Challenges to overcome
Perceived conflicts with the drive to be more efficient
Efficiency and value for money are important considerations in project planning and financing. A sustainable outcome may result in higher short term costs than would otherwise be accepted, in order to achieve the long-term benefits. Yet people and organisations are often under pressure to reduce short term costs, for example as part of efficiency drives. This can make it difficult for them to select the most sustainable option.
An important aspect of sustainability is the efficient use of resources, so it should be consistent with drives to improve efficiency. However, this is only possible if people recognise efficiencies as long term efficiencies. By taking a long term view of all the costs of a project, from inception to decommissioning and possibly beyond, where all social, environmental and economic costs are taken into account, both desires can be satisfied. HM Treasury guidance already emphasises that value for money must be assessed over the whole lifetime of public sector projects.
Basing spending decisions against sustainability criteria is the only way to ensure value for money over the long term. This means taking a 'whole-life cost' approach that takes account of environmental, social and economic considerations. On the other hand, decisions based on up-front costs alone can sometimes be a false economy.
Sustainable Development Commission, Financing Local Futures
In some cases, decisions made against sustainability criteria can also bring direct financial benefits in the short term, such as when implementing environmental efficiency measures which reduce use of energy, water or other resources. For some examples from Wales, see Appendix 2 of this report from the Wales Audit Office. However, where direct financial benefits do not result, short term considerations often outweigh the long term view, as highlighted in a 2007 National Audit Office report on government construction . To help overcome short term considerations, the NAO recommended that:
- there should be greater focus on 'Quick Wins' (products which meet environmental standards at minimal cost) and any other sustainable features which are cost neutral or have the potential to deliver cost savings in the short term; and
- full account should be taken of environmental targets - and the wider social and economic impacts which sustainable projects can bring. In this way environmental limits can be recognised and taken out of the value for money equation (much in the same way as it would be expected that organisations would no longer trade off health and safety concerns against cost.
Value for money is an important concept in procurement as well as a wider financial management consideration. If finance and procurement functions can work together to achieve a common viewpoint, this will greatly assist the drive towards a sustainable organisation.
Short term thinking
Although there are clear benefits in making decisions based on a long term view, several factors contribute to organisations often having a more short term outlook. Examples include the folllowing.
- Short term budgeting and reporting cycles. Many organisations operate on the basis of annual or even shorter cycles. For example, public bodies tend to receive their funds in yearly tranches, with little flexibility to retain unspent funds at the end of the year.
- Split between capital and operational budgets. In the public sector, budgets are split in such a way that discourages investment in capital works to reduce future years’ operational costs. One example of how to overcome this comes from the Federal Buildings Initiative in Canada.
- Greater uncertainty in the long term. Discounting cash flows in future years to today’s terms reflects this greater uncertainty, but what discount rate is appropriate in the very long term depends on a moral question of intergenerational equity.
Recognising external benefits and monetising intangible benefits
In making a decision based on social, economic and environmental benefits, your organisation may also benefit directly itself; for example, buying recycled products can be cheaper, or buying from local farmers can provide better quality food. But on other occasions, your organisation might receive no direct benefits from such a decision and would bear the costs.
Even in cases where the organisation as a whole would save money over the long term, such decisions might not be taken if they do not meet the objectives of a particular department within the organisation (or indeed, a particular organisation within the Public Sector). Here, the problem is often the lack of joined up budgets; or the lack of mechanisms allowing for specific budgetary transfers between departments or organisations. One example of arrangements which have overcome this barrier is the Surplus Federal Real Property for Homelessness Initiative from Canada.
Representing the external costs and benefits (those not directly borne or received) of an organisation’s activities in monetary terms, thereby fully integrating them into its accounts, has been described as the holy grail of sustainable accounting. It is however, a very difficult thing to do. Various attempts at this have taken place. Decision makers who wish to strive for sustainability accounting should explore these as a first step, and that way build up a picture of what might be possible in their own organisation. A good place to start is the resources provided by the SIGMA project.
For more detail on Full Cost Accounting, see the article of that title in 'Sustainability accounting and accountability', edited by Unerman, Bebbington and O’Dwyer.
Are there challenges in this area we haven’t discussed? If so, please tell us about them.
Do you have another example of how these challenges can be overcome? If so, please submit a case study.