Guide to sustainability accounting: What is it & why does it matter?

Many larger companies are required by UK law to publish Environmental, Social and Governance (ESG) reports discussing the action they’re taking in each of these areas. Smaller businesses may also seek to report on these areas, in order to provide transparency to potential customers and investors. As such, clients may come to you, as their accountant, for support with measuring and reporting on their sustainability.

In this guide, we’ll explore how you can help them. We’ll look at the frameworks you can use to build sustainability reports for clients, along with what sustainability in accounting means for your practice.

What is sustainability accounting?

Sustainability accounting involves collecting, analysing and reporting on the social and environmental impact of a business. Along with the business’ impact on the environment, this also extends to paying employees fairly and supporting the communities the business operates in.

Measuring and analysing environmental, social, and governance aspects allows you to get a clear picture of the impact a business has on the world.

What is sustainability reporting in accounting?

Larger companies – those with more than 500 employees and a turnover of more than 500m – are required to report on Environmental, Social and Governance performance through an ESG report. Gov.uk provides a full set of ESG reporting criteria online.

ESG reports combine research, data and internal case studies to show the sustainability of a business, from its carbon footprint to its pay scale.

Understanding the fundamentals of sustainability accounting

Sustainability accounting works alongside financial reporting – addressing the environmental, social and governance performance. For this reason, accounting practices are well-placed to help make small businesses environmentally sustainable, by guiding them on what to measure and how to measure it.

Within an ESG report, there are lots of different factors to include. Let’s break them down.

Environmental:

• carbon emissions
• waste management
• impact on local biodiversity
• energy use and renewables

Social:

• community initiatives
• corporate culture
• human rights
• modern slavery

Governance:

• executive pay
• board diversity
• business ethics
• anti-corruption

There are several frameworks and standards you can base reports on. We’ll come onto those later in this guide.

Why sustainability accounting matters: A catalyst for sustainable growth

A sustainability report can be used as a roadmap for change. Let’s say you calculate your client’s carbon footprint based on their yearly expenditure data. They’re surprised by the result, so they set the target of a 30% reduction for the following year. When your clients know exactly what's going wrong, they stand a better chance of fixing it.

But why is sustainability reporting important?

Considering the connection between ESG performance and profitability, there's a powerful business case for becoming more sustainable. Sustainability reports are a useful tool for external stakeholders – such as customers, investors and potential employees – who want to engage with you or your clients.

Here’s a closer look at the benefits of sustainability reporting:

• Risk management: Sustainability reporting drives transparency, and when you and your clients can see business operations clearly, you can spot opportunities for improvement.
• Cost reduction: Sustainability reports can highlight areas where your clients are overspending, or spending on the wrong things. They can also help clients save money in the long run, especially when it comes to regulatory compliance and related fines if operations aren’t up to scratch.
• Decision-making: Having an ESG report enables better decision-making in the future because businesses can align their choices with their sustainability goals. For example, they may decide against a certain supplier because their processes are heavily reliant on natural resources.
• Improved reputation: Sustainability starts conversations, and could encourage new customers. Plus, job candidates might choose sustainable brands above the rest.
• Increased investor interest: Specialist firms and investors are committed to funding businesses that do right by the planet. If your clients are committed to sustainability, it could pay off on the investor front.

Understanding the landscape of sustainability accounting and reporting

There are various sustainability frameworks and standards you can follow to build a report for your clients.

The Task Force on Climate-Related Financial Disclosures (TCFD) framework has been widely adopted, and many large companies in the UK are required to follow the guidance. You can learn more about the sustainability reporting framework on the gov.uk website.

Along with the TCFD framework and others, such as the Climate Disclosure Standards Board (CDSB) framework, several reporting standards have been created to help businesses disclose the right information. In some cases, more than one set of standards may be used to compile a full ESG report.

Here’s a quick overview of three of the most common sustainability reporting standards:

1. GRI: The Global Reporting Initiative (GRI) standards are a popular choice for businesses around the world because they cover international best practices for sustainability. The standards cover economy, environment and people pillars, and are split into universal, sector and topic standards.
2. IFRS 1 and IFRS 2: These standards are investor-focused, and designed so that the businesses following them are disclosing comprehensive sustainability information. In the summer of 2023, it was confirmed that the UK would introduce Sustainability Disclosure Standards (SDS) based on International Sustainability Standards Board (ISSB) standards.
3. SASB: The Sustainability Accounting Standards Board (SASB) standards are geared towards sustainability issues that have a tangible impact on financial performance. They’re used globally and cover 77 different industries.

To find the most suitable framework for you and your clients, make sure you research which ones are used for particular industries. You could also look at competitor ESG reports to see what they include. The ICAEW has a helpful guide on ESG reporting frameworks you can refer to.

Embracing sustainability principles within your practice

Unless you’re running a practice that meets the larger company criteria, you’re not legally required to produce an ESG report yet. But you can still explore each of the sections – Environment, Social and Governance – to see how you measure up.

There’s evidence to suggest that companies embracing all areas of ESG outperform their peers. And governments around the world are slowly introducing measures that mean businesses will need to reduce their impact on the environment.

You and your colleagues will already have reporting and data management skills that are essential for this type of work, including regularly producing reports and forecasts, many of which will be needed to build a picture of ESG performance.

Think about what you can benchmark and measure for each of the three sections in your practice. For example – waste reduction in the office, impact on your local community (visiting local schools and hiring young talent), and the diversity of your leadership board.

Aligning accounting with sustainable development goals (SDGs)

Back in 2015, the UN launched a set of 17 sustainable development goals (SDGs) for member nations to achieve by 2030.

The goals included things like achieving gender equality, providing decent work and economic growth, ensuring access to affordable and clean energy, making cities and communities sustainable, and taking action to tackle climate change.

Accounting practices and their clients, no matter how small, can support these goals. Reducing energy use and choosing sustainable suppliers to limit environmental impact. Providing fulfilling work and fair compensation for all employees to improve equality. Choosing renewable and clean energy to help tackle climate change.

By embracing sustainability accounting and reporting, you and your clients can work towards these shared goals and a more equitable future.

At Xero, we’ve created our own set of environmental sustainability objectives based on the TCFD’s recommendations. These include:

• Reducing electricity consumption in buildings
• Minimising carbon-intensive travel options like air travel, and encouraging video and teleconference-style meetings
• Enhancing procurement processes so that environmental impacts are a key consideration when engaging with our supply chain (e.g. minimising the carbon impact of transportation)

Sustainability accounting with Xero

Xero has the tools to help you master sustainability accounting, whether you're providing the service for clients, or working on your own practice.

Inbuilt reporting features and automated bank feeds make it easier to track the carbon footprint of purchases. Draw up expenditure reports in a few clicks, and see how financially strong your clients and practice are with cash flow projects, profit and loss, and balance sheets.

Plus, we have a library of app integrations to support your ESG management. These tools provide additional features to track, analyse and take action on sustainability in your practice. Here’s a quick breakdown:

• Zero Carbon: Get an accurate picture of your carbon footprint. This app connects your expenditure data with its carbon database, for precise carbon footprinting. Completely automated, the app can help you tackle your carbon footprint with a single click.
• Greenly: Connecting you with climate expert support, Greenly helps you measure your impact on the environment, build an action plan to reduce it, and find offsetting solutions.
• Sumday: Deliver targeted carbon accounting services for clients, with Sumday’s selection of training courses, templates and guides. Complete baseline emissions assessments and support clients on their journey to carbon reduction.
• CarbonInvoice: What if you could reduce your carbon footprint with every invoice? CarbonInvoice includes the carbon cost of a project on every invoice and offsets them by planting native trees via the platform.

Explore our software for accountants and bookkeepers to help you master sustainability accounting for your practice and clients.