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«Published by the SIGMA Project, September 2003 SIGMA Project, 389 Chiswick High Road, London, W4 4AL SUSTAINABILITY ACCOUNTING GUIDE Contents ...»

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We would like to thank the following for their generous support in developing

this guide:

Published by the SIGMA Project, September 2003

SIGMA Project, 389 Chiswick High Road, London, W4 4AL




1. Executive summary

2. How to use this guide

2.1 Terminology

3. Introduction

3.1 Defining sustainability accounting

3.2 Financial accounting framework

3.3 Full cost accounting

3.4 Drivers for change

4. Overview of Sustainability Accounting

4.1 Introducing multi-dimensional accounting

5. Internal Flows: Role of the Profit & Loss Account

5.1 Current financial accounting practice

5.2 Economic Value Added

5.3 Environmental Value Added

5.4 Social Value Added

6. External Flows: Extending the P&L Account

6.1 External Environmental Impacts

6.2 External Social Impacts

6.3 External Economic Impacts

7. Assets & Liabilities: The Role of the Balance Sheet

7.1 Sustainability and capitals

7.2 Current financial accounting practice

7.3 Intangible Assets

7.4 Measuring intangible assets

7.5 Liabilities

8. Conclusion

8.1 Locating the approaches

8.2 Trends in sustainability accounting

8.3 Sustainability accounting as an enabler to wider sustainable development

8.4 How to start

9. References and Sources

Appendix 1: Drivers for change

Financial accounting and the service economy

Financial accounting and sustainability

Changing requirements of good corporate governance

Management benefits of sustainability accounting

Appendix 2: Economic Value Added

Appendix 3: Pro forma Environmental Financial Statement

Appendix 4: Pro forma Social Financial Statement

Appendix 5: The Co-operative Bank Model


Appendix 6: Pro forma External Environmental Cost Account

Appendix 7: Resources for Environmental Values

Environmental Valuation Methods

Resources for Selected Environmental Values

Specific Sources:


Prepared by:

–  –  –

We are grateful to the following for their input and expertise:

Roger Adams Executive Director – Technical Association of Chartered Certified Accountants

–  –  –

Rachel Jackson Head of Social and Environmental Issues Association of Chartered Certified Accountants Paul Monaghan Head of Sustainable Development Cooperative Financial Services

Additional editing by:

–  –  –

1. Executive summary Sustainability accounting is a useful tool that can be employed to assist organisations in becoming more sustainable. It recognises the important role of financial information in this transformation and shows how traditional financial accounting can be extended to take account of sustainability impacts at the organisational level. The focus is on extending the range of monetised information (covering environmental, social and economic impacts) on which decisions are made.

There are many examples of organisations experimenting with different ways of using monetised information for management decision-making and for communicating with stakeholders. This guide highlights approaches that are particularly relevant to managing for sustainability. For each approach, the background and its benefits will be explained, together with case studies and a reflection on any limitations. It is hoped these case studies and pro formas (as illustrated in the appendices) will offer an opportunity for other organisations to experiment with sustainability accounting approaches.

The approaches have been divided into those which deal with resource flows in a period (like a Profit and Loss Account) and those which consider stocksi at a particular point in time (like a Balance Sheet).

This guide brings together many different approaches to using monetised information for sustainability. At present there is no one comprehensive methodology and in practice organisations are focussing on different individual elements. Sustainability accounting is an area of fertile experimentation for many organisations.

2. How to use this guide

The key intended audiences for this guide are:

1. The finance function in an organisation

2. Sustainability practitioners in an organisation It can help employees with finance roles to understand sustainability considerations and options for developing finance mechanisms to reflect and report on these. Equally, information is provided to help sustainability practitioners to understand the options for working with their finance function to improve accounting practices.

The Guide starts from the basics, so some users may want to skip sections depending on their level of expertise and initial knowledge. The main text of the guide outlines the different approaches, which are illustrated with case studies and pro formas in the appendices.

Sustainability accounting is at an embryonic stage of development. This guide is intended to support people wanting to make progress in this area by


• Information on the range of approaches that are known to be available

• Alternative frameworks to improve understanding of how these approaches may fit together

• Information on each approach and how organisations can start to use them

• Suggestions of areas that require further development Due to its limitations sustainability accounting should be used in conjunction with other methods to inform decision-making.

This document is supplemented by the SIGMA Environmental Accounting Guide. The guide is based on experience of some of the organisations involved in the development of the SIGMA guidelines. It provides an introduction to internal and external environmental accounting and tools. It also summarises how an organisation can produce one type of external environmental accounts.

2.1 Terminology Throughout this guide we have used examples drawn from a diverse range of organisations and academic sources. Whilst this gives a good flavour of the range of activity, it can lead to confusion over terminology. We have decided to use the same terms as the authors so that the reader can further investigate each example, even where the term may have a different meaning than that of the Sigma Guidelines.

3. Introduction

3.1 Defining sustainability accounting For the purposes of this discussion paper the working definition of

sustainability accounting is:

the generation, analysis and use of monetarised environmental and socially related information in order to improve corporate environmental, social and economic performance.

A more complete and technical name could be ‘Sustainability Financial Accounting’, to differentiate this approach (focused on monetised data) from wider forms of sustainability reporting.

3.2 Financial accounting framework Sustainability accounting is based on extending the existing financial accounting framework. In the UK, this is based on a combination of company law, accounting standards from regulatory bodies and the customs used by accounting professionals. These are drawn together in UK Generally Accepted Accounting Practice (or UK GAAP). Different countries have different GAAPs, based on their own legal and regulatory frameworks but they influence each other and share many core principles.

There is, however, a strong move towards global convergence of financial reporting standards. From 2005, all EU listed companies will be required to comply with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Although there are many users of company accounts – such as tax authorities, regulators, employees, customers and suppliers – financial accounting is primarily designed for the investor, to inform them of the company’s financial performance and allow them to make investment decisions. Therefore, accounting practice draws a narrow boundary around the company for financial reporting.

The boundary uses the concept of control: does the organisation have the

ability to:

1. deploy economic resources and

2. benefit (or suffer) from their deployment?

If so, then the economic resources, and the benefits or costs which are associated with them, are included in the financial accounts. If not, the resources and the associated benefits or costs are not included.

3.3 Full cost accounting Present financial accounting and conventional economic measurement do not capture all the consequences of economic actions. Externalities – costs and benefits that do not accrue directly to the organisation – are not included in the financial accounts.

In a market-based system people are influenced by the pricing signals that are available. If prices do not include all the costs and benefits, then how can the market give the signals which allow for the most appropriate economic, social and environmental decisions? Full Cost Accounting is the general name for attempts to ‘get the prices right’, and so allow improved market-based decision-making. As such Full Cost Accounting refers to the external dimension of accounting for an organisation’s impacts. The sustainability accounting in this guide also includes examples of the internal dimension. (For further introduction and discussion of Full Cost Accounting see Bebbington et al, 2001 published by the ACCA.) For example, petrol emissions from transport contribute to acid rain, climate change, as well as adverse health effects arising from a reduction in air quality.

These environmental and social impacts generate real costs to society now and in the future. However, they are not reflected in the price of fuel. These externalities are not wholly borne by the person purchasing the petrol and driving the car. Externalities may also be positive: the car may be performing any number of tasks that lead to benefits to wider society (an ambulance, a truck transporting recycling material, a family visiting relatives).

There are means of bringing external environmental impacts within the control boundary of an organisation. Mechanisms such as taxes, levies or compliance costs internalise the cost of the environmental impacts so they are being recognised by the conventional financial accounting system, and earnings are reduced as a result. It remains true, however, that the extent of such internalised costs is rarely reflected in terms of financial statement disclosures.

Residual, non-internalised costs, both environmental and social, remain unrecognised and continue to represent a hindrance to fully effective resource allocation.

Many sustainability accounting approaches generate information on potential costs, benefits and price changes. The information generated is the financial impact that would have been incurred if the organisation had been sustainable.

This is known as the shadow price or shadow cost approach. Sustainability accounting aims to produce a set of shadow accounts which allow the sustainability position of the organisation to be represented. They show the costs and benefits of investing in sustainability and the potential social, environmental and economic risks relating to external impacts. The more complete information that is provided in the shadow accounts enable more informed economic, social and environmental decisions to be made.

Where an organisation is committed to work to sustainability principles such as described in the SIGMA Guiding Principles, sustainability accounting enables them to understand the financial implications of their progress towards meeting their commitments.

3.4 Drivers for change

The drivers for change are given in Appendix 1 and are broadly:

• Financial accounting and the service economy Financial accounting was codified in an era where manufacturing organisations dominated. It has not kept pace with the change to a service economy, so that crucial elements of an organisation’s success – such as reputation and creativity – are not represented.

• Financial accounting and sustainability Since financial accounting was codified there is a growing understanding of the global environmental, social and economic consequences of largescale industrialisation. Making decisions for sustainable development requires a broader perspective and longer timeframes than provided by financial accounting.

• Changing requirements of corporate governance Organisations are under more and more pressure from regulators and wider society to report on their environmental and social performance in the form of sustainability reporting.

• Management benefits of sustainability accounting Sustainability accounting can be part of operationalising sustainability in an organisation.

As a result of these changes in the broader business environment, it is possible to observe changes in the ways companies are now communicating.

There is an upsurge in non-financial and forward-looking reporting initiatives, as well as growing take-up of sustainability reporting. It remains true, however, that financial accounting is still struggling with issues such as the valuation of intangibles and the internalisation of environmental and social costs. Narrative and sustainability reporting are attempts to circumvent such measurement problems.

4. Overview of Sustainability Accounting

4.1 Introducing multi-dimensional accounting Financial accounting traditionally records the financially-related flows and stocks of an organisation in the form of the Profit and Loss Account and the Balance Sheet, respectively.

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