According to the latest assessment of global warming releases by the Intergovernmental Panel on Climate Change (IPCC), global greenhouse gas emissions have increased by 70% between 1970 and 2004. The IPCC also predicts that despite current climate and sustainable development initiatives, global greenhouse gas emissions will only continue to grow over the next few decades. These are stark facts that require collective action. By Michael Izza ofInstitute of Chartered Accountants in England & Wales.
I believe that it is critical for the global business community to act now, to take the lead in developing and implementing sustainable environmental practices. More importantly, as a profession with a long track record in developing the frameworks which allow for the efficient measurement of financial and non-financial information, chartered accountants have an important role to play in helping business deliver.
Businesses of all sizes are increasingly asking the question – what, as an organisation, are we doing to address our environmental responsibilities? Some uncomfortable answers are often thrown up but it is better that we ask, and ask now, rather than hope that the problem will go away. It is my belief that business leaders and advisors can and must be the agents of change within the organisations which they both advise and run.
The Stern report published last year presented the economic case for failing to meet the environmental challenge. Stern said:
‘The scientific evidence is now overwhelming: climate change is a serious global threat, and it demands an urgent global response…it will affect the basic elements of life for people around the world – access to water, food production, health and the environment. Hundreds of millions of people could suffer hunger, water shortages and coastal flooding as the world warms…if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of global GDP or more. Our actions now and over the coming decades could create risks of major disruption to economic and social activity, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century. And it will be difficult or impossible to reverse the changes.’
How do you address a challenge of this magnitude? Policy makers and governments, though often well intentioned, are limited by the speed at which they can respond. What is needed is vision, tenacity, innovation and a willingness to embrace change.
Business needs the vision to understand the extent of the problem; the tenacity to grapple with the issues; the ability to innovate to find solutions and new opportunities; together with the collective willingness to embrace change if we are to make progress.
On all these fronts I believe that it is business, in partnership with governments, regulators, investors and providers of finances that must now take the lead. In a way international business leaders are already today’s environmental pioneers. The actions of Terry Leahy, Chief Executive of Tesco, to commit to halving its energy consumption and introduce carbon labelling shows that he recognised a business opportunity which will also give the company a competitive advantage.
Stuart Rose, Chief Executive of Marks & Spencer is another example. He launched the ‘Plan A Campaign’, a five-year 100 step-plan to make the organisation carbon neutral as a direct response to the concerns of his customers and employees – critical drivers in terms of the commercial success of any business.
What both businesses are doing is disproving the orthodoxy that environmental sustainability is at odds with profit. Embedding environmental good practice into commercial operations is not just good for the environment – concern for the environment is now also good business.
Pioneers like Leahy and Rose have recognised the urgent need to work with governments as well as the investor community in order to help tackle the sustainability agenda head on. Their goal – and the goal I hope increasingly of all business – is to be able to continue to grow in a sustainable fashion – to meet the needs of the present without compromising the ability of future generations to meet their own needs. After all this is what we really mean when we talk of Corporate Responsibility.
Corporate Responsibility, however, is a term that can be misunderstood or have many definitions, alongside others in this arena. I use the following definitions:
Sustainability is the goal we are seeking: a planet where, to quote the Bruntland Report, we can meet ‘the needs of the present without compromising the ability of future generations to meet their own needs.’
Sustainable development is the process by which we achieve sustainability.
Corporate responsibility describes the actions, activities, obligations of business in that process. If we want our businesses to be sustainable in the long run, then the resources they rely on must also be sustainable. These include not just the raw materials, energy and so on that we use, but also the less tangible resources that are increasingly important to the successful enterprise today – our human and intellectual capital, our relationships with communities, governments, consumers and other stakeholders. The goodwill of each of these is necessary to the long-term success of business.
Corporate environmental responsibility is one of the three categories of sustainability generally used, social; economic; and environmental.
In terms of business, the extent to which the environment can be regarded as a driver of investment decisions is variable and highly uncertain for each investor group. However, the environment represents a major source of risk and opportunity to business and these are increasingly being taken into account by investors and financiers.
Environmental issues are also important for commercial lenders to business. The International Finance Corporation has recently re-worked its social and environmental performance standards and these have fed into a revision of the Equator principles, which are based on them. Questions include:
• To what extent and under what circumstances are environmental considerations built into investment and lending decisions and how is this achieved (e.g as part of a socially responsible investment/lending policy or as one of a number of general business risk factors)?
• What are the prospects for a socially responsible investment and lending community?
• What is the role of multinational lenders and investors in promoting the growth of environmental responsibility?
As part of business how can the accountancy profession help? There is a role for accountants in supporting environmental sustainability by providing clear, reliable information and, where required, assurance of it. But qualified accountants also do much more. They can be business leaders or at least involved at the heart of the decision-making, putting ideas into practice, giving them form and structure, building the evidence base for a business case and establishing the necessary supporting processes and procedures.
At the ICAEW, we have undertaken a significant piece of work in the field of corporate responsibility in the publication Sustainability: the role of accountants. We addressed what position the profession could take in this area and examined how markets work to deliver sustainable outcomes. For the policy mechanisms available to society to influence market behaviour to work efficiently, and for company managers to be able to make informed decisions, there must be clear, reliable information. This is the prime territory of our profession.
But our role is rarely restricted to this. As leaders and advisers of major businesses we have a role to play in fostering change within the organisations with which we work.
As a profession we have a key role to play in helping business measure the environmental impact of its activities. This to me is critical – only if we are able to quantify the impact of our corporate behaviour can we understand the extent of the changes we need to make.
Our task as finance professionals is to build the evidence base; to provide the frameworks as well as the guidance to enable businesses to deliver environmentally sustainable growth. As well as providing corporate responsibility with a language and a structure, as a profession we must be prepared to challenge – corporate processes, systems, decision making: if we are to bring about change we must act as the guardians of the process over the long term.
I genuinely believe that by working together with industry and governments, investors and financial institutions we can be an important part of the solution to the global challenges we all face.
To be so we must all be prepared to provide the leadership as well as the frameworks and guidance to enable business to account for the way it acts. We need to define the language of sustainable business reporting; provide the highest quality technical evidence to support sustainable investment; and above all make the case that being good is now good business.
Michael Izza is Chief Executive of the Institute of Chartered Accountants in England & Wales. A copy of Sustainability: the role of accountants is available at http://www.icaew.com
The articles published here in the Thinking CEO are internet updates of the latest management knowledge and practice, which have been commissioned by Sovereign Publications for their bi-annual magazine, CEO Today, and will appear later in the first 2007 issue of this publication. To contact Sovereign and CEO Today, go to:
http://www.sovereign-publications.com/ceo-art.htm
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