Green accounting

Putting on an environmentally friendly face has always been good for business, but companies need to do more these days to take advantage of the opportunities and avoid the risks associated with environmental sustainability.

Most big companies have corporate social and environmental responsibility programmes and many of these include a requirement to measure and disclose greenhouse gas emissions. Some even go as far as to report on their strategy for dealing with risks and opportunities associated with climate change.

Paul Dickinson, chief executive officer of the CDP, which holds the world’s largest database of corporate climate change information, said: ‘We have entered an era when climate change has become a mainstream issue for both investors and corporations. Investors recognise that corporate engagement with climate change issues is an important indicator of good quality corporate management.’

Public confidence in the reliability of green reporting is, however, dubious. A report commissioned by Christian Aid estimated that the FTSE 100 omit about 191.42m tones of carbon dioxide from the figures they report each year.

Probably not all of these omissions are deliberate. The huge amount of analysis that goes into calculating the total emissions involved in the production, distribution and use of a product or service is bound to lead to some errors. How does a business add up the carbon emitted every time one of its vehicles takes to the road? What about if a company outsources, should third party emissions be included in its carbon accounting?

“We have entered an era when climate change has become a mainstream issue for both investors and corporations.

Paul Dickinson, chief executive officer of the CDP

These are the kinds of issues that have spurred calls for a common international framework on carbon reporting. A coalition in the UK is one of the groups that is shouting loudest. It follows amendments to the UK’s Climate Change Bill that recently introduced mandatory reporting for companies on their carbon emissions. The Companies Act 2006 also requires quoted companies to ensure their business reviews and discloses, as part of the director’s annual report, information on environmental matters. At the moment, international standards for reporting emissions are optional unless a company is part of the EU emissions trading scheme.

As regulators, politicians, investors, employees and other stakeholders pay greater attention to corporate environmental sustainability the risks and opportunities for businesses continue to snowball. Audit and risk consultancy, Protiviti, asserted in a report that the regulatory shift towards external attestation of green credentials is inevitable. Companies may eventually need to obtain external proof that the environmental policies outlined in their annual reports are correct and adhered to.

The report highlighted a number of other operational and strategic risks associated with the environmental issue. It said failure to demonstrate good environmental practices could restrict an organisation’s ability to raise finance, as banks are now responsible for analysing environmental risk as part of their due diligence processes. Green policies are also seen as a good way of attracting and retaining employees.

A growing list of investment funds are also committed to green investing, and a huge proportion of general investors view green policies positively. In October last year Merrill Lynch partnered with Trucost to provide investors with an index focused on best in class carbon footprint companies. Latest figures released by EIRIS, a non-profit sustainable investment firm, show that as at December 31, 2007 there was £8.9bn invested in Britain’s green and ethical retail funds (those funds open to the general public). A spokesperson for EIRIS said: ‘Over the last few years we’ve seen a huge increase in the amount of money invested ethically, with many more Britons choosing green and ethical options when managing their finances.’

With these kind of pressures only growing it's obvious that companies should be making an effort to report environmental information and set targets for the reduction of emissions.