The sustainable CFO: How to account for the environment
One of the more unseemly concepts in economics is the ‘negative externality’. Essentially, it’s a fancy term for a cost imposed on a third party. All manner of pollution – water, noise, air, light – are negative externalities.
Negative externalities are, as the threat of anthropogenic climate change will attest, quite common in commerce. Clearly, to paraphrase the famous American scientist Barry Commoner, we have compiled a record of serious failures in recent technological encounters with the environment.
And on the surface, there would seem to be an ineluctable tension between management accounting and the environment. Surely an emphasis on minimising costs can’t coexist peacefully with sustainability, which centres on internalising externalities?
But according to Richard Carter, head of finance and sustainability at Suffolk-based brewer Adnams, the antagonism is entirely misconceived. Carter, one half of Adnams’ sustainability team, has helped turn the Adnams into a “zero waste to landfill” business.
At its simplest, sustainability is a cost saving. Carbon, water, waste: these are all proxies for cost, Carter explained. “If we can reduce those things, we’re reducing costs in the business. It’s that simple.”
Adnams is extremely resource-intensive, using something like 15 gigawatt hours of energy every year and 80 million litres of water. “It’s no secret what’s happening with the cost of energy, it’s rocketing. Water is inexpensive, but we’re in one of the driest parts of the country, our annual rainfall is on par with that of Jerusalem. We have to be careful with our use and the water companies restrict us. If we can’t use water, simply put we can’t make any more beer.”
Carter is passionate about the environment, but he’s crystal clear that Adnams’ motivations are economic as well. It isn’t a social enterprise, it’s a hugely ambitious business making beers, spirits and running pubs and hotels. And, like any head of finance, he’s tasked with doing more with less.
Adnams cost base is particularly affected by the changing climate. “We’re seeing warmer, wetter summers,” Carter told AccountingWEB. “That means we’ve got a higher level of nitrogen in the barley we use to make beer, and it creates lower yields. So we’ve got to buy more barley and then the cost of a pint goes up.”
Sustainable cost savings aren’t just about space age tech. “There are a number of ways to cut costs ethically,” said Michael Wilks, the finance manager at Winnow Solutions, a tech company focusing on food waste.
“Just looking around my desk I can see that most of our furniture is second-hand and reconditioned – cheap and ethical while being exactly as good as something expensive and unethical. Energy efficiency is another example – our Plumen bulbs give the same effect as incandescent bulbs but with a fraction of the electricity usage.”
Environmental initiatives have a tendency to create externalities, too -- but positive ones. LED lights, for instance, have a cost saving in terms of electricity, but then create ancillary benefits. LEDs burn cold, making temperature control simpler. They last longer, so there’s no need to shut down a warehouse aisle and get the cherry picker out to change them.
You can go much bigger than just light bulbs and furniture, though. Adnams’ distribution centre is constructed with zero-carbon ‘hempcrete’ and it’s sedum roof helps collect rainwater, saving a million litres of water every year. The eleven-year-old distribution centre saves Adnams over £50,000 a year in energy bills. “It’s already paid for itself.”
More than just raw materials, both Winnow and Adnams have seen the benefits of sustainability cascade down to employees. “Our people are our greatest asset, but they’re also our greatest expense,” said Wilks.
“One of the most significant things we can do to improve our bottom line is to get more out of our people and to attract the best without having to pay bankers’ salaries. Study after study has shown that people are happier and more productive in ethical, purpose-led businesses.
“Staff retention is greatly improved in an ethical business, and recruitment is far easier and therefore cheaper. This gives your bottom line a tremendous boost, and more than makes up for any extra expenses you might pick up in driving ethical change within the business.
The bottom line
When sustainability is bracketed alongside costs and business resilience, the link to the finance function becomes common sense. And as the climate changes, cost pressures will rise and the strategic role of the FD or CFO will have to adapt.
Finance professionals often talk of financial and operational gearing, Carter said, but it’s high time to consider what he sees as “environmental gearing”. That is, finding new, efficient ways to squeeze more out of a business. “In 2016, our production output increased by 14% when our energy usage increased by just 4%.”
“This is no longer hypothetical. We have got to adapt and minimise the effects. Regardless of whether you’re a climate change sceptic or not, nobody can suggest there’s an infinite supply of oil or bauxite that’s used to make the aluminium for beer cans. These resources are going to run out and we have to find a way to adapt. Those that adapt sooner have a big advantage.”
As Winnow Solutions’ Wilks sees it, sustainability can’t happen without the finance function. “It sets the tone for the entire business – it’s the engine room, after all,” said Wilks. “It’s very easy for sustainability and ethics to be trumpeted by the marketing department in a shallow effort to build the brand, but this is seen for what it is by increasingly savvy employees and clients.
“The finance team is instrumental in shifting the focus from the next quarter’s results to a longer-term view that will automatically encourage a more sustainable and ethical approach across the business.
“The data you choose to present and how you choose to present it can raise everyone’s eyes from short-term profit to long-term sustainable growth. This selection of the stories to tell with the data is also an opportunity to introduce ethics into the conversation.”
If you’d like more information on how to make your business more sustainable, here are some good places to start: