Organizations are struggling to understand the implications of environmental and social factors in their finances, operations and strategy, according to a new report from the Prince of Wales’s Accounting for Sustainability Project.
While some organizations are beginning to incorporate environmental and social information into their strategy and decision making, the job is often delegated to the corporate social responsibility or sustainability team, with sometimes limited impact on the wider business, and usually does not reach board level. There is a need for more robust information, data, methodologies and collection systems to allow more effective integration of environmental and social factors into decision-making and strategy, the report noted, but at present, there is not sufficient confidence in the information provided.
“The commercial rationale for incorporating these factors into decision making at board level has not yet been clearly articulated,” said the report. “The moral case is not enough.”
The report was presented Thursday at Prince Charles’s annual gathering of international accounting and business leaders, known as the Accounting for Sustainability Forum. The event was attended by approximately 200 accounting and business executives, including investors, government officials, academics and other stakeholders. The forum took place at St. James’s Palace in London, where attendees heard the next in line to the British throne speak about the role of the finance and accounting community in helping steer the world economy for the future.
"I am sure I don’t need to remind you that I am no expert in matters of finance and accounting," said Prince Charles. "I am, apparently, as various organizations of the media seem to insist, an interfering busybody! But I suppose this forum shows that being a busybody works! However, as some of you may know by now, I have been keen for many years to highlight that your community sits on the front line of developing a genuinely sustainable approach to business."
The prince also referred to the expected delivery by his son Prince William and daughter-in-law Kate Middleton, also known as the Duke and Duchess of Cambridge, of a future heir to the throne. "As many of you will know, the daunting challenge of building a better world that provides for a better life for everyone, all within the environmental constraints of our planet, is one that I have been concerned about for many years," he said. "And now that my first grandchild is on the way, even more so! Unfortunately, my concern has been portrayed as purely environmental when I have been at pains to point out just how significant these issues are to economics, business and long-term security. That is why I set up my Accounting for Sustainability Project eight years ago – to demonstrate that extending decision-making and reporting to include social and environmental factors in a systematic way can add real value to your organization and is, in fact, the only pathway to success."
Prince Charles described the new report by his organization, and some of the findings. "A4S recently commissioned some research into what would drive organizations towards more future-proofed decision-making and the results make striking reading," he said. "Many organizations clearly feel that the case for why these issues are relevant to board-level decision-making has not yet been made. There is no shortage of alarming – in fact, frankly terrifying – statistics about our changing world that should make that case, but perhaps it is not always so clear to organizations what these facts mean for them. Just last month, the World Bank and the Pottsdam Institute published a report reminding us all of what the dire consequences would be if we continue on our current path and, by 2050, let temperatures rise by an average of 4 degrees Celsius above the levels they were before industrialization – dire for human wellbeing, dire for the natural world and, thus, dire for our economy and the ability of your organizations to create value. But the challenge is how we translate these 'big picture' studies into the risks and opportunities for individual businesses and public sector bodies. We certainly need to focus on the opportunities that this present challenge offers us. And there are plenty of them."
The report on “future-proofing” the economy indicated that accounting and financial professionals nevertheless remain unconvinced when it comes to understanding the risks and opportunities of environmental and social issues which will reshape the economy in the coming decades.
The report, "Future Proofed Decision Making: Integrating environmental and social factors into strategy, finance and operations," discusses the context in which the work of valuing social and natural capital is currently taking place. It found that senior decision makers first need to understand why these issues are relevant to board level decision making and for the credibility of the data to be proven.
A senior manager that participated in the research explains one view, “Almost the only non-financial factor that the board leads on is corporate reputation… Apart from that one, every single decision has to be financially-based.”
According to the United Nations Environment Program, the global economy depends on an estimated $21 trillion to $72 trillion of services provided by the environment, money that is traditionally not accounted for in decision making or profit.
The research indicates that although some decision makers recognized that sustainability drives growth for their companies, there was still skepticism by others about the quality and robustness of many types of environmental and social data, which is preventing more widespread use by senior management. As one chief executive interviewed explained, “The Holy Grail is a well-being impact: our contribution per unit of planetary impact. But this is incredibly difficult to grapple with.”
The report also summarizes the key barriers and drivers for change and how the Accounting for Sustainability Project’s work in 2013 will be shaped by the need to address these concerns, along with steps organizations can begin to take now. Part of A4S’s 2013 work program includes the launch of an international leadership network for CFOs. A4S will also take part in the development of a training program for CFOs and the finance community more generally, working in partnership with the University of Cambridge's Programme for Sustainable Leadership and with WBCSD.
“There is a clear and urgent need to communicate better to senior decision makers - especially CFOs - the business case for considering the environment and society in the day-to-day running of their organization,” said A4S director Sarah Nolleth in a statement. “Not only do the report findings show that the business case needs to be articulated more effectively, but they also show that it needs to be made in the right way and using the right language in order for change to take place.”
Along with Prince Charles, other speakers at the forum included World Business Council for Sustainable Development president Peter Bakker, former International Corporate Governance Network chair Christianna Wood and Unilever CFO Jean-Marc Huët.
The report recommended that the valuation of environmental and social factors in financial terms should be done in a rigorous way using methodologies developed by trusted sources if they are to be widely adopted. “Some factors that are commonly understood to have an ethical dimension— such as child labor or worker fatalities —should arguably not be given a financial value,” said the report. “However, where possible, environmental and social factors should be linked to financial metrics in some way such as through mitigation, regulatory or restoration costs so that they resonate more effectively with key decision makers and can be more easily linked with strategic outcomes.”
A few organizations are already convinced of the commercial need to respond to significant environmental and social issues and have begun to broaden the information they use to set strategic objectives and inform investment decisions, the report noted. Within these companies, senior leadership is key, and in some cases CFOs have been the driving force for change.