With the increasing visibility and consequences of global warming, the costs related to environmental hazards are growing for companies worldwide. This impact extends across all aspects and operations of an organization, including its accounting practices. As more businesses embrace ESG standards and transition to green accounting, it’s important to understand the concept and identify its implications on the accounting profession.
Green accounting means the tracking and evaluation of a company’s attempts to protect the environment, reduce its carbon footprint, manage environmental risks, and invest in environmentally responsible ventures. Approaching operations from this perspective can create a stronger and more resilient brand, as well as become a point of differentiation for environmentally minded customers and investors.
This top-down realignment begins by changing the company’s governance structure to prioritize sustainability risks and opportunities. Refocusing in this way enables a company to identify, evaluate and manage environmental risks, as well as opportunities for sustainable growth. In most cases, this approach also impacts how employee and management performance is evaluated, prioritizing new sustainability metrics over previous job performance measurements.
Benefits of green accounting for businesses
While transitioning to green accounting incurs costs similar to any restructuring endeavor, companies are driven to invest in this approach to increase environmental sustainability. This is not in lieu of profitability but often with the goal of also ensuring long-term business success.
The benefits can include:
- Protecting the planet and business: Businesses can have a discernible impact on climate change by reducing greenhouse gas emissions and taking other eco-friendly measures. Green accounting is a way to prove a company is making these efforts and measure their success.
- Staying ahead of the competition: Going green shows a company is invested in the well-being of its employees, customers, community and investors. Many people, particularly in younger generations, prefer to support environmentally responsible businesses. Embracing and publicizing these efforts can help win the trust and loyalty of customers, opening doors to new growth opportunities.
- Decreasing long-term costs: Green business practices can save money in a variety of ways, including avoiding losses caused by climate-related disasters, penalties for breaking environmental laws and asset depreciation due to using inputs that contribute to pollution. Making these adjustments sooner rather than later can also help managers avoid rising costs due to resource shortages.
- Securing future savings: Sustainable businesses typically enjoy lower operating costs, experience consistent growth, receive tax incentives and credits, and make smarter, long-term investments.
- Attracting the right talent: By adopting green accounting practices, businesses can attract top-notch employees who care about more than a paycheck. In today’s job marketing, many in Gen Y and Gen Z prioritize employers with strong environmental values and practices.
How accounting firms can help
Not all firm clients will embrace the idea of green accounting, but some most certainly will. As this approach becomes more popular, accounting firms need to be prepared to meet these client needs and bring ideas and expertise to the table. Here are some steps to consider:
- Train your people: Green accounting covers a lot of new ground, including areas outside of conventional training. Preparing professionals to be ESG savvy requires training on carbon emission calculations, waste management, assessing DEI and community impact, and much more. Keep in mind that sustainability goals are a collaborative effort, thus any training you spearhead for clients must include all members of the company and not just those in financial roles.
- Understand your clients’ businesses beyond financial reporting: To be truly valuable to your clients, you must be aware of more than who their suppliers and customers are to understand the lifecycle of all inputs and final disposal of outputs. This includes where each component is originally sourced, how and if products can be reused or recycled, and how they are ultimately disposed. It also requires understanding a business’ impact on the environment, its community and its people, and how prepared it is for environmental threats.
- Build strong sustainability governance practices and measurements: Establish an ESG task force or committee to ensure all sustainability policies, programs and progress are monitored, risks and opportunities are identified and addressed, and that performance is measured and reported regularly. Over time, adjustments will need to be made, but tracking is vital to knowing where progress is occurring and where roadblocks are preventing movement.
- Keep environmental and societal impact in mind when accounting for business transactions: This added layer of reporting is essential for companies interested in accounting for their ESG impacts. For example, adding a new company vehicle would normally involve a debit to property and equipment and a credit to cash. However, when using green accounting methods, the company’s carbon emission monitoring database would also need to be updated to include the carbon footprint expected on the vehicle’s fuel usage, parts, and maintenance. Or to be even more thorough while sourcing and pricing the vehicle, you should look at factors other than price and quality to include its long-term environmental impacts, as well as available tax incentives and other benefits that aren’t typically included in this process.
- Create accurate sustainability reports for public consumption: While these efforts are partly altruistic, they also create good will and a competitive advantage with customers. It’s tempting to talk about what the company is going to do, though this can be met with stakeholder skepticism. Firms should stick to globally accepted sustainability reporting frameworks to ensure accuracy and transparency.
While still nascent, green accounting is expected to grow, particularly as more companies adopt ESG practices or if implementation is eventually mandated through legislation. A recent McKinsey report noted that companies that commit to ESG practices experience higher growth, lower costs, increased productivity, and fewer regulatory and legal interventions. Firms that understand how green accounting works will stand head and shoulders above the competition.
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