking at where the next most cost-effective place is to manufacture and which economies will be buying their goods in the future.’
Businesses may also decide to redesign their products and processes to increase efficiency, reduce wastage and costs, says Conway: ‘And by publicising sustainability activities to the wider public, they can benefit in areas such as reputation/brand management and reduced risk perception that can decrease insurance premiums.’
Just for large companies?
To date, the vast majority of organisations reporting on sustainability have been large, listed companies – very few small and medium-sized enterprises (SMEs) produce sustainability reports.
‘This additional reporting takes resources of a financial and non-financial nature to prepare, usually only available in the larger organisations,’ comments Leyshon.
ACCA, however, believes that smaller companies and third-sector organisations not covered by either legislation or reporting guidance should adopt some modified form of sustainability reporting.
‘Organisations of any size, sector, profit-making or otherwise can benefit from making their operations more sustainable,’ adds Conway.
Role of accountants
Sustainability needs to be measured, reported and assured and all these areas fall under accountants’ remit.
‘Accountants have an important role to play in helping companies embed sustainability into their corporate strategies, and are very well placed to do so,’ confirms Gordon Hewitt, sustainability adviser at ACCA. ‘A company’s finance function is responsible for producing much of the management information that forms the basis for internal strategy as well as reports for external stakeholders.’
A business can only modify its behaviour if they have good quality, trusted information.
‘When looking to address sustainability issues, companies can only manage what they can measure so it’s important that accurate, complete and reliable information gets collected,’ says Hewitt.
In organisations where sustainability reporting is yet to be adopted, accountants have just the right knowledge and skills to help develop a credible standard of reporting.
‘They recognise the need to be accountable to external stakeholders and the need to operate to good governance and ethical standards; they can develop performance metrics and monitoring/auditing systems, they can set budgets, produce strategic plans and manage risk,’ says Conway.
Many accountants are also good team-players and able to work with colleagues in the areas of the business beyond the finance function, which is important as sustainability reporting requires inputs from across the organisation and incorporates a lot of non-financial data.
‘However, they must also be prepared to acquire new skills in developing verifiable non-financial measures for issues that cannot be easily monetised, and in enhancing estimation techniques and forward planning, especially in areas that are more subjective than many traditional accounting measures such as environmental or health impacts,’ points out Conway.
Practice clients also now expect their accountants to be ‘trusted business advisers’, including on the issues of corporate sustainability, rather than just ‘number-crunchers’.
‘The accountant’s role has shifted over the past 20 years from a reporter of historical performance to being much more the forecaster and the business planner,’ says Russell.
‘This trend will almost certainly continue as the financial services industry is now increasingly pointing out that historic performance is no indication of future performance.’