Kermit the Accountant: It's Not Easy Being Green

Whenever we at CFO Innovation write about environmental and sustainability issues and the emerging green economy, readership numbers are often not that large. Are finance professionals not interested at all in these issues?
 
They are interested, insists Gordon Hewitt, Sustainability Advisor, Association of Chartered Certified Accountants (ACCA). He cited an ACCA survey that found 81% of accountants feel strongly that the private sector had a responsibility to protect the natural environment.
 
“It’s clear that accountants are aware of these issues and consider them important,” he says. “But at the same time, 75% of the accountants said that they felt they needed training and guidance on natural capital to help them better manage the associated risks and opportunities.”
 
Hewitt spoke to CFO Innovation’s Pearl Liu about the latest developments in green economy initiatives and the impact on finance functions. Excerpts:
 
I’ve always wondered how these green economy issues will play with finance professionals, who have been trained to quantify everything. They tend to focus on numbers.
We would argue that they need to broaden their considerations to bring into account environmental and social factors. One thing you hear regularly from sustainability professionals is [the mantra]: ‘What gets measured gets managed.’ Whilst things like ecosystem services and biodiversity don’t have a price per se, they do have a value – the value that companies will be receiving in terms of water from the environment, for example.
 
Finance professionals need to start considering ways to measure that kind of value so they can manage those benefits. Certainly numbers are important, but we need to move away from purely just looking at prices to broader metrics to measure a company’s impact and dependencies on natural capital.
 
Are there new skills that finance people need to acquire?
We did a survey looking at our members’ attitudes, and we found that 81% of the accountants that we surveyed felt strongly that the private sector had a responsibility to protect the natural environment. So it’s clear that accountants are aware of these issues and consider them important.
 
But at the same time, 75% of the accountants said that they felt they needed training and guidance on natural capital to help them better manage the associated risks and opportunities. It’s, again, clear that they need some support and guidance in terms of how they should address the issue.
 
But I think, inherently, the work accountants do can be easily applied to do these topics. Essentially it’s collecting data, reporting on company operations and helping business leaders, CFOs and CEOs, better manage their operations. At the moment, most accountants only do that through the financial lens. But if you apply the principles of accounting to, let’s say ,the environment or to society, you can get the same results. I think the skill sets of accountants are incredibly strong.
 
A shift to green economy won’t happen without the skills of accountants. I’m a bit biased, I’m an accountant myself, and so I’m going to say that. I do feel passionately about that. I think it’s really important. I think there’s a great opportunity for the accounting profession there.
 
Is it true, though, that finance typically regards sustainability issues and programmes primarily as a cost or a constraint to financial performance?
Any kind of sustainability initiative is going to cost that business. I do think this can be a misguided view, and actually certain sustainability programmes can, in the longer term, save companies money.
 
It’s safe to say that when you look at greenhouse gases, you can pretty much translate that into energy-use, which can again be easily translated into energy cost. You’ll need to do a full-on energy audit when you go through the process of reporting on your greenhouse gas emissions. Through that process, you’ll be able to spot areas of inefficiency. When you reduce your greenhouse gases, you reduce your energy use, which benefits your bottom line.
 
One thing we need to consider here is that CFOs, when they are looking at any new products, will have to look at the payback period of an investment. And often, the payback period for any kind of sustainability programme may be slightly longer than a traditional type of investment. So maybe it’s a case of CFOs slightly broadening their horizons to take into account the longer term benefits that they get from addressing sustainability.
 
Are there any examples of companies that are approaching this issue in the correct way, in your opinion?
The best example that I’ve come across relates to the [German sports lifestyle company] Puma. In 2011, they released an environmental profit & loss statement. It seems they looked at their entire supply chain and tried to consider the cost of all their externalities, such as the value of their greenhouse gas emissions, water use, land-use change, and so on. They managed to value that impact at €145 million.
 
That’s not an amount that they pay per year, because we’re talking about environmental impact down their supply chain, but it’s something which is costing the economy. It gives them a sort of target to focus on sustainability programs. The programme is so successful that the parent company, PPR, has started using this methodology across their brands now.
 
Let’s focus on Asia. Are there any specific regulations, for example taxes or subsidies, to promote the green economy in the region?
Yes, certainly. The first one I’d like to mention is from China’s current five-year national plan [2011-2015]. Within that, there’s a lot of metrics around energy. I think the aim is to reduce energy intensity by 16% and they’re looking to reduce carbon intensity by 17%. Water scarcity is the biggest problem in China and they’re looking to reduce the water intensity of their economic output by about 30% in this current five-year period.
 
In terms of some subsidies, another great example out of Asia is South Korea. Post-financial crisis, many countries have created stimulus packages to get their economy back on track. The South Korean government has spent 80% of its post-financial crisis recovery package on environmental, low-carbon projects. They’ve got really ambitious targets; they’re aiming to reduce emissions by 30% by 2020.
 
In Indonesia in 2011, the government passed a law that banned the conversion of peat land and primary forests for two years. This was a project that they put into place with the Norwegian government, and it’s protecting 64 million hectares of trees from logging. Land-use change is a big source of carbon emissions for Indonesia, and obviously the planet relies on strong forest ecosystems, of which Indonesia has a lot.
 
Those are three examples I’ve come across. I think there’ll certainly be more. Looking at Asia, there are huge challenges. There’s a lot of huge demographic change taking place, a lot of population growth, and wealthier populations trying to maintain their consumption habits.
 
But there’s also a lot opportunities to green economic thinking put into place. I think it’s really encouraging to see from these three countries the strong messages coming from government.
 
I assume that the issues around the green economy will affect some companies and industries more seriously than others.
Definitely. I think different industries have different impacts and dependencies on the natural world. One telling example is logistics. Clearly logistics involves a lot moving things around the world, so rising fuel prices will have an impact on the costs associated with logistics operations.
At the same time, logistics companies have relatively high carbon emissions. If there is strong legislation around carbon emissions, or let’s say, a carbon tax is imposed, that can have a big impact on a logistics company. So they need to start thinking about how they can reduce their impact [on the environment] to reduce their risks and costs in the long run.
 
Another good example is this mining company operating in Kalimantan in Indonesia. That mining operation was surrounded by forests, and in order to remove the ore that they mined, they have to transport [the mined material] downriver. But the river has been silted up because of deforestation. By reforesting, the river is returned to a healthier state, it flows a lot better, and the company is able take away their product and get it to market.
 
And if you have company assets near the sea, whose waters might rise in the future, your enterprise obviously will be affected, regardless of whether you are in logistics and mining or not.
I think you touched upon a really great point here, which to me is the whole argument. Accountants have to start considering these things. You talk about sea level rise, factories in operation in low-lying areas. Once you consider the amount of infrastructure around ports, around cities built in low-lying areas, the threat of climate change and sea level rise is huge. They have serious implications on the value of those assets.
 
I think the accounting profession has an important role to play. Accountants do have an accounting standard, called IAS 36, which relates to the impairment of assets. So, for instance, an accountant should [periodically] conduct an impairment review. They look at the assets listed on that balance sheet and have to think about whether or not the current value of that asset is still fair.
 
At the moment, there’s no reference to environmental issues within that standard. I’d really like to see that take place because I think the point you raise around sea level rise is important.
 
In South America, a Chilean company has a mine operating at a very high altitude. And in order to get their ore down from the mine site, they have to use a lot of water. So they created slurry, which they piped down. Due to climate change, however, they’re now facing water scarcity issues. In the long run, these will make mining operations not economically viable. They’ll have to have to write down [the mining assets].
 
What’s happening with integrated reporting?
Integrated reporting is a relatively new development in the corporate reporting space. Sustainability reporting is a lot more established; it has been happening, in one shape or form, probably [for] around 20 years.
 
One of the issues with sustainability reporting is that companies will produce an annual report which will have all the financial information, and they’ll produce a sustainability report which would be totally separate. Actually a lot of stakeholders, especially investors, would like to see the financial data and the sustainability data in one place, so they get a full, holistic view of all the risk and material issues facing the company.
 
Financial reporting is very backward-looking. The profit and loss statement looks at the company’s performance over the previous year, while the balance sheet is a snapshot of the company’s assets and liabilities. There’s not much about the future outlook about that business.
 
When an auditor goes and does an audit of the company, they need to do a going-concern review. They need to assess whether or not the company is able to continue for one year after the balance sheet date. That’s not a very long time. So the reports don’t give investors and other stakeholders a clear view of all the issues facing a business, and also a sort of forward-looking analysis of what are those issues and how are they going to impact the company in this future.
 
So what integrated reporting is trying to do is pull together all of those issues in one place and have a much more forward-looking view of those issues and how the company is set to deal with them.
 
The International Integrated Reporting Council is the one that are really driving this whole initiative. They haven’t as yet produced their integrated reporting framework. So it’s very interesting – this year they’re going to be launching, I think in December 2013. So everyone is waiting with bated breath; everyone is expecting good things out of it. We’ll see what happens.
 
What advice do you have for companies and finance professionals in Asia with regards to green economy and sustainability issues.
I think the best tip for Asian companies is just to get going. Accountants need to start broadening their assessments to see [what are] the impacts on their company. Companies outside of Asia that do it really well have been doing it for 20 years. So it’s very much a journey.
 
You can’t expect to produce a perfect sustainability report in your first year. But the key point is to start on the journey; to start to assess a company’s sustainability performance and then start managing. It’s going to take a while. It’ll take years to implement all the right policies and systems, but the point is just to start. I think that will be my tip.
 

I had a very interesting time when I came up to Asia last year because I talked with a number of CFOs and they were very engaged, they could see the issues and they wanted to know how they can better manage them. I think there’s certainly the will in Asia. We need to see that converted into action. I think that could only be a good thing. 

 

Photo credit: Shutterstock

 

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