THERE HAS been a steady rise in sustainability reporting over the last years, much of which has been voluntary. The recent decision by government to make the reporting of greenhouse gas (GHG) emissions mandatory further increases the sustainability role of the finance director.
The historic development of environmental regulation, taxes, levies and now mandatory reporting has the potential to create confusion and build the perception that addressing the green agenda is a burden. The evidence is however that embracing sustainability can lead to short-term profitability improvements and longer term competitive advantage.
To maximise the opportunity it is important to stand back and understand the trends driving the short-term reporting and regulatory challenges. By doing so it is possible to not only deal with the short-term needs but to ‘future proof’ the organisation by addressing environmental systems, management and governance.
The following trends have been evidently growing for some time.
The changing environment
At the core of all that follows is the fact that real environmental constraints are growing. There has been a lot of emphasis on carbon (greenhouse impact and fossil fuel dependence) but all natural resources are challenged with economic and population growth. Even the most hardened sceptic cannot deny a growing evidence of data that water, waste, critical raw materials, agriculture, ecosystems and biodiversity are all coming under pressure. Every business needs to know how it will be affected across its whole value chain, extending this to an understanding of the impact on its supply chain and markets for products.
Rising cost of the environment
The costs resulting from these constraints are being internalised; directly through material costs and indirectly through government by the way of regulation, levies and taxes. In the UK there are nine significant environmental taxes and the chancellor has stated recently that he plans to increase the proportion of tax revenue that comes from green taxes. Companies should know where these taxes are hitting the business and what is being done to control them. The Carbon Reduction Commitment (CRC) is the most recent high profile example of how an environmental constraint has over time become a cost on business. Although the CRC was a particularly unpopular mechanism and a proposal for simplification is in consultation, it is likely that whether it survives or not environmental taxes will only grow. This is an area of significant potential competitive advantage, as those businesses that get these rising costs under control first will be the ones that win through.
Environment and reputation
The link between environment and reputation has strengthened and many companies have been proactive in the management of their reputation. However, in the fast moving socially connected world, with the increased complexity of managing global environmental risks brands can be trashed in days. Society is driving a need for environmental disclosure. There are a number of voluntary global initiatives for reporting sustainability performance for example the Carbon Disclosure Project, Global Reporting Initiative (G4, the fourth edition is currently in consultation). A key thrust of the recent Rio 20+ was the recognition that corporate sustainability reporting was important; “business groups should work with governments and international agencies to develop a framework for sustainable development reporting, and should consider mandatory reporting by corporations with market capitalizations larger than $100m”. It was in this context that the UK government announced the introduction of mandatory GHG reporting.
Environment and investors
Investors have been slow to recognise the need for companies to manage their environmental sustainability. However, for all the reasons mentioned above, investors are starting to ask for better and more consistent reporting. There is a growing evidence base of the profitability improvements that can be achieved. There have also been a number of high profile cases of environmental issues not being managed resulting in significant destruction of shareholder value.
Environment and company governance
There is a point beyond which government cannot micro-manage the way an economy addresses all aspects of the environmental challenge. As a result there will be a greater burden placed on corporate management to take responsibility. GHG mandatory reporting will require public disclosure of carbon emissions in company directors’ reports. The UK Government has recently announced that it will introduce regulations under the 2006 Companies Act by April 2013. This will affect all UK companies quoted on the Main Market of the London Stock Exchange, estimated to be around 1,100 companies. Government will then undertake a review and decide in 2016 whether to extend the regulation to all large companies; this could bring a further 24,000 companies into the carbon reporting regime. There is also a move to increase Director’s responsibility for a company’s overall environmental performance, through the Companies Act 2006. This is currently under consultation.
Summarising the trends it is clear that what was voluntary will become mandatory, what could be managed outside the core will now need to be integrated into the fabric of decision making. It is clear that every business should embrace the latest development in GHG mandatory reporting and use it as vehicle to improve environmental systems, management and governance. It is an opportunity not just to satisfy today’s reporting requirements but an imperative for future survival and growth.
Jan Chmiel is CEO at the Institute of Environmental Management and Assessment (IEMA)
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