Sustainability: the role of accountants

Sustainability: the role of accountants

Published in October 2004, Sustainability: the role of accountants, describes ways in which information supports mechanisms used to promote sustainable development and the challenges and opportunities for accountants that these present. The report takes a market-based approach, starting from the fact that individuals, societies and governments are interested in the environmental, social and economic impacts of enterprises and that professional accountants in business and in practice are likely to have an increasing role in meeting those concerns.

About the report

Reference is made to a wide variety of UK, European and global initiatives to foster sustainable development, including steps taken by governments, business and other organisations. Such actions are shown to take the form of eight different mechanisms:

• Corporate policies whereby the perceived expectations of society convince organisations of the merits of adopting policies on sustainability and publishing information about the policies and their impact.
• Supply chain pressure by which the expectations of society drive purchasers to promote a desired standard of sustainable performance and reporting amongst suppliers and others in the supply chain.
• Stakeholder engagement enabling those with a particular interest to influence the decisions and behaviour of an organisation, to engage an organisation in ongoing dialogue and a process of feedback to and from stakeholders, supported by information flows about sustainable performance.
• Voluntary codes through which society encourages organisations to improve particular aspects of their sustainability performance, often requiring a statement for stakeholders regarding compliance or an explanation of non-compliance.
• Rating and benchmarking by which investors and others, or agencies working on their behalf, grade organisations through the use of benchmarks or ratings on the basis of information on sustainability policies and performance and thus influence the behaviour of organisations and stakeholders.
• Taxes and subsidies to incentivise organisations to operate in ways that contribute to sustainability, requiring information in the form of tax returns and grant claims.
• Tradable permits whereby governments ration allocations of scarce resources or undesirable impacts so as to improve sustainability, requiring information about quota utilisation and prices to support the operation of fair markets.

To support each of these mechanisms, organisations, governments, tax authorities, market regulators and stakeholders need to rely on credible information flows if they are to operate effectively. This is an area where professional accountants can help, working with other experts where necessary. The report therefore looks at the potential role of accountants in ensuring that organisations and their stakeholders have the information available to support the mechanisms that will enhance sustainability.

Each of the eight mechanisms is dependent on the support provided by reporting and assurance, as are answers to questions about overall progress towards sustainable development and the contributions of individual organisations to sustainability. These supporting activities are dealt with in the final two chapters of the report:

• Information and reporting through which organisations facilitate, both internally and externally, the operation of mechanisms to promote sustainable development.

• Assurance processes through which organisations underpin the legitimacy of mechanisms to promote sustainable development.

Together, the eight mechanisms and two supporting activities constitute an infrastructure for promoting sustainability, in which the role of accountants and of the members of any other discipline or profession can be analysed in terms of its contribution to satisfying the wishes of individuals, societies and governments.

In addressing a topic, each chapter describes recent developments, summarises the existing involvement of the accountancy profession and points the way forward. Where applicable, the results of a recent ICAEW survey of practitioner opinions are also included.

Accountants and others who are not familiar with ways of promoting sustainable development will find that mechanisms such as supply chain pressure, stakeholder engagement and tradable permits are of particular interest.

Supply chain management practices play a key role in minimising reputation risks and promoting sustainable consumption and production. Companies wishing to offer their customers products or services produced in an environmentally and socially responsible manner need procedures and tools with which they can assess performance not only within their own structure but also along their value chains. Areas in which accountants are likely to be involved include the preparation and monitoring of purchasing policies and the design and operation of supply chain management systems.

Stakeholder engagement helps enterprises to anticipate issues, to deal with them proactively and to build a more sustainable business. An open dialogue with internal and external stakeholders can provide a better understanding of potential risks, an opportunity to detect concerns and to build, or rebuild, reputation and credibility. Effective stakeholder engagement is dependent on the provision and feedback of reliable information, including social, environmental and economic data.

Schemes involving the use of tradable permits enable desired outcomes to be achieved at minimum cost and are increasingly being used for purposes such as the reduction of greenhouse gas emissions. A trading scheme of this nature already exists in the UK and an EU-wide scheme is due to start on 1 January 2005.

For those businesses that are affected, the possession of emission permits, allowances and corresponding assets and liabilities will have important management and accounting implications. There will be a substantial role for accountants in reviewing information about emission levels and market prices and contributing to the management of trading activities.

This is the fourth report in our Information for Better Markets campaign.It follows Prospective financial information: guidance for UK directors, published in September 2003, New reporting models for business, published in December 2003, and Digital reporting: a progress report, published in September 2004. For more details visit www.icaew.com/bettermarkets.

Download the full report (PDF 413 kb/116 pages).

An Executive summary (PDF 65 kb/4 pages) and an Abstract (PDF 107 kb/6 pages) are also available.

This report draws on the results of an ICAEW survey on Environmental and Social Issues. To view the results of the survey, please click here.

For further information on the report, please email sustainability@icaew.com.

For printed copies of the report or the abstract, please telephone the Institute's technical department on +44 (0) 20 7920 8634.