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Sustainability Accounting

1 Sustainability Accounting : 14/04/2004

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Published by Constructing Excellence T 0845 605 55 56 E-mail [email protected] www.constructingexcellence.org.uk

What is Sustainability Accounting?According to common definitions, there are three keydimensions of sustainability: the economic, the socialand the environmental. As a result sustainabledevelopment can be measured in terms of these threedimensions: The economic impact might be the effect on local

employment and livelihoods by the organisationsoperations

The social impact might include staff terms andconditions or projects in the community

The environmental impact might include the qualityof waste water discharged or greenhouse gasemissions from operations

Accounting for the financial aspects of anorganisations performance is a statutory requirement.Accounting for sustainability is currently a voluntaryactivity. However, companies are increasinglyreporting aspects of their social and environmentalperformance.

Why is Sustainability Accounting Important?Sustainability accounting provides a useful tool toidentity, evaluate and manage social and

environmental risks by identifying resource efficiencyand cost savings and link improvements in social andenvironmental issues with financial opportunities. Italso allows comparison and benchmarking of performance and identification of best practice.

What are the benefits?Organisations committed to sustainability look beyondimmediate profits to returns and value, which can beachieved over many years and in ways that haveconsideration of environmental and social issues. Inthe case study described later, over 1.5 million wasidentified in direct and indirect costings. Thesustainability accounts can be used to: Collect information on environmental and socially

related expenditure and link them to financialbenefits

Show how environmental and social external costscan decline over time with commitment tosustainability

Highlight the social and environmental risksassociated with current financial performance andaid risk management

Identify which stakeholder relationships present

sustainability risks and benefits Encourage partnership between stakeholder

organisations

Why sustainability accounting in theconstruction sector?The construction industry is a significant part of anyeconomy. Furthermore, the industry is key to thequality of life in terms of housing, utilities andtransport infrastructure and so therefore has animportant opportunity for the industry to positivelyimpact on its employees, the local communities inwhich it operates and enhance the surroundingenvironment.Many organisations are involved in helping theconstruction industry put the sustainable developmentprinciples into practice to move away from the potentialdetrimental effect that construction can have. Theregulator, the Environment Agency stated that in 2000,the industry was responsible for 600 water pollutionincidents.

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How to do itIn practice, it is usual to prepare two kinds of sustainability accounts to capture the direct financialimpacts (costs and benefits) of sustainability initiativeson the organisation as well as the indirect social andenvironmental impacts (evaluated in financial termswhere possible) of the organisation on third partystakeholders (such as the community and futuregenerations) as shown in Figure 1.

Figure 1 Overview of Sustainability AccountingFramework

Direct accounts draw out sustainability relatedinformation that is otherwise hidden in thetraditional financial accounts. These provide a re-

statement of traditional financial information toshow expenditure on social and environmentalactivities and capture any associated benefits.

Indirect accounts provide the financial expressionof selected externalities, both environmental andsocial. An externality may be defined as a cost (or benefit) which is borne by stakeholders such as thelocal community or suppliers, rather than theorganisation itself. Where possible, financialvalues are assigned to indirect values. When thisis not possible; the indirect impact should be statedin non-financial terms. Indirect impacts accrue tothird party stakeholders.

It is usual to produce separate direct accounts for environment and social and the same for indirectaccounts as it is not appropriate to compare, merge or offset one cost/benefit against another.

Preparation of the Direct AccountsThere are four steps in the preparation of the directenvironment and social accounts .

Step 1 Determination of the scope and boundary of theaccounts

It is important to specify the scope of the accounts atan early stage. It will also be necessary to determinewhether there is a physical boundary to the area thatthe accounts are to cover, perhaps a time period,stakeholder or spatial boundary.

Step 2 Identify all environmental and social features of the organisationEnvironmental and social features are any aspect of the organisations activities, which will have abeneficial impact. At this stage all environmental andsocial features should be included even if the maindriver was statutory or commercial.

Step 3 Identify additional financial costsFor each feature, identify the additional financial costswhich would not otherwise be spent if environmental or social considerations were not being made. This isdone using the following classification: Staff costs Suppliers/contractors Regulatory Capital costs

Step 4 Identify Additional financial savings/benefitsFor each feature identify any actual or projectedfinancial benefits/savings that may be attributed to theenvironmental or social feature using the followingclassification: Revenue generated Cost savings/costs avoided Regulatory costs avoided Grants/subsidies/awards received

Environ-mental

Social Environ-mental

Social

Direct Account(affecting theconstruction

company)

Indirect Account(affecting other

stakeholders e.g.client; staff; users)

Restatementof Traditional

Accounts

AdditionalAccounting

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Preparation of the Indirect AccountsThere are essentially three steps in the preparation of indirect cost accounts :

Step 1 Scoping ImpactsIdeally a stakeholder approach should be used toidentify all significant environmental and social impactsfrom the organisations activities. A full life-cycleapproach will scope out upstream and downstreamimpacts.

Step 2 Determining boundariesThis involves prioritising which impacts to account for and which impacts to consciously exclude. Thisdecision will have an impact on the estimation of sustainable profits. Financial accounting boundariesare governed by statute and focus on issues that affectshareholder value. Sustainability accounts have abroader focus that encompasses significantenvironmental and social risks that impact onstakeholder value.

Step 3 Monetary Valuation of ImpactsMethods to assign monetary values to environmentalimpacts have been developed over the past decadeand are increasingly accepted both within governmentand corporate circles. There are several differenttypes of environmental valuation methods that could beused. Forum for the Future has pioneered itsenvironmental accounting framework using avoidanceor restoration values. This is the least controversialmethod as it is based on the actual costs that would beincurred by business in order to prevent or avoid itsindirect footprint.The valuation of indirect social impacts is a less well-developed field. In principle, the same approach tovaluation could be applied to social impacts. For example, social costs can be derived from the costs of

avoiding or preventing impacts (e.g. health and safetyimpacts) or the cots of compensating affecting parties.

Key Issues to Consider While sustainability accounting is potentially a verypowerful tool for internal management and externalreporting, the practical application of the methodologywill be an essential part of its evolution. Some keyissues which need consideration are: Boundaries of responsibility sustainability

accounting is a voluntary activity and as such, it isup to the individual organisation to determine their boundaries of responsibility.

Valuation method the use of avoidance andrestoration costs is considered to be the mostappropriate method. However, the costs of

prevention or restoration do not give anyinformation about the relative priority that differentstakeholders might attach to indirect impacts.

Adding up and across the conversion of socialand environmental impacts into financial valuesmakes it possible to add up the impacts and tradethem off against each other. For example thiscould allow a company to trade off the cleaning upwaste water discharges against increasedproduction of carbon dioxide, or netting off a newinvestment in community provision againstincreases in unpaid overtime. Even morecontroversial is a trade off between categories.

For example reducing solvent emissions to cover for increasing health and safety risks at a plant.Many of these trade-offs do not make sense from asustainability point of view.

Accounting for what you can count there isconcern that these accounts will only include itemswhich are easy to convert to financial values, for example, the costs of waste disposal or the costsof fitting new plant to reduce emissions.

Related resourcesFurther information is available from:

1. Carillion plc (2000), We are Making Choices:Carillions environment, community and socialreport 1999-2000. Published in the UK.

2. CIRIA (2001), Sustainable Construction: companyindicators. Report No. C563, Published in the UK.

3. DETR (1999), A better quality of life: a strategy for sustainable development in the UK. Published byThe Stationery Office). Published in the UK

4. DETR (April 2001), Building a better quality of life astrategy for more sustainable construction.Published in the UK.

5. Howes, R. (2002) Environmental Cost Accounting:

An Introduction and Practical Guide. The CharteredInstitute of Management Accountants (CIMA)Publishing, London

6. Casella Stanger, Forum for the Future, Carillion plc(2002) Sustainability Accounting in the ConstructionIndustry. Published by CIRIA, on behalf of CasellaStanger.

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Case study at Great Western HospitalThe Partners in Innovation (PII) project SustainabilityAccounting in the Construction Industry is a highly innovativeproject and is one of the first practical examples of sustainability accounting being applied in the UK. The projectfocused on developing methodologies for sustainabilityaccounting and piloting them at a construction project todevelop the business case for sustainable construction.The Great Western Hospital (GWH) project at Swindon wasselected to provide a detailed case study for the project. It isbeing built by Carillion Building Special Projects, part of Carillion plc. Carillion became involved with the PII project

because it was keen to try and establish the link betweenenvironmental, social and financial performance on aconstruction project.Environmental and social information was gathered from theGWH project at all stages. A sustainability accountingstatement was produced for the project showing that thesustainability initiatives built into the design, construction andmaintenance phases of the hospital generated an estimated1,639,788 in direct savings for Carillion. (This figure should beused for illustrative purposes only. It provides a snapshotillustration of the types of costs and savings that are possible but does not provide a comprehensive review of all thesustainability features of the Great Western Hospital). Thestatement uses the CIRIA environmental and socialindicators with some additions that evolved from themembers of the PII project, to categorise the initiatives.

This Factsheet was prepared as part of a Partners in Innovation Project (Project Number - PII: 39/3/671) funded bythe DTI and undertaken by Casella Stanger in partnership with Forum for the Future, Carillion plc and ConstructionIndustry Research and Information Association (CIRIA).The full report of this project is available to download from the Partners websites and fromwww.constructingexcellence.org.uk/pdf/sustainable_business_accounting.pdf P rinted and bound copies of thereport are also available from CIRIA: [email protected] Report ref: X105. Price 40.

LOGOS DTI, Casella Stanger, Forum for the Future, Carillion

PhotographsPage 1 Great Western Hospital, Swindon, courtesy of Carillion. Page 4 Great Western Hospital, Swindon, courtesy of Andrew Southall arcblue.com.

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