As the threat and effects of global warming become more apparent, the costs of environmental hazards are becoming excessive for companies globally. The impact permeates every aspect and function of an organization, including its accounting. As more businesses shift to green accounting, it’s important to understand what this concept involves and how it affects your accounting function.
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What is Green Accounting?
At a high level, green accounting is a way to account for efforts a company undertakes to protect the environment, reduce its carbon footprint and environmental risk, and invest in environmentally responsible businesses. Companies that engage in green business activities can increase their sales with a better product image, improve customer and investor perceptions, and create a more robust and resilient brand. Many companies and countries have begun to study and apply green accounting, leveraging the expertise and input of accountants skilled in this approach.
Green accounting is a large-scale, top-down restructuring of how a company approaches its accounting, involving not only the accounting department but all stakeholders, including the local community and governmental jurisdiction. It starts with refocusing a company’s governance structure toward sustainability risks and opportunities.
The design of the governance structure must be strategic to ensure the company can identify, assess, and manage environmental risks while seizing and sharing opportunities. That even extends to how employee and management performance is assessed—not with outdated job descriptions, but with metrics and targets that cultivate sustainable solutions and growth.
As with any restructuring, the transition to green accounting doesn’t come without costs. So, why would a company invest in moving to green accounting?
What Are the Advantages of Green Accounting?
By helping businesses assess their environmental sustainability and meet sustainability goals while maintaining profitability, green accounting enables organizations to realize the following advantages—ultimately making them future-ready and future-proof.
● Ensures we all have a planet to live and conduct business on. Businesses will play a significant role in reducing climate change impact by cutting greenhouse gas emissions and taking other critical measures. Green accounting is one of many ways organizations can protect the planet and reduce the threat of business cessation.
● Keeps you ahead of the competition. Engaging in green accounting can help a company position itself as a reliable and trusted brand that thinks beyond profitability, focusing on the well-being of its employees, customers, community, investors, and other stakeholders. Many such stakeholders are moving away from companies that aren’t good environmental stewards and shifting their spending and investments to green businesses. Sustainable companies boost stakeholder confidence and open new opportunities for growth.
● Reduces your long-term costs. Green business practices like green accounting can reduce a company’s costs in many ways. They can help you avoid losses from climate-fueled natural disasters, penalties for violating environmental laws, and impairment losses on assets that contribute to pollution or are used to manufacture unsustainable products that soon will be banned. Green practices also can combat the rising costs of production inputs resulting from resource shortages.
● Drives future savings. Sustainable businesses enjoy lower operating costs, improve top-line growth, receive government tax incentives and credits, and optimize investments in green assets, leading to fewer expenditures and capital acquisitions.
● Enables you to get the right talent. Obtaining the talent you need to grow and thrive is challenging in a tight labor market. Additionally, today’s employees choose jobs not only based on the compensation package, but also on the employer’s business practices, goals, and values—including its commitment to environmental responsibility.
What Does a Shift to Green Accounting Involve?
For organizations that are ready to extend their commitment to environmental stewardship and sustainability by adopting green accounting practices, this shift in approach will involve two key transitions.
• Moving from financial accounting to environmental financial accounting (EFA). EFA focuses on the accounting and reporting of environmental transactions and events that affect financial performance. For every debit and credit, an accountant must consider a transaction’s entry or impact on the environment. That includes identifying underlying costs, whether they have a material impact on the environment, and whether they could affect the economic decisions of various users of the company’s financial statements.
• Transforming from management accounting to environmental management accounting (EMA). EMA considers environmental costs and benefits to identify, analyze, manage, and reduce organizational costs like energy consumption, risk management, and raw materials use.
It’s up to an organization’s green accountant, in partnership with an outsourced accounting partner like Scrubbed, to drive these transitions and build a strong EFA and EMA foundation. Accounting teams in forward-thinking organizations typically take steps like the following to help the business forge a feasible path forward for its sustainability efforts:
• Work with Research and Development to transition products and services to sustainable solutions
• Dialogue with Procurement to find suppliers and vendors that promote sustainability
• Work with Human Resources (HR) and Technology to create policies that minimize resource use and ensure effective, efficient use of supplies and digital alternatives
• Partner with Operations and Management to analyze the feasibility of flexible work arrangements to minimize employee mobility and reduce transportation carbon footprint
• Work with HR to encourage employees to be eco-friendly at work and at home, through green initiatives that incentivize environmental contributions
• Team up with Learning and Development to improve employee awareness of environmental issues and solutions
• Prepare reports that go beyond balance sheets and income statements to include information on the company’s environmental and societal impact
• Budget and forecast the company’s future readiness for sustainability
Looking Beyond Company Boundaries
While building a solid internal foundation for green accounting approaches like EFA and EMA are essential for companies committed to environmental responsibility, the effort doesn’t end there. It’s equally important to incorporate Environmental National Accounting (ENA) into a business’s practices.
ENA supports a country’s green initiatives by assessing its economic activities, economic growth, and natural resource use and analyzing how environmental impacts are managed across the nation. While traditional national accounting would consider a country’s gross domestic product (GDP) and net domestic product (NDP) as the only measures of its economic performance, ENA factors in the environment, resulting in a new standard called environmental domestic product (EDP).
From the default formula of NDP, EDP adds in the net accumulation of produced economic assets, non-produced economic assets, and non-produced natural assets, making environmental protection and preservation part of the equation. Through this step, countries and regulators are committing to the environment, enacting environmental laws, and providing ecological incentives to each nation’s members to promote country-wide sustainability and improve EDP.
Tax authorities, the US Securities and Exchange Commission (SEC), the International Sustainability Standards Board (ISSB), and the EU Corporate Sustainability Reporting Directive (CSRD) are some of the institutions and agencies releasing regulations and standards that would require businesses to implement green accounting. Our earlier blog provides a look at some of these upcoming regulations and standards.
How Scrubbed Can Help
The transition to green accounting takes a good bit of time and energy, but the benefits far outweigh the effort and cost. To help ease the transition and remove the regulatory compliance burden, more organizations are partnering with Scrubbed to assist with their shift to green accounting.
Scrubbed’s technical accounting, tax, advisory, and other teams help companies navigate the green woods, support the transition to green accounting, and leverage tax incentives for green initiatives. And our ESG team keeps tabs on standard-setting developments and regulations to help companies comply with new and evolving requirements.
Contact Scrubbed to learn how we can help your business make a smooth transition to green accounting.