Green accounting supports bringing about change by interconnecting, or better integrating, environmental considerations into traditional financial reporting practices for holistic decision-making: Md Sajid Khan, Association of Chartered Certified Accountants

Climate change, freak weather conditions and growing environment-focused challenges have increased recently. Businesses accountability for their ecological footprint is increasingly becoming the norm.          

As explored in ACCA’s research Making information connections for sustainable value creation connected green accounting supports bringing about change by interconnecting, or better integrating, environmental considerations into traditional financial reporting practices for holistic decision-making that reflects ecological concerns and offers companies a solid roadmap towards sustainable and profitable practices. 

It lets companies disclose material impacts, risks, and opportunities connected with nature, offers transparency and is an enabler to bake in long-term resilience into strategic decision-making, business model transition, risk, business and financial management. Therefore, with more sustainable practices there will be an opportunity to reduce costs and introduce innovation for long-term success. Further, sustainability concerns are becoming important in shaping investment choices, with a Deloitte survey stating that 85% of organisations have increased sustainability investments in the past year, up from 75% in 2023. 

A shift to green accounting practices reflects the crucial relationship between businesses and nature. The Kunming-Montreal Global Biodiversity Framework urges companies to disclose biodiversity-related impacts. Professional accountants will undoubtedly play a crucial role in managing the shift towards green accounting, fostering trust and transparency while helping businesses navigate the complexities of sustainability reporting. Green accounting approaches and the role of professional accountants are explored in ACCA’s work Empowering business: navigating nature-related reporting and Professional accountants changing business for the planet: a guide to natural capital management.

How is it being implemented?

The first step towards green accounting is to develop solid and robust standards. Currently, the move towards standardisation is still evolving through multiple initiatives. It includes initiatives such as the Taskforce on Nature-Related Financial Disclosures (TNFD), which defines impact as changes that impact the capacity to carry out many functions and is working on building more complex and location-specific metrics. The International Sustainability Standards Board’s (ISSB) IFRS S1 and S2 standards provide a solid baseline for identifying environmental related risks alongside other risk, including how they may interconnect with each other, as well as enabling vital interconnected, coherent and consistent corporate reports that are necessary for quality in decision-making. 

The International Ethics Standards Board for Accountants (IESBA) code and independence standards are being updated for sustainability, and should be used alongside the International Auditing and Assurance Standards Board (IAASB) guidance for sustainability assurance.  Together they support building trust in sustainability reporting and managing greenwashing or greenhushing risks, for example in the overstatement of environmental credentials or conversely underreporting.

Green accounting practices do bring challenges for accountants. First, nature-related reporting requires a range of often non-financial measures presenting difficulties associated in obtaining accurate measurements, such as changes in species number and diversity in the region relevant to an organisation, whether dependency on or impact to nature. This means accountants will need to update processes and systems, plus collaborate with other experts to access and interpret data in new formats, before integrating insights into broader business processes. Whilst the development of consistent international standards is very much a nascent journey, it further complicates implementation, underscoring the need for alignment among regulatory frameworks.

How can it be done?

The challenges notwithstanding, the opportunities are huge. To apply green accounting effectively, management support is crucial to develop an internal culture for prioritising sustainability and to build the necessary processes to fulfil the requirements of the selected green accounting standards. Therefore, it is necessary for professionals to increase familiarity with critical frameworks, such as TNFD, ISSB standards, and the Global Reporting Initiative (GRI). 

Further, processes are likely to leverage technology tools, even Artificial Intelligence (AI), to analyse and report biodiversity data, for which the earlier mentioned collaboration will be necessary.  Engagement with stakeholders, including suppliers, customers, investors will help not only the collection of data but also set expectation interconnected sustainability and financial goals, anticipated future risks and opportunities.

When organisations embrace green accounting practices applying the requirements of the selected reporting frameworks, with the requirements of IESBA and IAASB embedded then these organisations will be able to position themselves as sustainability pioneers. The alignment of financial success with environmental responsibility offers a solid competitive advantage.

The call to action 

Business, finance and accountancy professionals have many roles in green accounting, including but not limited to

-Developing the business case for sustainability and highlighting key benefits like cost savings, innovation, and market access, mainly when regulatory or investor pressure is absent. 

-Collaborating with other experts to develop the processes and systems for the collection, analysis, interconnection and integration of biodiversity metrics into key business processes and financial reports. 

-Using the interconnected and integrated sustainability and financial information in the development of recommendations for future strategy, its implementation and sustainability risk management.

-Assuring the business case, processes and systems, reported information and its use in support of building trust, accountability, and meaningful progress toward sustainability. 

As the demand for transparency and accountability grows, green accounting will undoubtedly become a cornerstone of modern business practices.