We speak to Green Finance expert Professor Shantanu Banerjee about the future of sustainable accounting and finance, and academia’s role in how we will tackle the upcoming environmental, social and governance (ESG) challenges.
Companies are becoming increasingly vulnerable to public scrutiny over their approach to the climate emergency and social justice issues. However, are the rules of the game really changing for the corporate sector?
Non-financial stakeholders, such as customers, employees and local communities, have had minimal control over companies’ choices, despite the impact these could have on them.
The negative externalities have historically been ignored by managers and investors, and at best this was something to manage ‘strategically’ to avoid lawsuits.
However, years of environmental damage have brought us to the brink of a climate crisis.
This has driven non-financial stakeholders to take actions which are directly influencing firm behaviour and changing the priorities to succeed in a competitive business environment.
Customers are becoming increasingly more sensitive to the environmental and social footprint of the products they purchase.
Regulations are being developed to account for sustainability within production processes and business practices, and governments in most countries are designing incentives to achieve their net-zero targets.
There is also a growing majority of investors and financial intermediaries valuing the importance of sustainability of their portfolios and clients.
As a result of all these, the rules of the game for standards of sustainability practices and the requirements for related disclosures are changing rapidly in the corporate sector.
From a sustainability perspective, how are non-financial stakeholders influencing the financial management strategies of firms and investors?
Traditional financial theories often underestimate the role of non-financial agents in long term value creation, but there is increasing acceptance that such framework fails to generate business models which lead to sustainable value creation.
Retail customers with purchasing power are making educated choices about the products they purchase, and the environmental and social policy preferences of these end users are transmitting through the supply chain.
Social media is making it easier for customers, employees and other concerned stakeholders, to influence a company’s reputation on social and environmental responsibility.
For example, responding to customer preferences, Unilever launched its Sustainable Living Brands1, which include Dove and Ben & Jerry’s, focusing on reduced carbon footprints and ethical sourcing. These brands grew over 50% faster than others in Unilever’s portfolio.
The regulatory scenario is also evolving fast. For example, the announcement of the International Sustainability Standards Board (ISSB)2 at COP26 (Glasgow, 2021) set out the commitment to create a global baseline for sustainability reporting.
The UK government is a strong supporter of the ISSB and is working towards adapting the new reporting standards into UK legislation.
This means the Financial Conduct Authority will soon be able to introduce requirements for UK-listed companies to report sustainability-related information3.
Several other countries are also prioritising standardised sustainability accounting and disclosure.
Social impact of corporations and working conditions of employees are also attracting a lot of surveillance.
For example, the 2015 Modern Slavery Act4 obligates firms with a turnover of over £36m to report on the steps taken to tackle human exploitation in their supply chains.
Corporations can expect increasing social and legislative demands on the transparency and accuracy on the information they share in all aspects of sustainability.
However, many hold the perception that companies are just ‘ticking the box’ with generic reports and statements on sustainability. Is there real change or are they simply paying lip service?
Here we need to look at the role of all financial stakeholders, not just companies, and the value they place on corporate financial and non-financial reporting.
Unfairness and inequality grow in the system due to the self-serving nature of agents, but conflicts can be resolved by better quality information, and this also includes sustainability-related issues.
Long-term equity investors are pushing for businesses to safeguard the future of their investments and banks understand they cannot diversify away systemic climate risk of their lending portfolio, unless the overall impact of economic activity on climate is slowed down and reversed.
These financial stakeholders value better quality information and more sustainable business practices.
Climate risk exposure and carbon footprint impact borrowing costs, insurance and asset valuations of companies.
Firms integrating sustainability into financial strategies enhance resilience, attract responsible investors and secure long-term profitability while mitigating ESG risks.
So, business organisations are trying to manage climate risk and improve business practices in a verifiable manner.
High-quality firms are trying to go one step further by establishing best practices while the regulation of standards for sustainability reporting develops, to signal their quality and differentiate from competitors.
For example, IKEA uses Global Reporting Initiative (GRI)5 standards and have set up ambitious goals (eg becoming climate positive by 2030) and clear performance indicators.
Unilever follows the Task Force on Climate-related Financial Disclosures (TCFD)6 recommendations and is demonstrating clear indicators and roadmaps for carbon reduction with third-party verification.
How can academia support the transition to a greener future, specifically in the area of accounting and finance?
The industry needs a new generation of professionals with their finger on the pulse of sustainable accounting and finance, to change the course of development to a greener future.
From our University‘s perspective, it all starts with a strong research foundation and industry links, that help us improve our learning environment and benefit our students.
Several researchers in the Management School’s Accounting and Finance Group are already developing research projects on environmental, social and governance policies for different firms.
My aim is to take up a leading role to make this important research stream more productive and impactful.
In terms of financial reporting there is potential for exploring, not only information content, but also how standardisation impacts the quality of sustainability disclosures and practices at company level, and the climate crisis overall.
Another area of particular interest is how firms respond to regional initiatives on biodiversity preservation and incentives to implement cleaner production methods, measure and manage climate risk exposure and benefit from sustainable human capital management.
These lines of research will lead to collaborations with researchers in the Management School’s Centre for Sustainable Business, the School of Environmental Science and other relevant multidisciplinary research groups within the University.
We are also looking at expanding our national and international impact, by enabling joint projects with business partners and other research institutions within and outside the UK.
From a teaching perspective, we are not only working to embed sustainability within our existing programmes, but we are also launching a specialist Green Finance and Sustainable Accounting MSc.
This programme integrates the mainstream principles of traditional accounting and finance, with specialist knowledge of modern sustainability concepts.
Our goal is to enhance employability for our students, as businesses, investment funds and banks are embracing new models that reduce environmental costs and create sustainable value for employees, customers and suppliers.
1 From 2010-2019 Unilever shifted its corporate identity towards sustainable living with its Sustainable Living Plan aimed at repositioning the fast-moving consumer goods giant as a purpose-driven company. In 2018, the company’s Sustainable Living Brands grew 69% faster than the rest of the business, delivering 75% of Unilever’s growth.
2 The International Financial Reporting Standards (IFRS) is a set of accounting rules that govern how public companies report their financial information, to make financial statements consistent and comparable across borders. Following strong market demand, on 3 November 2021 trustees of the IFRS Foundation announced the formation of the ISSB, aimed at developing standards for high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets.
3 Based on the global corporate reporting baseline of IFRS Sustainability Disclosure Standards, the UK government is working on the development of the UK Sustainability Reporting Standards (UK SRS).
4 The Modern Slavery Act 2015 provides law enforcement the tools to fight modern slavery, ensure perpetrators can receive suitably severe punishments and enhance support and protection for victims.
5 GRI is an independent, international organisation which has developed a common global language to assess and report on environmental, social and economic impacts.
6 Established in December 2015 by the G20 and the Financial Stability Board, the TCFD provides recommendations on the types of information companies should disclose to support investors, lenders and insurance underwriters, so they can appropriately assess and price a specific set of risks related to climate change.
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Professor of Accounting and Finance and Director of Research for Accounting and Finance Group |