How should company sustainability be measured and can accountants help?
- By John Tyson -
- Apr 26, 2012
Accountants learn to measure financial performance and report on company activity. These skills place them at the centre of sustainability discussions in companies as the business world reacts to the environmental and energy challenges of the next decades. John Tyson, an Accountant for Virgin, explores in the first of this two part guest blog, ‘How should company sustainability be measured and what role might accountants play’?
Ahead of the Rio+20 United Nations Conference on Sustainable Development in June this year, PUMA released its first Environmental Profit and Loss (EP&L) in November 2011, with the help of environmental-consultancy firm Trucost. This included a relative cost analysis from the business on five key environmental areas, including greenhouse gases and water use, as well as segmental reporting, spreading that cost regionally and across PUMA’s key product lines. One of the first of its kind, the report sent shockwaves through the corporate world, which was left wondering, ten years after Sarbanes-Oxley, whether financial reporting, as well as corporate governance, was going to change just as radically again. The precedent is there for a legal framework requiring further disclosure, including financial incentives and disincentives, and a new body of environmental accounting standards.
Since the Stern Report, and more recent TEEB publications, there has been increasing pressure for countries, and ultimately businesses, to recognise the cost they have on the environment. In 2006, Stern estimated that 1% of global GDP needs to be invested in order to avoid the worst effects of climate change, namely a 5% per annum reduction in global GDP. Assuming those figures to be accurate, the payoff is plain to see. TEEB estimated that an annual investment of US$ 45 billion into protected areas alone could secure the delivery of ecosystem services worth some US$ 5 trillion a year. The subsequent loss of that natural capital would be comparable in value to the financial crisis in 2008. But while national governments protected retail banks in 2008, we cannot expect them to entirely shoulder the environmental burden as well.
Sustainability reporting, like that done by PUMA, is a continued expansion of the Corporate Social Responsibility reports already completed by many of the world’s largest corporations, but potentially gives clearer estimations of direct impact on the environment, including cost analysis. The intention is for companies to communicate to stakeholders in more than financial terms, beyond purely economic events. Consultancies like Trucost offer benchmarking tools allowing companies to indicate how they compete in their sector. Stakeholders are increasingly concerned with recognising companies for more than their financial success. In the future we could see further environmental taxation based on national targets (like the UK’s Carbon Reduction Commitment scheme), and pay incentives also driven by sustainability goals. A large part of the cost of protecting ecosystems could be borne by the companies affecting them, and not the taxpayer.
One of the major failings of Corporate Social Responsibility (CSR) reporting to date has been a lack of standardisation and benchmarking, preventing easy comparison and meaningful analysis by stakeholders. This is a complex issue, with different sectors having radically different environmental impacts. Add to that national and cultural differences: the United Nations have had difficulty measuring global deforestation due to different national definitions of a forest. Before there can be accurate – and ultimately auditable – data on sustainability and company costs, there needs to be greater integration globally, as well as locally, on establishing valuations of natural capital. The PUMA EP&L relies on such valuations, but based on a national (US) level. Water depletion is often a more local phenomenon, while at the same time impacting on a global basis due to the constant upsweep into the water cycle. Relative currency valuations will also distort compiled figures, unless a single ‘gold standard’ could be agreed upon.
Read Part Two here: www.virgin.com/people-and-planet/blog/part-two-how-should-company-sustainability-be-measured-and-can-accountants-help
Image: designed by M. La Fosse from Keri Omuro’s photostream
By John Tyson.
This guest blog complies to Virgin.com terms & conditions.