Economic subjects | Accounting » Heloise-Fiona-Elizabeth - Accounting for Sustainability

Source: http://www.doksinet Accounting for Sustainability Guidance for Higher Education Institutions Source: http://www.doksinet Prepared by: Sara Parkin OBE Dr Andy Johnston Heloise Buckland Fiona Brookes Elizabeth White Higher Education Partnership for Sustainability Forum for the Future Rupert Howes Julie Richardson David Bent The Sustainable Economy Programme Forum for the Future November 2003 Forum for the Future 227a City Road London EC1V 1JT T 020 7477 7706 F 020 7251 6268 E heps@forumforthefuture.orguk www.hepsorguk www.forumforthefutureorguk Registered Charity No. 1040519 ISO 14001 EMS 59526 Design by yippieyeah This guide was printed by Severnprint on Evolution Satin which is manufactured from 75% recycled fibre, 55% is post-consumer and 20% post industrial. The print process is powered entirely by Ecotricity, electricity from renewable sources. Many people have given their valuable time and support to inform the content of this guidance. In particular, we would like to

thank the UK Higher Education Funding Councils for their financial support, and the British Universities Finance Directors Group whose members have played an active role in exploring with us the implications of sustainable development for their profession. We would also like to thank those who participated in the seminars and the discussions facilitated by BUFDG, and those who contributed to the consultation draft of this report. Copies of the seminar reports are available from Forum for the Future Source: http://www.doksinet Contents Foreword Who is this publication for? Summary The Higher Education Partnership for Sustainability 2 3 4 5 Section 1 The context for sustainability accounting 1.1 The accounting and finance professions 1.2 The higher education sector 1.3 The Government 7 8 10 12 Section 2 Overview of sustainability accounting 2.1 Tools for understanding sustainable development 2.2 Concepts and principles of sustainability accounting 15 15 22 Section 3 Practical

guidelines for sustainability accounting users 3.1 Internal sustainability accounting: restatement of traditional financial accounts 3.2 External sustainability accounting: extension to traditional financial accounts 3.3 Assets and liabilities: the role of the balance sheet 37 47 54 Section 4 Where next? 57 Appendix Appendix Appendix Appendix Appendix 59 61 63 65 69 1 2 3 4 5 References Initiatives of interest Environmental valuation methods Sources of information for valuing environmental impacts Acknowledgements 38 Source: http://www.doksinet Foreword Higher education in the UK is entering a period of demanding challenges, both globally and nationally. Sector bodies and individual institutions are already developing leadership, governance and management systems that actively build on existing experience but which also drive and support new investment, productivity, service delivery and quality of performance right across the sector. They are developing systems that both

reflect past achievements and strengthen the sector through the diversity of institutional missions. Potentially, one important contribution to developing those systems is to be found in what has become known as sustainability accounting. This is a new accounting discipline, emerging from a respected longer term body of work on environmental accounting, which strives to introduce methods for accounting for social and environmental impacts (positive and negative) that are normally not included in traditional financial accounting processes. The objective is to give a clear and complete picture of the real costs and benefits arrising from decisions about allocating resources – financial, human or physical. Since the publication of the DfES Sustainable Development Action Plan, and in light of Universities UK’s draft statement of recommended practice on accounting in further and higher education, higher education will need to be seen to be responding to a wide range of stakeholders on

its sustainability performance. Not everything can be quantified, of course, but using financial systems to help us integrate some non-financial information into reports is an important tool for management and for communication. These guidelines are welcome, therefore, and I hope they will prove attractive to anyone in the higher education sector with responsibility for financial direction and institutional reporting. I am happy to make up to £50,000 available to take this work forward in the higher education sector. Sir Howard Newby Chief Executive, Higher Education Funding Council of England 2 HEPS Accounting for Sustainability Guidance Source: http://www.doksinet Who is this publication for? The purpose of this publication is to provide an introduction to techniques that enable non-financial (ie environmental and social) considerations to be integrated into traditional financial accounts. Trials of techniques for integrating environmental considerations into traditional

accounts have been under way for some years. Methods for broadening these techniques to include social and other non-financial considerations is at an early stage. Sustainability accounting embraces social, economic and environmental dimensions, and strives to address all three dimensions at the same time. Achieving sustainable development means progressing all the dimensions together. Recognising the pioneering nature of this work, and in accordance with the statement of recommended practice (SORP) for higher education, this guide explores the latest thinking about sustainability resource flows, assets and liabilities and offers guidance on implementing sustainability accounting in higher education. It will be of interest to: • Anyone with a responsibility for governance, leadership and management of the sector, one of its agencies or bodies or an individual institution (university or college): for example, higher education finance directors, pro-vice chancellors with a finance

remit, governors and members of university councils with a finance remit, finance directors of funding councils and auditors. Environmental and social information is already being incorporated into some aspects of decision-making in higher education and this guide offers techniques to consolidate this and develop it further. Accounting for the contribution a student population makes to the local economy is just one example. • Managers responsible for implementing sustainability policies within an institution. Sustainability accounting techniques further the business case for changing or introducing an activity: for example, a new training course for staff, new waste management practice, or a diversity or transport policy. • Academics teaching and researching in the area of sustainability accounting. Over the last ten years, environmental accounting has developed an academic community with associated teaching and research outputs. Sustainability accounting is an extension of this

work and offers enormous learning and research opportunities. Accounting professional bodies such as the Association of Chartered Certified Accountants (ACCA) have outlined the need for further research into sustainability accounting practices for local government.1 Sustainability accounting has, to date, been pioneered by the business sector. The higher education sector now has the opportunity to build on existing experience and develop new practice in this emerging field. The Government’s vision is: “to see private and public sector organisations in the UK take account of their economic, social and environmental impact, and take complementary action to address key challenges based on their core competencies“.2 1 2 Ball A. Sustainability Accounting in UK Local Government: An Agenda for Research ACCA Research Report No. 78 2002 (wwwaccacouk) Society and Business, Corporate social responsibility report, 2002 (www.societyandbusinessgovuk) HEPS Accounting for Sustainability

Guidance 3 Source: http://www.doksinet Summary In response to the drivers for more accountability and transparency in accounting practice and the pressures on the higher education sector to include non-financial data in risk management and reporting, this guidance offers an accounting framework that can report on financial, social and environmental performance at the same time. For those with a responsibility for governance, leadership and management in higher education, this guidance introduces sustainability accounting as a legitimate and practical response to the government’s sustainable development agenda, which has resonance for both the accounting profession and the higher education sector. For managers responsible for implementing sustainability policies within an institution, this guidance offers explanatory tools to assess how an organisation is contributing to sustainable development and to assist in prioritising future actions. For individuals teaching or researching

the evolution of accounting practice, this guidance gives a clear overview of the concepts and principles of sustainability accounting. Readers will have a clear idea of the difference between internal and external sustainability accounting, shadow accounts and balance sheets, environmental valuation methods, restoration and avoidance values, and the role of stakeholders in sustainability accounting. Those with the capacity to do so will recognise the research opportunities offered by the emerging field of sustainability accounting. This guidance acknowledges and builds on the experience of business in accounting for the environmental and social impacts of their operations and offers the sector clear steps to implement sustainability accounting. Readers will be equipped with frameworks to include the environmental, social and economic dimensions of an activity or institution in their traditional accounts to help inform decisions. Readers will also be able to express the impacts (both

positive and negative) of their activity to the outside world in financial terms. We recommend that individual institutions take up the techniques suggested in this guidance at whatever level is appropriate to them; for an individual project; within a department or across the whole institution. We also recommend that the funding councils adopt sustainability accounting techniques to inform their own internal management and encourage institutions to do likewise. Finally, given the pioneering nature of sustainability accounting, we would strongly urge those in a position to do so to commission further research in this area. 4 HEPS Accounting for Sustainability Guidance Source: http://www.doksinet The Higher Education Partnership for Sustainability This publication is one of the outputs of the Higher Education Partnership for Sustainability (HEPS). HEPS is a three year initiative established by Forum for the Future in the summer of 2000 and involves 18 universities and colleges from

across the UK. HEPS is funded by the Higher Education Funding Councils of England, Scotland, Wales and Northern Ireland. The aim of HEPS is to establish a pioneering partnership group of Higher Education Institutions (HEIs) that are seen to be achieving their strategic objectives through positive engagement with the sustainable development agenda, and to generate the transferable tools, guidance and inspiration that will encourage the rest of the sector to do likewise. Participating universities and colleges • • • • • • • • • University of Aberdeen Heriot-Watt University University of Birmingham University of Brighton University of Cambridge City University Liverpool John Moores University Loughborough University Queen’s University, Belfast • • • • • • • • • University of St Andrews University of Stirling Middlesex University University of Newcastle University of Salford Sheffield Hallam University College of St Mark and St John The Surrey

Institute of Art and Design Cardiff University In HEPS’ view, universities and colleges play three roles in society, as: • institutions that form and inform leaders and decision-makers of today and tomorrow through teaching and research agendas • managers of major businesses where prudent use of resources not only saves money but safeguards reputations • important bodies in the local communities and regional development – as employer, purchaser, service user and provider. Commitment to active engagement in the partnership was agreed at vicechancellor/principal level. All staff, students and the wider community of the university or college are encouraged to participate in HEPS. The work of HEPS is delivered through three types of activities: • individual work programmes tailored to the institution’s priorities • partnership wide capacity building activities covering areas of interest to all partners (eg, purchasing, travel planning, finance, resource management and

communicating for sustainability) • sustainability reporting: developing a framework and process for tracking progress and communicating an institution’s contribution towards sustainable development. More information about HEPS may be found at www.hepsorguk HEPS Accounting for Sustainability Guidance 5 Source: http://www.doksinet Summary of contents Section The aim of this section is: Read this if: Contains details of: 1. The context for sustainability accounting To outline the reasons why the higher education sector should take up the challenge of sustainability accounting. You want to find out about the government’s sustainable development agenda and the implications for the higher education sector and for the accounting and finance professions. Queen’s University Belfast whole Life Costing 2. Overview of sustainability accounting To provide clear frameworks for understanding sustainable development. You want to be able to assess how your organisation is

currently contributing to sustainable development and prioritise future actions. The Sustainability Appraisal Grid To outline the concepts and principles behind sustainability accounting. You want to understand the difference between internal and external sustainability accounting, shadow accounts and balance sheets, environmental valuation methods, restoration and avoidance values and the role of stakeholders in sustainability accounting. Anglian Water External Environmental Accounts To show how to present traditional accounts in a way that provides environmental and social information. You want to include the environmental, social and economic dimensions of an activity or institution in your traditional accounts to help inform decisions. University of Aberdeen internal sustainability accounting sheet To show how to extend traditional accounts to provide environmental and social information that is not yet being accounted for by the organisation. You want express the impacts

(both positive and negative) of your activity or institution on the outside world in financial terms. To suggest how the sustainability accounting agenda could be taken forward. You are interested in trying out some of the techniques in this guide. 3. Practical guidelines for sustainability accounting 4. Where next? 6 HEPS Accounting for Sustainability Guidance University Carbon Club Sustainability Accounting Cube Sustainability Accounting Framework Wessex Water investment towards sustainability Wessex Water external environmental account Contact details of people and organisations who can help you implement sustainability accounting Source: http://www.doksinet Section The context for sustainability accounting 1 Existing accounting frameworks are under scrutiny and review as requirements for more transparency and accountability affect private and public clients and their regulatory bodies. At the same time, organisations are beginning to be expected to include

non-financial aspects in their reports; their impact (positive or negative) on the environment or the community. In the higher education sector, pressure to integrate sustainable development into policy and practice is increasing, through a Department for Education and Skills (DfES), and via the drive to increase the knowledge and skills base in the UK. Everything is underpinned by government policy on sustainable development, which is backed by undeniable evidence of the consequences of unsustainable development. The drive for a more effective and efficient public sector, led by the Prime Minister himself, further increases the push towards an accounting framework that can report on financial, social and environmental performance together. Box 1. The concept of sustainable development is not difficult. This is the Government’s definition: “The UK Government defines sustainable development as meeting four objectives at the same time, in the UK and the world as a whole: • •

• • social progress which recognises the needs of everyone effective protection of the environment prudent use of natural resources maintenance of high and stable levels of economic growth and employment.“3 Unfortunately, even the Government itself tends to quote this definition using only the bulleted objectives. The opening sentence is omitted Consequently, most people miss the main point, which is that those objectives should be met at the same time. It is the simultaneous progression of our economic, social and environmental goals that is essential if development is to be sustainable. Only this way can the damaging trade-offs between them (which have resulted in unsustainable development) be identified and avoided. Implementing sustainable development, therefore, means designing intellectual and practical tools that make it possible to think about all the elements of sustainable development together. The more individual decisions are made in that context, rather than in

isolation, the more they are likely to contribute positively to sustainable development. See page 15 for an explanation of tools for implementing sustainable development. 3 See www.sustainable-developmentgovuk HEPS Accounting for Sustainability Guidance – Section 1 7 Source: http://www.doksinet In order to shift onto a sustainable development path it will be necessary to develop intellectual and practical tools that enable us to think about, and then progress, our economic, social and environmental goals, simultaneously. Sustainability accounting techniques are an essential part of this process. 1.1 The accounting and finance professions Sustainability accounting is based on existing financial accounting frameworks. In the UK this is based on a combination of company law, accounting standards from regulatory bodies such as the Accounting Standards Board and the customs used by accounting professionals. These are drawn together in the UK General Accepted Accounting Practice

(UK GAAP) and made specific to individual sectors in a Statement of Recommended Practice (SORP). This guidance has been developed in the context of the SORP for Further and Higher Education4 (see pages 26 and 30). At the moment, conventional financial accounting and conventional economic measurements do not capture all the consequences of economic actions. One aspect of this is the absence of an organisation’s hidden costs and savings in the traditional accounts. For example, savings made on waste disposal costs are unlikely to figure in the accounts in the context of the cost of the recycling programmes implemented to achieve those savings. Internal sustainability accounting is a method to address this and is explained in section two. A second aspect relates to the costs and benefits that are not accrued at all in the organisation’s accounts and instead are picked up by the rest of society. For a university these could include the jobs created and amenities provided in the local

community (benefits) and inflated house prices, traffic congestion, noise and litter (costs). These are known as ‘externalities’ and external sustainability accounting is a method to internalise them. This is also explored in section two Currently, traditional financial accounting does not provide the information that is needed in order to ascertain whether deployment of financial resources is being carried out in the best possible way. For an organisation with a mission greater than maximising its own profit, such as the higher education sector, this is key. In this sense, to focus purely on the financial bottom line is like staring at the oil gauge in your car: oil is necessary to keep the engine running, but the gauge tells you nothing about where your journey is heading.5 Drivers to incorporate sustainable development into the practice of accounting and finance profession include: • Saving money Resource efficiency and cost-saving opportunities can be identified by routinely

collecting information on environmental and socially related expenditures and linking them to financial benefits and environmental and social performance. For example, monitoring the use and cost of energy across a campus might be the first step towards reducing bills and improving efficiency. Sustainability management accounts can also provide a useful internal reporting tool to track progress and show how environmental and social external costs decline over time with commitment to sustainability. Leading companies are now recognising that their long term future is inescapably linked to their overall environmental and social performance. (See, for example, external environmental accounts for Anglian Water Services on pages 28 and 29 and for Wessex Water on page 46) 4 Universities UK, Statement of Recommended Practice: Accounting for Further and Higher Education, October 2003. 5 Thank you to Andrew Whitley, founder of the organic business Village Bakery, for this metaphor. 8 HEPS

Accounting for Sustainability Guidance – Section 1 Source: http://www.doksinet • Governance The world of corporate governance is changing. The company law review6, the new Combined Code on Corporate Governance, the Turnbull Report on internal controls7, the Pensions Act disclosure measures8 and the Association of British Insurers (ABI) Guidelines on Socially Responsible Investment (SRI)9 and the Myners Review on Institutional Investment (2201)10, all point to the need for more comprehensive reporting of social, environmental and ethical (SEE) risks. These initiatives promote active institutional investor engagement with the companies in which they are investing, in relation to wider external impacts and their associated risks. Some of the recommendations of these initiatives have already been adopted by the higher education sector. For example, the new accounts direction for the sector (HEFCE Circular Letter 24/00) requires internal control and risk management assurances to be

contained within published financial statements from 2002-2003, as recommended by the Combined Code on Corporate Governance. The company law review recommendations that material impacts on environment and community be reported alongside financial information in the operating and financial review are also likely to affect the higher education sector. • Reputation Financial analysts and investors are showing more interest in using data that is outside traditional accounting when valuing a company or organisation. Many of these are non-financial, such as customer churn (retention and recruitment) rates, brand value and access to new markets. In response to this demand a number of financial products based on an assessment of sustainability performance have been launched, such as the FTSE4Good indices11 and the Dow Jones Sustainability Group Index12. Just one example of this trend entering higher education sector practice is the proposal by the Roberts review of the research assessment

exercise (RAE)13 that before receiving research funds through this process, HEIs must have a ‘Research Competency Assessment’ that includes training of researchers, equal opportunity policy and a staff development policy. Similar quality control processes relating to the effect of the management of human and financial resources will be of interest to other ‘customers’ of the higher education sector – including students, research funders, potential business partners and funding councils. • Risk management There is increasing pressure to manage and report on non-financial risks. Strategies to manage and reduce risk can benefit from the identification of social and environmental risks associated with current financial performance and with particular stakeholder groups (using external costs as indicators of risk). Without adequate and appropriate systems to identify and account for 6 7 8 9 10 11 12 13 Department of Trade and Industry, Modernising Company Law, Cm 5553, July

2002. (wwwdtigovuk) The Institute of Chartered Accountants, Internal Control, Guidance for Directors on the Combined Code, September 1999, otherwise known as The Turnbull Report (www.icaewcouk) Since the amendment to the Pensions Act in 2000, pension funds are now required to disclose in their Statement of Investment Principles: the extent to which social, environmental or ethical considerations are taken into account in the selection (if at all) retention and realisation of investments and their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to investments (see www.hsmogovuk) See www.abiorguk See www.hm-treasurygovuk See www.ftse4goodcom See www.sustainability-indexcom Roberts, G Review of the research assessment exercise, presented to the UK Funding bodies, May 2003. (see www.rareviewacuk) HEPS Accounting for Sustainability Guidance – Section 1 9 Source: http://www.doksinet such costs it is unlikely that organisations will be able

to meet the future expectations of their stakeholders. In response to the drivers outlined above there has been a move to better understand the intended, and unintended, consequences of deploying financial resources. Full cost accounting, environmental accounting and whole life costing are examples. Full cost accounting is the general name given to attempts to ‘get the prices right’ and to allow improved, market-based decision making14. See Bebbington et al, 2001 for an introduction to and discussion of Full Cost Accounting, and R Howes, Environmental accounting: an introduction and practical guide, London, the Chartered Institute of Management Accountants Publishing, 2002 for an introduction to environmental accounting. Whole life costing is a method to identify the costs and benefits of an activity over its lifetime that, for example, is promoted by the Office of Government Commerce to all departments as part of their Successful Delivery Toolkit15. Whole life costing is also

promoted through Proc-HE, (formerly JPPSG), the Purchasing and Procurement Strategy Group for HE.16 Box 2 Queen’s University whole life costing Queen’s University use a whole life costing model for all purchases over £25,000. This is a cradle to grave assessment, which incorporates the maintenance costs, refurbishment costs, running costs, electricity costs and disposal costs associated with the purchase. The model can calculate these costs for up to 25 years and the discount factor can be adjusted over time. It is considered part of the quality assessment that informs the decision to make the purchase. Coopers and Lybrand were commissioned by the Joint Purchasing and Procurement Strategy Group for higher education to develop this model and it is now being used by several other universities. For more details about the whole life costing model, contact Proc-HE. 1.2 The higher education sector Until recently, there has been little pressure to integrate sustainable development

into the curriculum and estate management of publicly funded HEIs. However, on 23 September 2003, the DfES published a Sustainable Development Action Plan,17 which will have a significant impact on the sector. As a result, the next grant settlement letter to Higher Education Funding Council for England will, for example, raise the issue of a sustainability strategy for the higher education sector and “signal to the university sector that education for sustainable development requires development“. A similar obligation to integrate sustainable development into their operations has rested with the Scottish Higher Education Funding Council for some time, and was boosted recently by the publication of the Scottish Executive’s Lifelong learning strategy.18 Since its establishment, the National Assembly of Wales had a 14 ACCA, Full cost accounting: an agenda for action, ACCA Research Report No 73, Certified Accountants Educational Trust, 2001 15 See www.ogcgovuk and the Treasury’s

guidelines on Construction Procurement at wwwjppsgacuk 16 Proc-HE 0141 330 3151 or proc-he@gla.acuk 17 See www.dfesgovuk/sd 18 Scottish Executive, Life Through Learning through Life: The Lifelong Learning Strategy for Scotland, February 2003 10 HEPS Accounting for Sustainability Guidance – Section 1 Source: http://www.doksinet statutory duty to promote sustainable development in everything it does19, and the Welsh Education and Training Council is required to use sustainable development principles in its procurement processes, and sustainability appraisal tools for all programmes and projects.20 Learning and Skills Councils, Sector Skills Councils and Regional Development Agencies all have responsibility to help deliver sustainable development. Relationships with all of these agencies will be important for higher education institutions, especially in the context of the regionalisation of government policy – so being in step, if not providing leadership, will be important.

Moreover, there is evidence that potential and current higher education students do care about sustainable development. For example, People and Planet, a leading student organisation for global and sustainable development issues is now active in 70% of UK universities.21 Studying in an institution that not only integrates sustainable development into its teaching, but puts it into practice on campus, will matter increasingly for student recruitment and retention. Schools, of course, have had a statutory obligation to include sustainable development in the national curriculum since September 2002.22 Learning and skills for the 21st century So far there is no explicit policy link between sustainable development and the debate over the learning and skills (and the research base) needed for the UK to thrive in a competitive 21st century global economy, but there soon will be. The importance this Government places on boosting knowledge and skills is evident not only in the higher education

White Paper, 21st Century Skills – Realising our Potential 23 but also the recent avalanche of related publications and reviews: • Our Competitive Future: Building the Knowledge Driven Economy, (DTI and HM Treasury,1998) • Report of the Council for Excellence in Management and Leadership, Managers and Leaders: Raising our Game (DTI and DfES May 2002) • Excellence & Opportunity: Science & Innovation Policy for 21st Century, (DTI June 2001) • Opportunity for All in a world of change, (DTI/DfEE, February 2001) • Investing in Innovation: Science Engineering and Technology, (HM Treasury July 2002) • Sir Gareth Roberts’ Review of the Research Assessment Exercise (May 2003) • Lord Sainsbury, Science and Technology Review (DTI July 2003)24 • HM Treasury-commissioned Lambert Review of Business-University Collaboration (July 2003)25 • DTI and Office of Science and Technology review of Research Councils26 When considering the purpose of generating knowledge and

skills and research outputs, the link to sustainable development becomes obvious. For example, the businesses that thrive into the 21st century will be those that can deliver 19 20 21 22 23 24 25 26 The Government of Wales Act 1998 Reaching Higher Education and the Learning Country: A strategy for the HE sector in Wales, March 2002 See People and Planet Annual Report 2001/2 (www.peopleandplanetorg) See www.standardsdfesgovuk See DfES July 2003 (www.dfesgovuk) See www.britainusacom See www.hm-treasurygovuk See www.cstgovuk HEPS Accounting for Sustainability Guidance – Section 1 11 Source: http://www.doksinet goods and services with radically lower inputs of energy and raw material – as envisioned in the recent White Papers on energy27 and production and consumption.28 The higher education teaching, research and knowledge transfer responsibilities will all be affected. Graduates of any discipline who are sustainability ‘literate’ will be at a premium, and the research

councils are working hard on cross-disciplinary programmes that look for explicit sustainability outcomes. (See, for example, National Environmental Research Council (NERC) activities on Sustainable Energy.)29 “Being literate in sustainability is a basic skills everyone, especially engineers, should have,“ Lord Sainsbury, Minister for Science and Innovation, Department for Trade and Industry, 21 February 2003. 1.3 Government 30 Rhetorically at least, sustainable development is at the heart of government policy. However, putting this relatively straightforward concept into practice is proving difficult. (See Box 1) The Government and the Treasury are backing sustainable development because of the incontrovertible evidence. The consequences of accelerating environmental degradation and persistent poverty, injustice and inequality are evident in so many policy areas, as well as in the daily lives of people in both rich and poor countries. This is happening in a world that is

supposed to be richer than ever before. For further details visit the websites of the World Watch Institute, the World Resources Institute, the UN Human Development Programme and the Intergovernmental Panel on Climate Change.31 The cascade of policies and strategies related to sustainable development over the last few years proves that governments are convinced by the evidence of its importance. A few examples are given here: • Millennium Goals agreed at World Summit on Sustainable Development in 2002 • EU legislation on landfill, waste, water, carbon emissions and trading, renewable energy obligations • UK policy on energy and production and consumption • UK Strategy on Sustainable Development (just starting its first five-year review) and those of devolved administrations32 • Other UK Mechanisms to drive change in UK practice: - The Environmental Audit Committee - Cross Department Committee of Sustainable Development Ministers - Treasury sustainability appraisal of

departmental spending plans - Government procurement policy - Cabinet Office and public sector reform - Amendments to the Pensions Act (making explicit ethical investment policy) 27 Our Energy Future – Creating a Low Carbon Economy, DTI February 2003 28 Changing Patterns; UK Government Framework for Consumption and Production, Defra and DTI, September 2003 (www.defragovuk) 29 See www.nercacuk 30 During his speech made at Forum for the Future’s Engineers for the 21st Century event (See www.forumforthefutureorguk) 31 www.wriorg, wwwworldwatchorg, wwwundporg, wwwippcch 32 See www.sustainable-developmentgovuk 12 HEPS Accounting for Sustainability Guidance – Section 1 Source: http://www.doksinet • Sectoral sustainability trategies (eg construction, manufacturing, DTI’s pioneer group33) • Business sector initiatives including: - environmental and social reporting (DTI has a minister for corporate social Responsibility (CSR)) - Turnbull Report recommendations on internal

governance - Company Law Review “Corporate social responsibility [is] broadening all the time into a belief that economic, social, and environmental objectives can be pursued together and in harmony.“ Gordon Brown, Chancellor of the Exchequer, speaking at the Future Wealth of Nations conference, 4 March 2003 Public Sector Reform The Government is keen to see policies implemented quickly. It is concerned not only that policy should be better designed to make implementation easier, but also that, in the public sector especially, implementation should be seen to be both effective and efficient. Public sector reform is being led by the Treasury and the Cabinet Office, with the Prime Minister playing an active leadership role. “Public services are the power of community in action. They are social justice made real. [They] often work in systems and structures that are hopelessly old fashioned, or even worse, work against the very goals they aim for.“ Tony Blair, Labour Party

Conference speech, 2 October 2001 A number of Cabinet Office units are charged with making public service delivery more efficient (financially) and effective (in delivering the outcomes intended by the initial policy) under what is called The second phase of public sector reform: the move to delivery. For example, the Regulatory Reform Unit has recently published a report on the higher education sector looking at whether bureaucracy hinders HEIs from carrying out their core activities of teaching and research.34 The emphasis on gearing the higher education sector up to meet demanding challenges, both globally and nationally, will mean developing institutional systems, for example: modernising human resource strategies and procedures; revitalising business processes and structures; investing in development and support for leaders, managers and governors. At the heart of these will be high performing systems for accounting and reporting on progress. In this section, policy and practice

in the accounting and finance profession, in higher education, and in Government have been reviewed, showing a logic towards developing sustainability accounting techniques tailored to the needs of the higher education sector. Some of the arguments as to why this is a good thing in its own right have been examined: 33 See www.dtigovuk 34 Regulatory Reform Unit, Higher Education Easing the Burden, Task Force Report, July 2002. (see www.cabinet-officegovuk) HEPS Accounting for Sustainability Guidance – Section 1 13 Source: http://www.doksinet • • • • saving money good governance reputation risk management. A top driver, though, is the evidence-driven sustainable development policy of government. This is still aspirational, but is becoming real through initiatives such as HM Treasury’s revised aims and its sustainability appraisals of all departmental spending plans. Further pressure on the higher education sector to consider more integrated approaches to its accounting

and performance management procedures comes from the Government’s ambitions for public sector reform. The next section gives an overview of sustainability accounting tools, concepts and principles, to act as a reference to readers working through the more practical guidelines in section three. 14 HEPS Accounting for Sustainability Guidance – Section 1 Source: http://www.doksinet Section Overview of sustainability accounting 2 Changing policy and practice in the accounting and finance profession, in higher education and in Government makes the case for developing sustainability accounting techniques tailored to the needs of the higher education sector. This section of the guide brings together and clarifies: • some tools for understanding sustainable development to assist in the development of sustainability accounting techniques • the concepts and principles that inform sustainability accounting 2.1 Tools for understanding sustainable development Sustainable = capacity

to continue development = path of human progress Sustainable development = a path for human progress that has the capacity to continue There are many definitions of sustainable development. The one used by the Government is given in Box 1 on page 7. But however expressed, development will not be sustainable if economic, social and environmental goals are not progressed simultaneously. A conscious effort has to be made to identify, and avoid, the damaging trade-offs where, for example, a decision that is good economically is not beneficial environmentally or socially. This means that the full cost is not paid over the counter, but elsewhere, by a damaged environment, or by the exploitation of people, either now (as with CO2 emissions and health affecting pollutants) or in future generations. The ‘at the same time’ (AST) test is important in helping to decide whether a decision contributes positively to sustainable development. If the decision was taken by considering the

economic, social and environmental consequences (now and in the future) at the same time, then it may well contribute to sustainable development. There can be no certainty, of course, but the challenge is to increase the probability that it does. Tools – both intellectual and practical – will be required to enable the AST test to be met. In this section, we give a brief explanation of some of the tools used by Forum for the Future to help any person or organisation think through any decision, large or small, in a sustainable development context. The tools are complementary to existing quality and risk management processes and can provide a useful framework to bring disparate elements of these together: for example, environmental management systems, Investors in People and Balanced Score Card. For a long time sustainable development has been presented as the triple bottom line (by business), or for even longer as a set of overlapping circles (by engineers) (see Figure 1). HEPS

Accounting for Sustainability Guidance – Section 2 15 Source: http://www.doksinet Figure 1 Environment Environment Society Economy Society Economy Sustainable Development The triple bottom line Although these are useful ways of illustrating the concept of sustainable development, here are two problems: • neither figure suggests a way that sustainable development might be operationalised • both imply that there is equality between the three dimensions of sustainable development Let us deal with the second point first. As the nested circles in Figure 2 illustrate, the real bottom line is in fact the environment. The ecological systems upon which all life depends are governed by universal scientific laws and if we work against them (which we are currently doing) we risk making part, or all, of the environment uninhabitable. We can, however, as a society, decide to set objectives for the way we develop, and the ethical and value system in which we wish to operate. Finally,

we can structure the economic system to help us meet those objectives, within the ethical framework we have set. Although economics tries to portray itself as being governed by laws that are as immutable as those that govern the biological world, this is not true. Economic systems are a construct of society and subject, therefore, to its direction. Figure 2 Environment Society Economy Even if the expression shown in Figure 2 of the concept of sustainable development is accepted, it still only inches us towards understanding how it may be implemented. This is why Forum for the Future has developed an approach that draws on the language of economists to expand the triple bottom line, and think of the major classes of resources that are available to anyone to do anything. We have settled 16 HEPS Accounting for Sustainability Guidance – Section 2 Source: http://www.doksinet on five classes of resources and, like any economist, would expect the stock of these resources, if in good

shape, to provide a flow of benefits. An economist would call the stocks of resources ‘capitals’. What we call the five capital model of the economy is illustrated, with some stocks and flows, in Table 1. It shows some examples of the sort of benefits we would expect to enjoy if the stocks of each of these capitals was maintained. A sustainable society can be thought of as living off the income generated by capitals (flows) rather than degrading the capitals themselves (stocks)35. Table 1 Forum for the Future Five Capital Model of the Economy Capital/Resource Stock Flow36 Natural Land, sea, air, vegetation, ecological systems Food, water, energy, waste disposal, climate Human Knowledge, skills, health, motivation, spiritual ease Happiness, creativity, innovation, work, energy, participation Social Families, communities, organisations, governance systems, schools Security, shared goods (eg, culture, education) inclusion, justice Manufactured Infrastructure, roads,

buildings, tools, fixed assets Living/working space, access, distribution, recyclates Financial Money, stocks, bonds, banknotes Means of valuing, owning or exchanging other four capitals The economy (or more accurately, society) has chosen not to invest in natural, human or social capital in the same way as it does in manufactured capital, but this is changing. It is all too obvious now what happens if there is poor investment in manufactured capital – the railways, for example. Similarly, neglecting (the right kind of) investment in education, communities or maintaining the quality of the environment, leads to interruptions in the respective flow of benefits, for example, a skilled workforce, safe neighbourhoods and a stable climate. The use of this model is spreading. For example, the World Bank, the Department for International Development, Interface (the worlds largest manufacturer of carpet tiles) and Wessex Water use this model to help them think through their strategies

for, respectively, world development, poverty relief and business excellence. Approaching the model from the perspective of economics or accounting, the question may be asked whether different types of capital can be substituted. There are those who would argue that sustainable development implies there should be no diminution in total capital stocks, so that a reduction in stock in one area – such as social progress – can be counterbalanced by a gain in the stock in a different area – such as economic growth. Others consider, however, that the stocks are not substitutable. Manufactured goods such as affordable air 35 An idea articulated well by E F Schumacher in Small is beautiful: a study of economics as if people mattered, 1972 36 The flow can be positive or negative, depending on the quality of the stock. HEPS Accounting for Sustainability Guidance – Section 2 17 Source: http://www.doksinet conditioning systems are no substitute for environmental services that deliver

the benefits of a reasonably stable climate. In either case, the five capital model of the economy offers a framework within which to examine the impacts of any activity or institution, enabling decision makers to see the positive and negative effects of their decision on the environment and on people, as well as financially. It can help demonstrate (to auditors, various stakeholders, potential funders, etc.) that the decision has undergone an AST test. If used thoughtfully, the framework may also help to clarify investment priorities in order to optimise positive and minimise negative outcomes. Using the five capitals on one axis, and the three manifestations of a university or college on another (overleaf), it is possible to map what the institution is doing to maintain, ideally enhance, but certainly not erode each of the five capitals: • as a business in its own right (procuring services, managing people and buildings) • as a leader in provision of learning and research (what

an HEI is in business to do) • as a major influence on the community (where the HEI carries out its business). The Sustainability Appraisal Grid (Figure 3 on page 19) has been used in the HEPS to map contributions to sustainable development at university level, or for a specific initiative such as building a new swimming pool or evaluating a transport plan. The word contribution is important here, as each university or college has a different mission, and so have different contributions to make. For example the number of jobs created in the local economy will vary according to the size and location of the institution, and the mass of resources an institution uses will depend on the areas of teaching and research. Completing and regularly revising a Sustainability Appraisal Grid is a useful starting point for a university or college that is considering using sustainability accounting techniques. It is also a useful management tool in itself, as it highlights gaps and connections that

can aid more efficient allocation of resources across the institution. An illustration of some of the things that might go into a grid is shown in Figure 4 on page 20. 18 HEPS Accounting for Sustainability Guidance – Section 2 Source: http://www.doksinet Figure 3 Sustainability Appraisal Grid What can the university (or activity) do to enhance the ‘stock’ of the following resources, or ‘capitals’? Three ways in which a university manifests itself As a business As a place of learning and research As a key member of the community NATURAL The resources and services provided by the natural world 1 2 3 HUMAN The energy, motivation, capacity for relationships and intelligence of individuals 4 5 6 SOCIAL The social groupings that add value to individuals (eg, families, communities, parliaments, universities) 7 8 9 MANUFACTURED The ‘stuff’ that exists already – buildings, railways etc. Can it be used in a way that requires fewer resources and more human

creativity? 10 11 12 FINANCIAL The money, stocks etc., that enable us to put a value on, and buy and sell the above resources. Are there ways that financial value can more accurately represent the real ‘cost’ of using these resources? 13 14 15 The boxes have been numbered for ease of reference when using the grid. HEPS Accounting for Sustainability Guidance – Section 2 19 Source: http://www.doksinet Figure 4 Sustainability Appraisal Grid illustrating what a university might do to contribute to sustainable development 20 What can be done to maintain or enhance the ‘stock’ of the following resources, or ‘capitals’? Three ways in which a university ‘manifests’ itself As a business As a place of learning and research As a key member of the community NATURAL The resources and services provided by the natural world 1. Use resources efficiently • Reduce energy and raw material use • Drive waste out of the system 2. Develop the new economy •

Exploit teaching, research, business development opportunities in lowcarbon, high human creativity economy 3. Conserve, enhance the environment • Subscribe to low impact travel schemes • Increase biological mass and diversity (on campus and locally) HUMAN The energy, motivation, capacity for relationships and intelligence of individuals 4. Attract and keep good staff • Create community of purpose for staff, students, other stakeholders • Be a values-led organisation • Ensure healthy working culture and physical environment • Be active on diversity 5. Provide good student experience • Be a values led organisation • Ensure healthy working culture and environment (a new ‘conviviality’ quotient) Enhance employability of graduates • Ensure sustainability literacy for all 6. Promote Life Long learning • Mix on/off campus learning experiences for both students and community (workbased learning) • Clear learner paths in and out of HE – from school, FE, work,

non working SOCIAL The social groupings that add value to individuals (eg families, communities, parliaments, universities) 7. Provide good governance, management • Ensure clarity and coherence in strategic planning and well trained managers • Modernise charters, decision-making systems to ensure transparency and democracy 8. Anticipate future markets for graduates • Articulate and meet 21st century challenges through teaching, research, knowledge transfer • Promote a vision of the future that engages new generations • Prepare graduates for multi-disciplinary approaches to problem solving 9. Respond to other policy agendas • Ensure equal opportunities/access, and other human rights • Understand employer demand in context of future needs Renew purpose of HEI • Provide leadership for society in complex, rapidly changing times • HE to set as well as respond to agendas HEPS Accounting for Sustainability Guidance – Section 2 Source: http://www.doksinet Figure 4

What can be done to maintain or enhance the ‘stock’ of the following resources, or ‘capitals’? Three ways in which a university manifests itself As a business As a place of learning and research As a key member of the community MANUFACTURED The ‘stuff’ that exists already – buildings, railways etc. Can it be used in a way that requires less resources and more human creativity? 10. Demonstrate best value in use of estates • Ensure building design, refurbishment, all estate management is best practice for purpose and for environment • Forge local partnerships (eg renewable energy generation) 11. Excellence in research & teaching • Integrate student learning with campus improvement, and community experience • sustainability research/ consultancy • Encourage innovation for sustainable design solutions 12. Promote community relations, outreach • Share sports, library other facilities • Build portfolio of joint ventures for student, staff and local

residents • Sustainable transport partnerships FINANCIAL The money, stocks etc that enable us to put a value on, and buy and sell the above resources. 13. Save money/ be efficient • Use whole life costing • Invest ethically (eg pensions) • Provide incentives for adding value to physical resources 14. Compete internationally/ regionally • Structure internally and make relationships to facilitate ideas-innovationimplementation process • Export models and programmes 15. Modernise risk management • Report on environment and social impacts as well as financial • Use procurement strategies to support local markets and ethical trade HEPS Accounting for Sustainability Guidance – Section 2 21 Source: http://www.doksinet 2.2 Concepts and principles of sustainability accounting The sustainability appraisal grid is a good way to start thinking about the many aspects of sustainability at the same time and consider how they work together in an HEI. This section explains

the various concepts and principles behind sustainability accounting and concludes by drawing these two parts together into a sustainability accounting framework. Practical guidance on using this framework follows in section three. The main concepts and principles that inform sustainability accounting are: • • • • • • the three dimensions of sustainability accounting internal sustainability accounting external sustainability accounting shadow accounts and balance sheets restoration and avoidance values stakeholder identification. The three dimensions of sustainability accounting Financial accounting traditionally records the financially related stocks and flows of an organisation in the form of the profit and loss account and the balance sheet, respectively. Sustainability accounting tries to provide extra information that can be thought of in three different dimensions: 1. Timing - in this dimension the information can provide a snapshot in time of the state of the stock

of goods and services, or, over a period of time, the flow of goods and services arising from the stock. 2. Location of impact - this dimension considers where the impact is located in the accounts. Is it already within the HEI’s financial reporting boundaries - internal – or is it outside the traditional reporting boundaries – external? 3. Type of impact - this dimension identifies the impact as either environmental, social or economic. The types of impact can be disaggregated into the five capitals (see Table 1). The Sustainable Economy Programme at Forum for the Future has developed the Sustainability Accounting Cube to illustrate these three distinct dimensions of sustainability accounting (see Figure 5). The cube is used to help explain the difference between traditional accounting and sustainability accounting, internal and external sustainability accounting and the role of the balance sheet. 22 HEPS Accounting for Sustainability Guidance – Section 2 Source:

http://www.doksinet Figure 5 The Sustainability Accounting Cube Timing of impact Flow Internal Social (Social & human) External Economic (Manufactured & financial) Location of impact Stock Environmental (Natural) Type of impact For simplicity, we have clustered the type of impact as economic, social and environmental for the remainder of this guidance. Traditional financial accounting only includes the internal stocks and flows of financial value on the balance sheet and profit and loss account respectively. Sustainability accounting desegregates the internal accounts to show costs and benefits relating to economic, social and environmental performance. It also extends the accounting boundary to consider the monetary value of external impacts. Figure 6 From traditional to sustainability accounting Traditional accounting Sustainability accounting Timing of impact Timing of impact Flow Social Environmental Environmental Type of impact Type of impact External

Economic Internal External Social Internal Economic Stock Location of impact Flow Location of impact Stock Moving from traditional accounting to sustainability accounting requires adjustment and extension to the primary statements in the following ways: • Restatement of the profit and loss account to show costs and benefits relating to economic, social and environmental performance (internal sustainability accounting, see page 24). • Extension of the profit and loss account to encompass the external costs and benefits to the environment, society and the economy, which are not traditionally taken into account (external sustainability accounting, see page 25). HEPS Accounting for Sustainability Guidance – Section 2 23 Source: http://www.doksinet • Extension of the balance sheet to take account of the full range of assets (including intangible assets such as brands, human capital or reputation as they relate to sustainability); and ‘shadow’ liabilities

(including liabilities relating to sustainability risks) of the organisation (see page 26). Internal Sustainability Accounting These accounts summarise the internal financial flows associated with performance in the economic, social and environmental dimensions. Costs and benefits that are already included in the financial accounts are reorganised to show previously hidden links, for instance, between prominent environmental expenditure and previously hidden savings. The information is extracted from existing accounting systems and re-presented to show the sustainability related elements of current expenditure, which are linked with associated financial benefits (in terms of extra revenue or avoided costs) or costs incurred. There is obviously no single definition of what constitutes environmentally or socially related expenditure and this will vary according to the nature of the institution and its activity. Examples could include the cost of special insurance fees to cover the use of

hazardous chemicals, or the cost incurred by making a website or lecture room accessible for students of all abilities to conform with the Disability Discrimination Act 1995. Hidden savings could include the reduction in waste disposal costs as a result of undertaking a recycling programme, savings on energy bills due to an energy efficiency programme (see University Carbon Club in Box 3) or the increase in student fees as a result of a new marketing campaign. Internal sustainability accounting helps make the link between these hidden costs and benefits and financial performance more visible, thereby providing decision makers with a more complete picture of the institution’s operations. Section three provides detailed examples of the different ways of restating internal flows (costs and benefits) and internal sustainability accounting is shown in columns two, three and four in the Sustainability Accounting Framework (Table 4, page 34). Box 3 EU Carbon Emissions Trading Scheme The

European Carbon Emissions Trading Scheme comes into force on 1 January 2005. All organisations with a combustion installation on site that has a thermal input greater than 20MW will be required to enter the scheme. Organisations participating in this scheme will have to reduce their carbon emissions according to set targets or face steep penalties. Some HEIs have already been identified as applicable for the scheme. The University Carbon Club has been set up to help HEIs reduce their carbon emissions. The universities of Brighton, Brunel, Edinburgh, King’s College London, Loughborough, Middlesex and Plymouth have already taken steps to reduce their emissions through energy efficiency measures and the purchase of renewable energy. The participating universities set themselves annual targets to reduce their aggregated CO2 emissions. These universities have made a collective saving of £500,000 to their energy bills over 2002/2003, and are a step ahead of other HEIs who may not yet have

considered the implications of the scheme. 24 HEPS Accounting for Sustainability Guidance – Section 2 Source: http://www.doksinet A university’s traditional accounts can be reorganised to show that the costs of reducing carbon emissions are associated with the savings made on energy bills. When the connections between costs and benefits are made explicit in this way it is easier to make decisions about the deployment of financial resources. Internal sustainability accounting is a technique to achieve this The Carbon Club is managed by Battle McCarthy37, and more information about the trading scheme can be found on the Defra website.38 External sustainability accounting While internal sustainability accounting deals with financial flows that are already recorded somewhere in the institution’s financial accounts, external sustainability accounting deals with the costs and benefits (externalities) that are not currently accounted for by the institution. Through their

activities and operations, HEIs add and subtract value from society, the environment and the economy. Universities UK has attempted to establish some of the value the sector adds to the economy and society (see page 27). There have also been some attempts to express in financial terms a university’s contribution to the local economy and society. Box 4 The impact of Loughborough University on the local economy Loughborough University has estimated that the total annual impact of the university on the output of the local economy is estimated to be £18.8 million. This calculation will include data that does not currently appear within the university accounts, for example earnings through jobs created and money spent on local services such as cinemas and taxis. The university is using this calculation to help convince local residents of the value of more students, “who are better known for anti-social behaviour than for economic and voluntary contributions“. Source: Times Higher

Education Supplement, 1 August 2003 Social and environmental costs and benefits may either be recorded on someone else’s balance sheet or not captured at all. For example, the costs to a community of a large student population may include increased traffic congestion and rising property prices near student accommodation. External benefits may include the community’s enjoyment of university facilities such as swimming pools, libraries, theatres, and the environmental gains of maintained green space on university land (in terms of pollution absorption and biological diversity). Often an impact will have both internal and external components. For instance, stress has impacts both inside an organisation through lost productivity and outside an organisation through the way it affects the quality of life of the employee and family. The impact to the organisation is internalised as lost 37 See www.battlemccarthycom 38 See www.defragovuk HEPS Accounting for Sustainability Guidance –

Section 2 25 Source: http://www.doksinet productivity and could be drawn out in one of the internal sustainability accounts. The wider impacts on the individual and society (such as the associated cost to the NHS for treatment) are not internalised and so would appear in an account of external social costs. Sustainability balance sheet accounting The two sections above deal with the flows of costs and benefits – the internal and external profit and loss accounts. These flows can be translated into changes in stocks. However, the way the value of stocks, (rather than the changes in them), should be represented is a less developed aspect of accounting. Theoretically, a sustainability accounting balance sheet could report a snapshot of the environmental, social and economic stocks, inside and outside the organisation. A sustainability profit and loss account would then recognise the inand out- flows of these stocks over time This has not yet been attempted in a systematic fashion

anywhere. Present practice on the balance sheet already considers the internal generation of stocks. For example, the institution’s brand, the quality of its people and its reputation are all valuable stocks. These intangible assets are internal stocks on which the organisation may want to put a monetary value and incorporate into the traditional accounts to assist its decision making. Box 5 Intangible assets In October 2001, the European Commission began funding a two-year programme of economic research, bringing together leading experts from the business, academic and policy communities to focus on intangibles and how they relate to policy-making, reporting and measurement, skills development and management. The outputs of this programme were presented at a conference in the Cass Business School in July 2003 and include policy recommendations, case studies and research papers (totalling more than 60). The website wwweuintangiblescom provides a comprehensive source of information

and publications relating to intangibles. The SORP for further and higher education defines goodwill and negative goodwill as intangible assets and does provide scope for these to be monetised, under certain conditions. “A purchased intangible asset should be capitalised at cost. An intangible asset acquired as part of a business combination should be capitalised separately if its value can be measured reliably. An internally developed intangible asset may only be capitalised if it has a readily ascertainable market value.“39 An organisation also has an impact on the external environment, society and economy, outside its own boundaries. These may include the human capital of its employees at home or after they leave the organisation, the social capital of the communities in which the organisation operates and the natural capital on 39 Universities UK, October 2003 26 HEPS Accounting for Sustainability Guidance – Section 2 Source: http://www.doksinet which it relies. Do the

organisation’s activities increase the stock of human happiness? Do they contribute to increasing stocks of natural capital? Box 6 The costs and benefits of universities to the economy and society The Times Higher Education Supplement “Town and Gown“ series made attempts to describe the value universities add, or take away, from society and the economy, although these have rarely been put into monetary terms. • For every 100 jobs within institutions themselves, 89 other jobs were created.40 • “About a quarter of my [taxi] business is taking students and other people to and from the university“(Loughborough) • The University’s £14.5 million Sportspark – including an Olympic size swimming pool – is open to anyone for a 50p fee (Norwich) • Average house prices increased by 18 per cent in East Anglia in the year to 30 June (Cambridge) • “While Headingley is quite busy and noisy from September to June, and there does tend to be litter and debris in the streets

and late-night high spirits, it can feel a bit like a ghost town in the summer when they have left“ (Leeds). Source: The Times Higher Education Supplement. 8, 15, 22, 29 August 2003 The external social and economic impacts of an institution are, however, far more commonly expressed in non–financial terms, as shown below. The external social and economic costs and benefits of an HEI have been expressed in places, albeit in non-financial terms. However, little has been done so far to account for and report on the external environmental impacts of a university’s operations. By contrast, environmental accounting (and reporting) is becoming more common in the corporate world. Anglian Water Services, Wessex Water, Bulmers (a cider maker), construction firm Carillion, retailer Marks & Spencer, and Interface are using Forum for the Future’s environmental accounting methodologies to account for and better manage their impact on the environment. For two years running, Wessex Water

has published its full external cost accounts alongside its conventional financial statements in its annual report.41 While the externalities for an HEI would be very different to those for a water company, the principles of measuring current performance, setting a target and estimating how much it would cost to meet that target would be the same for a university or a company. 40 Universities UK, The impact of higher education institutions on the UK economy, May 2002 41 Wessex Water Services Ltd, Annual Review and Accounts (2002): Clear Commitment, 2002 HEPS Accounting for Sustainability Guidance – Section 2 27 Source: http://www.doksinet Table 2 Anglian Water Services External Environmental Cost Accounts for 2002 Anglian Water Services External Environmental Cost Accounts Emissions/Impacts Emissions (tonnes) Reduction Target (tonnes) (sustainability gap) 312,052 847 1,765 187,231 508 1,059 IMPACTS TO AIR Direct Energy Electricity consumption 706 million kWh CO2 NOx SO2

Total (avoidance) Natural gas consumption 10 million kWhs (CO2 only) Fuel oil – 370,000 litres (CO2 only) 9,672 1,833 1,100 6 7 992 595 6 4 87,000 6 522 4848 28 6 2,800 - 14,000 29 355 4,683 50 6 2,800-14,000 28 719 2,241 47 6 2,800-14,000 13 485 12,199 147 6 2,800-14,000 73 1889 780 2< 6 14,000 5 24 13,825 Process related emissions Methane (CH4) emissions from waste water treatment 145,000 (expressed as CO2 equivalent) Road Transport Company cars, car derived vans and panel vans 44 million km 8079 CO2 NOx, HCS and particulates 34 Commercial vehicles (LGVs) 9.75 million km 7,805 CO2 NOx, HCS and particulates 61 Commuting 30.36 million km CO2 3,735 NOx, HCS and PM 58 Contractors 41.2 million km 20,332 CO2 NOx, HCS and PM 182 Air travel CO2 NOx Total costs carried forward 28 £’000S To deliver the relevant sustainability targets Unit Avoidance and restoration costs where applicable 780 2< HEPS Accounting for Sustainability Guidance – Section 2

Source: http://www.doksinet Table 2 Emissions/Impacts Emissions (tonnes) Reduction Target (tonnes) (sustainability gap) £’000S To deliver the relevant sustainability targets Total costs brought forward 13,825 IMPACTS TO LAND Contaminated land (restoration of 600 acres of sacrificial and dedicated land) 1,000 600 IMPACTS TO WATER Abstraction at vulnerable sites - provision of alternative supplies at priority sites 2,000 Rounding 25 Total sustainability cost 16,450 Profit after tax per the financial accounts Outstanding Environmentally sustainable/adjusted profit To be calculated HEPS Accounting for Sustainability Guidance – Section 2 29 Source: http://www.doksinet Restoration and avoidance values Sustainability accounting techniques can be criticised for trying to put a monetary value on things that are, sometimes, literally “beyond value”. For example, how do you put a monetary value on a white rhino, a patent ozone layer, a human life? The moral

debate over this is likely to continue. For organisations that do decide to put a monetary value on something that has traditionally not been valued in this way, there are a number of valuation techniques available. The valuation techniques recommended in this guidance are based on the work of Forum for the Future and others, and concentrate on restoration or avoidance values. Notes on other techniques are given in Appendix 3 The use of avoidance or restoration costs is in line with the United Nations recommendations for environmental adjustments to the national accounts. What would it cost to restore contaminated land? What would it cost to avoid the emissions of CO2? For many of these costs market values are available; for example, the cost of sequestering carbon or purchasing energy from renewable sources in the first place. These last costs will be particularly relevant for those universities who will come under the EU carbon emissions trading scheme when it starts in 2005 (see Box

3). Environmental accounting has been under development for much longer so it can refer to a scientific validated baseline against which restoration and avoidance costs may be measured. (see Appendix 3 for some of these figures) However, a similar scientifically rigorous approach to social impacts (positive or negative) is in its infancy. For instance, there will be different views about how best to define acceptable (ie baseline) blight from close proximity to student accommodation. Nevertheless, work on metrics for accounting for social costs and benefits is underway, and universities, as institutions with major social as well as environmental and economic impacts, have an opportunity to contribute greatly through developing and trailing them (academically, as well as practically). Again, examples of using restoration values for environmental costs can be found in the corporate sector. For example, Anglian Water Services has published the impact of the company’s sustainability

costs on its reported profits within the final accounts and review.42 The sustainability cost estimate represents the cost to the company of restoring the damage resulting from its most significant external environmental impacts over a particular accounting period.43 In Appendix 3, we give an overview of various environmental evaluation methods and in Appendix 4 we list specific methods and sources of further information for different environmental impacts. Stakeholder Identification for Sustainability Accounting Box 7 Users of a higher education institutions reports and financial statements The SORP for higher education has identified the following groups as the potential users, to varying degrees, of an institution’s reports and financial 42 Anglian Water Services plc, The right structure for sustainable growth, Sustainable development report 2002 43 Howes, R, Coming of Age, Environmental Finance November 2002 30 HEPS Accounting for Sustainability Guidance – Section 2

Source: http://www.doksinet statements. Many of these users will also be interested in the non-financial reports of institutions. These user groups may have differing needs in detail, but certain key elements, including the need for clarity, comparability and accountability, are common to all: • • • • • • • • • the governing body of the institution the funding councils Government departments and Parliament the institution’s employees (past, present and future) the institution’s students (past, present and future) lenders and creditors other institutions, schools and industry grant-awarding bodies, donors and benefactors the general public. There are several ways of designing the reporting framework for sustainability accounting. Anglian Water Services and Wessex Water, for example, use environmental media for their (external) environmental accounts (see pages 28 and 29). Less developed are financial statements of social impacts To date, organisations reporting

on their (external) social impacts have focused on one element; for example, the Co-operative Bank on its customers and the London Benchmarking Group on their involvement with the community.44 For the purposes of this guide we propose to use a framework based on stakeholders, those who are affected by or can affect an activity or organisation. Not only is this a useful way of thinking about the interests of the very large number of bodies involved with a university or college, it is also the recommended approach of the SORP for further and higher education. If the objectives of financial statements and reports are governed by the needs of users and potential users, why not organise and present them in this way? Of course, it is up to individual institutions to consider which categories of stakeholders will work best for them; however, the recommendation is that the scope be as wide-reaching as possible. The Sustainability Appraisal Grid on page 19 can help with this scoping exercise.

Even if ‘graduating’ elements from the scoping exercise to formal accounting process takes place over a period of time, holding and occasionally reviewing the whole picture makes sense in risk and other management terms. The benefits of using stakeholders in the sustainability accounting framework for a HEI are: • it is consistent with the SORP for higher education (see Box 7) • it captures areas relevant to sustainability accounts that may not be immediately obvious to finance directors of higher education institutions • it enables better relationships to be established, and collaboration secured for future data gathering • it may satisfy the formal reports required by stakeholders (financial and nonfinancial) on performance (eg, public and private investors, grant awarding bodies, funding councils) 44 See www.lbg-onlinenet HEPS Accounting for Sustainability Guidance – Section 2 31 Source: http://www.doksinet • it helps achieve clarity of reporting and

accountability expectations on both sides, particularly if the stakeholders are involved in the process. For the purposes of this guide we have identified six significant stakeholder groups. These are listed in Table 3 Different institutions may wish to add, subtract or unpack any of these, depending on their mission and priorities. Identifying the costs and benefits associated with the stakeholders and categorising these as internal or external, environmental, social or economic is the essence of the sustainability accounting framework. This is illustrated in Table 4 Practical guidance on how this information can be integrated into the accounting systems is outlined in the next section. The Sustainability Accounting Framework shows the internal and external costs and benefits associated with particular groups of stakeholders. It is up to the individual HEI to select the appropriate stakeholder groups. In the example in Table four we have used six groups of stakeholders. For each

stakeholder group the costs and benefits (or flows) have been categorised as environmental, social or economic as well as internal or external. The net value added is the sum of all of the benefits (row 1) minus the sum of all of the costs (rows 2 + row 3 + row 4, etc.), as illustrated in Table 4 32 HEPS Accounting for Sustainability Guidance – Section 2 Source: http://www.doksinet Table 3 Examples of stakeholder groups for an HEI Stakeholder group Examples of members 1 Customers and users (of higher education services and products) Students (past, present and future) Graduate employers Research and consultancy clients Research councils Professional bodies Funding councils and other public grant makers 2 Suppliers Of goods (materials, food, buildings, energy) Of services (maintenance, waste removal, training) 3 Employees Academic staff Non-academic staff Trade and professional associations (AUT, Universities UK, BUFDG, AUDE etc.) 4 Community Community groups

(resident, special interest) Transport operators Local businesses Housing associations Local amenity providers (recreation) Local schools NGOs 5 Public sector Government departments Regulatory bodies (eg Quality Assurance Agency) Regional government offices Regional Development Agencies Learning and Skills Council Sector Skills Councils 6 Investors and Governance University governing council Pension fund trustees Grant awarding bodies Donors, benefactors Higher education and sustainability policy makers HEPS Accounting for Sustainability Guidance – Section 2 33 Source: http://www.doksinet Table 4 Sustainability Accounting Framework, illustrated with examples of internal and external costs and benefits to an HEI STAKEHOLDERS INTERNAL 2 Social 1 Environmental 3 Economic Costs and benefits 34 1 Customers and users Research and consultancy income. Savings on reduced waste disposal costs. Savings on insurance for hazardous waste. Income from visitors and other users.

Income from grants, research funds, student fees, endowments. 2 Suppliers Energy costs associated with use of products. Disposal costs. Supply chain management costs and savings. Payments for materials and services purchased. Maintenance, running, refurbishment costs. 3 Employees Workplace savings (eg energy, paper efficiency). Income from car parks, investment in bike racks/showers. Cost of training and staff development. Savings from improved productivity. Cost of compliance with DDA, Equal opportunities – savings on recruitment costs. Total remuneration to employees (including wages, training and benefits). 4 Community Contribution to local conservation projects. Contribution to local schools activities, volunteering, Local Strategic Partnerships. Payments from visitors to university amenities. Savings from shared facilities. 5 Public sector Environmental taxes, landfill tax, disposal costs, licences, fees, penalties, grants tax savings. Cost of staff training

for compliance with health and safety, QAA inspections. Regulatory charges, taxes. 6 Investors and Governance Interest payments on environmental investments. Interest payments on social investments. Interest payments on loans, dividend payments. 7 Net value added HEPS Accounting for Sustainability Guidance – Section 2 = (row 1) – (row 3 + row 4 + row 5 + row 6) Source: http://www.doksinet Table 4 continued Sustainability Accounting Framework, illustrated with examples of internal and external costs and benefits to an HEI EXTERNAL 5 Social 4 Environmental 6 Economic Costs and benefits Student transport, litter. Impacts of learning/ research on graduate ability. Student impact on local community, (noise, culture, tourism, volunteering). Impact on house prices. Money spent in locality. Contribution of knowledge and skills to economy. Environmental impacts associated with production of purchased goods. Health and social costs associated with production of purchased

goods. Impact on local economy in place of production. Costs, benefits of staff travelling to/from work. Impacts of resource use in workplace (energy, water, food, equipment). Benefits to families of employees, amenities used. Jobs created in locality, money spent on local goods and services. Pollution from traffic, and other emissions to land, water and air. Contribution to Biodiversity Action Plan. Student volunteering, community benefit of sports facilities, libraries, noise, etc. Impact on local economy from tourism generated by university. Contribution to local and regional government environmental targets/strategies. Contribution to regional and local government skills agendas for region. Knowledge and skills created for UK economy. Environmental impacts of companies pension funds, etc. Social impacts of companies pension funds, etc. Investment in companies operations. = (row 1) – (row 3 + row 4 + row 5 + row 6) HEPS Accounting for Sustainability Guidance –

Section 2 35 Source: http://www.doksinet 36 HEPS Accounting for Sustainability Guidance – Section 2 Source: http://www.doksinet Section Practical guidelines for users 3 The previous section of this guidance gave an overview of sustainability accounting, with an explanation of some of the key concepts and principles involved, together with a short introduction to ways of understanding what sustainable development is and how a university can make a contribution. The section ended with a presentation of the Sustainability Accounting Framework on page 34; this framework illustrates some of the costs and benefits pertinent to a University’s stakeholders, which are possible elements to be included in the sustainability accounts. This section focuses on the practical steps to be taken by an organisation that wants to introduce sustainability accounting. Some of the concepts introduced in the previous section are revisited in this one though the reader is encouraged to refer back

to section two while working through section three. This section is divided into three parts: 3.1 Internal sustainability accounting: restatement of traditional financial accounts 3.2 External sustainability accounting: extension to traditional financial accounts 3.3 Sustainability balance sheet: extension of the balance sheet to take into account the full range of assets including intangible assets and ‘shadow’ liabilities These guidelines give emphasis to internal sustainability accounting because this is what some HEIs are already doing. Moreover, the requirements on reporting by the funding councils and others means that some of the non-financial data and information is already available. For example, HEIs are already reporting on student retention rates, widening participation progress and, in some cases, energy use. External sustainability accounting is a challenge for any sector. Our experience, however, is that the most compelling stories, and the most important issues, are

highlighted by considering the external costs and benefits of an organisation. The corporate sector has made significant progress in environmental accounting. However, considering the sustainability balance sheet, with a view of the value of stocks of an organisations’ assets and liabilities, both internally and externally, is still in the realms of early experimentation. Sustainability accounting presents an opportunity for the higher education sector, for research as well as in practice. Forum for the Future recommends that an organisation start with internal sustainability accounting and then move to external sustainability accounting, and in both cases use the sustainability balance sheet. HEPS Accounting for Sustainability Guidance – Section 3 37 Source: http://www.doksinet 3.1 Internal sustainability accounting: restatement of traditional financial accounts Internal sustainability accounting involves a restatement of existing financial flows (costs and benefits) of

sustainability performance. The accounts are, in effect, represented to show the sustainability related elements of current expenditure They cover the front right hand quadrant of the cube (Figure 7). The internal flows (costs and benefits) are illustrated as the front right hand quadrant of Figure 7. Figure 7 Timing of impact Flow External Social Internal Economic Location of impact Stock Environmental Type of impact The process to achieve internal sustainability accounting has been outlined below as six steps which are explained in the following paragraphs. 1. Identify the stakeholders 2. Determine the scope 3. Prioritise areas to be incorporated into the account 4. Restate the consolidated income and expenditure account 5. Add the costs and benefits related to environmental and social performance to the restated accounts 6. Report the internal sustainability accounts alongside the traditional accounts 1. Identify the stakeholders Identify the individuals and groups of

people who are likely to affect or be affected by the institution or activity being accounted for and involve these people in the process from the start. Use the stakeholder table as a prompt (Table 3) 2. Determine the scope Identify the economic, social and environmental areas where the organisation or activity could have an impact using the Sustainability Appraisal Grid (Figure 3). Use the completed grid on page 20 as a prompt if you need it. 38 HEPS Accounting for Sustainability Guidance – Section 3 Source: http://www.doksinet Figure 3 (as page 19) Sustainability Appraisal Grid What can the university (or activity) do to enhance the ‘stock’ of the following resources, or ‘capitals’? Three ways in which a university manifests itself As a business As a place of learning and research As a key member of the community NATURAL The resources and services provided by the natural world 1 2 3 HUMAN The energy, motivation, capacity for relationships and intelligence of

individuals 4 5 6 SOCIAL The social groupings that add value to individuals (eg, families, communities, parliaments, universities) 7 8 9 MANUFACTURED The ‘stuff’ that exists already – buildings, railways etc. Can it be used in a way that requires fewer resources and more human creativity? 10 11 12 FINANCIAL The money, stocks etc., that enable us to put a value on, and buy and sell the above resources. Are there ways that financial value can more accurately represent the real ‘cost’ of using these resources? 13 14 15 HEPS Accounting for Sustainability Guidance – Section 3 39 Source: http://www.doksinet At this stage it is important to be as comprehensive as possible, and to keep a record of this scoping exercise to avoid the disaggregation of environmental, economic and social outcomes of financial investment that lies at the root of unsustainability. Sustainability is all about thinking of each concept in the context of the other in order to minimise

negative outcomes and maximise positive ones. In addition, it is important to determine whether the accounts will include all downstream cost and benefit flows (affecting the main users of the HEI services, such as students or research bodies), as well as upstream costs and benefits (relating to environmental or social specifications on goods and services supplied). We recommend, and have assumed for the purposes of this guide, that the accounting will encompass upstream and downstream cost and benefit flows for a whole HEI. 3. Prioritise areas to be incorporated into the accounts Select some areas to incorporate into the accounts in accordance with the mission, or other objectives of the institution, and if possible the stakeholder’s views. Justify this prioritisation and do not worry if you start with very few areas. That is how companies and other organisations are doing it. As a rule of thumb it is best to: • start with the areas where financial data may be readily available,

and then add as capacity to collect and process data and confidence develops • try to get a balance between nationally important areas (eg, CO2 emissions), sectorally important data (eg, relating to widening participation) and data important to your institution (eg, staff recruitment and retention) • develop the quality of your written reporting at the same time as you increase the number of monetised values you use. 4. Restate the consolidated income and expenditure account Restate the income and expenditure according to the framework you are using for sustainability accounting. Table 5 and 6 show the accounts for the University of Aberdeen before and after restatement using a stakeholder approach. Accounts presented in this way shows how economic value added is distributed across different stakeholder groups. It allows comparisons over time, across the HE sector, and between sectors. For example, Table 5 shows that users and staff are the most significant stakeholders in terms of

economic value added. This may not be surprising but it shows well the effect of policy and priorities to key stakeholder relations. 5. Add the costs and benefits related to environmental and social performance to the restated accounts. The priorities identified, with stakeholders and ideally using the Sustainability Appraisal Grid (see step 3), will highlight the areas to include for the environmental value added and social value added both of which are explained below. Internal environmental value added The aim of incorporating environmental value added into the accounts is to draw out environmentally related financial information that is otherwise hidden in the traditional income and expenditure account. An internal environmental account makes explicit current levels of expenditure on environmental activities and captures any associated financial benefits (such as revenues generated, 40 HEPS Accounting for Sustainability Guidance – Section 3 Source: http://www.doksinet Table

5 University of Aberdeen consolidated income and expenditure account for the year ended 31 July 2001 Income/expenditure £000 INCOME Funding council grants Tuition fees and education contracts Research grants and contracts Other income Endowment and investment Income Total income 45,922 17,563 31,229 17,352 2,469 114,535 EXPENDITURE Staff costs Other operating expenses Depreciation Interest payable Total expenditure 71,688 35,162 8,892 1,639 117,381 Deficit on continuing operations after depreciation of fixed assets at valuation but before tax Share of operating profit/loss of associates Taxation Deficit on continuing operations after depreciation of fixed assets at valuation and tax (2,846) (1) (5) (2,852) costs saved and taxes avoided). It is basically an aggregated cost-benefit statement at the organisational level. Expenditures include both a depreciation allowance for capital expenditures (eg, equipment for the treatment of waste) and environmentally related operating

expenditures (eg, staff costs, running costs, materials and services, environmental taxes and licences). Associated financial benefits may include additional revenue generated (eg, revenues from recycled waste), cost savings (eg, reduced waste disposal costs), regulatory costs avoided (eg, savings in landfill tax) and grants and subsidies received (eg, grants under the Energy Saving Trust’s Clean Up Programme.45 The process may be equally useful when applied to the day-to-day operations of an HEI or to large capital projects – such as the construction or restoration of university buildings. Forum for the Future has been involved in developing the use of internal environmental accounting in the private and public sectors (see Box 8). Table 7 illustrates the application of internal accounting to track environmentally related costs and savings related to a hypothetical ABC University. The environmental value added is then added or subtracted from the restated economic accounts. This

table represents a more detailed version (ie, with costs and benefits made explicit) of column one of the Sustainability Accounting Framework on page 34. 45 See www.cleanuporguk HEPS Accounting for Sustainability Guidance – Section 3 41 Source: http://www.doksinet Table 6 University of Aberdeen internal economic account for the year ended 31 July 2001 Stakeholder 1. Customers and users 2. Suppliers Economic value added (£000) Cash received for supply of products and services Funding council grant Fees Research grants Other income 45,922 17,563 31,229 17,352 112,066 Cash payments for materials and services purchased Other operating expenditure 35,162 3. Employees Total remuneration to employees Staff costs 71,688 4. Community Support for community activities Not known 5. Public Sector Regulatory charges and taxes paid Taxation 6. Investors and governance Depreciation and interest Depreciation Interest payable (investment income) Associate share of operating

loss 7. Net economic value added = (row 1) – (rows 2+3+4+5+6+7) 5 8,892 1,639 (2,469) 1 Deficit on operations 8,063 (2,852) Box 8 Internal Sustainability Accounting in the construction sector Internal environmental accounting is being used to help the construction of the new state-of the-art campus at the University of Hertfordshire. The financial implications of energy, water, waste, materials, transport, wildlife habitats and community relations were all considered in the planning stages. The £120 million project incorporates a number of sustainable design features.46 For general information about the application of the methodology to the construction sector see Sustainability Accounting in the Construction Industry, a report prepared for the DTI by Forum for the Future and Casella Stanger.47 46 See www.hertsacuk 47 See www.ciriaorguk 42 HEPS Accounting for Sustainability Guidance – Section 3 Source: http://www.doksinet Table 7 ABC University: internal environmental

accounts Stakeholder Environmental Feature or Activity Customers and users Suppliers Employees Costs £ Benefits £ Environmental Value Added £ Fees for courses with sustainability ‘literacy’ component X X Environmental research grants X X Environmental spin offs/ consultancy income X X Income from recycled materials X X X X Additional costs (or savings) from specification management (eg, ethical, fair trade, local) X Environmental materials and services X X Resource efficiency savings X X Cost of work-place related activities (and savings) X X Staff insurance (working with hazardous materials) X X Community Contributions to environmental initiatives X X Public sector Environmental taxes X Paid or avoided (eg, landfill) Investors Total Environment value added Environmental grants X Annual depreciation on environmental investments X X X X X X X X X (XXX) HEPS Accounting for Sustainability Guidance – Section 3 43 Source:

http://www.doksinet Internal Social Value Added The hidden socially-related information and associated financial benefits (such as revenues etc) can be drawn out of the traditional income and expenditure account using exactly the same process as for environmental value added. There are no common definitions of what constitutes socially related initiatives in the higher education sector. A good place to start is to identify costs and benefits related to health and safety, staff training, social and ethical specifications in supply chain management. Again the Sustainability Appraisal Grid can be used to draw out stakeholder views and help identify priorities and any associated costs and benefits. In some instances, such as deciding on which consultancy or research grant income to include, definitions may be difficult. Therefore it is up to the individual HEI to decide which social features or activities should be included, as long as the reasons for this choice are transparent. In time,

and given a good mechanism for sharing experience and learning, a more standard approach to deriving social added value will develop, as has been the case for internal environmental accounting, albeit mostly in the business sector to date. The higher education sector could make a significant contribution to the development of techniques for calculating social value added – through the experience of the institutions themselves, as well as through research – for individual institutions, and for the sector as a whole. Table 8 illustrates the application of the methodology to track socially related costs and savings related to the hypothetical ABC University. The outcome of calculating the socially-related value added may then be added or subtracted from the restated accounts. This table represents a more detailed version (ie with costs and benefits made explicit) of column three of the Sustainability Accounting Framework on page 34. Table 8 ABC University: internal social accounts

Stakeholder Social Feature or Activity Customers and Users Suppliers and Contractors Costs £ Benefits £ Social Value Added £ Student fees for courses with sustainability/social ‘literacy’ component X X Socially related research grants X X Other income from socially related services X X Student Sabbaticals X X X Additional costs (or savings) from supply specification (social; ethical; fair trade)48 X X X 48 See HEPS, Purchasing for sustainability: guidance for higher education institutions, Forum for the Future, 2003 44 HEPS Accounting for Sustainability Guidance – Section 3 Source: http://www.doksinet Employees Costs of training suppliers X X Proportion of staff costs attributed to social activities (eg Health and safety; security) X X Staff training and development X X Recreational facilities X Staff cost savings (eg low staff turnover and sickness) Employees X X Proportion of staff costs attributed to social activities (eg Health

and safety; security) X X Staff training and development X X Recreational facilities X Staff cost savings (eg low staff turnover and sickness) X X Community Contributions to local community groups X X Public Sector Socially related taxes (eg NI contributions) Investors and Governance Taxes and fines avoided (eg Health and safety fines) X X Socially related grants (eg HEFCE funds for disability access; widening participation; human resources strategy) X X X X X X Annual depreciation on social investments X Savings from favourable investment terms Total Social Value Added X X X (XXX) HEPS Accounting for Sustainability Guidance – Section 3 45 Source: http://www.doksinet 6. Report the internal sustainability accounts alongside the traditional accounts The institution may prefer at first to keep its sustainability accounts for internal use only to help decision making, until it has gained both competence and confidence in sustainability accounting,

the institution may prefer to keep its sustainability accounts for internal use only to help inform decision making. We recommend however that the information generated is reported early on to the relevant stakeholders who may be involved in improving its quality and utility. The communication of this information depends on management objectives, for example attracting students to the university or college; attracting or retaining staff, building community relations and partnerships around common objectives (eg, travel planning); reporting to boards of governors, strategic decision making; bidding for research funds. An example of both environmental and socially related financial information published alongside the traditional financial accounts is Wessex Water’s ‘Investment to Sustainability Account’ which is published in the Annual Review and Accounts alongside the External Environmental Accounts (see Table 9). The Investment to Sustainability Account reports on costs

associated with environmental and social issues and includes mandatory and discretionary expenditure. Wessex Water used the five capitals to help them identify all areas of expenditure. The areas of expenditure have subsequently been organised according to the key stakeholder groups, which makes it clear for the stakeholders to understand where resources have been allocated. If the associated benefits (ie savings) were included in this account it would be an excellent example of a full internal sustainability account. Table 9 Wessex Water – Investment to Sustainability Account £000 Customers and Communities • Mandatory expenditure - Example – water supply quality enhancement work, such as mains relining • Discretionary expenditure - Example – replacement of customers’ supply pipes; education service - Example – charitable donations to community projects Environment • Mandatory expenditure - Example – capital investment to meet the Bathing Water Directive •

Discretionary expenditure - Example – trials on options for more sustainable water resources - Example – conservation grants to Wildlife Trusts Employees • Mandatory expenditure - Example – basic pay and conditions • Discretionary expenditure - Example – enhanced overtime expenditure - Example – staff training - Example – company contributions to pension scheme; enhanced maternity leave 46 HEPS Accounting for Sustainability Guidance – Section 3 30,099 2,146 130 48,062 417 155 26,570 1,911 962 29,510 Source: http://www.doksinet Investment – Infrastructure • Mandatory expenditure - Example – replacement/refurbishment of sewers 59,381 Totals • Customers and communities • Environment • Employees • Infrastructure • Total 32,375 48,634 58,953 59,381 199,343 Box 9 Purchasing, Reporting and Communicating for Sustainability; Guidance for HEIs The HEPS has produced guidance on purchasing for sustainability, reporting for sustainability and

communicating for sustainability in the HE sector. These documents are available from Forum for the Future, or may be downloaded from www.hepsorguk For those universities wishing to report their institution’s contribution to sustainability systematically there is a new on-line reporting for sustainability system (HEPS RT) to help an institution set targets and improve sustainability performance as well as communicate the progress made. To obtain your username and password to use HEPS RT email Forum for the Future on hepsrt@forumforthefuture.orguk 3.2 External Sustainability Accounting: extension to traditional financial accounts External sustainability accounting explores the value an HEI adds to or subtracts from society, the environment, and the economy that is not covered by the existing accounts. (see page 22 for a fuller explanation) It extends the traditional accounting boundaries to take into account environment, social and economic costs and benefits that accrue to an

enlarged group of stakeholders. A distinction is made between private costs and benefits which accrue directly to the organisation (explored in the restated internal accounts) and external social and environmental costs and benefits which accrue to other stakeholders. For example, the impact of CO2 emissions or loss of biodiversity or drainage capacity due to a change in land use (eg, a new car park) causes damage to the environment with biological, human health and financial consequences that are not accurately represented by the price paid for the energy or materials used to construct the car park. By contrast, an HEI will have a major positive impact to log for the value graduates and research add to society and the economy that is not represented in the total grant or fee received by the university or college. It is these wider impacts that external sustainability accounting seeks to internalise. HEPS Accounting for Sustainability Guidance – Section 3 47 Source:

http://www.doksinet The external flows (costs and benefits) are illustrated as the back right hand quadrant (shaded) of the sustainability accounting cube below. Figure 8 Timing of impact Flow External Social Internal Economic Location of impact Stock Environmental Type of impact The same process for identifying internal social and environmental impacts is used to identify external ones. But in this case, the organisation must collect new information that relates to the organisation’s activities. The impacts are evaluated in financial terms wherever possible (ideally using avoidance and restoration costs) and reported in the same way as for internal sustainability accounts. Ultimately, the external accounts can be integrated into (or presented alongside) the traditional financial accounts to give a more accurate picture of the full costs and benefits associated with the contribution of the HEI (or the sector) to society. They can be categorised using a stakeholder

framework (see page 33), and informed by a Sustainability Appraisal Grid (see page 34) to maintain an overview of all of the potential impacts and connections between the social, environmental and economic dimensions. At this scoping stage it is important to identify both positive and negative impacts, which will ultimately be translated into costs and benefits or simply reported qualitatively. Table 10 shows some examples of the types of the external impacts that may be relevant to the higher education sector.49 49 This was developed from a variety of sources and background materials (including inputs during a finance directors and purchasing officers workshop, Public Sector Reform: Reducing Costs and Risks in Higher Education, 24th October 2002) 48 HEPS Accounting for Sustainability Guidance – Section 3 Source: http://www.doksinet Table 10 Identifying external environmental and social impacts Stakeholder External Impacts (positive and negative) Environmental Social Users

(customers) Environmental impacts relating to student transport; accommodation (energy; waste; noise) Impacts of environmental training and research on government policy; business; consumer behaviour Environmental benefits of more environmentally active and aware citizens Development of social networks. Impacts of training and research on social policy; business practices; consumer behaviour Contribution of knowledge and skills to economy and society Benefits to society of more socially active and aware citizens Social impacts of widening access and job opportunities Increased earning potential of university students Suppliers Environmental impacts associated with the production and distribution of purchased goods and services (eg transport; resource extraction; pollution in manufacturing) Social impacts associated with the production and distribution of purchased goods and services Employees Environmental hazards associated with the workplace (eg science laboratories; estate

management) Working terms and conditions (eg health and safety; training and development; unpaid overtime; long and inflexible hours; redundancy; accidents and health risks at work; job dis/satisfaction) Community Emissions, effluents and waste to land; air and water; habitat change and biodiversity Public access to HE grounds. Volunteering of staff and students eg tree planting schemes; inputs in kind to HEPS Contribution to social capital (eg public lectures, recreational facilities, libraries); community health impacts; volunteering of staff and students; nuisance and disturbance Public Sector Impact on environmental legislation and how this has led to wider benefits Impacts on social and labour legislation and how this has led to wider benefits or dis-benefits Investors Impacts on sector from reporting on environmental performance Impacts on sector as a result of reporting on social performance HEPS Accounting for Sustainability Guidance – Section 3 49 Source:

http://www.doksinet The following paragraphs explore the potential external environmental, social and economic impacts (both positive and negative) of an organisation and give examples of attempts to monetise the related costs and benefits to inform decision making. In places, (eg Anglian Water Services and Wessex Water) the resulting external sustainability accounts have been published alongside the traditional accounts. However, the information relating to these impacts (whether monetised or not) can also be reported to the relevant stakeholders in other ways, such as through the Annual Report, in the University prospectus or through internal processes. External Environmental Impacts External environmental accounting is perhaps the most established methodology of any aspect of sustainability accounting. Largely because it has been developed in the corporate sector by companies keen to avoid risks, and to proactively establish a reputation for responsibility in this area. Wessex

Water and Anglian Water Services have led the way with a methodology developed by Forum for the Future, and have published their external environmental accounts for the last two years (see page 28 for Anglian Water Service’s published accounts). Wessex Water publishes an External Environmental Account in the Annual review and accounts (alongside the Investment to Sustainability Account – see page 46). The environmental classifications developed by the Global Reporting Initiative (see Appendix 2) are used to organise their external environmental accounts. The classifications are Impacts to Air, Water, Land, Habitat and Diversity. Physical quantities are converted to a unit avoidance cost using what is now a fairly standard approach to calculating the avoidance or restoration of the environmental impact. Appendix 3 gives further details of typical valuation methods. Table 11 External environmental account: Wessex Water Stakeholder Consumption Emissions Target Unit avoidance cost

2001/2002 £000 Emissions to air 204.5m kWh Grid electricity CO2 – 87,916 CO2 – 36,074 Various – mixed approach NOx – 245 NOx 147 employed, taking in CO2, NOx SO2 – 511 SO2 – 307 and SO2 (1,560) Natural Gas 19.2m kWh CO2 – 3,646 CO2 – 1,577 CO2 – 2,069 tonnes at £6 (10) Diesel Oil 0.868m litres CO2 – 2,991 CO2 – 616 CO2 – 2,375 tonnes at £6 (10) Vehicles 2.046m litres CO2 – 5,028 CO2 – 2,176 CO2 – 2,852 tonnes at £6 20) Other 17 Other – £2,800 - £14,000 per (320) tonne Methane CO2 – 42,819 CO2 – 26,846 CO2 – 15,973 tonnes at £6 (100) tonne Impacts on water Meet DEFRA Priority 1 sites (440) Abstraction guidance on Priority 2 sites (1,850) low flows 50 HEPS Accounting for Sustainability Guidance – Section 3 Source: http://www.doksinet Impacts on land Contaminated land See notes (120) (4,430) Environmental sustainability cost Profit after taxation as per 72,000 the financial accounts

Environmentally 67,570 sustainable profits Source: Adapted from Wessex Water Services Ltd, Annual review and accounts, 2002.50 Wessex Water published its external environmental costs of £8,341,000, which, when deducted from reported profits showed an ‘environmentally sustainable profit’ figure of £63,500,000. The companies’ understanding of its negative environmental impact enables it to more easily reduce this impact in the future and to demonstrate to investors, customers and regulators that it is seriously engaged in ‘protecting’ profits through a responsible approach to minimising environmental damage. Box 10 From paper to car insurance policies - examples of external environmental accounting from Forum for the Future’s business partners • UPM Kymmene (Shotton Paper Mill) are measuring the change in environmental impact when moving from 35% virgin timber inputs and 65% recycled paper to 100% recycled paper with environmental accounting51 • The Co-operative

Insurance Society are measuring the impact of car insurance policies by examining environmental impacts of preferred garages52 External social impacts This aspect of the sustainability accounting framework is still very much in its infancy so there are few examples of organisations accounting for external social impacts in financial terms. Perhaps the most comprehensive (but somewhat dated) example of corporate accounting for the social costs and benefits associated with its activities is the preparation of a Social Income Statement by the Cement Corporation of India.53 More recently, BP in collaboration with the University of Aberdeen have developed the Sustainability Assessment Model (SAM)54 which is an accounting tool that tracks significant external impacts (including social) on a project basis. HP Bulmers 50 51 52 53 54 See www.wessexwatercouk See http://w3.upm-kymmenecom/ See www.ciscouk Featured in Gray et al, Accounting and accountability, London: Prentice Hall, 1996 See

www.abdnacuk/oilgas/research/man3shtml HEPS Accounting for Sustainability Guidance – Section 3 51 Source: http://www.doksinet (the cider makers) have been working with Forum for the Future to undertake an innovative stakeholder consultation on ‘The social cost of alcohol’. This produced a working model for sharing responsibilities between producers, consumers, marketeers and retailers. Other examples can be drawn from liability settlements for social damages or valuation of specific aspects relating to the health and safety of products (see www.baxtercom) Some examples of relevant external social impacts that might be incorporated into a university or college’s external sustainability accounts are given in Table 10 on page 49. External economic impacts As well as environmental and social impacts that go beyond the boundaries of traditional financial accounts of an organisation, there are wider economic impacts that might affect a range of stakeholders in both beneficial

and adverse ways. For example, there are positive impacts on local suppliers and service providers from a larger business like a university or college via the economic multiplier (a measure of how long a payment stays in the local economy). Surprisingly, the measurement and valuation of the external economic ‘footprint’ is the least developed aspect of sustainability accounting, however the work started by Universities UK55 may well put the higher education sector in the vanguard. In the UUK report external economic impacts are described as ‘Knock-on’ or multiplier effects or even ‘rippling-out effects’ which are categorised into the following two types: • “Indirect effects: HEIs purchase goods and services from other sectors in order to support their own activity, thereby stimulating activity in those industries. The supplying industries also make purchases from other suppliers in order to fulfill the orders from HEIs, and those suppliers in turn make purchases, so

there is a rippling-out effect. • Induced Effects: HEIs pay wages and salaries to their employees, who spend this income on consumer goods and services. This creates wage income for employees in other sectors, who also spend their income, and so on, rippling throughout the economy.“ In the same report UUK incorporated the financial value of these external economic impacts (such as the off-campus expenditure of overseas students) into their final calculations for the overall impact of the UK higher education sector on the UK economy. The results are shown in Table 12 55 Universities Uk, The impact of higher education institutions on the UK economy, UUK, May 2002. 52 HEPS Accounting for Sustainability Guidance – Section 3 Source: http://www.doksinet Table 12 Overall impact of the UK higher education sector on the UK economy HEIs Overseas students Overseas visitors The HE sector Total Output (Direct plus ‘knock-on’) £32,507 million £2,072 million £235 million

£34.8 billion Total household Income (Direct plus ‘knock-on’) £12,683 million £499 million £68 million £13.3 billion Total employment (Direct plus ‘knock-on’) 537,248 ftes (full time equivalents) 22,157 ftes 3,197ftes 562,602 ftes Export Earnings £1,278 million £1,261 million £125 million £2.7 billion Source: Universities UK, May 2002, page 30. Most significantly for the future governance and financial management of HE the UUK report concludes with a recommendation for government policy to account for the externalities of any HEIs activity. “Government policy intended to affect ‘social’ aspects of higher education, or indeed to encourage one type of higher education activity over another, may need to take into account any wider ramifications, perhaps unexpected, on HEI activity and the implications for the UK economy overall.“ (UUK May 2002) In the light of the recently published DfES Sustainable Development Action Plan (see page 9), the

existing need to report on internal non-financial risks (see HEFCE’s new accounts direction for the sector, page 10), and the likelihood that forthcoming requirements on businesses to report on material impacts on environment and community will cascade into the public sector, UUK’s work on economic impacts seems to give the higher education sector a good start when it comes to external sustainability accounting. HEPS Accounting for Sustainability Guidance – Section 3 53 Source: http://www.doksinet 3.3 Assets and liabilities: the role of the balance sheet To complete the picture of sustainability accounting, this section looks at the whole of the right hand side of the Sustainability Accounting Cube, as shaded in the diagram below. It addresses the (intangible) assets and (shadow) liabilities, which might be included in a sustainability balance sheet. Figure 9 Timing of impact Flow External Social Internal Economic Location of impact Stock Environmental Type of

impact Sustainable development may be understood in terms of the stocks of the resources or capitals available to us, or as the flows of benefits that can be expected from those stocks of capital if they are in good shape (see Table 1 page 17). The profit and loss account reports the flows through an organisation over time, and so far we have tried to illustrate how that may be adjusted to incorporate internal sustainability value added, and/or external sustainability costs and benefits. Over and above that, there is no reason why a sustainability accounting balance sheet should not report a ‘snapshot’ of the stock of each of the five capitals. Together, the stocks and flows would show the total resources available for the value creation process. Strictly speaking, the Balance Sheet should capture, in the form of a shadow liability, the credits of the shadow costs debited from the profit and loss accounts of avoiding environmental and social impacts incurred through the year. This

would build up a value that represented what would have had to be spent to avoid the historic impact of the organisation’s activities – how much it has drawn down on human, social and environmental capitals to be able to perform its value creation. Shadow provisions, which would represent the cost of the restoration and avoidance costs of continuing with present activities into the future could also be calculated. For example, the costs of reducing carbon emissions for those universities who will come under the EU emissions trading scheme may need to be calculated (see box 3 page 24). The ‘stock take’ can consider both internal and external capitals, in the same way as the aspect of sustainability accounting concerned with flows. • Internal capital stock taking: Internal measurements of an organisatio’s success in generating assets for its own use. For example, the intellectual capital of its staff or reputation of its ‘brand’. 54 HEPS Accounting for Sustainability

Guidance – Section 3 Source: http://www.doksinet Organisations that are concerned with building capital stocks are working internally and this is what we focus on in the following paragraphs. • External stock taking: measurements of external capital generation, outside the boundaries of the balance sheet. For example, an enhancement of the social capital of the community in which it operates through the provision of cultural and recreational facilities, or the natural capital by increasing biodiversity. There are a number of techniques being developed for exploring assets and liabilities from a sustainability perspective. However, there is a rather bewildering amount of confusing terms and jargon because it is an area of active innovation. Also, as with other aspects of sustainability accounting, there is a danger of using monetised measurement as the only way to represent intangible assets. Professor Edvinsson, a pioneering practitioner of intellectual capital when director at

Skandia, likens describing intangible capitals to describing the weather: “to be precise and comparative you need numbers, but you also need narrative to give context and a frame.“56 Nevertheless, universities and colleges should have a specific interest in intangible assets. In the business world it is estimated that ‘assets, like intellectual capital, capacity to innovate, can represent a significant percentage of the company’s stock market value. For example BT has estimated that “CSR performance accounts for over 25% of the image and reputation driver of customer satisfaction“, making it a significant factor for business strategy.57 The proportion must be even greater for a university or college that is in the business of ‘selling’ its capacity to build intellectual capital through its teaching and research. The SORP for higher education acknowledges that an accurate valuation of ‘intangibles’ can be legitimately included in the accounts (see page 30). An HEI

can avoid the risk of losing the stock of human and environmental capital by understanding it better and also more successfully maintain or build it, as well as to promote it to key audiences. Some examples of capital ‘stocks’ for a university or college might include: • Staff teaching quality; research competencies; management and leadership excellence • Capacity to move ideas along the innovation to implementation trajectory • Staff with ‘sustainability literacy’ – able to incorporate sustainability issues into any discipline and thereby help grow a sustainability literate workforce • Capacity to solve multi-disciplinary sustainability problems. (through consultancy, research) • Quality of teaching and research environment • Addition to stock of environmental capital through estate management or contribution to local Biodiversity Action Plans. In Measuring the Wellspring of Knowledge,58 Karl-Erik Svieby maintains that an organisation must grow and renew its

‘intangibles’, manage them effectively and keep them stable. He categorises these as illustrated in table 13 which has been adapted for the case of an HEI. 56 www.skandiacom 57 Stephen Timms MP, speech at Business in the Community Awards, July 2003 58 Sveiby, K E, 1998 HEPS Accounting for Sustainability Guidance – Section 3 55 Source: http://www.doksinet If decision makers understand the financial implications of a university’s intangible assets they can better tackle strategic issues such as balancing teaching, research, knowledge transfer priorities and forge more successful collaborations with other institutions. Table 13 Examples of intangible assets for a university Intangible assets External structure 56 Knowledge capital Internal structure Competence Growth/Renewal Satisfied Customer Index (includes community) Overall student demand New course, new research streams, new local partnerships IT investments Learning and research environment investment Number of

years’ education for staff Incoming competence from partners/ customers Efficiency Professional standards Student retention Support staff % Values Value added/employee Stability % of courses maintaining high intakes Repeat research/ consultancy contracts Turnover Ratio Professional turnover Relative pay HEPS Accounting for Sustainability Guidance – Section 3 Source: http://www.doksinet Section Where next? 4 This guidance attempts to build on the progress made so far in the way we account for and report on an organisation’s impacts on society, the environment and the economy. It aims to provide a framework and process for the higher education sector to incorporate non-financial (ie environmental and social) considerations into traditional financial accounts. Some organisations’ traditional accounts are already informed by financial information relating to environmental and socially related internal impacts, others are accounting for their external environmental

impacts, and a few strategic organisations are looking at the knock-on effects of an organisations’ operations to the economy but very few are doing it all at once. The sustainability accounting framework offered in this guide is a proposed framework to help HEIs address this challenge. Some suggestions for taking this agenda forward are: 1. Individual HEIs trial sustainability accounting 2. The funding councils adopt some of the techniques to inform their own internal management and encourage institutions to do likewise 3. Further research on sustainability accounting is commissioned Institutions willing to trial the techniques presented in this guidance may wish to contact the Sustainable Economy Programme at Forum for the Future which has been helping organisations implement environmental accounting for some years, and has developed the sustainability accounting methodologies in this guidance. For further details please contact the Sustainable Economy Programme on 0207 7324 3610

or email c.alexander@forumforthefutureorguk HEPS Accounting for Sustainability Guidance – Section 4 57 Source: http://www.doksinet 58 HEPS Accounting for Sustainability Guidance Source: http://www.doksinet Appendix References 1 Anglian Water Services plc, The right structure for sustainable growth, Sustainable Development Report, 2002. Bell A, Sustainability accounting in UK local government: an agenda for research, ACCA Research Report No 78. Casella Stanger, Forum for the Future and Carillion, Sustainability accounting in the construction industry, CIRIA Publication X105, 2003. Gray et al, Accounting and accountability: changes and challenges in corporate, social and environmental reporting, London: Prentice Hall, 1996. HEPS, Purchasing for Sustainability: Guidance for Higher Education Institutions, Forum for the Future, 2003. Institute of Chartered Accountants, Internal control: guidance for directors on the combined code (“the Turnbull Report”),1999. People and

Planet, People and Planet annual report 2001/2, 2002. Regulatory Reform Unit, Higher education easing the burden, Task Force report, HMSO, 2002. Richardson and Nurick, Environmental valuation: theory, techniques and applications, Wye College, University of London, 1999. Schumacher, E F, Small is beautiful: a study of economics as if people mattered, Vintage: London, 1972. Scottish Executive, Life through learning; learning through life: the lifelong learning strategy for Scotland, 2003. Society and Business, Business and society: corporate social responsibility report, www.societyandbusinessgovuk, 2002 Sveiby, KE, “Measuring the wellspring of knowledge.” CPA Journal Australia, June 1998, see www.sveibycom Universities UK, Statement of recommended practice: accounting for further and higher education, 2003. Welsh Assembly Government, Reaching Higher: higher education and the learning country: a strategy for the HE sector in Wales, 2002. Wessex Water Services Ltd, Annual review and

accounts 2002: Clear commitment, 2002. HEPS Accounting for Sustainability Guidance 59 Source: http://www.doksinet General sources ACCA, Full cost accounting: an agenda for action, ACCA Research Report No. 73 Certified Accountants Educational Trust, 2001. This provides sources for a range of environmental values used in different environmental accounting frameworks. Bebbington, J et al, “An account of sustainability: failure, success and a reconceptualization.” Critical Perspectives on Accounting, 12 (2001): 557-587 CIMA, Environmental cost accounting: an introduction and practical guide, CIMA Publishing, London, 2002. This guide was prepared for CIMA by Forum for the Future, providing a range of environmental values based on costs of avoidance or restoration. Concerted Action on Transport Pricing Research Integration, Valuation of transport externalities, 2001 (see www.europaeuint) Costanza, R et al.”The value of the world’s ecosystem services and natural capital.”

Nature 387 (1999): 253-260 Department for Environment, Food and Rural Affairs, Achieving a better quality of life: review of progress towards sustainable development: Government Annual Report 2003, DEFRA Publications, February 2003. Edvinson, L, Intellectual capital: realizing your company’s true value by finding its hidden brainpower, www.homeattnet, 1997 Envalue database, www.epanswgovau This is the New South Wales Environment Protection Authority’s database, which has a searchable environmental valuation database. Envirowise, Using environmental management accounting to increase profits, 2002. This publication was funded by CIMA, ACCA, the Environment Agency, Defra and the Institute of Chartered Accountants in England and Wales. EVRI database, www.evriecgcca This is the best-known database of environmental valuations, Canada’s Environmental Valuation Resource Inventory web-based database for environmental valuation studies – each study includes details of the estimated

monetary values, the specific units of measure, and technical information on the methods that were used to arrive at the results. ExternE Project, www.externejrces This is an EU project with multiple objectives, including research into the internalisation of externalities and the possible application of the accounting framework in policy-making. External cost data is compiled in a readily accessible database. The ExternE studies for transport and power plants are the most quoted damage estimates. Howes, R, Coming of age, Environmental Finance, November 2002. New Economics Foundation, Prove it: measuring the effect of neighbourhood renewal on local people, New Economics Foundation, 2000. 60 HEPS Accounting for Sustainability Guidance Source: http://www.doksinet Navrud, S (ed), Pricing the European environment. Scandinavian University Press/Oxford University Press, 1992. This is the most complete review of European valuation studies done until 1992. Putnam, R D, Bowling alone: the

collapse and revival of American Community, Simon & Schuster, New York, 2000. References to about 450 European Valuation studies are included at: www.europaeuint/comm/environment/enveco/others/evripart2pdf HEPS Accounting for Sustainability Guidance 61 Source: http://www.doksinet 62 HEPS Accounting for Sustainability Guidance Source: http://www.doksinet Appendix Initiatives of interest 2 Global Reporting Initiative “The Global Reporting Initiative (GRI) is a multi-stakeholder process and independent institution whose mission is to develop and disseminate globally applicable sustainability reporting guidelines. These Guidelines are for voluntary use by organisations for reporting on the economic, environmental, and social dimensions of their activities, products, and services. The GRI incorporates the active participation of representatives from business, accountancy, investment, environmental, human rights, research and labour organisations from around the world.

Started in 1997 by the Coalition for Environmentally Responsible Economies (CERES), the GRI became independent in 2002, and is an official collaborating centre of the United Nations Environment Programme (UNEP) and works in cooperation with UN Secretary-General Kofi Annan’s Global Compact.“ www.globalreportingorg/about/briefasp SIGMA Project – stakeholder engagement tool “The stakeholder engagement tool provides organisations with two ways of improving their stakeholder engagement practices. The first approach is based on the AA1000 process that incorporates stakeholder engagement as a core element of the process of managing, measuring and communicating performance. This process helps an organisation capture different stakeholder aspirations and needs, and balance and manage the inter-linked elements of social, environmental and economic performance. The second approach is a set of tools that help organisations explain and evaluate their stakeholder engagement. The first tool

looks at the drivers of engagement and the second, provides a set of key questions on the who, what, where, when and how of engagement and the best techniques to use. This tool is aimed at managers within an organisation, especially those with responsibilities for stakeholders.“ www.projectsigmacom/Toolkit/StakeholderEngagementasp HEPS Accounting for Sustainability Guidance 63 Source: http://www.doksinet 64 HEPS Accounting for Sustainability Guidance Source: http://www.doksinet Appendix Environmental valuation methods 3 Most environmental valuation methods seek to measure the monetary value of environmental benefits or losses directly from the preferences of the stakeholders affected. This information may be obtained directly from actual or surrogate market information or by direct surveys or experiments. The environmental value is based on willingness to pay (WTP) to obtain environmental benefits (eg improvement in local air quality) or willingness to accept (WTA)

compensation to suffer an environmental loss (eg degradation in local air quality). Environmental valuation methods based on WTP or WTA are demand-side methods – they are based on estimating the demand for environmental resources based on stakeholder preferences. They are distinguished from supply side methods which are based on the costs of supplying environmental resources or services. Examples of supply side methods Supply side methods are based on the costs of preventing environmental damage or the costs of restoration or replacement once damage has been incurred. Supply side methods also includes the impacts on productivity due to changes in environmental quality. These methods capture the costs to the organisation of improving environmental quality – they do not capture to the benefits to society of such improvement. Productivity approach: In this technique, environmental quality is viewed as a factor of production. Changes in environmental quality lead to changes in

productivity and production costs, which in turn lead to changes in prices and output, which can be measured and observed. For example, improvements in soil conservation will feed through into changes in agricultural yields and prices. Hence, the costs of soil erosion can be evaluated using information obtained from agricultural markets. Preventive expenditure method: This approach has much intuitive appeal in that it is based on actual expenditure incurred to prevent, eradicate or reduce adverse environmental effects. Replacement cost method: This is an ex-post environmental valuation approach. In other words, it estimates replacement or restoration costs once environmental damage has taken place. Expenditures to neutralise soil and water acidity from agricultural run-off are examples of the costs incurred to restore damaged environmental assets to their original state. Examples of demand side methods: Hedonic pricing: This method uses information from a surrogate market to estimate

the implicit value of an environmental good or service. For example, differential housing prices can be used to estimate how much extra people are willing to pay for residential property in areas free from traffic or industrial air pollution. HEPS Accounting for Sustainability Guidance 65 Source: http://www.doksinet Travel cost method: This method uses a combination of surveys and surrogate markets to estimate the demand curve for an environmental resource. As its name implies, the travel cost method infers willingness to pay for environmental goods and services from the time and expense involved in travelling to them. The method is usually used to derive values for recreational sites. Contingent valuation method (CVM): This method elicits information on environmental preferences directly from the individual using surveys, questionnaires or experimental techniques. CVM is based on hypothetical behaviour inferred from surveys or experiments rather than on actual observed behaviour.

It has wide applications but is the most unreliable of the methods as it is subject to a number of inherent biases. 66 HEPS Accounting for Sustainability Guidance Source: http://www.doksinet Appendix 4 Sources of information for valuing environmental impacts This section provides some examples of per unit monetary values for different types of environmental impacts. Environmental values are not static but change in response to changing market prices (eg market price of abatement technology) and environmental preferences. They will also vary according to the different environmental valuation method used (ranging from abatement costs; damage costs and restoration values). For this reason, this section provides a resource of publications and web-sites which can be used to find and update environmental values. General sources for information on environmental values are provided together with illustrative values for a range of specific environmental impacts. Carbon dioxide Unit

value Valuation method Source £6.50 - £21/tonne (depending on location, baseline, sustainability benefits etc) Restoration cost based on market price of carbon sequestration Market prices of carbon sequestration www.climatecareorg www.futureforestscom www.co2com $3 - $5/tonne Emissions trading market price Current market prices reported in Environmental Finance www.environmental-financecom Examples of emission trading transactions from around the world. www.cleanerandgreenerorg £30/MW (approx £0.03 per kWh) Cost of Renewables Obligation Certificates www.dtigovuk Unit value Valuation method Source $6,400/ton Market spot price: NOx emissions trading price (2003) www.environmental-financecom www.cleanerandgreenerorg $4,500 - $4 800/ton Market future price (2005) www.natsourcecom is a site for a US brokerage service that trades NOx Dutch Gilders (NGL) 10/kg Marginal abatement costs BSO/Origin 1990-1994 Nitrogen oxide HEPS Accounting for Sustainability Guidance

67 Source: http://www.doksinet $19-$1,025/ton (UK) Damage cost approach based on willingness to pay to avoid adverse human health effects, agricultural effects and material damage. CWRT (1999, p. 3-64) $12,610/ton Damage Cost ExternE Project $90-2,003/ton Damage Cost ORNL/DOE (1995) Unit value Valuation method Source £2,400/tonne Environmental tax Based on EU and Scandinavian environmental tax rates (linked to external damage costs) $2,000/ton US SO2 trading scheme penalty for non-compliance OECD, Encouraging environmentally sustainable growth: experience in OECD countries, 2001 $105-$225/ton Market spot price (2001) www.environmental financecom www.natsourcecom $69-$212/ton US EPA Acid Rain SO2 Trading Program www.cleanerandgreenerorg NGL 14/kg Marginal abatement cost BSO/Origin (1990-1994) $444/ton UK damage cost approach (health, agriculture and material damage) CWRT (1999, p3-64) $4,140-6,050 Damage cost ExternE Project $10-1,002 Damage cost

(selected aspects) ORNL (1995) Unit value Valuation method Source £2 800/tonne Marginal Abatement Cost BSO/Origin figure from 1995 Accounts $850-$34,004/ton Damage cost ORNL (1995) $3,200-$43,800/ton Damage cost RCG/Hagler Bailly Study (1995) $16,060/ton Damage cost ExternE Project Sulphur Dioxide Particulate matter (PM) 68 HEPS Accounting for Sustainability Guidance Source: http://www.doksinet Volatile organic compounds (VOCs) Unit value Valuation method £7,200/tonne Abatement cost: cost of installing end of pipe technology to reduce emissions to lowest practical level Source Waste Type Valuation method Unit value Source Botton Ash NGL 100/tonne of dry matter Marginal abatement Cost BSO/Origin (1990-1994) Fly Ash NGL 200/tonne of dry matter Marginal abatement Cost BSO Origin (1990-1994) Sewage Sludge NGL 500/tonne of dry matter Marginal abatement Cost BSO Origin (1990-1994) Waste to Landfill £23/tonne Based on difference between UK and

Austrian rate (based on damage costs) UK landfill tax £12/tonne Austrian landfill tax £35/tonne Water effluent Unit value Valuation method Source NGL 12/inhabitant equivalents Treatment costs BSO Origin (1990-1994) Transport Unit Value MECU/ vehicle km Average diesel car Average 3-way-cat car Valuation method Source PM 134.80 10.85 Damage cost ExternE Project (transport) (www.externejrces/transpdf Nox 7.31 4.75 Damage cost As above CO2 2.62 3.16 Damage cost As above HEPS Accounting for Sustainability Guidance 69 Source: http://www.doksinet Capri Project: Total external costs from transport (damage costs): ECU/1000 vehicle kms, 1995 Mode Accidents Air pollution Noise Climate change Total Cars – urban 56 – 204 7.3 – 838 3.3 – 135 2.3 – 54 65.6 – 2932 Cars – interurban 8 – 25 7.8 – 1090 2.0 – 101 29.1 – 1576 23.9 – 9126 6.0 – 242 29.9 – 9368 Trucks – urban Trucks – Interurban 50 – 60 20.0 – 3435

71.2 – 2777 22.1 – 684 163.3 – 7496 Bus – diesel 814 – 870 152 – 1575 210 7.9 – 87 1183.9 – 26637 Tram 8 19.2 33.1 60.3 Rail – passenger 13 – 36 36.8 – 5006 50.6 – 4556 14.6 – 4605 115 – 1452.7 Rail – goods 13 – 36 91.0 – 7231 848 – 3152 48 – 1744 1000 – 5655.1 Air passenger 7 -35 804.0 250 710 1771 – 1799 Air transport: Capri Project Per Unit value Valuation method Source 40 – 200 ECU/tonne CO2 Avoidance cost Capri Project Agriculture and forestry 70 Type of impact Per unit value Valuation method Source Agriculture £208/ha (1996) Damage costs including water contamination; damage to wildlife habitat; emission gases; soil erosion and food poisoning Pretty et al (2000) Forestry $3,225/tree Replacement Cost New York Neighbourhood Tree Survey, New York Times, 12 May 2003 HEPS Accounting for Sustainability Guidance Source: http://www.doksinet Appendix Acknowledgements 5 Forum for the

Future and the Higher Education Partnership for Sustainability would like to thank all those who have participated in meetings and seminars and given their time, advice, comments and suggestions relating to the production of this guidance. In particular we would like to thank representatives from the following organisations. Anglia Polytechnic University Aston University Bolton Institute of Higher Education British School of Osteopathy British University Finance Directors Group Brunel University Cardiff University Chartered Institute of Purchasing and Supply Chartered Institute of Public Finance and Accountancy City University College of St Mark and St John Department for Environment, Food and Rural Affairs Department for Education and Skills Department for Education and Learning Northern Ireland Education and Learning Wales Higher Education Funding Council for England Heriot-Watt University Higher Education South East Imperial College Lancaster University Leeds Metropolitan

University Liverpool Hope University Liverpool John Moores University London Business School London Metropolitan University London School of Economics and Political Science Loughborough University Manchester Metropolitan University Middlesex University Nottingham Trent University Queen Mary University College Queen’s University, Belfast Royal Holloway University of London Royal Veterinary College Standing Conference of Principals Scottish Higher Education Funding Council Sheffield Hallam University South Gloucestershire Council Swansea Institute of Higher Education Thames Valley University The Open University The Surrey Institute of Art and Design UMIST Universities Superannuation Scheme Universities UK University of Aberdeen University of Birmingham University of Bradford University of Brighton University of Cambridge University of Glasgow University of Gloucestershire University of Leeds University of Leicester University of Newcastle University of Nottingham University of

Plymouth University of Salford University of Sheffield University of St Andrews University of Stirling University of Surrey University of the West of England University of Wales Bangor University of Wales College University of Wales Institute, Cardiff University of Wales Swansea Wessex Water Writtle College York St John College HEPS Accounting for Sustainability Guidance 71 Source: http://www.doksinet Disclaimer Whilst every effort has been made to ensure that this document is factually correct at the time of going to press, the data, discussions and recommendations are not intended for use without substantiating investigations by the users. Mention of a particular website does not imply endorsement of a company by Forum for the Future or the other authors of this guide. No responsibility for loss suffered by any person acting or refraining from acting, as a result of this publication will be accepted by Forum for the Future or the other authors of this document. Source:

http://www.doksinet Forum for the Future Sustainability Accounting Cube Timing of impact Flow External Social Internal Economic Location of impact Stock Environmental Type of impact Traditional financial accounting only includes the internal stocks and flows of financial value on the balance sheet and profit and loss account respectively. Sustainability accounting desegregates the internal accounts to show costs and benefits relating to economic, social and environmental performance. It also extends the accounting boundary to consider the monetary value of external impacts. Source: http://www.doksinet