Green Accounting and Sustainability Reporting
Written by: Hilbert College • Nov 10, 2023
Green Accounting and Sustainability Reporting ¶
Amid calls from consumers and employees to curtail their impact on the climate, companies are focusing on initiatives to protect the natural environment.
These sustainability practices, which aim to support businesses and nature in the long term by fostering a harmonious relationship between the two, are becoming the norm in the corporate world. Between 2017 and 2022, the world’s 250 largest companies increased their level of reporting of sustainability goals by 40% to 50%, according to research firm Statista.
The accounting sector plays a key role in this business trend. Professionals in this sector are increasingly responsible for measuring and reporting the impact that a company can have on the environment and how organizational practices can reduce that effect. This work, called green accounting, or sustainability accounting, is part of a larger movement to track corporate risks and opportunities—and it can pay dividends for both the business and the planet.
What Is Green Accounting? ¶
The term “ green accounting,” also called environmental accounting or sustainability accounting, refers to the tracking and study of organizational efforts and investments to protect the natural environment.
Companies that use green accounting consider the risks and benefits associated with efforts to limit their negative impact on the environment. This focus on the climate and its well-being when performing accounting math and determining financial results sets green accounting apart from other types of accounting.
The environmental impact that green accounting helps to measure is often a component of an organization’s reporting on overall sustainability efforts. These reports typically also include information about the business goals and activities related to social issues and corporate governance.
Types of Green Accounting ¶
At the corporate level, environmental accounting includes the following:
- Environmental financial accounting. EFA notes each transaction’s potential impact on the environment.
- Environmental management accounting. EMA includes environmental costs in the analysis and planning and in managing risk.
Sustainability accounting can occur at the national and international levels as well. Environmental national accounting (ENA), for example, considers the ecological and economic impacts on an entire country.
Considerations in Green Accounting ¶
To assess the environmental impact, green accounting considers an organization’s use of:
- Raw materials
- Waste management
- Products and services
According to a 2021 report from the Association of Chartered Certified Accountants (ACCA), 75% of accounting and financial professionals believed that they should be included in corporate efforts to curb climate change. Accountants do typically play a critical role in this work. Effective green accounting, however, is a companywide effort that also evaluates impacts on stakeholders, such as the local community, and adherence to government regulations.
Goals of Green Accounting
With origins in the environmental movement that began in the second half of the 20th century, green accounting aims to address more than a century of damage that business and industry have caused to the natural environment.
The World Economic Forum noted in 2021, for example, that global temperatures have increased with each wave of industrial advancement. These changes are also a contributing factor in the increasing frequency of billion-dollar weather and climate disasters, from wildfires to flooding.
Green accounting is an effort to slow the growing tide of these climate disasters—and to respond to directives from governments, investors, customers and employees who believe that the corporate world has a responsibility to protect the environment.
Resources: Environmental Impact of Business Activities ¶
Practices that have historically been commonplace in the business world, such as the use of large amounts of fossil fuels and excessive reliance on paper, have contributed to climate change. The following are some resources for more information about the impact of these actions:
Environmental Impact in Business: Assessments, Issues and Solutions: This 2023 article from Impact Day details the ecological harm of the following business issues:
- Supply chain practices
- Product life cycles
- Production processes
Fossil Fuels: The Dirty Facts: This 2022 article from the National Resources Defense Council (NRDC) describes how the fossil fuels—including coal, natural gas and crude oil—that businesses use are damaging the natural environment. The effects of the reliance on fossil fuels include the following:
- Toxic runoff in streams
- Air pollutants
- Nutrient removal from land
Met Office: Atmospheric CO2 Now Hitting 50% Higher Than Pre-Industrial Levels: This 2021 article from the World Economic Forum explores how levels of carbon dioxide, which traps heat in Earth’s atmosphere and can cause people to have health problems, have skyrocketed compared with early in the 19th century.
“What’s the Environmental Impact Each Time We Hit ‘Buy Now,’ and Can We Change Course?”: This 2021 discussion from NPR’s “All Things Considered” explores how the COVID-19 pandemic’s effect on business illustrates industry’s impact on the environment. Author J.B. MacKinnon notes that when consumption declines, the natural environment shows significant improvement.
3 Components of Sustainability Reporting ¶
Although they may follow any of several standard formats, sustainability reports all typically contain data about environmental, social and governance (ESG) practices and impact. Below is a description of each of the three main elements that are standard in sustainability reporting.
1. Environmental ¶
The environmental component of sustainability reports, including information derived from green accounting, focuses on a company’s ecological protection efforts. Depending on the industry, this reporting could include data about corporate initiatives such as those related to:
- Carbon emissions
- Raw material sourcing
- Digital waste materials
- Ecological impact of investments
- Land use plans
- Vulnerabilities from climate change
- Clean technology opportunities
2. Social ¶
Sustainability reports generally focus on an organization’s internal practices and external impact related to social issues, which include the organization’s human rights and equity practices and their effect on those in the organization and in the community. Social sustainability data could cover areas such as:
- Health and safety standards
- Data security
- Health care access
- Professional development
- Product safety and accessibility
- Stakeholder complaints
- Management practices
3. Governance ¶
In governance reporting, businesses provide information about the impact of their internal management practices. Metrics in this reporting could include those associated with:
- Executive administration
- Business ethics
- Accounting and tax practices
- Corporate instability
- Executive pay
- Board diversity
- Lobbying regulations
Why Green Accounting and Sustainability Reporting Are Important ¶
Companies are increasingly recognizing the value of green accounting and, more broadly, sustainability reporting. According to a 2022 article in the Sustainability Accounting, Management and Policy Journal, by 2020, 96% of the world’s 250 largest companies had reported on their sustainability efforts. In 1997, only 35% of them had.
These numbers illustrate the corporate world’s recognition that green accounting and sustainability reporting can offer benefits for not only the environment and business communities, but also the bottom line. Most corporations now find sustainability reporting important for multiple reasons, as outlined below.
Protecting the Environment ¶
Engaging in practices that promote sustainability, including green accounting, helps to protect the planet where people live—and where businesses operate. Companies can help to ensure that their operations continue while also setting the trend for other organizations and society as a whole to engage in practices that’ll limit climate change.
Managing Corporate Risk ¶
By carefully reviewing corporate processes and practices and their impact on ESG concerns, businesses can understand the risks that those issues might present to their operations. They can take action to mitigate the risks, enhancing their processes and protecting themselves from potential harm.
Strengthening Business Budgets ¶
By adjusting their plans to account for issues such as climate-related disasters or government mandates, companies might, for example, guard against fines or the unavailability of endangered natural resources. According to a report presented at the 2021 International Conference on Industrial Engineering and Operations Management, green accounting and sustainability reporting have had a positive effect on profits and on insurance and capital costs.
Building the Customer Base ¶
Companies that report on their sustainability efforts can position themselves as good stewards of the environment, moving beyond an attitude that exclusively values profits. This open use of sustainability practices can help to attract customers. According to a 2022 IBM consumer survey, 49% had willingly selected higher-priced products branded as sustainable or socially aware in the previous year.
Attracting Top Talent ¶
Respondents to the IBM survey indicated that they’d prefer to work for companies that value environmental sustainability. Green accounting and sustainability reporting can make businesses more attractive to the quality talent they seek.
Meeting Regulatory Requirements ¶
In many cases, ESG reports are a requirement, particularly for companies in the European Union and United Kingdom. The U.S. Securities and Exchange Commission (SEC) mandates that the companies it regulates provide sustainability reports to investors.
Earning Tax Breaks ¶
Federal and state tax credits and deductions are among the incentives available for companies with sustainability practices. Companies can take advantage of tax incentives, price reductions, loans and grants for initiatives that range from using energy-efficient equipment to placing geothermal systems in buildings.
Understanding Sustainability Deductions and Credits ¶
Sustainability accounting can inform plans for pursuing tax deductions and credits. While these incentives can vary, the following are five of the tax breaks commonly available to U.S. businesses:
- Deduction for energy efficient buildings. This tax break allows businesses to deduct from their taxes a portion of costs associated with building improvements for energy efficiency.
- Credit for alternative energy. Tax credits can offset costs for installing windmills, solar panels and geothermal energy equipment.
- Credit for electric vehicles. The use of certain electric vehicles can qualify companies for tax credits during their year of purchase.
- Credit for zero-emission nuclear power. Businesses can earn tax credits for the zero-emission nuclear power that they produce and sell.
- Credit for clear fuel production. Businesses can earn tax credits for the sale of clean fuel, which produces fewer environmentally harmful emissions.
Because tax laws differ by state and are subject to change, it’s important to verify with tax professionals, the IRS and state tax officials which incentives are available in any given year.
Resources: Sustainability Deductions and Credits ¶
Accountants and executives interested in learning more about sustainability deductions and credits can turn to various resources:
- Tax Information for Corporations: —The IRS provides links to information for companies of various sizes and structures. The revenue service also offers resources for small businesses.
- 5 Great Environmental Tax Incentives: BOSS Magazine offers information about business and individual tax credits and deductions.
- 5 Types of Tax Breaks for Eco-Friendly Businesses: First Citizens Bank outlines some ways that sustainable companies can save on taxes.
- Sustainability Credits & Incentives: Accounting and advisory firm BDO offers information and links related to sustainability tax breaks.
- “Tax Credits and Deductions Available for Sustainable Energy and Green Initiatives”: Diversified Tax presents information about tax breaks and how to pursue them.
- United States: Corporate — Tax Credits and Incentives: PwC explores various tax incentives, including those related to ESG.
Implementing Green Accounting Practices ¶
Companies seeking to explore and engage in green accounting can take some key steps to promote its practices. Tips for implementing green accounting practices businesswide include the following:
- Transitioning to sustainable equipment and practices
- Researching vendors and partners that support sustainability
- Allowing flexible work arrangements that require less travel
- Developing business plans that reflect research and reporting on the organization’s ESG impact
- Launching initiatives that support climate-friendly practices among employees, such as:
- Educating employees about the value of protecting the environment and implementing green accounting
- Creating challenges that encourage employees to use sustainable office products and energy sources and to reuse and recycle when possible
- Minimizing the use of paper
Protect the Planet With Sustainability Accounting ¶
Following more than a century of environmental damage caused in part by industrial and business practices, companies are now embracing opportunities to counter these negative effects. By taking actions such as sustainability accounting and reporting, companies can help to protect the planet while also realizing reputational and financial rewards.