How should company sustainability be measured and can accountants help? Part two

John Tyson, an Accountant for Virgin, explores in the second of this two part guest blog, How should company sustainability be measured and what role might accountants play?

Read Part One here:

Since 2010, the World Banks WAVES Partnership project has been looking to implement wealth accounting, a method of accounting incorporating the value of natural resources and ecosystems into a countrys national accounts, intending to disseminate its results in 2015, the same year that IFRS is fully implemented. We are on the brink of establishing a single global financial reporting structure under IFRS, and it seems an ideal time for accounting professionals and bodies to consider internationally applicable standards for an Environmental Profit and Loss (EP&L).

Simple questions include whether the EP&L should be included in a companys financial statements, and whether it should then be incorporated into the income statement and balance sheet, or shown as a separate disclosure. IAS 37 is currently restrictive on the recognition of provisions, but the international community might feel that companies should observe an obligation to restore natural environments, even when legally they are not currently required to. Presently companies may wish to recognise environmental assets and income, in addition to the costs that prudence is likely to encumber upon them. Where a company has improved a natural asset, such as assisting an endangered species, or cleaning contaminated rivers for its own use, it would seem fair for this to be recorded in the same EP&L. It seems preferable to maintain a separate set of standards for financial and environmental concerns, but it is clear that the two would need to coexist, and there is no reason why financial standards shouldnt offer a basis for environmental ones.

Once new standards have been established, alongside the accurate capture of data by statisticians and experts at various levels, accounting professionals could see their work swell. Management accountants may be called upon to reappraise costing for a product to include environmental costs; financiers may need to assess not only gearing, but also long-term ecological obligations; auditors will increasingly be required to ensure correct valuations of projects designed to limit pollutants; tax specialists will find new areas of expertise in environmental tax law.

Accountants are ideal proponents for the meaningful reporting on sustainability, since the profession is entirely principle led. All practitioners are required to undertake and ascribe to ethical training and codes, which will be vital when dealing with an issue which is at least in part a question of morality, since companies will be expected to consider stakeholders well beyond their current understanding. Financial statements are currently absolutely required to provide a true and fair view, and that clearness and clarity will stand EP&Ls in good stead. But mostly accountants will be gifted in the application of prudence. Environmental issues often have to be seen in the long term, allowing for gradual decline in ecosystems, such as the desalination of the oceans, and company boards may initially be unwilling to foot the bill now for something that may not be realised for decades. Equally the accountants expectation of reliable and accurate evidence will push back on those preparing data, including lobbyists like the TEEB group and consultants like Trucost, to ensure efficacy in their modelling.

Furthermore, due to the global nature of this matter, and multi-national character of corporations, the Big 4 accounting firms, which operate in practically every country on the planet, should become leaders in sustainability reporting. McDonalds has thirty thousand restaurants in 119 countries with one million employees worldwide. The environmental aspects of such a behemoth from its supply chains to its consumer impact are far reaching, and require both global and local knowledge. The Big 4 firms are ideally placed to offer both, and can ably assist in preparation and auditing of any sustainability data.

Though this is an international issue, not all countries are on the same page, with considerable opposition from the new economic superpowers, China, India, and soon Brazil, who feel that to put environmental constraints on them now would shackle their growth. Recently China rejected the EUs emissions-trading scheme, and Russia threatens to do the same. Perhaps it is time for the Big 4, who operate in all these countries, to use their position to encourage adoption of sustainable reporting in even the most hostile environments, and work through their own international organisations to discuss the national issues at play. Accountants are not only technicians for their clients, but trusted advisors and educators, and could greatly influence the debate going on in boardrooms across the world.

Twenty years after the last Earth Summit in Rio, we are in an optimistic place. The WAVES Partnership will offer further advice on green accounting, and PUMAs EP&L has shown the corporate world that sustainable accounting is deeply manageable. But a crucial point that needs to be established in an increasingly litigious world is that of scope, since reporting ultimately brings up the sticky issue of negligence, and sustainability reporting potentially widens the scope of stakeholders to its greatest extent to date. In 1992 the precautionary principle was established, placing the burden onto initiators, not the affected party, to prove their actions would not cause harm to the public or the environment. In 2012 there is now a realisation that our every action has an impact, and now the impetus is to quantify and measure that so that stakeholders have a transparent view on the economic decisions they make. Responsibility is shifting to the consumer, but without meaningful reporting it is impossible for the consumer to make the right decisions. The pressure is on to develop accurate and tangible environmental accounts, and accountants have to be involved in that process.

Image: designed by M. La Fosse from Keri Omuros photostream

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