Last updated: 18 May 2023 11:00 Posted in: Sustainability
Recording and advising on money-based transactions has been the ‘superpower’ of accountants for centuries. Accountants must now take account of natural and social capitals. Larger companies are already required to report on their environment, social and governance (ESG) impact. It is only a matter of time before smaller organisations are required to follow suit.
It is a mistake to wait for regulation before acting. Success is now influenced by the extent to which companies can mitigate the risks and take advantage of the opportunities in the new sustainable economy. Smart organisations (both big and small) are already implementing strategies that respect natural and social capitals in their business models. These will be the winners in the new sustainable world. The accountants advising the winners start by taking account of the impacts of natural and social capitals before they are reflected in financial or monetary transactions. They gain a strategic advantage by acting in advance of economic change.
The role of financial capital
Why will natural and social capitals inevitably be reflected in financial capital? The simple answer is that otherwise, society as we know it will likely fall into chaos as the natural world becomes uninhabitable in many places. Societies will be disrupted by water shortages, crop failures, biodiversity loss, pandemics and other disasters arising from climate change.
The following forces are driving natural and social capital into the accountant’s remit:
Governments: Governments globally are taking action to encourage organisations to account for natural and social capital by laws, taxes and incentives that accelerate the transition to environmental and socially positive outcomes.
The natural world: Severe weather events cost money in numerous ways. Biodiversity loss has been linked to issues such as pandemics, which disrupt economies. Abuses of the natural world are costly and are making some operations uninsurable.
Society/consumers: People are starting to understand the issues relating to environmental and societal justice and are concerned for the future. Consumers are beginning to make choices based on the sustainability footprint of their purchases.
Investors: Environmental and social issues put investments at risk. Investors are starting to require that their money positively impacts society and the environment. Regulators are accelerating the shift to responsible and impact-led investment.
Business acquirers: Businesses are being sold for a premium if they can demonstrate that they are mitigating the risks and taking advantage of sustainability issues.
Economics: Scarce natural resources, the impact of climate change and the cost benefits of green technologies create compelling economic scenarios. These save money and create competitive value and wealth for risk-takers and breakthrough inventions.
Technology: Methods of harnessing natural resources such as solar, wind and waves are less harmful to the environment. The cost of new green technologies is decreasing rapidly.
Customers: Consumers, larger companies and governments are bringing sustainability factors into their procurement choices, so it is becoming harder for non-sustainable businesses to win.
Employees: People want to work for companies that positively impact their communities, society and the environment.
Cost of running a business: Sustainability often means less waste, the avoidance of unnecessary consumption, less travel and improved efficiency. Businesses use fewer resources for the same outputs, resulting in savings and improved profits.
Purposeful business: A focus on natural and social capitals and how these integrate with the organisation’s goals and objectives brings about positive motivation and success.
Grant funding and bidding for tenders: Charities and businesses with sustainability credentials are being prioritised for grants over those that can’t demonstrate net zero plans and ESG credentials.
These forces are changing organisational business models. Accountants that include their impact on financial plans, business cases, budgets and cash flow forecasts help their clients to succeed in the new sustainable economy. Failure to adapt to these changes will result in missed opportunities and possible business failure.
Accounting firms must adapt to remain competitive in the new sustainable economy. You need to demonstrate that your firm intends to make profound changes to address the challenge. Appoint a senior partner or board member to focus on sustainability and ESG matters to inspire your teams and make things happen. This ensures that necessary resource is allocated. Embracing sustainability and ESG requires taking internal and client-facing actions to integrate ESG and sustainability into their practices.
Client facing initiatives
Integrating sustainability and ESG factors into your accounting firm’s practices can unlock new opportunities, drive business growth and help your clients to succeed in the new sustainable economy. Embrace the challenge and position your firm as a leader in the accounting industry, driving positive change for both your clients and the world.
Accountants have a crucial role in transitioning to a sustainable economy. By taking a proactive approach to incorporating natural and social capitals into your practice, your firm can capitalise on the opportunities presented by the new sustainable economy and help your clients become winners in this era of transformational change.
Dr Peter Ellington is CEO and Founder of Triple Bottom Line Accounting, a UK based digital practice providing a range of services to SMEs, and Associate Professor in Accounting at the University of East Anglia.
AIA is committed to educating its members in sustainability and green finance. As a professional body we are committed through our policy agenda to act as an authoritative voice within the accountancy sector to raise standards and education in green finance and sustainability. We also ensure that our members have the skills, knowledge and tools to promote sustainable business practices.