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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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EC (2001), Commission Recommendation of 30 May 2001 on the Recognition, Measurement and Disclosure of Environmental Issues in the Annual Accounts and Annual Reports of Companies. Official Journal of the European Communities 13th June 2001.

Gray R.H., D.L. Owen & C. Adams (1996) Accounting and accountability:

Changes and challenges in corporate social and environmental reporting (London: Prentice Hall)

Henriques A. and Richardson J. (forthcoming 2003), The Triple Bottom Line:

Does It All Add U? Earthscan, London.

OECD (1995) The Economic Appraisal of Environmental Projects and Policies:

A Practical Guide. Organisation of Economic Cooperation and Development, Paris.

ORNL (1995) Oak Ridge National Laboratory study Estimating Fuel Cycle Externalities. US Department of Energy.

Pearce D.W. and Newcombe J. (1998), Corporate Sustainability: Concepts and Measures’. CSERGE, mimeo.

Pretty J.N. et al (2000) An Assessment of the Total External Costs of UK Agriculture. Agriculture Systems 65(2000) 113-136.

RCG/Hagler Bailly (1995) New York Environmental Externalities Cost Study.

Richardson J. and Nurick R. (1999) Environmental Valuation: Theory, Techniques and Applications. Wye College, University of London.

Appendix 1: Drivers for change This section outlines the current financial framework and identifies drivers for change towards an integrated sustainability accounting framework. Some of the drivers are ‘pulls’ from regulators, investors and stakeholders while others are internal ‘pushes’ for better managerial information.

Financial accounting and the service economy Much of the present financial accounting framework was codified in the early 20th century. Consequently, financial accounting is well suited to the dominating businesses of that era: manufacturing industries where companies owned large amounts of plant and machinery and employed large numbers of manual workers.

In the last 20 years, the structure of the largest economies has moved from manufacturing to service industries. Companies now rely on the qualities of the services they provide, their innovation and how customers, investors and wider stakeholders perceive them. For example, a company like Nike controls its brand, product designs and the quality of production but the actual manufacturing is sub-contracted.

Even with the bear market of the early part of the new century, corporate market valuations exceed their accounting net asset value. The differences between market and book values are indications of aspects of company performance that fall outside traditional accounting methods. The difference is often assigned to intangible assets that represents the faith investors have in the ability of the company to deliver net economic benefit over the long term.

This faith is not based on the historic cost of the assets and liabilities but on the reputation of the company to deliver consistent competitive advantage.

The competitive advantage can be assigned to intangible assets such as brands, employee capabilities, management reputation and so on. For example, when valuing a film production company, the market does not first consider the fixed asset value of the cameras or editing equipment. They consider the track record the companies have in producing films which earn money, and whether that feat can be repeated.

Traditional accounting is still struggling with how to provide an objective financial valuation methodology for these intangible assets. Increasingly analysts and investors are using data that is outside traditional accounting when valuing a company. Many of these are non-financial - like customer churn (retention and recruitment) rates. This guide provides examples of companies trying to communicate their own monetised measures.

Financial accounting and sustainability When the financial accounting principles were being codified, the global environmental impacts of industrialised society were not a pressing issue. At that time industry was considered socially responsible if it provided a return on investment and a platform for national economic growth.

Now, however, there is a growing understanding of the global environmental, social and economic consequences of large-scale industrialisation. The demands made on companies to demonstrate that they are socially responsible are changing. The focus of economic progress is moving from development – economic growth – to sustainable development – economic, social and environmental improvements on a global scale. Traditional accounting was not designed for this purpose but is presently undergoing a transformation process whereby historical financial accounting data is increasingly supplemented by non-financial data relating to the broader sustainability debate. The sustainability accounting examples in this guide are part of that transformation.

Making decisions for sustainability requires a broader perspective that draws on economic, social and environmental dimensions. It must also recognise longer timeframes that enable appropriate consideration of the way current decisions impact on future generations.

Sustainability accounting is one approach to the challenge of making decisions for sustainability.

Changing requirements of good corporate governance Accounting for the financial aspects of an organisation’s performance is a statutory requirement. Accounting for sustainability is currently a voluntary activity. However, the changing corporate governance environment, as evidenced by the Turnbull Reportx, the UK Company Law Reviewxi, and the recent Association of British Insurers Report (2001)xii, means that companies are increasingly reporting aspects of their social and environmental performance.

Reporting sustainability accounts can increase transparency with stakeholders and deliver benefits. For example, this provision of information can help a company negotiate more favourable terms with the investment community through disclosure demonstrating how its management are identifying;

evaluating and managing social and environmental risks. Where appropriate, sustainability accounting can also be part of how an organisation communicates with its regulators.

Management benefits of sustainability accounting Sustainability accounting can be part of operationalising sustainability in an organisation. Sustainability management accounts provide a useful internal reporting tool to track progress towards sustainability goals. In particular, they

can be used to:

• Identify resource efficiency and cost-saving opportunities by routinely collecting information on environmental and socially related expenditures and show how effective these expenditures are by linking them to financial benefits and environmental and social performance.

• Compare performance and identify best practice

• Link improvements in sustainability performance with specific and identified financial opportunities

• Highlight the social and environmental risks associated with current financial performance – using external costs as an indicator of risk.

• Identify which stakeholder relationships present the greatest social and environmental risks.

• Show how environmental and social external costs decline over time with commitment to sustainability.

• Raise awareness and promote internal change and innovation Sustainability accounting provides an opportunity to contribute to the development of an individual business case for sustainability.

Appendix 2: Economic Value Added

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1 Operating expenditure Staff costs (apportionment of personnel costs allocated to environmental management) 2 Suppliers: environmentally related operational costs 3 Regulatory: includes EA and local authority charges;

waste management licences; landfill tax; climate change levy 4 Other: includes contributions to environmental groups 5 Capital Expenditure – Depreciation End of pipe Integrated capital expenditure Total Environmental Costs Environmental Benefits 6 Revenue Generated e.g.

Revenue from recycled waste Additional revenue from environmental price premium Additional business generated due to environmental reputation 7 Cost Savings e.g.

Reduced waste disposal costs Energy conservation savings Packaging cost reductions 8 Regulatory Costs Avoided e.g.

landfill tax savings climate change levy savings trade effluent savings penalties/fines avoided 9 Grants/subsidies received e.g.

enhanced capital allowance for energy efficient appliances Total Environmental Benefits Net environmental costs/benefits

–  –  –

1 Operating expenditure Staff costs (apportionment of personnel costs allocated to socially related activities; staff training & development;

other staff welfare benefits) 2 Suppliers: socially r related operational costs (e.g.

additional cost of social/ethical specification on products or suppliers) Regulatory: includes socially related taxes and penalties and fines for non-compliance (e.g. national insurance contributions; health and safety fines).

Community: contributions to community activities (grants; in-kind contributions) Capital Expenditure – Depreciation Socially related investments (e.g. health and safety; staff welfare and recreation facilities) Total social Costs Social Benefits 6 Revenue Generated e.g.

Additional revenue from social/ethical price premium Additional business generated due to social/ethical reputation 7 Cost Savings e.g.

Savings from low staff turnover Savings from reduced insurance due to improved health and safety record Increased staff productivity & morale 8 Regulatory Costs Avoided e.g.

Penalties/fines avoided 9 Grants/subsidies received e.g.

Investors in people awards (if money received) Grants for disability access Total Social Benefits Net Social Costs/Benefits Appendix 5: The Co-operative Bank Model (This appendix was written by Paul Monaghan of Co-operative Financial Services.) For all major products, the bank has asked its customers to specify the degree to which ethical and ecological factors influence decision making, as exemplified in Figure 1.

Figure 1: Personal Current Account Customer Example:

'Which of these factors are important in your decision to open and maintain a Co-operative Bank account?' Any number of influencing factors can be specified

• Branch near home/work

• Parents banked there

• Recommended to me

• Dissatisfied with previous bank

• Image/reputation

• Ethical/ecological reasons

• Lower charges/competitive rates

• Other 'Which one of these factors is most important in your decision to open and maintain a Cooperative Bank account?' Only one influencing factor can be specified

• Branch near home/work

• Parents banked there

• Recommended to me

• Dissatisfied with previous bank

• Image/reputation

• Ethical/ecological reasons

• Lower charges/competitive rates

• Other This produces a response range. For example, 53% of personal current account customers state that 'ethics' is one of a number of important factors, whilst 31% cite 'ethics' as the most important factor. Data is derived via comprehensive telephone polling. Computers randomly sort options presented to pollsters to ensure that no bias arises from the order of presentation. For reasons of commercial confidentiality, the bank will not publish the ethical motivation factors of each product as this might allow competitors an unfair advantage when designing and marketing products. However, all data has been viewed by the bank's social auditor, who can provide assurance that factors have been formulated in a balanced and robust fashion. The bank does indicate the net profitability contribution of Personal Banking and Corporate and Business Banking.

It is interesting to note that, where comparative information is available for UK retail banks in relation to the importance customers place on ethical and environmental factors, the data indicates that Co-operative Bank customers are uniquely placed to express a preference. For example, MORI Financial Services conducts research on a biannual basis into the influence of various factors on the opening of personal current accounts. This research strongly indicates 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, and this is by far the most frequently specified reason), it is only rarely specified by customers of other banks (just one percent cite ethics as being influential in opening an account). This is considered to be a consequence of the fact that only customers of The Co-operative Bank are routinely presented with products and services in which 'ethics' are constituted as a core component.

Findings The bank's ethical and ecological positioning makes a sizable contribution to the bank's profitability. 24% of profits can be attributed to customers who cite ethics as an important factor (2001: 26%), and 13% to customers who cite ethics as The principal factor behind the reduction in 'ethical' profitability contribution between 2001 and 2002 was the improved contribution of Treasury and Asset and Liability Management to the bank's profitability in relation to retail banking.

As a proportion of retail banking profits, ethical customers are in fact making a larger contribution in 2002. There was an almost two-fold increase in the percentage of Visa credit card customers stating that ethics and ecology are important factors in opening and maintaining an account. In addition, now Business Direct and Direct Banking customers both state that ethics and ecology is the number one reason for opening and maintaining an account.

Of the profitability attributed to customers who cite ethics as the most

important factor, 72% is attributable to Personal Banking customers (2001:

69%) and 28% to Corporate and Business Banking customers (2001: 31%).

Of the profitability attributed to customers who cite ethics as an important factor, 68% is attributable to Personal Banking customers (2001: 61%) and 32% to Corporate and Business Banking Customers (39%).

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