Sustainability Accounting

Climate Change has and is continuing to bring about substantial changes in how all business is operated and how it’s impacts are reported. Beyond altruism and transparency, international and national legislation and regulations to cap and reduce the emissions of GreenHouse Gases will play an ever increasing role within the emerging field of Sustainability Accounting.

What does this mean for professional accountants? A large opportunity. Accountants and accounting firms which take the time and the effort to become educated in this still evolving field, will also be positioning themselves as sustainability leaders and opening up new branding and marketing opportunities.

In order to fully understand the implications of Sustainability Accounting and the opportunities it presents, it is important to understand some of the more recent history of the environmental movement and how various regulatory issues have evolved worldwide. This article will discuss current and proposed legislation and new requirements for auditing and reporting plus techniques for the integration of sustainability into 'mainstream' reporting, both to management and external stakeholders. Specific focus will also be addressed for public companies, companies doing business outside the US, and governmental entities.

What is it?

In it’s broadest sense, Sustainability Accounting, is an environmental footprint measurement and reporting system for any business, Non-governmental organization (NGO), charitable or government organization. It is important to state that Sustainability Accounting here in the U.S., is today, with a few exceptions, mostly performed on a voluntary basis. It is based upon the theory that organizations are responsible for more than just financial profit and loss, but also the organization’s overall effect upon the environment, specific interest groups, stakeholders and communities. Organizations such as the Global Reporting Initiative (GRI) and the Prince’s Accounting for Sustainability Project are currently developing valuation methodology to take into account community indicators, human rights indicators, and content and materiality.

Using a more narrow definition, Sustainability Accounting is utilized to measure and report an organization’s impact, in units (tons) of greenhouse gas (GHG) emissions in compliance with various carbon trading systems and regulations. Accounting methods employed for this purpose are compatible with internationally accepted GHG measurement and reporting plans (schemes).

Accounting for Climate Change
Officially, the concept of required sustainability accounting began with the adoption of the Kyoto Protocol: a treaty to the United Nations Framework Convention on Climate Change (UNFCCC) aimed at fighting global warming. It was initially adopted in December 1997, and entered in force in February 2005, with 187 countries signing and ratifying the protocol. Under the protocol, 37 industrialized nations (known as Annex I countries) committed to a 5.2% reduction from 1990 levels in Greenhouse Gas (carbon dioxide, methane, nitrous oxide, sulfur hexafluoride) and two other groups of gas emissions (hydrofluorocarbons and perfluorocarbons) , with the remaining countries giving general commitments. The United States, a party to the UNFCC, did not sign nor ratify, although it is responsible for over 36% of 1990 emissions of all Annex I countries. However, American companies doing business in those countries which are parties to the Protocol are required to be in full compliance.

The Intergovernmental Panel on Climate Change, formed in 1988, is the leading body for the assessment of climate change, established by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) to provide the world with a clear scientific view on the current state of climate change and its potential environmental and socio-economic consequences. In 1995, the IPCC issued it’s second assessment report which included providing values for global warming potential. These were the first units of measurement for converting various greenhouse gas emissions into comparable CO2 equivalents – the start and basis of this new emissions reporting, which is required under the Kyoto Protocol. For the first time in history, emissions could now be valued, inventoried, and traded, utilizing cap and trade strategies through financial exchanges. Each country is responsible to create a national authority to manage its greenhouse gas inventory and with it, provide accurate reports to the governing protocol authority.

The GHG Protocol Initiative was organized by the World Resources Institute (an environmental think-tank that goes beyond research to find practical ways to protect the earth and improve people’s lives) & World Business Council for Sustainable Development (a coalition of 200 international companies)in order to create a general accounting framework for inventorying and reporting of emissions. The GHG Protocol further categorizes these direct and indirect emissions into three broad scopes:

• Scope 1: All direct GHG emissions.
• Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam.
• Scope 3: Other indirect emissions, such as the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities (e.g. T&D losses) not covered in Scope 2, outsourced activities, waste disposal, etc.
Accounting and Reporting Principles

The GHG Protocol Corporate Standard 2004, which is currently used by hundreds of organizations including auto manufacturers, cement companies, consumer goods manufacturers and dozens of other industries, provides the accounting and reporting principles that underpin and guide GHG accounting and reporting for scopes 1, 2 and 3 emissions. The five accounting and reporting principles described in the table below are further elaborated in the GHG Protocol Corporate Standard.

Relevance: Ensure the GHG inventory appropriately reflects the GHG emissions of the company and serves the decision-making needs of users – both internal and external to the company.

Completeness: Account for and report on all GHG emission sources and activities within the chosen inventory boundary. Disclose and justify any specific exclusions.

Consistency: Use consistent methodologies to allow for meaningful comparisons of emissions over time. Transparently document any changes to the data, inventory boundary, methods, or any other relevant factors in the time series.

Transparency: Address all relevant issues in a factual and coherent manner, based on a clear audit trail. Disclose any relevant assumptions and make appropriate references to the accounting and calculation methodologies and data sources used.

Accuracy: Ensure that the quantification of GHG emissions is systematically neither over nor under actual emissions, as far as can be judged, and that uncertainties are reduced as far as practicable. Achieve sufficient accuracy to enable users to make decisions with reasonable assurance as to the integrity of the reported information.

On the Home Field

Although the U.S. is not part of the Kyoto Protocol, there have been significant regulations, guidance and even Executive Orders issued by two US Presidents as a means to begin tracking and reducing our country’s emissions. Various states have for years, required reporting from their largest emitters. This past November, the EPA published a list of 10,000 facilities of large emitting entities which are now required to publicly report or potentially be subjected to fines. With pressure from various large investment groups, the SEC published new “guidance” for 10-K and 10-Q reporters on disclosure of risks due to climate change. President Obama signed Executive Order 13514 essentially activating Executive Order 13423 (President Bush 2007) on establishing GHG reduction goals and strategies for all federal agencies. In the senate, the Kerry-Lieberman Bill proposes the start of a cap and trade system wherein large emitters are penalized, and low emitters are rewarded.

On the corporate side, large companies such as Walmart, have analyzed their GHG impacts, and have not only begun reduction initiatives, but have also started to encourage and soon perhaps, require their 160,000 suppliers worldwide to also reduce their GHG emissions through their ambitious Sustainability Index project. In response to pending and current legislation, as well as initiatives such as Walmart’s, many of the Fortune 500 companies have hired or appointed those with backgrounds in both environmental matters and accounting as Chief Sustainability Officers to manage and oversee their GHG initiatives.

The trickle-down effect to mid-size companies, NGO’s, and other organizations is accelerating. Perhaps fueled by the Gulf Oil leak, interest in the environment is again peaking and many companies are seeking to effectively position themselves as leaders in sustainability. As the Enron scandal provided the impetus for Sarbanes-Oxley, and the Banking collapse of 2008 has fostered in the consideration of a triple bottom line (people, planet and profit) business philosophy, it appears that the concept and establishment of more sustainable business practices combined with consistent reporting is on firm ground.

With an ever increasing consumer and regulatory demand for transparency, organizations of all sizes in virtually every industry will soon need professional sustainability reporting and validation services from a “Green Accountant”.


Keith Winn is vice president of marketing and chief operating officer of GreenProfit Solutions Inc., a Ft. Lauderdale based sustainability consulting, certification and contracting firm. You may visit their website at www.greenprofitsolutions.com or contact him directly at 800-358-2901 or kwinn@greenprofitsolutions.com.