Key considerations
- Is sustainability relevant when raising finance?
- How should sustainability be integrated into budget planning?
- How can sustainable social and environmental impacts be represented within accounting?
- How does sustainability relate to financial opportunties and risks?
- How can finance staff develop the knowledge and skills to build sustainability into their role?
1. Is sustainability relevant when raising finance?
Debt. Some commercial lenders now make assessments of environmental and social risk to inform their decision of whether to provide finance or not. With these lenders, if your organisation has considered environmental and social impacts you will be more likely to obtain finance.
More widely, any information on sustainability provided to potential lenders can help address one of the common criticisms of traditional financial reports – which is that they only contain historic data. Information on sustainability tends by its nature to be more forward looking.
Lenders are increasingly looking to provide finance for sustainable projects or organisations in order to bolster their own corporate reputations. This is another reason for organisations to consider sustainability before seeking finance.
More information on the financial industry’s approach to sustainability is in the Finance sector module.
Equity. Socially Responsible Investment is a growing area, with some estimating the European market to be worth over £1 trillion by the end of 2007. The market is now supported by indexes, such as FTSE4Good, which provide independent benchmarking of environmental and social performance. There are therefore a growing number of investors looking for sustainable organisations to invest in.
Public sector. Sustainable development is now a key government objective, so there should be more support available than ever before for project options which target sustainable outcomes. However, these options can only compete for resources with less sustainable options if they are compared against appropriate criteria. Such criteria might be qualitative or quantitative. How to decide such criteria is discussed in appraisal and evaluation techniques.
Guidance on how to raise finance for sustainable projects within local government is available from the Sustainable Development Commission .
2. How should sustainability be integrated into budget planning?
To ensure budgets will deliver sustainability as a corporate priority, Forum for the Future recommends that organisations develop a sustainability integration tool.
Once projects that seek sustainable objectives have been approved, they can be fed into budget planning. The next question is then whether the additional benefits brought by choosing the sustainable option need to be reflected in budgets and accounts…
3. How can sustainable social and environmental impacts be represented within accounting?
Attempts are being made to develop methodologies by which external or intangible costs and benefits into internal monetary terms. One example is the work of the SIGMA Project. However, a mature and viable methodology for fully integrating sustainability into financial accounting remains an objective to be worked towards, rather than a mature practice to be applied.
It is, however, the case that since 1 October 2007 Companies Act legislation has required organisations to disclose and comment on environmental liabilities in their annual reports. This could push those involved in financial reporting to give greater consideration to external environmental impacts and how to value them. The legislation states:
"A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have (amongst other matters) regard to –
a. the likely consequence of any decision in the long term,
b. the interests of the company’s employees,
c. the need to foster the company’s business relationships with suppliers, customers and others’
d. the impact of the company’s operations on the community and the environment"
Also on 1 October 2007, reporting requirements were expanded on to build on the obligation for large companies to produce a Business Review that includes environmental matters, where appropriate. This requirement is part of the EU Accounts Modernisation Directive which already affects all companies reporting from 1 April 2005. Medium-sized companies are strongly encouraged to report on these issues voluntarily.
High profile legal claims regarding the long term impacts of such things as cigarettes, asbestos and now even greenhouse gas emissions may also help move things in a similar direction.
4. How does sustainability relate to financial opportunties and risks?
Social and environmental factors can present as great opportunities and risks for businesses as economic factors. For example, climate change will bring new business opportunities as a result of greater demand for low-carbon goods and services. But it will also bring:
- physical risks resulting from changes in weather;
- regulatory risks arising from national and international policies imposed on organisations to reduce greenhouse gas emissions;
- reputational risks generated by customers’ and other stakeholders’ perceptions of action or inaction on the issue; and
- competitive risks arising from rising energy prices and changes in demand for certain products and services.
These issues have been explored by John Llewellyn in his reports on 'The Business of Climate Change'. These papers also outline some of the opportunities brought about by climate change and the implications for various industries. These include both opportunities to use new technologies to stimulate growth and to generate business in new markets such as carbon offsetting.
By embedding sustainability into financial management, an organisation can better plan for such opportunities and risks in its decision making. For more background, see the Sustainable Development Commission’s 'Financing Local Futures'.
5. How can finance staff develop the knowledge and skills to build sustainability into their role?
The accounting profession’s skill-set in information analysis and reporting, and in the assurance process, makes it well-placed to help organisations meet the challenges of sustainability. This was recognised in a 2004 report published by the Institute of Chartered Accountants in England and Wales. The ICAEW website has a wealth of resources to help accountants explore how sustainability can impact on their work, as do the Association of Chartered Certified Accountants and The Chartered Institute of Finance and Accountancy.
The Sustainable Development Commission’s 'Financing Local Futures', though primarily written for local government professionals, has many resources that are applicable to any organisation, for example the top ten tips page. For more information on developing skills in sustainability more generally, see the Skills module .
Are there key considerations we haven't included? If so, please let us know.