Sustainability and Shareholder Value

Today’s corporations face increasing expectations for taking an active role in meeting the world’s environmental and social challenges. The accounting profession, too, has a critical role to play in helping to meet these challenges.

As businesses and other organisations rise to the occasion by adopting and implementing sustainable business practices, it will be essential for finance and accounting professionals to assume a greater leadership position in sustainability, and bring their skills to bear to ensure the long-term viability of their organisations.

Accountants are actually well-placed to oversee the integration of sustainable business practices into the DNA of their organisation. They have the skill sets to provide the information, analysis and options to inform the right decisions and ensure organisations are creating strategies that mitigate environmental and social risks and focus on the long-term. In their role as information providers, accountants can be very influential; they can change mind-sets and influence decision making processes and reporting.

Corporate sustainability programs are evolving. Companies and their executives are increasingly recognising the importance of sustainability to the future of their businesses. While many corporate sustainability initiatives began because organisations felt they had to (in response to compliance requirements) and/or that they should have them (in support of corporate values statements), more organisations now want to deploy sustainability programs to reap greater shareholder value.

Rather than treating sustainability efforts exclusively as a response to legal and regulatory requirements, more organisations are now integrating sustainability activities into how they manage reputation risk, generate cost savings and ensure long-term profitability and competitive advantage.

Corporate sustainability programs are also expanding in number across the spectrum of company size and industry sector. No longer solely the domain of the smokestack industry or large multinational conglomerates, organisations of all types and size are increasingly implementing sustainability programs and practices. However, how these efforts look and operate varies tremendously by country, industry, company size and individual company.

As with any rapidly evolving business discipline, organisational sustainability has yet to settle upon a standardised definition or approach. ‘If you walk into a room and start talking about sustainability you will find very quickly that almost everyone has an opinion and a different level of education related to sustainability’, notes Steve Leffin, Director of Global Sustainability for US based UPS’ corporate plant engineering. ‘This is largely because sustainability comprises a complex array of issues.’

To produce a snapshot of this evolution, the American Institute of Certified Public Accountants (AICPA), Canadian Institute of Chartered Accountants (CICA) and the Chartered Institute of Management Accountants (CIMA) conducted a survey of organisational leaders who are members of these associations. The survey, which defines sustainability as ‘the consideration of environmental and/or social issues in the value creation process along with the financial performance of the enterprise’, asked respondents questions in four areas:

• Sustainability drivers and strategy
• Sustainability program scope and priorities
• Measurement, reporting and assurance
• The finance function’s involvement

• Board and senior management commitment
• Understanding and analysing the key sustainability drivers for the organisation
• Integrating the key sustainability drivers into the organisation’s strategy

• Ensuring that sustainability is the responsibility of everyone in the organisation (and not just of a specific department).
• Breaking down sustainability targets and objectives for the organisation as a whole into targets and objectives which are meaningful for individual subsidiaries, divisions and departments
• Processes that enable sustainability issues to be taken into account clearly and consistently in day-to-day decision-making
• Extensive and effective sustainability training

• Including sustainability targets and objectives in performance appraisal
• Champions to promote sustainability and celebrate success
• Monitoring and reporting sustainability performance

 Sustainability drivers and strategy

Among all survey respondents, compliance and regulatory requirements remain the most commonly-cited critical driver for both large companies (34%) and SME companies (24%). SME respondents identify ‘efficiency and cost savings’ (19%) as the second most common driver.

The second-ranking critical driver for large companies was ‘reputation/brand risk management’ (32%), followed by ‘achieving competitive advantage and long-term profitability’, ‘efficiency and cost savings’, ‘the value set of the company and/or its leaders’, and ‘customer demand for sustainable products’, respectively

Exhibit 1 - Critical sustainability drivers - MNCs

Exhibit 2 - Critical sustainability drivers - SMEs

Reporting and assurance

Less than one-third of all respondents currently include sustainability information in their external reports. Large companies are much more likely to do so than small to medium-sized enterprises (see Exhibit 3). Among large companies that incorporate sustainability information into their external reporting, 29% include sustainability information in their annual reports, 17% publish separate sustainability reports and 13% do both.

 

Exhibit 3: External Reporting

Among responding companies that share sustainability information in formal external reports, 73% do not request assurance for this information via a third party; 13% request assurance via an external firm (other than a professional accounting firm); 8% request ‘reasonable assurance’ through a professional accounting firm performing an attest engagement and 5% request ‘limited assurance’ through a professional accounting firm conducting a review engagement (see Exhibit 4).

Exhibit 4: Assurance and sustainability

CIMA, the Chartered Institute of Management Accountants, founded in 1919, is the world’s leading and largest professional body for management accountants, with 183,000 members and students operating in 168 countries, working at the heart of business.