«Published by the SIGMA Project, September 2003 SIGMA Project, 389 Chiswick High Road, London, W4 4AL SUSTAINABILITY ACCOUNTING GUIDE Contents ...»
The Co-operative Bank has considered the financial benefits to the bank of its ethical policies through focusing on its customers’ behaviour. Using the Cooperative Bank Model they estimated the additional profit generated from attracting ethically minded customers. The methodology estimates the net contribution that its ethical and ecological stance has made to net profits and reported the results in its Partnership Reports for 2000, 2001 and 2002iv. The findings show that in 2002 around 24% (est. £30 million) of profit can be assigned to customers who cite ethics as an important factor, and 13% (est.
£16 million) to customers who cite ethics as the most important factor.
The results were based on a survey for all major products, which asked customers to specify the degree to which ethical and ecological factors influence decision making. The research strongly suggests that whilst ‘ethics’ is a major determining factor for customers of The Co-operative Bank (28% cite ethics as being influential in opening an account) it is only rarely specified by customers of other banks.
The Co-operative Bank Model is worked through as a practical example inAppendix 5.
London Benchmarking Group (LBG) Model has focused on community. The LBG Model provides a methodology to measure the costs of corporate community involvement and the associated output effects. The model assigns monetary value on the ‘input’ costs of a company’s community involvement programmes, whether the contributions are made in cash, time or in-kind.
Combining this with the programme management costs, covering salaries, benefits and overheads of staff involved in community relations, enables a total cost of community involvement to be evaluated.
The ‘outputs’ or benefits of community involvement may be expressed in
financial and/or non-financial terms. For example:
• Leverage of cash and resources from other sources drawn in by the programme
• The community benefit, such as the number of people in society who benefit
• The business benefit which accrues.
The categories of input costs and output benefits of corporate community programmes are summarised in the LBG matrix (Table 4).
6. External Flows: Extending the P&L Account Sustainability accounting extends the traditional accounting boundaries to take into account environment, social and economic costs (and benefits) that accrue to the full range of stakeholders. A distinction is therefore made between private costs and benefits which accrue directly to the organisation and societal or external costs and benefits that accrue to other stakeholders.
Stress has impacts both inside an organisation e.g. through lost productivity, outside an organisation e.g. the quality of life of the employee and family. The impact to the organisation is internalised as lost productivity and could be drawn out in a Social Financial Statement. The wider impacts on the individual and society are not internalised and so would appear in an account of external social costs.
To prepare external accounts an organisation must collect new information on the external environmental, social and economic impacts relating to the organisations' activities. These impacts are evaluated in financial terms where possible.
There are essentially 4 steps in the preparation of external cost accounts:
1. Scoping impacts:
Ideally a stakeholder approach should be used to identify all significant environmental, social and economic impacts associated with the organisations’ activities. A full life-cycle approach will scope upstream impacts (associated with the supply of products and services);
downstream impacts (associated with the use, disposal or remanufacture of products) and at the operational level (associated with the manufacture and distribution of the product).
The SIGMA Stakeholder Engagement Tool provides guidance on how to identify and engage with stakeholders. This approach should be used to scope out environmental, social and economic impacts and to prioritise stakeholder concerns. This can be supplemented with internal documentation (such as the ISO 14001 Significant Aspects Register of Environmental Impacts); reports and interviews. This guide classifies environmental impacts according to the categories in the Global Reporting Initiative – which itself was prepared using a multi-stakeholder approach.
2. Determining boundaries:
This involves prioritising what impacts to account for and what impacts to consciously exclude. This is an important decision having a significant impact on the estimation of sustainable profits. As already noted, financial accounting boundaries are governed by statute and focus on economic resources under the company’s control. This narrow definition of organisational responsibility is being changed by recent legislation and voluntary guidelines affecting reporting of significant social and environmental risks. As sustainability accounting is currently a voluntary exercise, the choice between narrow or broad system boundaries will ultimately rest with the individual organisation. Decisions on boundaries and other issues should be disclosed in the accounts to give users a better understanding.
Full cost accounting requires that broad system boundaries be drawn that internalise the full impacts that an organisation has on social, environmental and economic systems. Box 1 shows the different types of costs that would be taken into account in a full cost approach.
Conventional accounting only includes Tier 0 (Usual Costs) and Tier 1 (Hidden Costs).
3. Monetary valuation of impacts Methods to assign monetary values to environmental impacts have been developed over the past decade and are increasingly accepted both within government and corporate circles. There are a wide variety of different types of environmental valuation methods that can be used – some more controversial than others. They can be split into those that are based on the costs to the organisation of reducing its environmental footprint and those that are based on valuing the damage cost to society. Appendix 7 provides a summary of the different environmental valuation approaches, selected examples of valuations and links to a range of public sources.
The valuation of external social impacts is a less well-developed and controversial field. In principle, the same approach to valuation could be applied to social impacts. For example, measures to prevent or reduce social impacts could be regarded as a form of avoidance cost. Likewise, compensation to affected parties could be regarded as a form of restoration cost. A practical example might be the costs of installing new safety devices to reduce accidents at work or the costs of incorporating measures to reduce the health or safety risks associated with the use or disposal of the final product.
4. The Triple Bottom Line: Calculating Sustainable Profit Whilst companies ‘add value’ through their activities they also extract value for which they do not pay. Financial profit is a measure of value added for the organisation – but traditional profit and loss accounts do not take account of external environmental, social and economic costs that impact on the wider society. Deducting total external costs from financial profit gives an estimate of the sustainable profit level.
Box 1: Full Cost Accounting Tier 0: Usual Costs Includes direct and indirect costs usually associated with the project of both a capital and revenue nature.
Tier 1: Hidden Costs These are additional costs that are usually found in overheads/general accounts. They would include regulatory and health, safety and environmental management systems – both capital and revenue in nature.
Tier 2: Liability Costs There are ‘contingent liability costs’ that are not presently incurred in a conventional accounting sense. They may emerge depending on circumstances (for example, if the law changes) and their likelihood can be estimated. Such costs include fines, future clean up costs and regulatory costs associated with a project.
Tier 3: Less Tangible Costs Costs and benefits that may be assessable in financial terms are likely to arise from improved sustainability management. These costs and benefits could include the loss/gain of goodwill arising from a project; changing attitudes of suppliers, customers, and employees; and advertising/image issues from sustainability performance.
Tier 4: Sustainability Focused Costs Costs that would be incurred if a sustainability focused approach was taken to a project or organisational performance. Costs to ensure zero environmental (and social) effect could be estimated. It is unlikely that such costs would become real costs in the absence of a radical change in the regulatory and operating environment.
Adapted from Bebbington and Thomson; p53
6.1 External Environmental Impacts The professional accounting bodiesv, the UK Government and the European Commissionvi are all encouraging organisations to measure, manage and report the impact of environmental risks and liabilities on their organisations’ financial positions. Negative environmental impacts relating to an organisations operations and products represent potential liabilities which need to be accounted for in financial terms as far as possible. Examples of external environmental cost accounting are drawn from Forum for the Future and Trucost.
Forum for the Future has pioneered the development of external environmental cost accounting which is now being applied by a number of leading UK companies including Marks and Spencer, AWG (formerly Anglian Water), Bulmers (the Herefordshire-based cider manufacturer); Interface Europe, Uniqema, UPM Kymmene, and Wessex Water.
The external environmental footprint of an organisation is assessed according to the GRI categories of environmental impact. For each type of impact a sustainability target is estimated using latest available evidence.
Using avoidance and restoration values is the least controversial methodvii as it is based on the actual costsviii that would be incurred by the organisation in order to prevent or avoid its external footprint. For example, the additional cost of switching to renewable energy represents the costs of avoiding energy-related emissions. Restoration values are the costs of rehabilitating or restoring the environmental damage caused by the organisation’s operations and products. For the energy example, investing in carbon sequestration is one restoration option.
Table 5 illustrates the application of external environmental cost accounting to Wessex Water which published the account in the main annual review and accounts for 2002/2003. The basic pro forma for the External Environmental Cost Account is presented in Appendix 6. For more detailed information about environmental values that are available from public sources see Appendix 7.
Table 5 has been developed as follows: Consumption (in Table 5 shown as ‘A’) is converted into emissions (‘B’ in Table 5); The difference between present emissions and the sustainability target (‘C’ in Table 5) gives a ‘sustainability gap’ expressed as the avoidance amount (‘D’ in Table 5,); For each impact, a unit cost is determined based on what the organisation would have to pay to avoid the impact in the first place or, if avoidance was not possible, what it would cost to restore any resulting damage (‘D, £ per tonne’ in Table 5); The total external environmental cost for that impact is converted to a monetary estimate by applying the unit restoration or avoidance cost to the ‘sustainability gap’ (‘E’ in Table 5).
Details on how to estimate an organisation’s external environmental cost using a similar method can be found in the Sigma Environmental Accounting Guide.
A second example is Trucost, a London-based environmental rating company that aims to provide a means for companies and other organisations to measure, manage and communicate their overall environmental performance.
In particular, the Trucost model allows organisations to measure their external environmental impact in monetary terms. Trucost calculates a rating that compares economic activity as shown in the published accounts (internal costs) with economic activity when adjusted for externalities. The rating is expressed as a single percentage figure and is a measure of the extent to which organisations have internalised their external environmental costs.
6.2 External Social Impacts This aspect of the sustainability accounting framework is still very much in its infancy. Consequently there are very few examples of organisations accounting for external social impacts in financial terms and there is scope for innovation.
Perhaps the most comprehensive (but somewhat dated) example of corporate accounting for the social costs and benefits associated with its activities is the preparation of a Social Income Statement by the Cement Corporation of India (see Gray, Owen and Adams 1996: 105-106).
More recently, BP in collaboration with the University of Aberdeen have developed the Sustainability Assessment Model (SAM) which is an accounting tool that tracks significant external impacts (including social) on a project basis.
Other examples can be drawn from liability settlements for social damages or valuation of specific aspects relating to the health and safety of products.
The SAM seeks to track significant economic, resource, environmental and social impacts of a project over its full life cycle and then to translate these impacts into a common measurement basis – that of money. The approach was applied to a discrete BP project, an oil and gas field development. The full accounting tool is available from Baxter et al (2002).
The SAM examined social impacts of oil and gas field development and
identified three elements of social impact:
• Social costs and benefits relating to employment Direct value generated and the quantification of the health and safety impacts of these jobs. This is expressed as an estimate of how much economic activity is generated based on the multiplier effect of using the wages paid in the economy.