Sustainability accounting applies the rigor and data-centric mindset of accounting to the nuanced and complex field of sustainability, helping businesses better comprehend their environmental and social impacts and be accountable to all of their stakeholders.
Financial Reporting Standards Board offers several frameworks and proposals, which many companies around the world follow. However, most focus on providing timely information for investors while sustainability requires long-term considerations.
Environmental Accounts
To be truly sustainable, a company must understand the environmental effects of its products and operations. One effective tool to help achieve this is an environmental profit and loss account – this accounting method measures environmental costs from product lifecycle.
Environmental risk assessments take into account the costs associated with environmental damage to a company’s bottom line and help identify areas for improvement. They compare current conditions with a predetermined baseline state.
GRI, OECD and UNCSD are among the many organizations that offer standards and frameworks to assist businesses transition towards sustainability accounting. They encourage companies to adopt this form of reporting as it increases transparency and accountability, strengthening relationships with investors, clients and employees while building trust within communities. If you would like more information on becoming a pioneer of sustainability accounting contact us immediately to speak with an Enrollment Counselor today.
Wealth-Based Accounts
Numerous organizations provide companies with services to aid them with creating sustainability reports. Examples of such organisations include the Global Reporting Initiative (GRI) and OECD.
Accounting of this sort enables businesses to measure the physical exchange between natural environment and economy, which allows them to assess its environmental impact as well as performance during its operations.
One popular approach is the sustainable cost approach, which calculates an income statement item that represents what would cost to keep the biosphere as it was at the start of reporting period.
Some companies have even set up dedicated finance departments dedicated to sustainability issues, employing chartered and management accountants with an entrepreneurial flair to develop new tools. They can act as business partners for their Chief Financial Officer (CFO), serving as liaisons between them and the chief sustainability officer in addition to serving as liaisons between both. Reports generated can serve as powerful decision-making tools.
Physical Flow Accounts
Businesses that track sustainability metrics reap numerous advantages from doing so: greater transparency, increased competitive advantage and stronger relationships with local communities. For instance, renewable energy companies could use KPIs such as carbon emissions reductions, number of homes they power and community development projects supported as indicators to show off the impact of their innovative practices to investors while drawing in partners who share similar values to attract partners who align themselves with them.
The International Financial Reporting Standards (IFRS) Foundation has instituted a framework for sustainability reporting known as the Sustainability Accounting Standards Board (SASB), to aid companies with communicating ESG factors that could impede long-term value creation and providing investors with all of the information required for making sound investment decisions.
Yet many reports are voluntary and have no consequences for companies making overstatements or failing to disclose at all. To address this challenge, the IFRS foundation is working with stakeholders on tools designed to meet them; these should be available by 2022.
Financial Statements
At present, there are no legal requirements requiring companies to disclose ESG information; instead, many make false promises of sustainability without actually acting upon them. Therefore, third-party organizations provide numerous ratings and assessments which make comparison difficult.
Companies that embrace sustainability accounting provide their stakeholders with accurate and transparent information regarding their environmental, economic and social impacts. This allows for informed decisions to be made and relationships improved while helping avoid “greenwashing”, or false claims made about sustainability initiatives but failed to deliver on them.
Future regulatory changes could mandate publically traded companies to report ESG information. This may alter how financial statements are used as an indicator of sustainability. Meanwhile, there are various organizations offering guidance on creating sustainability reports using standard frameworks with emphasis on materiality analysis for each issue addressed within.
