- Cost Transformation
Reducing the detrimental impact of a business' activities on the natural capital upon which we all depend offers important commercial advantages. It enhances a brand's image (and therefore sales), improves profitability (by reducing long-run costs) and helps safeguard the future availability of natural capital.
"In stark financial terms, all the evidence demonstrates a simple fact: we are failing to run the global bank that we call our planet in a competent manner. We no longer just take a dividend each year; instead, for some time, we have been digging deep into our capital reserves. And, after the near collapse of our entire financial system, we all know that such excessive risk-taking can cause immense havoc. The ultimate bank on which we all depend – the bank of natural capital – is in the red; the debt is getting ever bigger and that is reducing Nature's resilience and considerably impeding her ability to re-stock. It leaves us dangerously exposed." (HRH The Prince of Wales, Speaking at The Prince's Accounting for Sustainability Forum, St. James's Palace, London, December 2013).
Adopting sustainable approaches throughout the business model (in research and development, manufacturing, packaging, logistics and marketing for example) helps to optimise the use of resources across the value chain. Product cost structures should reflect the costs of the natural capital consumed or those of replenishing this consumption. A business' strategy should specify its sustainability objectives, including corporate social responsibility, and describe the general approaches, measures and targets for achieving them.
Accounting for the costs of sustainability
Practices, processes and activities across the value chain should continuously advance the sustainability of the business model. The costs of sustainability initiatives, practices and processes should be accounted for in product costs, including full lifecycle costs where these are applicable.
Many organisations have developed approaches to help organisations manage their sustainability, including Global Reporting Initiative (GRI), Natural Capital Coalition, Sustainability Accounting Standards Board (SASB) and Accounting for Sustainability (A4S). However, there are few practical tools and solutions to help businesses account for and manage their sustainability. Management accounting can help to improve awareness of the issues by considering the following aspects:
- Risk: Expressing the risks to future performance associated with the scarcity or depletion of natural capital.
- Strategy: Showing how natural capital relates the organisation's business model and strategy, and how operations harmonise with wider society. For example, a soft-drinks bottling plant that depends on ground water as a vital natural resource may need to introduce initiatives to overcome concerns of the local farming community, which also depends on ground water.
- Integrated thinking: Integrating sustainability information with performance-management information across the business model and driving continuous improvement in all processes and activities.
- People engagement: Modelling future scenarios that engage people across the business in dialogue about sustainability.
- Supply chain engagement: Engaging with supply chain partners to identify risks to sustainability and develop mitigating strategies.