Regardless of one’s belief about the causes, global warming is a reality – this was the message conveyed by a recent survey of finance leaders that reveals the impact of global warming on the environment and business operations. Jemelyn Yadao finds out from Hong Kong CPAs how environmental issues affect companies and how they can address them
Sceptics of global warming have a slew of claims. They say there is no scientific consensus about the extent and causes of climate change; or that global warming stopped in 1998; or that the earth’s rising temperature is down to the sun – not human emissions of CO2.
A study that might not go down so well with these climate change sceptics is a poll of accountants who are seeing first-hand the impact of global warming. The Institute of Management Accountants conducted a survey of senior finance professionals in November 2016 and found that the majority of respondents believe global warming is occurring – 65% believe that global warming is having a significant impact on the environment, while 62% said it has significantly affected their business, with the increased cost of inputs highlighted as one of the most common consequences.
‘Respondents’ organisations are not just taking current profits into consideration but also “see the handwriting on the wall” – the coming impact on operations and profits from global warming – and making changes now to anticipate that impact,’ Raef Lawson, the IMA Vice President, Research and Policy, and a CPA, tells A Plus. ‘While only 24% of respondents indicated their company’s current profitability has been negatively or significantly negatively impacted by environmental issues, 64% of them have already changed their operations due to global warming.’
In recent years, the accounting profession has made progress on sustainability reporting and integrated reporting. With major exchanges around the world strengthening their requirements for listed companies to disclose their environmental, social and governance obligations – including the Hong Kong Stock Exchange – and about 1 500 large companies around the world adopting the framework of the International Integrated Reporting Council. The IMA’s survey results, however, shed light on the role of accountants, beyond ESG reporting, in implementing sustainability-related initiatives to address environmental issues for companies. ‘The types of changes made are typical of those in which the finance and accounting area would be involved,’ says Lawson. ‘For example, as management accountants, we often implement balanced scorecards containing both financial and non-financial performance metrics. Many companies are now measuring their carbon footprint and other sustainability metrics, and these would be appropriate non-financial measures for a company’s scorecard.’ He adds that companies are also investing in renewable energy sources or investing in technology to reduce carbon emissions. ‘Accountants are key to making appropriate investment decisions.’ Today, those anxious about the future of the planet are largely younger accountants, says Jane Gleeson-White, Australian business writer and author of Six Capitals. ‘I’ve seen a shift with more accountants thinking long term but it does seem to be a generational thing,’ she observes. ‘Generally, it seems that accountants under 50 are more open to long-term “integrated” thinking and reporting than older ones, who remain committed to the tried and true. There are exceptions in both cases, of course.’ To truly save the world, CPAs should see questions about sustainability as being under their remit, says Gleeson-White. ‘I feel integrated reporting and accountants cannot “save the planet” as long as they’re accounting for corporations whose sole legal imperative is profit maximisation. As I say at the end of Six Capitals, the contemporary corporation, a product of 19th-century industrial USA and Britain, needs a legal overhaul to extend its responsibilities beyond its focus on financial capital. And nature needs to be given legal standing, which has recently happened with a river (the Whanganui River) in New Zealand.’
Environmental stewards Survey participants in Hong Kong and China view global warming as a crucial issue, according to Lawson. ‘All of the respondents from the Asia-Pacific region indicated that they believe global warming is having a significant impact on the environment and should be addressed. They also all believed that organisations should engage in practices that promote environmental sustainability to the extent that there is an appropriate balance between their organisation’s economic, social and environmental goals,’ he says.
‘The impact of global warming is much more dramatic in Hong Kong and China than elsewhere in the world. Rather than relying on becoming more energy efficient or switching to cleaner energy sources, the most common impact was companies moving their production facilities.’
Many finance heads recognise that environmental problems can lead to supply chain disruptions. As environmental performance increasingly becomes a key criterion for businesses and consumers when making buying decisions, Kelvin Li, Finance Director at multinational engineering and infrastructure company AECOM, and a Hong Kong Institute of CPAs member, says it’s important for CPAs to work in partnership with suppliers to support each other in improving practices. ‘With our suppliers, we need to think about how we can have a better relationship with them to ensure they are environment-cautious when they provide their products to us.’
He adds that environmental issues affect his company in two ways. ‘First, it is the cost-saving side through the implementation of green measures – internally, we encourage our staff to print cautiously and reduce energy usage, coupled with usage of energy-saving lamps,’ says Li. ‘Secondly, it’s actually bringing us more business.’
Indeed, coastal flooding and storm surges cause significant damage to companies, says Freeman Cheung, Leader of the AECOM Greater China Environment Practice, a specialist environmental consultant. ‘Clients come to us for help on how to address the climate change issues from both a global and a business-resilience perspective because climate change introduces risks. Sometimes their assets may be located near the coast, and if there’s more flooding, more storm surges, that would have a direct impact on their operations and their financial assets,’ says Cheung. ‘We would advise the board to design for the longer flood cycles or, say, build a gate to prevent flooding, in order to have business continuity.’
In addition, climate change threatens freshwater sources. Much of the world faces a hotter and drier future under climate change, say many scientists. Rainfall will become more unpredictable, while storm surges could contaminate freshwater reservoirs.
Fresh water scarcity and the sustainable development of raw materials are key concerns for Kenneth Siu, Vice President of Financial Planning and Analysis at Carlsberg Group, and an institute member. ‘For us, the impact is quite material if you consider the whole supply chain process and the fact that malt and water make up our beer that is sold to market,’ he says. ‘Environmental issues will affect the harvest of natural resources, such as malt, rice, barley and, most importantly, clean water, hence supply would be reduced and prices would increase. It will also impact the quality of the harvest. That means we are left with more expensive raw materials that are of less quality.’
To tackle this issue, risk management skills possessed by CPAs are essential, notes Siu. ‘We can at least control the risk by hedging on the malt prices and so on,’ he says. ‘When we access capital expenditure to spend during the year we can also give more priority to capital expenditure regarding environmental requirements from the local authorities to ensure we are helping the environment and at the same time avoiding penalty payments.’
Naturally, some companies have a stronger stance on environmental issues than others. As Sammie Leung, Director, Risk Assurance at PwC Hong Kong has seen, the journey to building an organisational culture of sustainability varies across different sectors and companies across Greater China.
‘Some of the traditional companies would say environment measures are more for cost effectiveness. They are still thinking about printing two sides of the paper,’ says Leung, an institute member. ‘But the more established ones understand that if you do a good job in this area you could save yourself from a lot of trouble and if you do things smartly, you could actually help drive revenue, so there’s a lot more favourable impacts to the bottom line. Some know better than others.’
Canon Hongkong, part of Japan’s Canon, the imaging and optical products company, for example, has a corporate philosophy of Kyosei, which is the concept of ‘living and working well together for the common good,’ explains Gary Lee, its Senior Director and an institute member. ‘That corporate philosophy, instead of regulations, shapes our employee values and business strategies.’
Internally, the company has defined models for subsidiariecarbon emission in logistics functions, and their electronic work flows keep track of CO2 emissions of business trips.
Being in charge of the divisions of finance and accounting, information technology, supply chain management, and legal and compliance at the company, Lee has led his teams to help improve the company’s operational efficiency by integrating information technologies into different business operations. These all led them to achieving environmental sustainability.
They started in 2005 by computerising two work processes: the attendance system and the purchase order system – processes that involve masses of data being uploaded for analysis or further processing. ‘We started with these two because they were the biggest paper eaters – not just in terms of the paper costs, but also the manual work of processing, filing, keeping and disposing,’ Lee explains. The multiple departments involved in the two workflows meant that the company was no stranger to redundant data entry.
‘We set a limited scope at the beginning to let our staff buy-in the concept of electronic workflow. Later, it turned out to be a big success and different departments launched more computerisations and made requests for integrating different systems,’ he says.
As companies continue to respond to environmental challenges through a variety of operational changes, finance professionals agree that the issue of global warming is something that needs to be on their radar. ‘For sure, global climate change, at the end of the day, will have an impact on a company’s business,’ says Li at AECOM. ‘So accountants should think more strategically, they have to think out of the box, and imagine the kinds of impacts the environment will have on a company in the future.’
This article first appeared in the June 2017 issue of A Plus and is reprinted here with permission from Hong Kong Institute of Certified Public Accountants
Author: Jemelyn Yadao