Over the course of the past decade, businesses have been more scrutinised than ever when it comes to sustainability and protecting the planet we live in. This has led many companies and organisations to seriously analyse and make changes to the way they work and operate, putting eco-friendliness as a major priority. This even stretches to the attraction of a business when it comes to an investment or collaborative standpoint, with stakeholders becoming increasingly interested in issues of sustainability leading to accountants’ expertise in reporting on the company’s performance in this area.
The world we live in is a fragile one, with many experts clearly stating the next decade is crucial in trying to overturn the damage done and reverse the drastic effects that humanity has had on our planet’s eco-system. This is why it is hugely important for businesses to correctly record and account for their eco-friendly endeavours in a manner which not only encourages sustainability, but also puts it firmly in line with profitability and scalability. The IFAC’s ‘Accounting for Sustainability’ report (2015) states, ‘organizations need to consider the impact of economic activities—things bought, investments made, and waste and pollution generated—on the natural and human resources on which they depend,
capacity of these resources. In reality, this requires organizations to take into account the consequences of economic decisions on the natural environment, on economic development, and on the social conditions in which people live and work.’
Nordens are proud to be a part of the SME Climate Commitment, where annually the changes and progress we’ve made are recorded and submitted to the UN’s Race To Zero campaign. As part of the SME Climate Commitment, Nordens have committed to take action immediately in order to:
- Halve greenhouse gas emissions before 2030
- Achieve net zero emissions before 2050
- Disclose progress on a yearly basis
Whilst we encourage businesses we work with to join the commitment, many organisations are unsure as to how to properly record sustainability achievements within their business. We break down the different ways this can be done, and the overall impact it has on the global initiative to protect our planet for future generations…
What Are The Different Methods To Measure, Report & Assure Sustainability In Business?
According to the ICAEW’s ‘Sustainability: The Role Of Accountants’ report (2004), accountants have 3 critical roles in promoting sustainability. These are measuring related items, reporting them and providing assurance to stakeholders as regards to these metrics. These duties generally fall under the terms “social and environmental reporting” and “sustainability reporting”. In essence, both terms convey an integration of the financial or economic sustainability of a company, with its social and environmental sustainability.
A highly successful and popular way to record is through the “sustainable cost” calculation method, the calculation originating from the financial accounting concept of capital maintenance. This concept proposes that profit is the excess income after the company’s capital has been maintained. Likewise, a sustainable organisation is one which maintains man-made, renewable and critical natural capital over an accounting period. The sustainable cost is then the figure that would need to be spent, based on the company’s operations, to be sustainable. This amount is then deducted from the company’s profit to provide a measure of that takes into account the externalities produced by the company. Many businesses choose to go through this method by appointing a Head of Corporate Social Responsibility (CSR) who tally up all expenses that exert some level of carbon (transport, printing, electricity etc.) and then use that budget figure to balance their sustainability efforts through activities such as planting trees, cycle to work schemes, or funding to local environmental projects. This is particularly beneficial for businesses who due to the nature of their specific industry are unable to commit to a neutral carbon footprint.
Another method which has also increased in popularity over the past few years is the Environmental Profit and Loss (EP&L) account. This is a unique document which goes hand in hand with a business’s Statement of Profit or Loss. Basically, it deducts figurative costs from revenues that reflect the company’s effect on the environment, alongside financial costs and revenues, to arrive either at an environmental profit or loss. If a profit was to be disclosed it would be evidence that environmental revenues, such as cost saving and energy saving procedures taken by the business, exceed negative externalities to the environment.
Apart from being used as a reporting tool, an EP&L can also be used a practical forecasting tool or even a metric for managerial/directorial performance, by providing information to measure environmental processes which would then influence decision-making in relation to sustainability. For example, if a company were looking to introduce a company-wide EV (Electric Vehicle) scheme, it would calculate costs associated with the depletion of natural supplies and costs (i.e fuel, road tax, ULEZ etc) relative to the previous model of diesel/petrol vehicles. This would then in turn help inform, engage, and promote sustainable development through an organisation using analytics and statistics.
A Greener, Reliable Future On The Horizon?
Whilst it is incredibly encouraging to see a large number of businesses and organisations prioritising sustainability as a key facet of their operations, there are of course question marks related to the measuring and reporting of environmental endeavours. When it comes to the measuring and reporting, this is done voluntarily and isn’t regulated from a legal or governmental entity, meaning that figures and achievements can be manipulated to show things which just aren’t true or correct. Moreover, there is very little consistency and comparability in the manner in which firms report their sustainability performance, therefore it becomes increasingly difficult to see just how green and sustainable a business is, to determine and influence key decision and policy making.
Obviously, it’s positive to see an increasing number of firms take the unparalleled steps in promoting and achieving sustainability. However, as stated with many experts predicting this decade as make or break in terms of reversing climate change, more legislation and regulation is needed to tackle environmentalism on a mass scale in order to exact real change both nationally and globally.
We hope this has outlined to you the different methods in measuring and reporting sustainability within a business. If you require any further information on sustainability, or anything accounting related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.