News | 11th February 2019

Accounting’s Extra-Financial Future

By Kevin Horgan

Social expectations and environmental pressures are mounting on today’s businesses. Thankfully, tools exist to help businesses understand and improve their extra-financial performance.

Today’s businesses find themselves having to constantly adjust to new expectations from an increasingly informed consumer base, to changing laws around how they must interact with the natural environment, and to shifting demands from their workforce. Combined with the ever-increasing speed of technological development and the rapid arrival of competitors with entirely new business models, many companies now find their historically successful niches at risk. These challenges are compounded by ever-louder demands from investors and other stakeholders for comparable and credible company disclosures that go beyond the financials, to explain how the business is responding to this new normal.

A rapidly growing global population is driving demand for goods and services, creating new opportunities for business. Unfortunately, the side effects of this increase in consumption are causing challenges for companies; farmers and fisheries are battling with extreme weather events, mines are often having to reach into more difficult and costlier areas to access resources. At the same time, increased access to information is causing business practices up and down the supply chain to come under scrutiny, and rising inequalities are causing trust in companies to fall.

From the perspective of a business manager, nothing is as frustrating as having to aim towards a moving target. The appearance of new policies, societal expectations and operating requirements on the corporate radar can be disruptive to management’s long-term plans. In reality, these changes are data points trending towards a future state that we already know a lot about. The UN has produced 17 Sustainable Development Goals that help describe the future that the world’s governments are aspiring to. If managers are equipped with a similar, business-specific description of what they need to achieve over time, then they can start to prioritise the aspects that are most urgent and beneficial to their companies or divisions and to make changes that will have immediate benefits to their business while aligning with tomorrow’s required practice. These challenges to the current and future success of businesses are complex, interconnected and overlapping. They are systemic issues − and to address them we need to take a systems based approach.

The Future-Fit Business Benchmark is a free set of management tools that is designed to help businesses make sense of and respond effectively to these issues. It compiles the leading work of technical experts from several disciplines that spell out in simple terms where these social and environmental trends are headed, and what the implications are for businesses from a systems based perspective. It includes clear descriptions of the different ways that businesses can meaningfully contribute to society, and how to credibly articulate these activities to external stakeholders. It also outlines where companies may be at risk of causing negative social or environmental impacts, provides guidance on what actions can be taken to help mitigate these risks, and describes steps to decide which areas should be worked on first. It also includes clear, specific metrics that allow companies to quantify their results and track their progress. Importantly for many businesses, the benchmark is designed to make assurance by audit professionals possible, increasing the comfort level of managers and investors in their ability to make decisions based on this data.

Companies are already using the benchmark to make better day-to-day decisions. International companies such as the UK’s The Body Shop, Danish pharmaceutical firm Novo Nordisk, and South Africa’s De Beers Group are starting to use Future-Fit’s tools to help understand the future performance they need to achieve, and as a means to help guide their paths forward. A growing group of investors (representing £500 billion of assets under management at the time of publication) have formally committed to helping to develop and encourage adoption of the FutureFit Business Benchmark, because it delivers detailed and credible information on a holistic suite of social and environmental outcomes in a way that other reporting frameworks can’t match.

If managers are equipped with a similar, business specific description of what they need to achieve over time, then they can start to prioritise the aspects that are most urgent and beneficial to their companies.

Using the benchmark can also bolster your external engagement with customers and investors. Consumers still demand quality products at competitive prices but are increasingly insistent on buying from by brands that align with their values. They are very sceptical of ‘greenwashing’. The benchmark is designed by a neutral third party and allows companies to make data-based claims with a basis in the leading science from the relevant disciplines. Investment managers are also starting to demand information on companies’ social and environmental outcomes, both as a service differentiator that they can pass on to their customers, and also because of mounting evidence that these form a good proxy for the longterm risk of an investment. Even if a company does not have the solution to every issue, investors are eager to see that they acknowledge sources of potential risk and are actively engaged in managing them. Having a holistic strategy to identify and manage these risks also allows companies to set a defensible limit on what they should be expected to be accountable for.

For companies that are looking to better understand their social and environmental impacts, or who are looking to improve their performance in those areas, the Future-Fit Business Benchmark offers great management and engagement tools to start future-proofing their business models.

This article first appeared in Accountancy South Africa Feb 2019 Issue.

Kevin Horgan Impact Valuation Manager

Kevin is an impact valuation manager, with experience in measurement of business outcomes, internal controls, organizational change management, and assurance.

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