Measuring, Reporting and Acting on Sustainability

Adair Turner, the chair of the UK’s Financial Services Authority, memorably expressed the belief that “market economies will not of themselves combine [enterprise] with environmental sustainability or with a reasonably just and good society.” Dramatically he declared that “capitalism needs to be saved from itself.”

Today, in the UK and elsewhere, there is an intense interest in whether and how businesses and governments are deploying capital in a sustainable, just and good way.

The UK government’s £37bn bailout of RBS and Lloyds had, by last July, effectively provided every household in the UK with a £3000 investment in bank shares. The terms of the bailout requires the government’s UK Financial Investments (UKFI) body, which holds these assets, to engage with the investee companies, following the best practice of institutional shareholders. Improved financing of SMEs – a mechanism to support employment in the domestic economy – has been a condition of the government’s support for the banks. Now, civil society groups are also pushing UKFI to demand high standards of disclosure on, for example, the risks of investing in carbon-intensive oil production from oil sands.

The footage of banking leaders being compelled to account for their role in the global financial crisis by the Treasury Select Committee and Congress-appointed FCIC may have provided some moments of schadenfreude. But leaders outside banking and across the business world, have been shocked by how quickly governments, civil society and shareholders can turn on individual companies and, indeed, whole sectors who were just doing “the business of business”.

At the same time, politicians are accused of failing to allocate resources in a joined up way across the economy. The current bête noire of green businesses in the US and UK are government commitments to absolute national carbon emission reductions as part of the Copenhagen Accord, while subsidising the legacy industries responsible for the emissions. This causes more frustration when it’s perceived that the government support for the activities and technologies to meet those targets is less generous than the emerging economies – and China in particular.

Behind all of these challenges lies the question of how to account for risks and opportunities beyond the obvious and immediately accessible financial metrics. It has led management accountants to begin asking themselves “what will it cost us to meet society’s demands for sustainability and responsibility”? At the same time, sustainability professionals are thinking about Turner’s more fundamental challenge, “how can we save capitalism from itself”?

Trucost and Net Impact are working in different ways to help financial managers to counterbalance the economic focus on esoteric mechanisms such as Special Purpose Vehicles and Collateralised Debt Obligations as a source of short-term profit or risk mitigation. We believe accounting for the long term sources of value and systemic risk, as recognised by sustainability professionals, is equally, systemically important.

Trucost is a for-profit consultancy, based in the UK. Trucost’s environmental scorecard is used by investors, businesses and public sector organisations to account for the full environmental impact of their supply chains, investee companies and operations.

Net Impact is a global nonprofit membership network, with 15,000 members, which helps connect thought leaders and practitioners who are committed to using the power of business to deliver a net positive environmental, social and economic impact. Net Impact offers individual members and partner organisations opportunities to access focus groups and collaborative fora for discussing and resolving the difficult issues in sustainable business.

We seek to equip, educate and inspire politicians, investment professionals and other business people to better engage with the long term interests of a wider stakeholder base which includes investors, consumers, employees and taxpayers. We recognise that those interests are potentially limitless – we don’t claim to help organisations do what Goldman Sachs boss Lloyd Blankfein described as “God’s work” – but we believe that most of them are aligned on the desirability of a stable environment and sustainable growth.

In the first of two articles, we’re going to focus mostly on environmental sustainability.

Why we think Accounting and Sustainability disciplines need each other?

The Peak Oil Taskforce – led by Solarcentury’s Jeremy Leggett, Virgin’s Richard Branson and other business leaders – has issued a report which assesses these sorts of risks in relation to crude oil, on which many of the fundamental building blocks of industrial capitalism are based. In the UK this is described as an “oil crunch”, which could match the credit crunch in severity of impact, as imminently as 2015.

Reading this report, a professional involved in agriculture, transport, logistics, retail – in fact most sectors of the economy – trying to work out the “cost of being sustainable” might be having a sinking feeling. It’s a tough call to price a long term deal for a hydrocarbon-based polymer product, or supplies of goods with a large petroleum-transport footprint, or fertilizer-reliant “soft commodities”, when oil prices can fluctuate from $30/barrel to $140 in the space of 6 months. Yet if a professional needs to hedge their risks, they need to work out the amount of hydrocarbon-related exposure in their building portfolio, highway logistic network, shipping route. From that stable base, they’re in a much better position to take bets on new processes, materials, facilities and logistics.

Fossil fuels and carbon emissions are accessible examples of sustainability risks. But there are many others which, depending on the sector which the professional is managing, need to be quantified and managed. Water resources are particularly material for beverage companies and many process industries. The quality of the ecosystem, in terms of plant-pollinating biodiversity, is important to agricultural and horticultural industries.

Assessing the systemic risks and opportunities behind these variables relies on numerically-minded people, with the dogged determination to bring the enterprising plans of leaders and idealistic tendencies of sustainability experts back to earth.

At the end of 2009 Net Impact and Trucost brought together a focus group and speakers – consisting of professional accountants, MBAs and sustainability experts – to assess whether accounting and finance professionals are comfortable with this role. We entitled the event “Called to Account” and gathered group views using the Impact Monitor voting system. These are shared below, supplemented by case study examples from speakers at this and other Net Impact events:

Sustainability is still outside the finance and accounting comfort zone

Lisa Scott is Head of Corporate Governance and Performance Reporting at the UK government’s Highways Agency. Lisa is responsible for leading the Agency’s sustainable development action plan, a plan which is required of every UK central government department. She also helped to draft the new UK Treasury’s Sustainability Reporting in Public Sector Annual Reports, a mandatory sustainability reporting requirement for all central government Annual Reports. Lisa, as a professional accountant, perceives limits in the way the accounting discipline is set up, which makes it inadequate, on its own, to tackle challenges like climate change. “Implementing accounting for sustainability will never be enough. What really counts are the ensuing changes that it drives in decision making and behaviour.”

A survey result from our Called to Account focus group shows clearly where Net Impact members and event attendees see the responsibility for the large organisation’s sustainability – over a quarter of respondents cited the CEO/MD (or equivalent) while just under one in five thought a sustainability specialist would hold the greatest responsibility. There were notable mentions for the Chair and Chief marketing Officer. What’s more interesting is that, despite the group including a number of finance professionals, neither the accounting/finance roles or the company secretary were deemed responsible for sustainability.

To read the full article, download it from here in Adobe PDF format.