Finance professionals urge better environmental reporting

A growing number of companies are commenting on their environmental policies and practices in their annual reports, but much of the information given is selective and vague. A draft report from the Institute of Chartered Accountants in England and Wales (ICA) has outlined how the accountancy profession could contribute to more accurate reporting practices.1 A group of leading finance directors has also chipped into the debate, while drawing back from advocating the disclosure of bad environmental news as well as good.

The ICA's report is intended to provide an analysis of the key issues which need to be addressed before it can develop environmental accounting standards for its members.

The principles advocated by the ICA are that company environmental information should be readily accessible, accurate, and comparable over time and with other firms' reports. All stakeholders - investors, lending institutions, employees and consumers - should have the information they need. Detailed environmental reporting should be part of the firm's annual reporting cycle but separate from its annual report - although this too should contain an environmental overview.

To date, according to the ICA, the provision of environmental information has generally been "highly selective" and largely "public relations driven", with a "distinct tendency to err on the side of self-congratulations." And such information as is given is rarely quantified in technical or financial terms.

The ICA's conclusions are echoed in the latest edition of the Company Reporting journal.2 Only 9% of the firms on its database disclosed their environmental policies, achievements or expenditures in their latest annual reports. Another 9% made "vague or general statements without providing any real description of action being taken." Nevertheless, this is an advance on the previous year, for which the figures were 7% and 3%, respectively.

The ICA's report argues that certain environmental information should always be disclosed. This includes auditable environmental objectives, key environmental impacts, compliance with regulations and industry guidelines, material environmental liabilities, and the findings of external audits.

The environment is "increasingly being turned into a factor that does carry costs" and should therefore be treated within the conventional accountancy framework rather than in a separate environmental reporting system, the report also recommends. Indeed, accountancy rules already stipulate that contingent liabilities, such as potential clean-up costs, should be reported, although the ICA found "very little" evidence that UK companies are observing this requirement.

Improved techniques will be needed before environmental costs can be fully quantified, the ICA acknowledges. For example, methods of assessing the "cradle-to-grave" environmental costs of projects need to be developed.

Other research is needed in order to:

  • Develop clear guidelines on how environmental contingent liabilities should be handled, and when they should be deemed to exist. This may be a task for the Accounting Standards Board.

  • Provide guidance on standards of consistency, comparability and verifiability of disclosures in annual reports.

  • Assess the impact of environmental disclosures on company share prices, and how investment analysts use environmental information.

    The report concludes by proposing that the ICA should develop an Environmental Charter. This would provide a basis for reviewing examination requirements in order to ensure that chartered accountants have a broad environmental understanding.

    Finance directors are reacting more tentatively to the environmental challenge. A good practice statement by the Hundred Group of Finance Directors, representing the top 100 listed UK companies, urges all companies to disclose their environmental policies, along with measurable targets and practical examples of how policies are being implemented. The environmental statement should be a minimum of one page, it suggests.3But the Group draws the line at recommending reporting of progress against targets. This would involve disclosing bad news as well as good, which would be "unrealistic at present." In this respect the Group is already behind good practice. ICI's first environment report, for example, revealed prosecution data as well as the group's performance against its waste reduction target (ENDS Report 206, pp 15-18 ).

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