Prince Charles and the green bean counters

Trying to account for sustainability, literally, may seem like an arduous task. Given that the exact costs and benefits of environmental initiatives are often unknown, quantifying sustainability is indeed difficult.

Yet, there is hope, as a relatively well-known public figure from across the pond has been trying to spearhead better integration of accounting and sustainability over the past decade.

In 2004, the heir to the British monarchy, Charles, Prince of Wales, established the Prince’s Accounting for Sustainability Project (A4S) as a part of the Prince of Wales’s Charitable Foundation.

“In stark financial terms, all the evidence demonstrates a simple fact: we are failing to run the global bank that we call our planet in a competent manner," Prince Charles himself declared during the Prince’s Accounting for Sustainability Forum in 2013. "We no longer just take a dividend each year; instead, for some time, we have been digging deep into our capital reserve.” 

Out of the group's efforts to hone tools and techniques that help elucidate connections between sustainability and finance has most recently grown a new series of guidelines created with the help of CFOs and Finance Officers from Unilever, Burberry, National Grid, Walmart EMEA, and Marks & Spencer.

The business leaders all belong to the A4S CFO Leadership Network, which was established in December 2013, to bring together financial officers from large European companies. Though they come from starkly different economic sectors, they're all looking to better understand the business case for sustainability. 

“In terms of why finance and sustainability — that’s a question we still get from CFOs and finance people that we worked with," Jessica Fries, executive chairman of the Prince’s Accounting for Sustainability Project, told GreenBiz. "That’s a concept that even ten years and people still don’t find obvious."

More specifically, the new guides delve into several potential areas of sustainability-related financial impacts: how companies should consider sustainability in capital investment appraisals; defining and integrating natural and social accounting; enhancing investor relations with sustainability; and how to account for newer trends in sustainability.

Incentivizing change

While handy guidelines can be regarded as a step in the right direction when it comes to fully accounting for sustainability, it is reasonable to question whether businesses have any incentive to actually make use of them.

Large, publicly-traded companies are under constant pressure from their shareholders to enhance shareholder value. Start talking sustainability and the notion of value can take on a more quixotic character — until you fully understand the financial risks, and potential financial rewards, in play.

Since sustainable initiatives are traditionally conceived of as philanthropic or societal goals, rather than toward a company’s bottom line, it may seem much harder to convey shareholder value. This challenge may be most evident in the U.S., which has no federally mandated carbon tax and some of the lowest energy taxes in the world.

“If you look at the capital expenditure guide that was published last year, and case studies around how companies have started to integrate carbon into capital expenditure decisions, I think that’s an easier place for companies to start because of the clear link between carbon energy and cost, ” Fries said. “You don’t necessarily need a carbon tax to start some of that thinking. Of course, that might only get you so far."

However, there does seem to be a momentum shift afoot, even in the United States, toward creating a set of accepted standards and engaging in discussions around accounting for sustainability, as evident by the work of groups like the Sustainability Accounting Standards Board, the International Integrated Reporting Council, the World Business Council for Sustainable Development and the Global Reporting Initiatives.

Since there has been little done in terms of external business policy and regulation in the U.S., why are companies embracing new sustainable accounting initiatives?

“There has definitely been a shift in the marketplace in terms of investor appetite for this type of information," said Kristen Sullivan, a partner at Deloitte and head of the Assurance and Compliance Services in the U.S. “We've seen in the U.S. marketplace the continued interest from advocacy groups, from activist shareholders who are really interested in these types of non-financial indicators and disclosures.”

One of those activist investors is BlackRock, which manages $4.3 trillion worth of assets and is the world’s largest asset manager. BlackRock executives have publicly stated that they analyze a company’s sustainability plan before investing in it.   

“In other areas you see investor response generally after a big incident has happened," Fries said. "So, I think a challenge for a lot of companies is how do you communicate some of the issues your taking on a proactive basis, rather than just responding after something happens."

Non-financial information

Since much of accounting for sustainability involves long-term objectives in fields that aren't always immediately tied to a company's core business, sustainability reporting falls outside of financial statements. Rather, sustainability initiatives will mainly be conveyed using non-financial performance measures, which presents challenges of its own.

One of the most important steps, according Deloitte's Sullivan, is conveying the importance and relevance of sustainability measures to stakeholders — a concept refered to in accounting as materiality.

“The one point I would like to reinforce… is really this whole concept of materiality... If sustainability reporting were to continue, and in terms of just report as much information as possible it certainly was not going to help close that information gap,” said Sullivan.

“In terms of that disconnect between what companies are reporting, what investors and others need, and no ability to kind of meet in the middle and translate information into decision useful context.”