Archives For CSR

By Ramona Dzinkowski, economist and business journalist.

african-mine

On 2 April, the European Commission (EC) issued a consultation paper requesting comment on potential new disclosure rules regarding the use of conflict minerals in the manufacture of goods listed on European exchanges. This initiative follows the US Securities and Exchange Commission’s final 2012 rule on conflict minerals that requires companies listed in the US to disclose their use of conflict minerals manufactured in the Democratic Republic of Congo (DRC) and adjoining countries.

The US rule fulfills the requirements laid out in the Dodd-Frank Act 2008, which required companies using minerals from Africa’s Great Lakes region to publicise their due diligence practices to ensure the minerals they use in their products have not financed illegal armed groups engaged in the Congo’s war. These minerals include tin, tantalum, tungsten and gold, which are often used in the manufacture of a wide range of products. It is anticipated that the rule will affect approximately 6000 issuers in the US who will have to file their first minerals report in May 2014.

The gist of the US rules upon which the EC has framed its proposed disclosure requirements is that companies must determine whether or not they manufacture or contract to manufacture products that contain conflict minerals, whether these minerals originated from the specified conflict region or were obtained in scrap or recycled sources, and whether or not the conflict minerals benefited armed groups in the region.

While many have lauded the initiative, others see it as a prohibitively tall order and are concerned about the costs of the disclosure and the implications for using the reporting system in this way. Similar issues are unlikely to unnoticed by affected parties in Europe.

In response to the proposed ruling, the US-based National Association of Manufacturers pointed out that, among other things, the SEC has ignored the complexity of manufacturing supply chains. More specifically they say there are three major challenges for downstream users attempting to establish a chain of custody from the mine to the product:

1. identifying which mines are conflict mines – that is mines whose output is controlled by or taxed by warring factions;

2. tracing ores from the mine to the smelter; and

3. tracing conflict minerals from smelter through complicated supply chains to the finished product.

Implementation of the legislative language, must therefore, take into account these on the ground realities.

Some CFOs are questioning why the financial reporting system is being used to resolve political conflicts in the first place. For instance, how would CFOs be able to answer the question of which are conflict mines, and tracking down the sort of information required is not a traditional finance function. There’s also the level-playing-field argument that suggests that North American and European companies will now be at a competitive disadvantage against companies originating from countries that have no such disclosure requirement like China, Brazil, Indonesia and Canada.

In Europe, the EC is requesting all interested parties to comment on whether they should craft similar rules. Comments are due by 26 June 2013.

This article first appeared in Accounting and Business magazine, May edition, 2013.

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wind turbines

By Martin Kelly FCCA, associate professor, accounting at Waikato Management School, New Zealand

Corporations sometimes pollute rivers, destroy forests and generate dangerous gases without reporting any of the costs that such errant behaviour may ultimately incur. The UN has explained why business managers should consider the effects of their decisions not only on finance, but also on social systems and natural capital.

Business decision models must recognise how those decisions will affect natural capital, despite the effects not being material on reported profits. ACCA’s recent report, Is natural capital a material issue? is welcome because it highlights concerns about current business decision making practices.

However, attempting to make companies put value on natural capital in their financial reports may not be the best way forward.

Society is structured so that any organisations cannot exist unless they make profits. Managers are aware of this, but most managers might agree that it is wrong to:

  • Pollute streams and the sea;
  • Pollute arable land so that little will grow on it
  • Pollute the air and in so doing affect people’s health
  • Add to the world’s carbon emissions
  • Add to global warming
  • Add to ozone depletion
  • Destroy forests
  • Destroy fish and other natural food stocks
  • Drive species of plants and animals to extinction
  • Pass onto the next generation a degraded natural environment.

Depleting or destroying natural capital in these ways usually results from business activities undertaken to increase profits. While the ACCA report suggests that in accounting terms ‘a material issue is largely defined as one that has a significant financial impact on corporate activities’, the natural capital destruction listed above typically never appears in financial reports; it is invisible to people who are trained to view the world financially.

It is interesting to examine the efficacy of financial reports in discharging their more traditional role. The 2011 working paper of the International Integrated Reporting Committee, referring to financial reports observed: ‘The small percentage of market value now explained….down to 19 per cent in 2009 (for the S&P 500) from 83 per cent in 1975. The remainder represents intangible factors…’

Do we wish to introduce further estimates and complications to financial reports? It would be difficult to provide comparable natural capital figures for all financial reports that all interested parties would agree were fair. The ACCA report itself declares: ‘Studies undertaken….showed that corporate reporting on biodiversity is largely qualitative in nature…’

The argument that what cannot be quantified cannot have influence is an absurd one. A fishing company could decide not to fish within the habitat of an endangered species. Would it be worth estimating how much the company’s total fish catch declines in value as a result, or what the value of public relations benefits are? Would everyone agree?

Most managers are aware of such disastrous outcomes as those listed above. Surely they will avoid such outcomes, even without valuations, because it is the right thing to do. Or should managers do the right thing only when it can be justified financially? If we cannot trust senior managers to behave responsible, we must re-educate them away from the hegemony of the current market model or suffer the consequences.

ACCA’s report is welcome because it challenges its readers to address an issue that everyone, for the time being, can choose to ignore. The longer the issue is ignored, the more difficult it will become to sustain natural capital. It is undeniable that natural capital is a material issue in our world. It must be recognised as such, and the related problems are quantified and appear in financial reports.

This post first appeared in Accounting and business, February 2013

 

Barry Cooper-0513

By Barry Cooper, ACCA President

I would like to take this opportunity to send you all the best wishes for the Chinese New Year, which is now celebrated around the world. The Year of the Snake will be an important one not only for China and Asia, but for the whole world given the region’s economic importance and influence.

One of the key areas that Asian organisations will need to look at more closely, in common with their counterparts around the world, is how prepared they are to adopt a more sustainable approach in their operations. It’s important not just for how environmentally friendly businesses are perceived to be now, but for future generations too, which may have to pay a high price for any lack of global action.

ACCA recently published a report, The green economy: pushes and pulls on Corporate China, which asks whether corporate Asia is ready for the green economy. It concludes that the next few years will be critical ones in the shift to a more sustainable economy in Asia. All stakeholders will have to work together if sustainability is to be successfully adopted. Governments will need to promote green growth; investors will need to incorporate environmental, social and governance considerations into their decision-making; and companies will need to develop goods and services that minimise their environmental and social impact.

What was good to see from the report is that the business case for sustainability is gaining momentum in Asia and that leading companies are integrating sustainability into their corporate culture and decision-making processes. They are already seeing the benefits not only in terms of lower dependency on natural resources, but also in increased sales; customers from around the world are looking at sustainability issues before they make decisions about when, where and from whom to buy.

As accountants, you are well placed to help  businesses and the wider economy they operate in to measure, manage and report on their environmental and social impact, and to enable more organisations to adopt green practices. I wish you every success in this critical mission.

This post first appeared in Accounting and business, UK edition, February 2013

By James Bonner, independent sustainability consultant

A central theme in this series of blog posts is the acknowledgement that business, and the wider economy, is inextricably connected to, and dependent on, the natural environment – something that organisations, and their wider stakeholders, are increasingly recognising.

From the impacts and dependencies businesses have on ‘natural capital’, to drivers encouraging reporting and consideration of environmental issues by business, there is a realisation that the economic system (nationally and globally) relies upon the natural environment. Moreover, our economy, and the activities of business that drive it, negatively impact vital environmental resources and systems with likely adverse consequences for  long term economic growth, social development and environmental sustainability. This highlights a difficult, and fundamental, dilemma:

–          Our economic system is reliant on the natural environment.

–          The natural environment is being depleted and degraded, to a point of destruction, by our economic system.

Taking this paradox into account, it is clear that there is a pressing need to fundamentally change our economic approach, and as the WBCSD (World Business Council for Sustainable Development) state in their Vision 2050 project, a requirement that ‘economic growth is decoupled from environmental and material consumption and re-coupled to meeting needs.’ As such, the concept of a ‘green economy’ has been promoted as an alternative economic model, an approach based on the principles of sustainable development theory and ecological economics. The UK Government defines the concept in its 2011 paper ‘Enabling the Transition to a Green Economy: Government and business working together’ through stating: ‘A green economy is not a sub-set of the economy at large – our whole economy needs to be green. A green economy will maximise value and growth across the whole economy, while managing natural assets sustainably.’

Such a theoretical definition of the concept might seem somewhat notional but it does serve to capture the essence of what should be aspired to when determining such a new economic approach. Furthermore, it highlights that our current economic structure, in many senses, does the opposite to this – generating economic growth and development that is not inclusive across society, while exhausting and degrading natural assets. In any case some more applied definitions of a green economy have been offered including UNEP’s (United Nations Environmental Programme) perspective stating that ‘practically speaking, a green economy is one whose growth in income and employment is driven by public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services’.

Additionally the World Bank, in its substantial report from earlier this year ‘Inclusive Green Growth: The Pathway to Sustainable Development, describes the green economy in terms of ‘growth that is efficient in its use of natural resources, clean in that it minimizes pollution and environmental impacts, and resilient in that it accounts for natural hazards and the role of environmental management and natural capital in preventing physical disasters.’

As these more practical definitions infer, the green economy is/will be based on economic development and business activity which is low in carbon emissions and pollution (e.g. renewable energy and sustainable transport), that increases resource efficiency (e.g.  green buildings and eco-design), can help mitigate environmental impacts (e.g. flood management and urban planning), and will conserve key environmental services (e.g. sustainable agriculture and habitat conservation).

Find out more about the green economy at ACCA’s Accounting for the future online conference.

By James Bonner, independent sustainability consultant

Traditionally, expectations around improving the sustainability and corporate responsibility reporting of businesses has fallen on, and been driven by, governments and external regulators, and furthermore via the influence of other external stakeholders – NGOs, pressure groups and the wider public.

However, more recently, a number of investor groups have become increasingly involved and active in the area and through their role, as a powerful and influential stakeholder group, can have significant impacts on both corporate and investor behaviour with regards to non-financial risks (including wider sustainability issues).  The concept of Socially Responsible Investment (SRI) has become increasingly popular with the ‘USSIF, The Forum for Sustainable and Responsible Investment’ reporting in 2010 that sustainable and responsible investment in the U.S. had been growing at a significantly greater rate than all investments in general – 13% growth compared to 1%.

In addition, there have been a range of efforts to devise international frameworks and principles that aim to further incorporate environmental, social and governance (ESG) issues into the strategies/decisions of investors. By gaining the commitment of investors as signatories to their principles, such frameworks aim to progressively develop the inclusion of sustainability criteria throughout the wider investment landscape. Two of the most widely recognised frameworks that promote ESG considerations by investors are the Equator Principles and the UN Principles for Responsible Investment while the recently launched Natural Capital Declaration (NCD) is evident of investor groups considering their commitment to more specific ESG issues – in this case around the environmental issue of natural capital and biodiversity. To highlight what these principles cover, the following are an overview of their structures:

While such frameworks can be useful in developing the wider investment landscape to encourage organisations to be more accountable for their ESG impacts, there has been some criticism labelled at their effectiveness in practice. Such perspectives argue that they are ‘too weak to work’ and ‘encourage only minor alterations to investment decisions, within commercial constraints, rather than altering the underlying basis of decision-making’. This viewpoint, articulated here via an article by a representative of the International Institute for Environment and Development (IIED), nonetheless advocates strengthening such investment principles to improve their usefulness and effectiveness stating: ‘this should not be used as justification to stop using them [investment principles frameworks] – rather improved transparency, monitoring and measurement of the impact of investment principles is urgently needed.’

To take part in the debate join ACCA’s Accounting for the future conference.