SASB_EPI: Putting the E in ESG

Business relationships in difficult times

Sustainability and business — Environmental protection Introduction: Putting the E in ESG

April 2021

Why?

Sustainability a mainstream issue

As highlighted in the Sustainability and business — the call to action; build back better report, we started a programme of thought leadership to explore accountancy and sustainability. This is part of a series of briefs exploring the topic of sustainability, business and the finance professional’s key role. These briefs will help organisations consider the sustainability issues, how to integrate them into their long-term decision-making, and how to incorporate these issues into internal and external reporting.

Sustainability is a mainstream issue. Business performance can no longer be purely judged on short-term financial returns to shareholders. Groups — such as customers, workforce, society, governments and investors — all demand greater organisational transparency beyond the traditional financial metrics. Sustainability has fast become the lens through which an organisation is judged. However, sustainability is also an important opportunity to build resilient organisations for the long-term.

The sustainability call to action has implications for finance professionals. We are the individuals, teams and finance functions to make a difference. This comes from our skill sets and knowledge in organisational governance, strategy, risk management and performance through metrics and targets. We own the processes, systems, data, management information and reporting that will support our organisations’ transition to sustainable businesses. Finally, we support sustainable decision-making through our business analysis, and assurance of both financial and non-financial data.

The sustainability space — environmental, social and governance (ESG)

The UN World Commission on Environment and Development defined sustainability as development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Sustainability is often thought of as having three pillars or components: economic, environmental and social or, more commonly — profits, planet and people. In this context, its scope is about promoting prosperity and economic growth (profit) while protecting the planet and people across the three interconnected core elements:

Environmental considers how an organisation performs as a steward of nature. This factor includes the nature and extent of non-renewable resources used in production, as well as the release of potentially harmful elements to the air, land or water.

Social examines how an organisation manages relationships with employees, suppliers, customers and the communities where it operates. Social issues range from human rights and health and safety to other responsible business practices, such as product marketing and privacy. Expectations around these issues, as well as environmental issues, define what is often referred to as the social license to operate.

Governance deals with an organisation’s leadership and effective management of the business. In addition to overseeing strategy execution, performance and management of risks, effective governance ensures maintenance of the social license to operate. Specific governance considerations include executive pay, regulatory compliance, and shareholder rights, as well as internal controls and internal and external audits.

The ESG organisational
maturity journey

An organisation’s ESG story is, and will continue to be, a complex one. However, the more an organisation understands how the three pillars of environmental, social and governance sustainability together affect and shape their strategies and business model, the more business-resilient they become. During the COVID-19 pandemic, it has been noted that ‘companies with high ESG rankings have outperformed rivals during the crisis’.¹ Although we have separated the pillars into three simple introductory briefs, finance professionals and organisations must take a wide, integrated view across the whole sustainability arena.

To help understand the journey organisations take when considering ESG factors, we have fashioned a three-stage model. This will help finance professionals identify where their organisations are in building ESG business resilience and highlight possible knowledge and skills gaps. The model diagram and descriptions that make up the ESG organisational maturity journey are based upon the Future-Fit Foundation business benchmarking methodology and PwC’s ESG Pulse three stages of evolution.²

The sustainability journey has been an evolution, over many years, from Corporate Social Responsibility (CSR) to ESG. CSR was a self-regulation drive of individual organisations promoting good corporate citizenship in the business world and its roots can be traced to the 1950s. It focused an organisation on its efforts to have a positive impact on its employees, consumers, the environment and wider society. Reporting happened annually and CSR was an add-on to business activities that were often disconnected.

ESG, on the other hand, is seen as core to the way an organisation’s business operates. It measures activities to understand more fully the impact of an organisation’s actions. A focus that integrates sustainability into the strategic objectives, the mission, and everyday decisions of an organisation. This evolution includes an expanded role of organisational governance for the whole of its value chain and longer-term responsibilities around issues such as climate change and carbon accounting.

The changing sustainability landscape also mirrors how business responsibility has been evolving from a narrow shareholder to an inclusive stakeholder focus.

Shareholder perspective — lacking ESG identification, integration or communication

The focus of a shareholder perspective is primarily on financial returns to shareholders.
There is little consideration of how the three ESG pillars, in combination, affect the organisation’s purpose, strategy or business model.
If sustainability issues are considered, they would likely be reported in a corporate responsibility report and focus on activities of employees in their local communities, demonstrating ‘good corporate citizenship’.

ESG is seen as an “add-on” — no linkage to the long-term organisational strategy or value.
Focus is on short-term gains and rarely beyond the next quarter’s results.

Stakeholder perspective — strong ESG identification, limited integration and communication

The focus of a stakeholder perspective is on strong ESG identification, primarily through their risk management processes.
Some integration and overlap across pillars possible, but unlikely to be embedded into strategic goals or reflected in business model.

Communication still likely to be focused primarily on governance financial reporting.
Sustainability reporting often confusing with too much information, lacking in relevancy to intended audience, making industry comparisons difficult.

System value perspective — coherent ESG identification, integration and transparent communication

The focus of a system value perspective holistically is on long-term value creation; governance is aligned with social space and dependent upon the wider environmental pillar.

Vision of the future and understanding of what must be mastered to move towards desired future state informs decision-making; resources are directed to rapid and radical change.
ESG is embedded into the heart of the organisation; ESG risks and opportunities are stress-tested and scenario planning identifies trade-offs and inform strategic and business model decisions
The holistic approach feeds through into the communication of ESG risk and opportunity factors which form a transparent story focused on long-term value.

What?

The environmental focus

The global perspective

In the World Economic Forum’s (WEF) 2021 Global Risk Report, four of the five top long-term risks by likelihood are environmental:

Extreme weather (1st)
Climate action failure (2nd)
Human environmental damage (3rd)
Biodiversity loss (5th).³

These will or are already affecting business continuity and organisational resilience. Interestingly, extreme weather has been the top long-term risk by likelihood for five consecutive years. In terms of impact, five of the top-ten risks, are environmental:

Climate action failure (2nd)
Biodiversity loss (4th)
Natural resource crises (5th)
Human environmental damage (6th)
Extreme weather (8th)⁴

Organisations will need to reconnect with the environment and learn from nature. It will require a shift and adaptation of our need to work with nature, rather than against it.

Environmental protection and the UN Sustainable Development Goals
In 2015, as outlined in the CGMA guide, The role of the accountant in implementing the Sustainable Development Goals, the United Nations established its 17 Sustainable Development Goals.⁵ The goals recognise, that ending poverty must go hand-in-hand with strategies that build economic growth and address a range of social needs including education, health, equality and job opportunities, while tackling climate change and working to preserve our ocean and forests.⁶

Organisations and finance professionals have an important role to play in understanding their business impact and the opportunities for change across the three ESG core elements the United Nations’ 17 Sustainability Development Goals (SDGs) encompass.

There are six Sustainable Development Goals that are relevant and directly link to the environmental pillar.

6 Clean water and sanitation
Ensure availability and sustainable management of water and sanitation for all.
7 Affordable and clear energy
Ensure access to affordable, reliable, sustainable and modern energy for all.
12 Responsible consumption and production
Ensure sustainable consumption and production patterns.
13 Climate action
Take urgent action to combat climate change and its impacts.
14 Life below water
Conserve and sustainably use the oceans, seas and marine resources for sustainable development.
15 Life on land
Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss.

The goals should not be viewed in isolation from each other. By contributing towards one goal, there could be positive impacts on other goals not directly linked to the environmental pillar. Alternatively, a narrow focus on just one goal may lead to a negative impact or consequences on others.

If an organisation moves to an electric transport solution to reduce its carbon footprint but fails to consider the wider ecosystem, the action may just transfer the risk into its supply chain. This would be true if the energy supplier to the electric transport solution involved heavy carbon energy generation.

As stakeholders and investors increasingly rate the health of an organisation on its SDG information, the finance function and finance professionals can help by providing an integrated scenario approach that links the 17 goals to their business model.

For more information on the Sustainable Development Goals and the role of the accountant, download our report.

The organisational perspective

For an organisation, the focus is both their influence on the environment and the impact changing environmental patterns are having on their business. This includes an organisation’s usage of energy, how it disposes of waste, its pollution emissions and natural resource conservation. It also includes evaluating the environmental risks that an organisation might face in the future.

Using three sustainability frameworks and standards to compare terms, the following is a list of more specific environmental areas that might be relevant to a business that the finance professional could encounter, be asked to analyse data sets or be asked to report on.⁷ The list is not an exhaustive one but shows that the finance professional’s remit is more than the traditional finance capital focus.

The environmental pillar includes an organisation’s use of energy, how waste products are recycled or disposed of, the impact of pollution and emissions, use of natural resources and treatment of animals. These can be used in combination to understand the risks an organisation faces, build mitigations, help make more informed decisions and comply with local environmental regulations and reporting.

The breadth of this list underscores the wide network and connections outside of the finance function that may be necessary to enable the collation of environmental data. This involves interdisciplinary conversations across an organisation, the organisational supply chains and with external stakeholders.

Energy, water, waste and recycling
While common to all businesses, these are not normally areas a finance professional has direct control over. Data from experts in the field around an organisation or from its supply-chain partners are fed into the finance function to provide metrics and insights for reporting. However, reducing energy consumption, minimising waste and preventing pollution all have positive impacts on an organisation’s business model. They also help the more efficient use of raw materials leading to cost-saving, as well as reducing reputational and legal risks. Being able to include this kind of data in organisational business cases helps inform decision-making and builds more resilient long-term strategies.

Climate change
As demand from stakeholders increases for more climate-related organisational data, it follows that finance professionals must become more familiar with and understand climate change opportunities and risks. Our role is not to takes sides in any political debate, but to properly assess risk and provide reliable information on the commitment and measurable impact companies make on sustainability. This will help to support the efficient and informed capital allocations for organisations in the transition to a lower-carbon economy. It will also help organisations make more informed decisions in building resilient structures for the future.

Our focus has to be in two directions, the impact our organisations have on climate in the transition to a lower-carbon economy and the impact a changing climate has on our organisations’ business models. This includes the effects of advancing temperatures, the risk of flooding due to rising sea levels and or seasonal droughts.

One initiative gaining global traction is the Task Force on Climate-Related Financial Disclosures (TCFD) that published a set of recommendations in 2017.⁸ These overarching recommendations are set out in four thematic areas of governance; strategy; risk management; and metrics and targets. They aim to encourage high-quality climate disclosure for better and more informed decision-making.

Over the medium-term, mandatory climate-related disclosure is likely to become a reporting requirement around the world. The Canadian, New Zealand and U.K. national governments are already introduced mandated reporting requirements.⁹ The investor community’s calls for greater organisational transparency through accurate, comparable, and timely disclosure have also driven the increased reporting. However, we cannot afford to wait for mandatory reporting and must start accurately assessing and disclosing corporate climate-related risks and opportunities. We must start managing and integrating these factors into corporate decision-making now if we truly aim to reach the UN Sustainable Development Goals by 2030 and the national net-zero target by 2045/2050/2060.¹⁰

As part of our sustainability and business programme in 2021, we will explore rising temperature scenario planning and the role of the finance professional in more detail.

Greenhouse gas (GHG) emissions, and, net-zero carbon targets
While everybody is talking about ‘carbon footprints’, ‘net-zero’ and ‘zero emissions targets’, it is difficult to pin down what these terms mean, and how to go about measuring them in precise or agreed ways.

However, Greta Thunberg provides a vision of where organisations and finance functions need to move towards (above).

Every time we make a decision we should ask ourselves: how will this decision affect that curve? We should no longer measure wealth and success in the graph that shows economic growth, but in the curve that shows the emissions of greenhouse gases. We should no longer only ask: ‘Have we got enough money to go through with this?’ But also: ’Have we got enough of the carbon budget to spare to go through with this?’ That should and must become the centre of our new currency.¹¹

Greta Thunberg

There is no single agreed carbon accounting process and there are many methodologies. Numbers behind any carbon accounting system or net-zero targets are always just an approximation or a metaphor. There is no globally recognised definition of ‘net-zero’ for organisations. This can be difficult for finance professionals as we see numbers as precise solutions, very much in a black-and-white context. The accounting for GHG emissions and net-zero carbon targets are wrapped in many shades of grey, but they will become clearer as the science evolves. The key here is to experiment with the data you have and use it to facilitate debate and change within your organisation. It is also important to build your carbon knowledge, but be prepared to learn, unlearn and relearn as the different methodologies coalesce into a global standard.

Some current definitions

Carbon/GHG accounting
A means of measuring the direct and indirect emissions to the Earth’s biosphere of CO2 and its equivalent gases from industrial activities¹²
Net-zero
As the Carbon Trust points out a global definition of net-zero for business has yet to be agreed. A working definition is given as: Achieving a state in which the activities within the value-chain of a company result in no net impact on the climate from greenhouse gas emissions.¹³
Carbon footprint
The best estimate that we can get of the full climate change impact of something. That something could be anything — an activity, an item, a lifestyle, a company, a country or even the whole world.¹⁴

Where countries have set nation net-zero carbon targets, the next step for governments is the activity of translating their promises into actions for organisations. Also driven by investors, the demand for mandatory reporting of climate change organisational risks is likely to increase in the medium term.

In the U.K., the Government introduced a new mandatory carbon reporting regulation in April 2019. The Streamlined Energy and Carbon Reporting (SECR) scheme requires large UK companies to report publicly on their energy use, carbon emissions and other related information within their annual reports.¹⁵ Similar emissions reporting regulations have been introduced in:

South Africa with the National Greenhouse Gas Emissions Reporting Regulations, 2017
Canada with the Greenhouse Gas Reporting Program (GHGRP), 2004
Australia with the National Greenhouse and Energy Reporting Act (NGER), 2017¹⁶

However, understanding GHG emissions isn’t just about organisational reporting. Understanding emissions’ effects on organisational business cases leads to more informed decision-making.

In a conversation with the director of operations for a public body specialising in culture and education, they talked about the decision process for the location of new global service centres. They work in over 100 countries and as part of the business case for the siting of a new service centre, potential city location pollution data and metrics are used as a criteria measure in the approval process. It forms part of their environmental framework tool to manage and monitor their activities. This example directly links to ‘life on land’ (SDG 15) and climate action (SDG 13) in the environmental space, but the public body’s driving motivation was the ‘good health and well-being’ (SDG 3) of staff working in a service centre. It shows the interconnectedness when contemplating sustainability factors. Actions under the environmental pillar can have both positive and negative implications for the social and governance pillars.

As part of our sustainability and business programme in 2021, we will explore carbon accounting and the role of the finance professional in more detail.

Biodiversity and keystone species
A simplified definition of biodiversity from The Economics of Biodiversity: The Dasgupta Review is ‘The variety of life in all its forms, and at all levels, including genes, species and ecosystems.’¹⁷

This builds on the United Nations’ Convention on Biological Diversity (CBD) definition of:
The variability among living organisms from all sources, including inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems.¹⁸

Biodiversity is critical because it represents the foundation of ecosystems that, through the services they provide, affect human well-being.

These services that ecosystems provide include:

provisioning services such as food, water, timber and fiber;
regulating services such as the regulation of climate, floods, disease, wastes and water quality;
cultural services such as recreation, aesthetic enjoyment and spiritual fulfillment; and
supporting services such as soil formation, photosynthesis and nutrient cycling.

Ecosystems that provide these services include unmanaged ecosystems, such as wildlands and nature preserves, or other ‘protected’ areas; they also include managed systems, ranging from farms, croplands, rangelands to aquaculture sites, as well as urban parks and ecosystems.

Assessing the many dimensions of biodiversity is very complex, and includes attempts to characterize the attributes of ecosystems, their status and their performance, along with measures of ‘ecological capital’, which indicate the amount of resources available for providing services, such as total species and richness, and soil nutrients.

In 2010 at the Conference of Parties held in the Aichi Prefecture, Japan, a revised and updated Strategic Plan for Biodiversity was created which included strategic goals and targets for the 2011–20 period.

In September 2020, the CBD published the fifth edition of the UN’s Global Biodiversity Outlook Report. The report, providing an authoritative overview of the state of nature worldwide, noted depressingly that none of the 20 Aicihi biodiversity targets set in 2010 had been achieved.¹⁹ Six of the objectives were deemed to have been ‘partially achieved’.

But what has this got to do with finance professionals? Well, target 2, set in 2010, is a good starting point:
By 2020, at the latest, biodiversity values have been integrated into national and local development and poverty reduction strategies and planning processes and are being incorporated into national accounting, as appropriate, and reporting systems.²⁰

The report notes that some progress has been made in the last 10 years to integrate biodiversity into organisational planning and accounting, and, incorporate it into reporting. However, biodiversity loss has critical implications for both organisations and humanity. This ranges from the possible collapse of food and health systems to the disruption of entire supply chains. Whether labelled nature loss, ecological sensitivities or keystone species accounting, it is a growing area of importance for organisations, finance functions and finance professionals to understand. They are also important indicators for organisations in addressing their impact and the risk upon them of climate change.

Regulators and governments are also focused on this area, so increased legislation and reporting will affect organisations over the next five years. Here is a brief summary of biodiversity considerations that are receiving particular attention:

Rainforest deforestation — Companies selling products such as palm oil, soy, rubber and cocoa grown on deforested land must carry out due diligence into their supply chains to ensure compliance with local laws protecting forests and other natural ecosystems, or they could face fines.²¹
Keystone species accounting — This area is growing in importance for many industries dependent on agriculture. A keystone species is an organism that helps define an entire ecosystem, such as a bee, which is a pollinator for fruits, nuts and other crops. Since these crops are often grown in concentrated geographical locations, the surrounding communities are especially vulnerable to the possible decline of the keystone species.²²

Movement ecology — The study of the movement of wild species, called ‘movement ecology’, is providing scientists with early indications, through animal and plant migration, of where climate change impacts are happening.²³Migration patterns are being viewed as a response to environmental change and how an ecosystem functions. This kind of data is also useful to organisations in understanding the next great migration and how they will need to adapt their business models.

As part of our sustainability and business programme in 2021, we will be exploring biodiversity, species accounting and the role of the finance professional in more detail.

How?

The four sustainability lenses of governance; strategy; risk management; and metrics and targets

There is increasing pressure for organisations to demonstrate their sustainability credentials. Therefore, CFOs, finance functions and finance professionals must define, enable, shape and tell their organisations’ ESG stories. When thinking about business resilience and environmental sustainability, a great place to start is with the four lenses of governance; strategy; risk management; and metrics and targets. These lenses come from the TCFD framework recommendations for evaluating and reporting climate-related risks. If you take out the specific climate references from their recommendations, it still provides a broad framework for working with any of the core elements of sustainability, whether environmental protection, social inclusion or governance.

In the 2019 white paper Re-inventing finance for a digital world: The future of finance, we explored the role of the finance function and its primary activities. These are the primary activities of information, insight, influence and impact. Whether you are assessing risks, reconciling accounts or compiling management information reports, the process activities remain constant. By overlaying the four sustainability lenses to the basic finance activities, we can understand where to focus our time and resource.

By focusing across these four areas, the finance function’s basic activities are:

Assembling information for sustainability metrics and targets
Analysing for insight to build sustainability issues into risk management processes
Advising on sustainability risks and opportunities to influence organisational governance
Applying for impact by building sustainability into strategy and organisational control systems.

Governance lens
What is the organisation’s governance around the environmental risks and opportunities?

When it comes to environmental issues, governance boards must spend more time engaged in robust discussions and making more informed decisions for their organisations. The senior executives and board directors of an organisation are the individuals best enabled to reduce environmental risks. However, to have an informed debate, they require relevant, insightful content and the ability to take the long horizonal view. Their focus needs to be a stewardship role, which can be difficult when, in some organisations, financial incentives are used to continue with ‘business as usual’.²⁵

Finance functions have a role to play in producing assessments for boards that, ‘aim to reduce the ignorance of the decision-makers’.²⁶ This can be achieved by finance functions and boards engaging with scientists and academics, ‘to verify the technical and scientific legitimacy of any action’.²⁷

Strategy lens
What are the actual and potential effects of environmental risks and opportunities on the organisation’s business model, strategy and financial planning?

The TCFD recommendations use scenario planning to help build resilience into an organisation’s strategy. It asks organisations to consider different climate-related scenarios, including a two degrees Celsius increase in global temperatures. Using scenario planning across the environmental issues can help understand the effects and implications over the long term on an organisation’s strategy and business model. Once articulated, environmental factors can be embedded into the control systems (such as strategic planning, budgeting, performance measures and performance reviews).

Risk management lens
How does the organisation identify assess and manage environmental risks?

David Omand, in his book How Spies Think, accuses the business world when managing risks, ‘of remaining too short term and transactional’.²⁸ Environmental risks are anything but short-term or transactional.

Firstly, there needs to be an organisation-wide conversation on your environmental risk appetite. Once there is common agreement, this needs to be built into your organisation’s Enterprise Risk Management (ERM) processes.

When thinking about the risks and opportunities to your organisation, an excellent place to start is with the WEF Global Risk report 2021. There are six global environmental risks that ‘if it occurs, can cause significant negative impact for several countries or industries within the next 10 years’.²⁹ These are:

Biodiversity loss and ecosystem collapse
Climate action failure
Extreme weather events
Human-made environmental damage
Major geophysical disasters
Natural resource crises.

It is about translating these risks into a language your organisation understands and debating strategy and business model implications. At the very least, your organisation must consider which are transition risks to becoming a lower carbon entity and which are physical risks to the business.

Finally, it is worth exploring the network drivers of the six global environmental risks to understand possible future cause and effect relationships.³⁰ This will help understand how risks and opportunities integrate across the pillars of environmental, social and governance.

Metrics and targets lens
How are metrics and targets used to assess and manage environmental risks and opportunities?

Investors and governance boards increasingly need environmental data to make more informed investment decisions. They also want comparable and consistent data. For finance functions and finance professionals this means setting and managing environmental organisation metrics and targets that lead to disclosure that is reliable, verifiable and objective.

However, these must also be science-based targets where there is strong evidence of causality. Authors Carl Bergstrom and Jevin West point out that we must understand the difference between correlations and causation when using metrics and targets for environmental risks. We must all watch out for evidence of correlation being miscast as evidence of causation.³¹

A final lesson, again from Bergstrom and West (above), is that just producing metrics and target data on environmental factors are not helpful on their own. Finance functions and finance professionals must also provide context.

To tell an honest story, it is not enough for numbers to be correct. They need to be placed in an appropriate context so that a reader or listener can properly interpret them. One thing that people often overlook is that presenting the numbers by themselves doesn’t mean that the numbers have been separated from any context. The choices one makes about how to represent a numerical value sets a context for that value.³²

Bergstrom and West

Who?

Finance professionals, finance functions and organisations

'Organisations around the world are resetting the way they think about sustainability, and this has significant impact on stakeholders’ trust in their non-financial data, risk management procedures and business recovery. As core members of almost every business, government and non-governmental organisation, CGMA designation holders play a pivotal role in providing non-financial and financial management information to drive business performance, develop strategies and influence decision-making. They bring a unique set of skills and knowledge to the table and can work with stakeholders to integrate responsible practices into their business and operating models'.
Andrew Harding, FCMA, CGMA, chief executive — Management Accounting, at the Association.

Finance professionals

Finance professionals have a pivotal role to play in supporting their finance functions and organisations on their ESG journeys. An obligation to upskill and understand how sustainability issues affect their organisations’ resilience and that of wider society. As accountants, we are the trusted advisers and not only bring credibility to information, but also insight, influence and impact. We must analyse and advise on ESG factors, that tend to be non-financial, to help our organisations make informed and holistic decisions.

The environmental factors are complex, requiring finance business partners and finance professionals to engage with climate scientists, biodiversity experts and regulators in technical conversations. These are interdisciplinary and transdisciplinary conversations. However, by asking the right questions, investigating the logic and verifying the technical findings, finance professionals become the bridge back into the finance function and can translate results into a familiar business language. Through analysis and validation against an organisation’s business model, they turn environmental data into commercial insight.

The finance function can then communicate these insights and contribute an objective, responsible perspective, to influence organisational decision-making. This is done while, at the same time, guiding actions and ensuring an organisation achieves the required impact through control systems, such as strategic planning, budgeting and performance measures.

If you, as a finance professional, are not yet engaged in these kinds of environmental areas, it is time to upskill and find professional development opportunities to increase your environmental knowledge. But some words of warning — this is not about you becoming an expert in any particular sustainability issue. It is about having a broader understanding about what it means and connecting them into your organisation’s control systems to provide insight, influence and impact into organisational decision-making.

Finance functions
As finance functions work with the rest of the organisation, they can break down siloed activity and thinking around sustainability. They can also encourage diverse ESG thinking from across an organisation and its supply chain. This is because they can circumnavigate the usual top-down ‘chain of command’ approach in favour of a ‘chain of communication’.³³

The Global Management Accounting Principles defines management accounting as ‘the sourcing, analysis, communication and use of decision-relevant financial and non-financial information to generate and preserve value for organisations.’³⁴ This applies equally, across the ESG pillars, to sustainability information where finance acts:

As a trusted source of the management information providing sustainability data integrity
As a commercial analyst, providing sustainability insight into the drivers of organisational value
As the subject matter expert and steward, contributing the sustainability perspective to strategic decision-making

Through partnering, using sustainability insights to address performance issues and enables solutions to create value³⁵

Organisations
In his book Green Swans, author John Elkington, focuses on the software and algorithms controlling capitalism:
Their focus on financial value above all other forms has delivered huge rewards for those in capitalism’s driving seats but also burned through unconscionable amounts of natural, social and human capital along the way.³⁷

For organisations, and in fact for finance functions and finance professionals, to integrate ESG factors into their strategies, business models and reporting requires a change in thinking. It requires moving from mechanistic thinking, where the focus is about increasing efficiency, to systemic thinking, where the focus is about being effective. Dealing with complex ESG issues requires a holistic approach that moves from:

Disconnection to interconnectedness thinking
Linear to circular thinking
Silo to emergence thinking
Parts to whole thinking
Analysis to synthesis thinking
Isolation to relationship thinking³⁸

The evolving ESG landscape
Finally, it is worth remembering that an organisation’s environmental focus will continue to evolve as ESG and stakeholder priorities change. Bergstrom and West have observed that ‘science is a haphazard collection of intuitions, norms, customs and traditions that have developed by trial and error over the past several centuries’.³⁹ The same is true of the sustainability space, and this has implications for finance professionals. We will all need to continually adapt our learning and engage in multi-disciplinary conversations if we are to create and preserve organisational value for the long-term.

What’s next from the AICPA and CIMA?

We will continue to watch the sustainability space and play a central role in its development. We will ensure that the journey towards the development of global standardised comparable ESG metrics and non-financial reporting is not at the expense of closing any future sustainability debate and innovation. Our aim is to achieve a balance of sustainability reporting and assurance alongside data-driven insights so that resilient organisations and finance professionals can address future prosperity, planet and people challenges.

'We believe that we will see profound changes in the next few years in the work of management accounting and public accounting to embed new practices and standards relating to sustainability. The Association will continue to provide education and guidance to all areas of the profession, ensuring that it is ahead of this transformation. It’s truly an exciting time to be an accounting and finance professional'.

Andrew Harding, FCMA, CGMA, chief executive – Management Accounting, at the Association

Endnotes

Endnotes

¹ G Tett. Business face stern test on ESG amid calls to ‘build back better’. Financial Times, 18 May 2020. (Accessed 9 June 2020).

² J Elkington, Green Swans: The Coming Boom in Regenerative Capitalism (Fast Company Press, New York: 2020) p.149. Future-Fit Foundation, Methodology Guide: What the Benchmark is, Its Scientific Foundations, How it was Developed (April, 2019) p.12. (Accessed 9 June 2020). PwC, Mind the Gap: The Continued Divide Between Investors and Corporates on ESG (June, 2020) p. 5. (Accessed 9 June 2020).

³ WEF, The Global Risks Report 2021 (January, 2021). (Accessed 19 January 2021).

⁴ WEF, The Global Risks Report 2021 (January, 2021).

⁵ CGMA, Creating a sustainable future: The role of the accountant in implementing the Sustainable Development Goals. (London: April 2018). (Accessed 9 June 2020).

⁶Make the SDGS a Reality (Accessed 9 June 2020).

⁷ Sustainability Accounting Standards Board (SASB) standards (Assessed 9 June 2020); Global Reporting Initiative (GRI) standards (Accessed 9 June 2020). World Economic Forum (WEF) consultation draft, ‘Toward Common Metrics and Consistent Reporting of Sustainable Value Creation’ (Accessed 9 June 2020).

⁸ TCFD, Recommendations of the Task Force on Climate-related Financial Disclosures (June, 2017). (Accessed 16 November, 2020).

⁹ In May 2020, the Canadian federal government announced that large businesses affected by the COVID-19 pandemic and applying for emergency loans must publish annual climate disclosure reports. This applies to businesses with revenues above $300 million CAD. The loan requirements explicitly refer to the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), and requires applicants to link their corporate reporting to other environmental sustainability goals. The Canadian government clearly is linking COVID-19 stimulus packages with the building of sustainable and resilient businesses. N Degnarain. What Canada is getting right with its Covid-19 economic response plan. Forbes, 19 May 2020. (Accessed 4 June 2020).

In September 2020, the New Zealand Government announced their intension to implement mandatory climate reporting in line with the TCFD recommendations. If approved by New Zealand’s Parliament, financial entities with assets over 1$billion, including registered banks, credit unions, building societies, managers of registered investment schemes, licensed insurers, equity and debt issuers, and, crown financial intuitions, will from 2023 be required to make climate related disclosures. C Graham-Mclay, ‘New Zealand minister calls for finance sector to disclose climate crisis risks in world first’. The Guardian (London) 15 September 2020. (Accessed 16 November 2020).

Greater climate-related financial disclosure is also a goal of the United Kingdom’s Government. In a November 2020 statement, the UK’s Chancellor of the Exchequer set out his government’s intention to make TCFD- aligned disclosure fully mandatory across the economy by 2025, with a significant portion of the requirement in place by 2023. HM Treasury, Interim Report Interim Report of the UK’s Joint Government-Regulator TCFD Taskforce (November, 2020). (Accessed 16 November 2020).

¹⁰ By the end of 2020, countries which have built net zero carbon targets into legislation include, 2045 – Sweden, 2050 – Denmark, France, Hungary, Japan, South Korea, United Kingdom, 2060 – China. (Accessed 6 January 2020).

¹¹ G Thunberg, No One is too Small to Make a Difference (London, 2019). p.64.

¹² PCAF (2020). The Global GHG Accounting and Reporting Standard for the Financial Industry. First edition. (November 18, 2020). p.107. (Accessed 19 January 2021).

¹³ A Carrillo Pineda & P Faria, Towards a Science-Based Approach to Climate Neutrality in the Corporate Sector (Science Based Targets and CDP, 2019). p.14. (Accessed 19 January 2021).

The Carbon Trust also cite the Science Based Targets Initiative (SBTi) who are working towards achieving this with a company working definition. ‘A net zero company will set and pursue an ambitious 1.5°C aligned science-based target for its full value-chain emissions. Any remaining hard-to-decarbonise emissions can be compensated using certified greenhouse gas removal.’ (Accessed 7 January 2021).

¹⁴ M Berners-Lee, How Bad are Bananas? The Carbon Footprint of Everything (Profile Books, London: 2020). p. 7.

¹⁵ Guidance: Streamlined Energy and Carbon Reporting (SECR) (Accessed 20 January 2021).
SECR explained: Streamlines Energy and Carbon Reporting framework for UK business (Accessed 20 January 2021).

¹⁶ Climate Change Laws of the World (Accessed 20 January 2021).

¹⁷ P. Dasgupta, The Economics of Biodiversity: The Dasgupta Review. (London: HM Treasury, 2021). p. 501. (Accessed 10 February 2021).

¹⁸ Dasgupta, The Economics of Biodiversity. p.501.

¹⁹ Aichi Biodiversity Targets. (Accessed 8 December 2020).

²⁰ Aichi Biodiversity Targets. (Accessed 8 December 2020).

²¹ The UK Government, in August 2020, launched a consultation on proposed new legislation to protect rainforests and clean up supply chains. (Accessed 14 December 2020).

²² Based on a lecture given by Jan Bebbington, Professor of Accounting and Sustainable Development, Birmingham Business School entitled, ‘The Anthropocene, Corporate Biosphere Stewardship, The Keystone Actors, and, Inter-Disciplinary Scholarship’. Given at the Management Accounting Research Group (MARG) conference, at Aston University on 15 November 2019.

²³ S Shah, The Next Great Migration: The Story of Movement on a Changing Planet (Bloomsbury, London: 2020). p.243.

²⁴CGMA, Re-inventing Finance for a Digital World: The Future of Finance (January, 2019).p.12.

²⁵ J Atkins & B Atkins (Ed), The Business of Bees: An Integrated Approach to Bee Decline and Corporate Responsibility (Routledge, Abingdon: 2017). p.179.

²⁶ D Omand, How Spies Think: Ten Lessons in Intelligence (Penguin, London: 2020). p. 4.

²⁷ Atkins & Atkins, The Business of Bees. p.182.

²⁸Omand, How Spies Think. p.223.

²⁹ WEF, The Global Risks Report 2021 (January, 2021). p.87.

³⁰ WEF, The Global Risks Report 2021 (January, 2021). p.13.

³¹C Bergstorm & J West. Calling Bullsh*t: The Art of Scepticism in a Data-Driven World (Allen Lane, London: 2020). p. 62.

³² Bergstorm & West. Calling Bullsh*t. p. 83.

³³ D Epstein, Range: How Generalists Triumph in a Specialized World (London, 2019). p.264

³⁴ CIMA, The Global Management Principles (December 2015).

³⁵ CGMA, Re-inventing Finance for a Digital World. p.14.

³⁶ CGMA, Re-inventing Finance for a Digital World. p.14.

³⁷ J Elkington, Green Swans.p.30.

³⁸ L Acaroglu, Tools for Systems Thinkers: The 6 Fundamental Concepts of Systems Thinking (7 September, 2017). (Accessed 25 January 2021).

³⁹ Bergstorm & West, Calling Bullsh*t. p. 206.

Report author:

Dr. Martin Farrar
Associate Technical Director
Research and Development — Management Accounting

Association of International Certified
Professional Accountants

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