CPA Australia, a 120,000-strong professional accounting body with chapters across Asia and the rest of the world, recently issued its first sustainability report. “We understand we’re the first finance professional body to produce one,” says CEO Alex Malley. “Before we tell people what they should do, we believe we should do it first.”
Like many observers, Malley probably wishes the Copenhagen Conference had resulted in a more substantial climate-change agreement. "But it's our view that business can't necessarily wait for governments to come to final conclusions," he says. "Governments have a great capacity to bring business into some focus, but in the end, the execution is up to busines. It's about resource management. I don't know why any business in the world has to wait for government policy."
Malley spoke to CFO Innovation’s Cesar Bacani about measuring carbon footprints, carbon emissions trading and how these will affect the job of the CFO in the near future.
With world leaders now in Copenhagen discussing ways to mitigate climate change, every business will eventually be affected. How will the job of the CFO change?
The CFO is faced with three big issues. The first is to influence the board to start considering sustainability as a culture, not a marketing instrument. One should not underestimate the challenge in that role. The CFO has to influence change in the organisation, starting with the board, and that influence has to be about long-term profitable gains from this behaviour [from cost reduction and possible selling of carbon credits] and also a better retention of staff, because the evidence is that if staff believes in the business and its behaviour, they’re more likely to stay.
Number two is then to create an operating culture around the principles of what it means to be a sustainable organisation. The other word for that is continuous improvement. As an example, when we [at CPA Australia] produced last year’s annual report, we wrote to the members and said we’re going to produce a report online. They needed to write to us if they wanted it in paper, so we actually made it harder for them to get the paper. We had an unprecedented amount of paper savings. We then told our members, we saved this much oil, this much paper … so we actually quantified it.
Once you create the culture, you then get to step three, which is education. Through that process, we expect a carbon footprint and then we expect a whole new dimension of how we do business. The thing about sustainability is that people will pick you up on it. If you say you’re sustainable and then you hold a conference where everything’s in paper, they’ll come and tell you. This is a tough game, because when you do it, you believe it, you don’t realise how much of your behaviour is actually unsustainable.
Are you seeing CFOs being open to these ideas?
I think it’s fair to say that CFOs see their jobs doubling overnight. But they have a very serious responsibility to manage resources strategically. They can’t avoid this because that’s their training, that’s their skill and that’s their leadership opportunity. So if I can speak on their behalf, I think they’re horrified by the increased amount of work. But I think it’s their responsibility. It’s part of their portfolio.
The challenge for the CFO in the future is going to be: should we use bio-fuels or should we stay with fossil fuel? 'I know fossil fuel is running out, I know bio fuel might suit us, so I’m going to have to manage the analysis of whether it will be cheaper for us to do bio-fuel, or in some countries, uranium, because that’s a resource decision. It’s a cost decision.'
My job is not just furniture, equipment, buildings, goodwill. My job is to make sure we’re here in 10 years, in 20 years. And if I know the world is running out of fuel, then I need to start a discussion in the organisation about getting expert opinion on what are the options that are available to me. That’s going to determine who the really top organisations are going to be. They are the ones looking at sustainability.
The CFO is a key player in this?
Absolutely. Who else can it be? No doubt there will be a market created for environmental auditors and experts. But in the end it will be the CFO who will be the strategic leader. Even if there is an expert in the environmental impact of bio-fuels, the CFO will have to engage that knowledge and think about it and analyse it for their own organisation.
I think what will happen is the CFO’s role will become more strategic, and there’ll be more experts below the CFO, which has been happening in the last 20 years. There was once a time when the CFO did everything. Now as the markets and businesses grow, CFOs move further north and people come in behind them. Many CFOs haven’t done accounting for 20 years.
Not one individual person can manage this across all the countries. You need someone who leads the function and people underneath who have specialty skills. The CFO is going to have to select different skills underneath that.
THE GREEN ACCOUNTANT
Will CPAs in the future actually be measuring carbon footprint as well as the sustainability of their companies?
When you talk about emissions trading, that requires a business skill. It requires a measurement skill. When you talk about reporting information, that requires emissions reporting skill. The challenge for the profession is we need to widen our own role.
The community needs to know that credible analysts, measurers and reporters are actually reporting this information. So what we at CPA Australia are doing is that we’re actually encouraging wider pathways into our membership. We think there are many young people who are interested in environment and sustainability, who don’t necessarily want to be an accountant. We believe we can bring them into our profession. We’re actually widening the net so that we can encourage broader minded principals into our professional body.
You are training CPAs in this concept?
Our whole strategic plan is based on strategic leadership skills, international business capabilities and innovation. We’re training people in technical skills first, that’s our foundation, and then the CPA programme has strategic leadership programmes, international programmes so that we’re actually training people for what’s called the global market. Whereas even if we talk about a global market, most people still think about the small market they live in.
We have a whole series of education programmes on sustainability, matters of climate change, of resource management, all the areas that we’ve been talking about today, we have a whole series of CPD [continuing professional development] programmes and we also embed some of these issues in our CPA programme.
We [at CPA Australia] are promoting very strongly equal importance of financial and non-financial reporting. We’ve traditionally accounted for buildings. We now realise that much of the assets in the market are intangible. And so if I’m a paper manufacturer, I have to be accountable not just for the equipment I use, but I have to be accountable to my local community, I have to be accountable to the market, about my corporate behaviour, about my sustainable behaviour. So we are very encouraging of companies to enlist experts to do a carbon footprint in their accounting.
MEASURING CARBON FOOTPRINTS
Why are you so focused on measuring the company’s carbon footprint?
When you know your carbon footprint, that’s when it starts to [change company] behaviour. I can then say to all the departments in my company: ‘You’re in charge of printing, your emission last year was this, fix that up, make it better. I don’t want you to produce any less, I just want you to produce less carbon.’ That person will now think: ‘Not only is my pay rise dependent on my financial performance, but my pay rise is based on how little carbon I can produce.’
The really important issue is that once you’ve taken a carbon footprint, once you actually commit to that process, the market will say to you, what will you do next year? If that measure doesn’t keep improving or you don’t show some sign of improvement, you’re in trouble. I think that’s holding back companies at the moment, because they know once they commit to a carbon footprint, it’s a base and they can’t really walk away.
Is there any empirical evidence that a company with a smaller carbon footprint does financially better?
I’ve read research from various sources, academics, finance houses and from companies, a range of organisations, that say that there is increasing evidence that an efficient carbon managed business is also more profitable. Intuitively, that makes sense. Because if you are in charge of printing, for example, and you produce the same amount of product with less emissions, then you must be using in part less energy.
Some larger companies in Australia have done a carbon footprint. It created a whole series of KPIs [key performance indicators] for their managers. And there is now evidence of them having voluntary monitors among the staff who really believe in the carbon footprint initiative. They’re actually now creating committees and departments that monitor carbon emission and behaviours.
So every night someone volunteers to stay back and turn all the computers off, because they have worked out that they save so much energy [doing so]. What it does is create different incentives and that is showing in research showing that people [in these companies] are staying for longer. Sustainability gives a lot of people a reason to stay in the company.
Who measures a company’s carbon footprint and how do we know the numbers are accurate and credible?
There are a lot of private entities that are starting to become specialists in this area. What is important is that companies do some research about what a carbon footprint means, who provides [the service to measure it], what are their capabilities. Companies should be very careful about selecting the right provider. There’s a bit of due diligence required. To get an objective assistance is the key. It should be an entity you have no connection with. It should be regarded as an expert in the field.
Is a focus on sustainability providing companies with a competitive advantage against those that are not doing the same thing?
If my competitor does a carbon footprint and I don’t, and if all research studies say that more and more investors would like to see what I’m doing with the environment, then I’m going to be forced perhaps to do it. That’s a better reason for doing it than just [complying with] government regulations. If you allow people to compete with behaviour and compete with reporting, you’re likely to get far more positive results than if you say, 'you must do this.'
ISSUE OF REGULATIONS
Do you think governments should require companies to measure and report their carbon footprint?
At best we should have a framework that says every organisation should measure these aspects in their business and perhaps have some generic principles.
How about a narrower requirement, such as requiring that a company’s carbon footprint be reported as part of the annual report?
I think the way the Australian government is going is that they probably are going to do something like that. They’re saying, let’s start with some basic targets. Let’s start with some minimum behaviours. That’s probably a positive way. But I think what should be encouraged is that the annual report should become competitive about reporting good behaviour instead of reporting good news, because the report should be a result of behaviour, not a marketing document.
How about making it part of an IFRS standard?
I would hope that anything coming through on a standards basis would have appropriate mechanisms to air some of the principles of that before it becomes a standard. No standard should be formulated until it has been properly discussed through draft reports, through discussions papers.
But in the end there has to be a combination of incentive, framework and some element of standard/regulation. That should almost be just an overview, not you will do these things. If we commit to a narrow path now, we may well find that most of our energies is going to be spent correcting the original narrow view and costing business even more money. We don’t want to frighten them; we want to encourage them.
Aside from carbon footprint, is there any other measurement of sustainability?
At the moment if you add other new measures you might complicate things. Let’s start with something that everyone is starting to understand.
What about the cap-and-trade scheme for carbon emissions? The Australian Senate has rejected the government proposal, but I imagine some kind of deal will be hammered out going forward.
We’re trying to get a sense of how this is going to work. Is it going to be an incentive to produce less or is it going to be a penalty to producing more [carbon]? What’s the philosophy behind this trading system? What we are advising the community and our members and organisation is that we need to start preparing. We need to start preparing for expertise in this area, we need to start due diligence on what other markets are doing.
At the moment, [the proposed Australian scheme covers] about 700 of the top emitters in the country. We’re encouraging that this should be a more broader reach, because we believe that limiting this behaviour to just one segment is losing an opportunity to really broaden the cultural change. But we believe [broadening the coverage] is going to require more incentives and perhaps some tax breaks. We don’t want to add a burden to small and medium enterprises.
Do you think this should be an Australia-only trading system or should companies in Australia be allowed to buy carbon credits outside the country to offset carbon emissions in Australia?
Our view is that for it to be relevant, [an emissions trading program] needs to have international perspective. If an enterprise from Asia comes to Australia, there’s got to be incentives for them to be able to trade between what they’re doing in Asia with what they’re doing in Australia.
The trouble is, you can’t semi-control a free market. That’s when it gets complicated. So if you’re creating a market in a global economy, it’s somewhat implausible to have a finite market within a global market. So you need to have international capabilities.
We’re very concerned to make sure that no Australian business is penalised from competing internationally because the trading system is only in Australia. We’re equally concerned that companies from around the world are comfortable to come to Australia because they can offset their emissions with other organisations. If I am looking at Australia but need to pay a high price for doing business there, I don’t want to go.
Are there any lessons from prototype emissions trading in Europe and Japan?
I think one of the lessons is that effectively emissions trading creates normal business behaviour. That means that people look for ways to cut costs. In the case of emissions trading they look for ways to cut emissions. It’s creating the behaviour that we want.
Those companies that can reduce emissions quite dramatically because of the nature of their business are in a position to make money out of emissions trading. Other companies that can’t cut as much as quickly are going to go over the limit [prescribed by governments]. That’s going to cost them money [in terms of penalties], so they’re going to try to buy [carbon offsets from other companies], and that’s creating a market.
Is that good or bad?
The good thing is, with emissions trading, the cost is not so much the dollars; the cost is the environment and [emissions trading] is trying to minimise that. So that’s a positive.
But companies also have responsibilities to their shareholders to maximise investments. How does that square with minimising the cost to the environment?
You have two major responsibilities to the shareholders. One is proper results. The second one, which few are talking about at the moment, is to prove to them that you’re going to be still in business in ten years’ time.
I believe that in the future, as this market becomes more defined, you’re going to have to, perhaps every five years, buy a license from the government to continue your business. That’s where I see this going. Because resources are so limited, if you can’t prove minimum sustainability performance, I’m talking 10 to 20 years away, then you’re going to have to, every five years, re-sign a license to continue. And that’s going to be a very different world.