FSN: Accounting for Sustainability versus Profit

Accounting for Sustainability versus Profit – are they opposing forces?

14th January 2008
An eagerly awaited final report, driven by the Prince of Wales's “Accounting for Sustainability Project” seeks to demystify the issue of sustainability, embed best practice and recommend a reporting framework that will allow businesses to engage more effectively in a topic that is fast becoming the major concern of the twenty first century. The Project, which commenced in 2006 has attracted significant interest from industry which the Price of Wales says illustrates that while many organisations are aware of the need to take sustainability into account, “they do not have the methodology or tools to enable them to do so”. Others may argue that business leaders are not incentivised to take sustainability into account because these initiatives are often at odds with a profit motive. However, as Gary Simon , FSN's managing editor discovers, the mere act of reporting environmental performance alongside financial metrics shows that enhancing business performance and environmental performance are far from incompatible objectives.

Whether you are a skeptic or believer in relation to climate change, environmental damage and biodiversity, most of us can subscribe to the notion that the world is not blessed with infinite resources. The majority of us acknowledge a duty to preserve rather than squander resources, such as water, clean air, minerals and fossil fuels for future generations. Put simply, we are living on capital reserves whilst building an ecological debt we cannot repay.

It is a cost that traditional accounting systems cannot measure. The short term profit motive, the need to boost share prices and global accounting standards are seemingly completely at odds with the need to preserve resources for the future. Whilst conventional historic cost accounting recognises annual expenditure and quantifiable liabilities there is little recognition of the environmental cost both now and in the future of our business activities. It is a free ride with later generations picking up the tab.

So how do you get sustainability into the conscience of a business and its employees? And once there, how does one measure and report progress? These are the issues which the final report of the Accounting for Sustainability Project tries to answer. (Whilst sustainability covers a broad set of employee, social and environmental matters the report concentrates on environmental issues.)

The Project's recommendations tackle these issues in two parts. Firstly, it provides guidance to embed sustainability into day-to-day processes (including a web-based, decision-making tool) and examples of good practice drawn from the public and private sectors. Secondly, a “Connected Reporting Framework” is proposed to encourage and facilitate clear, concise and comparable sustainability reporting. This framework is also designed to ensure that broader and longer-term sustainability considerations are integrated and connected with traditional accounting measurements.

The first part of the report “Embedding Sustainability” is probably the least exciting and innovative. Take out the word “sustainability” from the 10 key pointers to embedding best practice and you are left with fairly bland statements applicable to almost any strategic initiative, for example, appoint “Champions to promote [sustainability] and celebrate success”, “Extensive and effective [sustainability] training” and “Including [sustainability] targets and objectives in performance appraisal”. However, on the plus side the report at least elevates the issue of sustainability to where it belongs i.e. at the strategic level. For example, unless environmental issues are interleaved with strategy and relevant KPIs' are developed, monitored and reported then environmental performance remains a vague and unquantified ambition.

However, the continuation of this section, suggesting a “Sustainability Decision-making Methodology” makes more interesting reading. The objectives for the model are to ensure, when decisions about products and services are made, that sustainability factors are taken into account alongside more conventional factors, and in a way that enables the financial interrelationship between the two to be apparent. In order to achieve this the Project has devised a process of reviewing the whole product or service range, analysing the life-cycle of particular products, followed by costing all the various options to reach a decision as to how the sustainability performance of the particular product or service can be improved.

It is this product and service level review that seems to be at the core of discovering real impacts on the environment and making the exercise of sustainability meaningful and measurable – a theme continued in the second part of the report which considers the “Connected Reporting Framework”. This emphasises the link between sustainability issues and the financial performance of the organisation – something that is illustrated to good effect in the case studies of organisations that have piloted the approach.

Aviva, the financial service organisation, is a good example. Under “Resource Usage” it reports, “The operating cost of water usage was £670,000 in 2006 (2005: £756,000), (2004: £956,000)” and the “Total cost of building-related energy in 2006 was £19.4 million (2005:£25.2 million)”. Reporting on sustainability alongside financial measures is focusing minds – at least in Aviva on further measures that can be taken. To reduce its carbon footprint in 2007/08 Aviva is installing Telepresence systems in six locations worldwide to reduce the amount of business travel, setting a reduction target of 10 percent.

Carillion plc has also implemented an organisation-wide framework on sustainability. The new John Radcliffe Hospital, a Public Private Partnership project in which Carillion is an equity investor as well as providing design, construction, maintenance and ongoing facilities management services, is an example of how organisation-wide KPIs can be translated into action. The energy usage for the John Radcliffe building was originally estimated at 56 giga-joules per 100 cubic metres per year. Through the recruitment of a dedicated energy manager on site, refinement of the on-site energy management systems and working closely with the Oxford John Radcliffe NHS Trust, the site is now reading 48 giga-joules. A waste management company was employed to segregate waste, this resulted in 36 tonnes (90%) of the average monthly waste being diverted from landfill. Ceiling tiles were selected that consisted of sustainable recycled materials of 30% post-industrial waste, this also resulted in financial savings of £60,000. Finally, Linoleum was used for 60% of the flooring, which is manufactured from renewable raw materials and is biodegradable. Selecting this product increased the replacement life cycle by 10 years compared to the use of manmade vinyl.

The examples strongly demonstrate that sustainability and good business (profits) are not mutually exclusive. But sustainability has to become a part of organisational thinking when operational decisions on products and services are made. Often it is not more costly – in fact the reverse. It is just a matter of asking could this product be developed with less energy, fewer pollutants and less packaging. Many times the answer is “Yes” but orgnanisations simply do not ask the question.

So will this report change behavior? Many reports have been written about sustainability by governments, NGOs and standard setters but most leave the readers confused. This report has some ‘meat' you can get your teeth into supported by some practical examples. It is not going to transform the world but it is encouraging change. Many of the organisations that contributed to the repot are trialing its principles. It is not difficult to implement – it just needs leadership from senior management and a different way of thinking. Preferably soon!

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