Accountants are helping the companies they work with deal with the kinds of sustainability issues that are becoming more of a concern for investors.
“Everyone thinks of accounting as measuring profit and loss, or something along those lines,” said Shari Littan, manager of corporate reporting technical activities at the Institute of Management Accountants. “But if you really look at what accounting is, it’s considering the fact that you have limited resources. Your organization and clients have limited resources so we have to collectively make decisions.”
She compared it to the iconic 1968 photo that astronauts on the Apollo 8 mission took from space of “Earthrise,” the first time that humanity saw Earth rising as a small blue planet in the distance.
“That’s what accounting is about, saying, 'How do I use the precious resources that I have?'” Littan said during an interview last week at the IMA’s annual conference. “What's the best use for them? For a long time, we thought it was only measured in financial resources. But there are other limited resources that are going to build a business, run a business, create value and maintain value. You have to have an understanding that other resources are limited too — the amount of water you can get, the amount of carbon that the world, the Earth and the atmosphere can absorb without causing some other harm, the amount of waste that we can put out — and all of these things are limited. So the idea is to say that if they are limited, how do we make better decisions? And if we're going to make better decisions, what information is it going to lead to and who is providing this information to the decision-maker? These things need to be taken into account.”
She is seeing more demand from investors for sustainability information, particularly from large multinational companies. “Any company that has significant business in Europe, for example, gets caught up in the EU non-financial reporting regulations,” said Littan. “The other aspects of it that affect U.S. companies are supply chain issues, if you are trying to do business with an EU company or trying to do business somewhere else in the world.”
She believes that more U.S. companies will feel pressured to report on such information as more of their competitors do. “If you're competing for capital, and investors are increasingly looking at this data — because it’s showing up on the Bloomberg terminals where you get your [environmental, social and governance] data and ratings — if a company sees that its competitors are reporting on something and they're not reporting on it, that’s another driver for them, at least from a market response, to start reporting,” said Littan. “The reporting aspect of sustainability accounting is global.”
Groups such as the Sustainability Accounting Standards Board, the International Integrated Reporting Council, the Global Reporting Initiative and the Carbon Disclosure Project have developed various reporting frameworks for sustainability reporting and are trying to align them through an effort known as the Corporate Reporting Dialogue.
“To some extent these organizations have put out frameworks that are somewhat competitive,” said Littan. “But in practice companies are saying, ‘Oh, I’d like a little bit of this framework and I’d like a little bit of that framework for our reporting.’ The Corporate Reporting Dialogue is trying to harmonize the different standards, which is not an easy thing to do. They are looking most closely right now at the recommendations of the Task Force on Climate-related Financial Disclosures that was established by the Financial Stability Board. They determined that climate change has a huge financial risk. One is the risk of weather events, and the second is stranded asset risk. A company has invested and built up its business model and its assets for a fossil fuel world, but now as companies move away from fossil fuel, you have the potential for unusable assets.”
Accountants can advise the companies they work with about both the risks and the opportunities available to them. “You can talk about risks, but you can also think about the opportunity aspects of it,” said Littan. “Even some small businesses are looking at how to reduce waste. That's an accounting and financial question right there. If I move to a zero-waste company, think of what I can save, and I‘ve built my reputation at the same time. So there's a lot of win-win going on for that little bit of innovation.”
While there are all kinds of climate-related risks that are becoming apparent, Littan also sees opportunities for companies that are looking for innovative solutions to the problem of climate change.
“They’ve got to think about what the world’s going to look like in 2070," she said. "Will you still be able to produce milk in California? Will you be able to put a hotel on the beach in Puerto Rico? These are real questions. Or you hear about starting a business to find a way to break down plastic or take plastic out of the ocean. That becomes competitive, but also it's a way to create a whole new business model. From the finance and accounting perspective, there are strategy issues. There are ways to think about what your competitor is doing or is not doing. There is a way to position yourself with your customers, your employees and your shareholders who have a longer-term vision to get the investors that you want. So it becomes not just a question of looking at sustainability issues because it's a nice thing. Yes, it’s a nice thing, but there are real costs and there are real opportunities.”
