Sustainability and business. The call to action: build back better

Business relationships in difficult times

Sustainability and business

The call to action: build back better October 2020

Why?

Sustainability is a mainstream issue

This is the first in a series of briefs, aimed to management accountants, happening due to the combined reach of AICPA^® and CIMA^® — together powering the Association of International Certified Professional Accountants^®. We are exploring sustainability, business and the finance professional’s key role. These briefs will help finance professionals provide leadership to their organisations as they consider sustainability issues and how to integrate them into long-term decision-making.

Sustainability is a mainstream issue. Business performance can no longer be judged purely 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 affects finance professionals. We are the individuals, teams and finance functions to make a difference because of 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 support a transition to sustainable businesses. We support sustainable decision-making through our business analysis, and assurance of both financial and non-financial data.

What?

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 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.

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 (SDGs).¹ 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.’²

The private sector was actively involved in multiple ways to establish the goals, and while the scope of SDGs is vast and applies at high levels to all countries, it’s also the responsibility of organisations of all kinds, all sizes and all purposes. Businesses have a particularly critical role to play, having the global influence and economic power needed to make the difference where it matters most — in the communities where people live and work.

The business community also embraces this expanded role of the organisation and are raising sustainability elements as global mainstream issues that require discussion and consensus. In August 2019, the Business Roundtable, an association of the chief executive officers (CEOs) of leading U.S. companies, redefined the purpose of a corporation. The statement, which 181 CEOs signed, committed the executives to lead their companies for the benefit of all stakeholders. This includes customers, employees, suppliers and communities (environment), as well as shareholders.³

COVID-19

The COVID-19 crisis shows the importance of early action and that organisations and governments should, and can, take huge steps to protect their populations. Climate change, another massive but foreseeable global risk, has exposed global fragilities but shown what is possible when communities and societies work together. As societies emerge from lockdowns, there are demands for national COVID-19 stimulus measures that go toward building more resilient and sustainable economies focused on long-term benefits. These appeals, such as ‘Build Back Better’ and the World Economic Forum’s ‘The Great Reset’ initiative, play to SDG 8, ‘Promote sustained, inclusive and sustainable growth’.⁴

AICPA and CIMA support a letter calling on the United Kingdom’s Prime Minister to use the United Nations Sustainable Development Goals to create a socially just and green recovery from COVID-19.⁵ The letter, from 150 businesses, civil society and organisations, recommends the use of the goals to:

Unite all sectors behind a plan to build a stronger and more resilient economy
Prioritise the most vulnerable in our society and level up regional and societal inequalities
Build coherent policies for a healthy planet and to aid transition to net-zero⁶

Interestingly, Linda Eling-Lee, the global head of ESG research at MSCI, notes that, ‘companies with high ESG rankings have outperformed rivals during the crisis’.⁷ A possible reason for this is the greater corporate adaptability that ESG reporting and scrutiny provides organisations to rethink their business models in times of stress.

What the pandemic and the build-back-better recovery phase amplify is how important all three core sustainability elements are for resilient businesses. Debates continue around the ethical implications of organisations that furloughed their employees onto government schemes at the same time as paying dividends to their shareholders. Profit, social inclusion or both?

The pandemic also caused us to stop and reflect on the interconnectedness of the health of humans, wildlife and the planet’s ecosystem. It has exposed the precarious nature of global supply chains and how reliant all countries and people are on each other as a result. As we reflect on the nature of fragility and the systematic threats human society faces, how do we embed sustainability risks and opportunities into resilient organisations of the future?

The calls from the investor, regulator and business communities

In his January 2020 annual letter to corporate executives, Larry Fink, the chief executive officer of BlackRock, placed sustainability and the issue of climate change at the centre of its investment process. Fink set out that, ‘climate change has become a defining factor in companies’ long-term prospects’ and ‘we are on the edge of a fundamental reshaping of finance’.⁸

This is an important sustainability milestone as BlackRock is one of the biggest holders of shares among U.S. publicly traded companies. It is also important because, in their investment stewardship approach, Fink calls out the Sustainability Accounting Standards Board (SASB) for providing ‘a clear set of standards for reporting sustainability information’ and the Task Force on Climate-related Financial Disclosures (TCFD) that provides a valuable framework for evaluating and reporting climate-related risks.

The Larry Fink letter is one example of a call from the investor community for financial market transparency and the importance of sustainable data to achieve clarity. Only through improved accurate and timely disclosure can stakeholders understand how organisations manage sustainability-related risks.

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, and require 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.⁹

Greater climate-related financial disclosure is also a goal of the United Kingdom’s Government’s Green Finance Strategy paper, issued in July 2019. By 2022, the expectation is for all listed UK companies and large asset owners are disclosing in line with the TCFD recommendations.¹⁰

In the United States, a committee within the market regulator, the Securities and Exchange Commission (SEC), urged the SEC to develop standardised principles-based ESG disclosure rules. The SEC’s Investor Advisory Committee, in May 2020, voted to make recommendations to the SEC on ESG disclosure. It contends that using ESG-related disclosures, ‘has gone from a fringe concept to a mainstream, global investment and geopolitical priority’ and based their recommendations upon the following:

Investors require reliable, material ESG information upon which to base investment and voting decisions.
Issuers should directly provide material information to the market relating to ESG issues used by investors to make investment and voting decisions.
Requiring material ESG disclosure will level the playing field between issuers
Ensure the flow of capital to U.S. markets and to U.S. issuers of all sizes.
The U.S. should take the lead on disclosure of material ESG disclosure.¹¹

This move in the U.S. acknowledges sustainability as a significant business factor and that its disclosure needs to be consistent and transparent.

The increasing demand for organisational sustainable thinking, sustainability metrics and non-financial reporting is coming from all sides. Investors, regulators and businesses all demand organisations focus on long-term value and resilience that meet present needs without compromising future generations’ ability to meet their needs.

Who?

The call to action for finance professionals

In February 2020, along with 12 other accounting body chief executives and Accounting for Sustainability (A4S), Barry Melancon signed a call-to-action statement in response to climate change. The statement highlights the vital role professional accountants play and should commit to when making sense of sustainability.

Provide sound advice and services as organisations, capital markets and governments develop and implement sustainability mitigation and
adaptation plans.

Use and implement existing and developing reporting frameworks such as those from the International Integrated Reporting Council and the Task Force on Climate-related Financial Disclosures.

Contribute to the efforts of the organisations they work with to integrate sustainability risk into organizational strategy, finance, operations and communications.

Support sustainable decision-making within the organisations they work for by allocating budgets and resources, and by developing high-quality and timely information and insights through measurement and disclosure, built on robust and transparent accounting systems.¹²

How?

The four lenses of governance, strategy, risk management, and metrics and targets

We recognise that the sustainability landscape is confusing, with many standards and frameworks options when providing a focus for your organisation. There needs to be greater cooperation and alignment across the existing frameworks and standards, and eventually a move towards a generally accepted set of international standards of sustainability and non-financial reporting.

In 2014, the Corporate Reporting Dialogue (CRP) was established. Its purpose is, ‘to strengthen cooperation, coordination and alignment between key standards setters and framework developers that have a significant international influence on the corporate reporting landscape.’¹³ The CRD published the report Driving Alignment in Climate-related Reporting in September 2019 that demonstrated high levels of alignment between frameworks when mapped against the TCFD recommendations.¹⁴

As noted above, the TCFD framework was identified as providing a valuable framework 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.

When thinking about business resilience and sustainability, a great place to start is the four lenses of governance, strategy, risk management, and metrics and targets.

Governance

What is the organisation’s governance around the sustainability risks and opportunities?

Strategy

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

Risk management

How does the organisation identify assess and manage sustainability risks?

Metrics and targets

How are metrics and targets used to assess and manage sustainability risks and opportunities?

At Davos in 2020, the big four accounting firms (Deloitte, EY, KPMG and PwC), in collaboration with the World Economic Forum (WEF), launched a proposal outlining a set of common environmental, social and governance metrics for mainstream annual reporting.15 The draft white paper, Towards Common Metrics and Consistent Reporting of Sustainable Value Creation, has been followed with a consultation period. It is seen as a drive to find a way for a global systemic solution for mainstream non-financial reporting. Drawn from existing standards and frameworks, the draft consultation proposes a set of 22 core reporting metrics and 34 expanded metrics across four pillars of principles of governance, planet, people and prosperity.

At this point, it is important to stress that sustainability is not purely a reporting and assurance endgame. Generic sustainability metrics should not be at the expense of genuine organisational insight. There needs to be a balance; remember resilient sustainable organisations are not built on metrics alone. Jerry Muller in his book Tyranny of Metrics points out:

Trying to force people to conform their work to preestablished numerical goals tends to stifle innovation and creativity — valuable qualities in most settings. And it almost inevitably leads to a valuation of short-term goals over long-term purpose.¹⁶

Finance professionals must take a holistic view and ensure sustainability is embedded into strategy and becomes a business process across the entire organisation.

What’s next from the AICPA and CIMA?

This brief is the beginning of a yearlong rolling programme of thought leadership exploring accountancy and sustainability, happening due to the combined reach of AICPA and CIMA — together powering the Association of International Certified Professional Accountants. The outputs include:

Three introductory guides into environmental protection (planet), social inclusion (people) and governance (prosperity)
Individual summaries of the current sustainability standards and frameworks that finance professionals can use
Explorations of the current key environmental protection issues
that finance professionals need to
be aware of
A white paper exploring sustainability and its impact on an organisation’s business model
A white paper exploring the growing move to a circular economy

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 standardised comparable ESG metrics is not at the expense of closing any future sustainability debate and innovation.

Finally, we aim 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.

Endnotes

CGMA. Creating a sustainable future: The role of the accountant in implementing the Sustainable Development Goals. (London: April 2018). (Accessed 9 June 2020).
Make the SDGs a reality. (Accessed 9 June 2020).
Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’. 19 August 2019. (Accessed 16 April 2020).
The great reset (Accessed 9 June 2020). G Tett. Business face stern test on ESG amid calls to ‘build back better’. Financial Times, 18 May 2020. (Accessed 9 June 2020).
linkedin.com/posts/cima_sdgs-buildbackbetter-futurewewant-activity-6676015800442228736-6Wan (Accessed 9 June 2020).
ukssd.co.uk/call-on-pm-to-create-socially-just-and-green-recovery (Accessed 9 June 2020).
G Tett. Business face stern test on ESG amid calls to ‘build back better’. Financial Times, 18 May 2020. (Accessed 9 June 2020).
Larry Fink. A Fundamental Reshaping of Finance. January 2020. (Accessed 9 June 2020).
N Degnarain. What Canada is getting right with its Covid-19 economic response plan. Forbes, 19 May 2020. (Accessed 4 June 2020).
HM Government, Green Finance Strategy: Transforming finance for a greener future (July, 2019).
Recommendation from the Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee Relating to ESG Disclosure (As of May 14, 2020). (Accessed 28 May 2020).
Call to action in response to climate change (Accessed 9 June 2020).
Driving Alignment in Climate-related Reporting (Accessed 9 June 2020).
Corporate Reporting Dialogue. ‘Driving Alignment in Climate-related Reporting: Year One of the Better Alignment Project.’ (2019). (Accessed 9 June 2020).
Toward Common Metrics and Consistent Reporting of Sustainable Value Creation (Accessed 9 June 2020).
J Muller. The Tyranny of Metrics (Woodstock, 2018) p.20.

Chartered Global Management Accountant^® (CGMA)

CGMA is the most widely held management accounting designation in the world. It distinguishes more than 137,000 accounting and finance professionals who have advanced proficiency in finance, operations, strategy and management. In the United States, the vast majority also are CPAs. The CGMA designation is underpinned by extensive global research to maintain the highest relevance with employers and develop competencies most in demand. CGMA designation holders qualify through rigorous education, exam and experience requirements. They must commit to lifelong education and adhere to a stringent code of ethical conduct. Businesses, governments and not-for-profits around the world trust CGMAs to guide critical decisions that drive strong performance.
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Association of International Certified Professional Accountants

The Association of International Certified Professional Accountants (the Association) is the most influential body of professional accountants, combining the strengths of the American Institute of CPAs^® (AICPA) and the Chartered Institute of Management Accountants^® (CIMA) to power opportunity, trust and prosperity for people, businesses and economies worldwide. It represents 650,000 members and students in public and management accounting and advocates for the public interest and business sustainability on current and emerging issues. With broad reach, rigor and resources, the Association advances the reputation, employability and quality of CPAs, CGMA designation holders and accounting and finance professionals globally.
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Report author:

Dr. Martin Farrar
Associate Technical Director
Research and Development — Management Accounting,
Association of International Certified Professional Accountants

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