It wasn’t long ago that sustainability programs and environmental, social and governance (ESG) issues were on the not-doing-now list for most companies. Executives typically said that significant increases in spending against vague results were the reasons why kept their sustainability initiatives in the incubation phase.
But in the past three years, we’ve witnessed much clearer successes with companies such as Schneider Electric, Boeing, and Schnitzer Steel that achieved tangible business results. In addition, actions taken by the Securities Exchange Commission (SEC) and the Task Force on Climate-Related Financial Disclosures (TFCD) requiring more ESG reporting and climate accounting, mainstream companies and industries now need to plan more aggressively.
As another indicator, we can look to the global consulting firms that have ushered in many new global business trends of lasting importance. McKinsey, Deloitte, Bain and KPMG now have strong ESG and climate accounting practices that are at least 5 years old. Comparing this to their involvement with Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) software, many different accounting initiatives including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the JOBS Act, we can assume that their mature consulting practices are also a signal that climate accounting is moving towards the mainstream.
Benefits that Drive the Bottom Line
If ESG and climate accounting is still a conversation on the expense side of your balance sheet, it’s time to broaden your company’s understanding of ESG and sustainability, and start finding the reasons why it can improve your sales, customer and partner relationships, and spending.
There are dozens of white papers on ESG and climate accounting, but I’ll summarize the five motivators that matter most to all companies:
- Reduced operational costs and mitigating climate risk — Decreased business travel, improved production efficiencies, optimized supply chains, reducing waste.
- Increased competitive advantage — In addition to customer and brand perceptions of pro-sustainability customers, you should expect that your target customers could also prioritize awarding contracts especially if they have strong sustainability initiatives themselves.
- Potentially higher company valuations — Wall Street sentiment favors that have less climate-related risk. In addition, a recent study by McKinsey and prospective acquirers will pay a premium for forward-thinking companies on this front, especially if they will be an addition to their overall ESG posture.
- Meeting increased stakeholder expectations — Customers, investors, employees and other stakeholders expect organizations to be transparent about their environmental impact and take action to reduce it.
- Strengthen your brand image with consumers and partners — In a recent consumer survey, 71% of participants said they’d pay a price premium for a sustainable brand, and 49% said they’ve paid a premium for products branded as sustainable in the last 12 months (IBM and the National Retail Federation). Moreover, between 2013–2019, products marketed as sustainable grew 5X faster than those that weren’t.
How to Get Started With a Climate Accounting Initiative – Executive Actions
Assuming you have a person or a small team named to drive your ESG programs, there are a few specific task categories that you should be monitoring, and align proper resources to make them successful.
- Essential data gathering — Consider all relevant aspects of your operations, such as energy use, transportation, and waste management. Ensure that you have a robust data collection and management system in place to ensure the accuracy and reliability of that data.
- Conduct a TCFD gap analysis — Know what metrics you’ll need to measure and report on, and the information sources you will need to include.
- Establish your climate accounting and carbon pricing strategy — Conduct scenario analysis and internal carbon pricing Integrating climate risk into core risk management including processes and controls.
- Begin technology budgeting and change management planning — What new systems will you need to track, measure, report and monitor your progress? What new employees, departments and processes will you need to sustain your initiatives?
The Time to Start Is Now
The earlier you start your climate accounting initiative, the more time you have to understand your emissions, identify areas for improvement, and implement strategies to reduce them. Additionally, starting early can help you stay ahead of any future regulations or changes in stakeholder expectations.
It’s also important to regularly review and update your climate accounting to ensure that it remains relevant and accurate over time. Climate accounting should be seen as an ongoing process, not a one-time event. Consequently, creating a team with a long-term mission, and investing in the systems to support climate accounting will be essential.