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:
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).
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.23 Migration 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.
