If you want to expand your company’s sustainability efforts but aren’t quite sure how to go about it, you’re in luck. And you have His Royal Highness the Prince of Wales, otherwise known as Prince Charles, to thank for it.
The heir to the British throne created the Prince’s Accounting for Sustainability Project (A4S) in 2004, bringing together leaders in the finance, accounting, and investor communities to drive a shift toward resilient business models and a sustainable economy.
In December 2013, A4S launched its Chief Financial Officer Leadership Network (the Network), a group of 16 CFOs from large European countries. They’re charged with seeking ways to embed the management of environmental and social issues into business processes and strategy.
Among the first big results from the Network is a set of four guides containing case studies that demonstrate practical applications of sustainability approaches and techniques. “As CFOs, we have a crucial role to play in helping our businesses to understand the value of values, and sustainability in particular,” says Network chair John Rogers, CFO of U.K. supermarket chain Sainsbury’s. “It can be a challenge knowing where to start.”
The four CFO-produced guides, which are available for free, are:
CAPEX: Describes how traditional financial-return-based investment decisions can be broadened to make sustainability issues more explicit and transparent. Examples of how this can lead to more cost-effective and resilient investment decisions are provided.
Enhancing investor engagement: Helps investor relations teams engage investors on the link between sustainable business models and the creation of shareholder value. It combines ideas that are quick and easy to implement, such as incorporating sustainability information into investor presentations, and those that will take more time, such as moving away from quarterly reporting of financial results.
Managing future uncertainty: Addresses the potential business impacts from such macro sustainability trends as climate change, water scarcity, increasing population, and severe weather events. It sets out why it’s important to adapt traditional risk management processes to respond to these trends, and provides examples of how to overcome some of the uncertainty associated with them so they can be better integrated into business decisions.
Natural and social capital accounting: Helps finance teams increase their understanding of this growing movement. It explains the key terms, how broadening accounting frameworks can benefit business, and the central role of the finance team in collecting, analyzing, and reporting this new type of information. The guide explores the benefits and challenges of converting natural and social capital impacts and dependencies into financial figures.
Case Study: CAPEX
Sainsbury’s set an ambitious goal to become the United Kingdom’s greenest grocer. It demonstrated the technical feasibility of cutting carbon consumption by 30% by 2020 through a series of sustainable technology projects. Post-investment review showed that these projects achieved better-than-expected financial results and accelerated cash-payback periods by one year.
Bolstered by that success, company leaders decided to aim higher. With a project called Triple Zero, they set a goal for two large new stores to get off the energy grid entirely, reducing carbon consumption to zero; to become water neutral; and like all Sainsbury’s stores, to dispose of zero waste in landfills.
The project team knew that the Triple Zero stores would be approved only if they could be shown to be commercially viable and their sustainability results were demonstrably repeatable. The eco-investments were not subject to any special conditions – they were evaluated against the same financial hurdles, using the same measures and models (including cash payback, net present value, return on capital employed (ROCE), and internal rate of return) as any other investment opportunity within Sainsbury’s.
Also, they were funded from existing capital funds, financed via existing cash inflows and debt facilities.
A dedicated finance team was assigned to help the project team identify and navigate government incentives; determine the cost savings from carbon, water, and waste reductions; and arrange capital allocations.
The Triple Zero stores opened in 2013. They featured a range of proven sustainable technologies, including rainwater harvesting, photovoltaic solar panels, CO2 refrigeration, efficient LED lighting, and a bee hotel. They also incorporated solutions new to Sainsbury’s, such as electricity and heating from a gas-fired combined-heat-and-power (CHP) generator, a bio-gas offset scheme, and partnerships with community water-saving projects.
The investments enabled the stores to achieve their Triple Zero goals while registering 22% ROCE, according to the guide.
Case Study: Social Capital Accounting
Marks and Spencer uses social-accounting techniques to calculate the monetary value of (though not its financial return on) its contribution to communities. Such investments include the company’s employability programs (Make your Mark and Marks & Start) and donations of staff time, products, and money for charities and community projects.
The evaluation techniques used to convert the data into monetary values are based on guidelines set out in the London Benchmarking Group (LBG) model. The model enables measurement of a company’s overall community contributions, taking account of cash, time, and in-kind donations, as well as management costs. The Marks and Spencer finance team lends its expertise in preparing figures and providing the analysis.
In 2014, the total value to society created from the company’s community investments was £23 million, £14.2 million in direct investments from Marks and Spencer and £8.8 million resulting from leveraged activities such as customer donations or enabling charity partners to attract additional support.
The approach allows the company not only to understand the total value created from its social activities, but also to assess the effectiveness of its campaigns, influence decisions, and prioritize future actions.
However, while Marks and Spencer derives some brand and reputational value from its community activities, it has not yet found a reliable method of calculating their effect on shareholder value. For that reason, it does not currently calculate a financial return on investment.