Climate Change and Management Accountants

Climate change poses a major risk to the global economy – possibly shrinking its output by 20%, according to the 2006 Stern Review on the Economics of Climate Change prepared for the British government. Given the likely effects on habitat, resource availability and consumption, every organisation will be affected.

Tackling climate change is not just a question of ‘doing the right thing’. Businesses have a duty to their customers, employees and crucially, their shareholders, to deliver long-term value and to manage risk. In other words, sustainability has always been a fundamental strategic goal.
David Smith, CEO of Jaguar Land Rover, says: ‘Sustainability is now a core consideration from the board to the shop floor. Our finance business partners play a pivotal role not only integrating sustainability issues into our long-term decision making process, but in the equally critical part they play in ensuring the organisation recognises in a timely way, the risks and opportunities presented by climate change in the day to day course of running the business.’
Managing and mitigating climate change must be embedded in every company’s decision making. When it comes to capital expenditure and investment decisions, for example, it is vital that enterprises apply the principles of sustainable procurement and consider long-term implications – financial, environmental and social – rather than just short-term costs.
Ad Hoc Basis
Management accountants have a key role to play in driving sustainable strategic and operational decisions. But CIMA’s research shows that even where finance teams are engaged in climate change related activities, it has often been on an ad hoc basis.
This must change. Management accountants are equipped with tools and techniques that can ensure businesses understand the scale of the problem, come up with viable solutions and ensure they are properly implemented. They have a pivotal role in providing business intelligence to support strategy and influence decision making.
Without the rigour and commercial acumen of the finance function, it may prove impossible to truly embed sustainability into normal business life. Failure for management accountants to get involved now, when key decisions are being taken in areas like carbon trading and compliance with new climate change related regulations, could result in far higher costs, lost opportunities or reduced competitiveness.

CIMA and The Prince’s Accounting for Sustainability Project (A4S), an initiative of Britain’s Prince Charles, have conducted an international survey of almost 900 finance and sustainability professionals. CIMA also carried out in-depth interviews with experts in leading companies. This has helped us understand best practice in this area as well as identify opportunities for the management accountant to become more involved.

This report makes a compelling case for every organisation to ensure that its finance team is at the heart of its climate-change strategy, whether that is complying with new regulations, mitigating its environmental impact or adapting to new circumstances. Senior decision makers should understand the value that management accountants bring to the issue; accountants themselves should be clear about how to make the case for their involvement and what skills they can bring to bear.
This report covers four main topics:
  • Businesses and climate change – how business is affected and what it needs to do
  • Barriers to change – and how a financial perspective helps overcome them
  • The management accountant’s role – skills, tools and techniques that can be applied to help companies mitigate and adapt to climate change
  • Best practice – how organisations can use management accountants to embed a rigorous approach to climate change into strategic and operational decisions

Business Imperative

Research has shown that one of the most important reasons companies fail is that they ‘miss colossal external changes’.That’s a definition that can easily be applied to climate change. Like any risk, however, there are upsides and downsides.
Research carried out by the Carbon Trust and McKinsey in 2008 suggested that tackling climate change could create opportunities for a company to increase its value by up to 80%, if it is well positioned and proactive. But up to 65% of value may be destroyed if the company is poorly positioned or a laggard on climate change.
There is stiff competition to secure funding for projects, and demonstrating a compelling return on investment in climate change management can be difficult. Strategic, long-term goals also play an important part in ensuring continued commitment to the longer term sustainability journey.
Management accountants are well versed in risk management and have the skills and techniques to support long-term strategic decision making, so it was no surprise that 80% of the respondents to our survey think finance professionals have a key role to play here.
Although 56% of our respondents feel their organisation is committed to mitigating climate change and a third believe that climate change is integrated within the overall business strategy of their organisation, 63% agree that their organisation can do ‘a lot more’ to reduce its environmental impact.
Only 38% say their business is well positioned to deal with the impact of climate change. Worse, one in five respondents say, climate change is not on their organisation’s agenda at all. Just 58% of respondents feel climate change is of central importance to their organisation.
That perceived level of importance makes a huge difference, and citing sustainability as a strategic goal also overcomes some of the financial-return questions on climate change management.
‘There will always be projects that can deliver a better return,’ says Richard Shore, Controller Global Marketing and Sales at Jaguar Land Rover. ‘But our commitment to deliver on long-term targets embedded into our strategic goals is dependent on such projects, so they will get the support and funding.
Organisations where climate change is a strategic priority are a third more likely to have implemented initiatives for mitigating or adapting to it than those without a strategic focus (see chart below).
Click on chart to enlarge

But there remain key questions, even for those organisations that are taking action and adopting a strategic context for climate change, particularly in highly competitive markets or periods of economic uncertainty when funds are scarce. What are they actually doing and why are they doing it?
Many organisations are looking only at the compliance issues with respect to climate change reporting on and gaining assurance over historic activities in order to comply with regulations, risk management and customer expectations.
But managing the risks of climate change and exploiting its opportunities also requires a focus on performance. It’s not just about measuring environmental impact or setting up a paper-recycling initiative in the office; it’s also about fundamental changes to operational activities to deliver real and sustainable change.
That more radical approach demands that climate change action has senior sponsorship. And expert and authoritative balancing of long-term value against short-term costs can create sustainable value for both shareholders and stakeholders.As an example, Jaguar Land Rover’s sustainability governance structure can be viewed here:
External Forces
Detailed (and increasingly financially modelled) evaluation of the risks and opportunities around climate change should compel organisations to act, especially in a more structured and strategic way. External forces are also pushing climate change up the business agenda.
New regulations, driven by co-ordinated legislative efforts on a global scale, are perhaps the most visible factor. Costs, such as changes to the tax regime or carbon trading, will become more tangibleand more material to profitability. That massively increases the need for vital business intelligence and demands the use of management accounting tools.
Investor expectations have also changed. Already, there are demands for clearer and more reliable reporting of the risks and costs around climate change, reporting that management accountants are uniquely placed to provide.
Indeed, one company we visited had been told by one of their institutional investors, ‘We have a standard policy of not supporting the reappointment of the Board unless companies are doing certain things [in the sustainability realm].
Furthermore, the Goldman Sachs Sustain report, released in May 2009, shows there is in carbon-intensive industries a correlation between carbon efficiency and valuation multiples, illustrating the increasing influence of ‘green credentials’on a company’s market capitalisation. ‘Shareholders want to know what’s being done,’ says Chris Harrop, Marketing Director at Marshalls plc, a British manufacturer of hard landscaping products. ‘A third of our shareholders are signed up to view Carbon Disclosure Project material.’
Employees and customers may not be so ruthless in their demands for detailed evaluation, but they still want to know that there is commitment and rigour behind climate-change activity. ‘It is fruitless trying to implement strategies if people are not aware of the reason why, and the benefit to be obtained, from these strategies,’ says one respondent to the CIMA survey. ‘Finance should first be allocated to education of the masses and then the overall buy-in will manifest itself with the desired results.’

This kind of finance involvement is demonstrated in the Punch Taverns case study, which can be read in full at

Global economics itself is a major driver for applying accounting to climate change. Spiralling utility costs are a factor, but the economic downturn and global competition has created further demands for operating efficiencies.
Aside from fuel savings, businesses are now examining investment in new technologies, plant and equipment requiring rigorous financial and strategic appraisal provided by management accountants. One example of the benefits from investing in steam valve technology is demonstrated by Compass’ management accounting team to their NHS Trust client (see case study at
The 36% of respondents who have cut back on environmental programmes during the downturn may be missing out on opportunities for long-term cost savings from projects ostensibly designed to further a sustainability strategy.
About the Author
Irene Teng is Regional Director based in CIMA’s Kuala Lumpur office.
She leads CIMA's strategy across ASEAN and Australasia, including student growth and related alliances and partnerships.
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