Management accountants are all about data. They turn numbers into stories that explain the past, present and expected future performance of the business.
Accountants and finance leaders must increasingly report beyond the financials. They have to consider information relating to the six capitals: financial, intellectual, social, manufactured, human and natural. These capitals present a more holistic view of an organisation’s value than financial capital alone, which allows for better decision making.
Accounting for Sustainability (A4S) have produced a new report, ‘The Essential Guide to Management Information’, which guides you through the processes of reporting on social and environmental factors.
According to the research, here are the five key benefits of integrating social and environmental information into decision making and reporting:
- Improved stakeholder engagement
Stakeholders need to be central to the production of reports. After all, they’re the people for whom the report is created. Stakeholders might include internal employees such as management, as well as external stakeholders ranging from investors to customers and regulators.
Whilst some stakeholders may require financial data alone, a holistic view of the business is often more valuable.
Investors, for example, want to understand any potential future risk to their money. Risk can come from social and environmental factors. Carbon-intensive industries may be restricted by regulation in the future, so investors will benefit from understanding how much of their money is potentially at risk. This is just one way in which integrating financial reporting with environmental or social data can help stakeholders.
- More efficient reporting
Organisations produce a lot of reports. End-of-month, end-of-year, interim financials, gender pay gap, carbon emissions, modern slavery statements, executive pay, fraud and corruption, integrated annual reports — the list goes on.
By making reporting more holistic, it becomes more efficient. Integrated annual reports that contain information on the six capitals rather than purely financial results mean that, in one report, a reader can understand the wider context of the business.
- Increased employee engagement
People increasingly choose jobs based upon the organisation’s environmental and social performance. Employees want to work for businesses with a purpose beyond making profit.
By transparently reporting on social and environmental factors — such as plans to reduce carbon emissions— an organisation can attract high calibre employees.
Some organisations link salary increases or bonuses to environmental or social factors such as achieving KPIs related to sustainability. This can help increase employee engagement by providing motivation to innovate and focus on solutions.
- Improved risk management
The world is changing rapidly, and risks to businesses are changing as well. Fraud and corruption remain major challenges. The media is full of stories of companies that have been linked to unethical employment practices such as underpaying factory workers.
Climate change also threatens many businesses. Risks include stranded assets, increased government regulation on polluting industry, and consumers shunning organisations seen to be part of the problem rather than the solution.
Integrating social and environmental information into mainstream reporting acknowledges that these factors can create risk that must be managed. This can be reputational risk if the media or customers pick up on unethical practices or legal risk if they find illicit activity. These ultimately lead to financial risk when employees, investors and consumers decide to move elsewhere.
- Improved financial performance
Reporting on environmental factors such as energy and water usage in offices can lead to more efficient allocation of resources. This reduces wastage, saving money.
Identifying opportunities for better engagement in the community or reducing negative impact on the environment can create competitive advantage amongst consumers who want to buy from responsible businesses.
Using social and environmental data can also lead to identifying new, future-ready business models.
Social and environmental data has a key role to play in decision making, and management accountants should be taking the lead in delivering this. Presenting a more holistic view of the business can reduce risk, improve financial performance, increase efficiency and improve engagement with different stakeholders.