Unlocking the potential of carbon accounting

Garreth Hanley:
This is INTHEBLACK, a leadership, strategy and business podcast, brought to you by CPA Australia.

Jacqueline Blondell:
Welcome to INTHEBLACK. My name's Jackie Blondell, and today we'll be talking carbon accounting. It's coming to a supply chain near you. We're looking specifically today at the role for businesses and the key role finance professionals will play in carbon measurement. And we're talking to Ashley Bleeker, who's a consultant who works closely with accountants in public practice, as well as helping companies generally achieve commercial outcomes around sustainability. Welcome, Ashley.

Ashley Bleeker:
Thanks for having me.

Jacqueline Blondell:
Now, in August this year, supermarket giant, Coles, announced it'll be working with at least 75% of its top suppliers, and that's by spend, to set emission targets by June, 2027. What does this mean for companies in the supermarket supply chain, all those suppliers?

Ashley Bleeker:
I think the first thing it means is many of them will be scratching their heads trying to work out what to do, but essentially it means three things for them. Firstly, they're going to have to start measuring their carbon footprint, if they haven't already done that. After measuring their carbon footprint, they're going to have to work out how they can reduce their carbon footprint. And to do both of those things, the third thing they're going to have to do is work out how to do it or pay someone else to help them work out how to do it.

Jacqueline Blondell:
So what would that involve specifically, say if you're, I don't know, a large biscuit manufacturer, what would be involved in that carbon measurement? What's the breadth?

Ashley Bleeker:
It's a really interesting place to start because measuring a carbon footprint luckily is a process that's been worked out and prescribed by the Greenhouse Gas Protocol. So there's a specific set of rules that everyone needs to follow to do this. But it essentially requires you to work out what emissions you produce under your own steam. So are you burning any fuel that creates CO2 emissions? Are you using any electricity that creates CO2 emissions? And then lastly, is there anything happening up and down your supply chain that's creating CO2 emissions?

Jacqueline Blondell:
Hence, the reason why a big supermarket would be requiring that over all the people at supply food to them. And I take it it's the trucks that deliver the food and that business as well?

Ashley Bleeker:
Yeah, it is. So for an organisation like Coles, to use that example, the vast majority of their big suppliers won't be a mum and dad grape grower in the Riverina. It'll be a lot of their corporate customers like Linfox that drives a lot of the trucks for them, and they'll have a cutoff point at somewhere, a threshold at somewhere. But yeah, a lot of their major customers, so Arnott's, the big suppliers will definitely be caught by that. And so as you can imagine, a truck company has a very different profile for its emissions than a biscuit manufacturer will have. Trucks obviously that use diesel produce a lot of exhaust gases. And I haven't been in a biscuit manufacturing factory for a while, but I'm assuming they use a lot of electricity to run their biscuit making machines.

Jacqueline Blondell:
And the smell is fantastic, I have been there.

Ashley Bleeker:
Awesome.

Jacqueline Blondell:
But let's look at other types of big businesses that will require this of their suppliers. What other companies are doing this, apart from say a supermarket like Coles?

Ashley Bleeker:
Where there's a lot of major corporates that are already under, I suppose the best way to think about it is market pressure to do something in this regard. So a lot of the major financial institutions in Australia are doing this as well. The banks in particular are looking at their supply chains, and they're not only looking at carbon footprinting, they're also looking more broadly at other issues that sit under the ESG banner. So other environmental issues, other social issues, other governance issues. And if you can't demonstrate to the bank, as a potential supplier, that you've made an appropriate commitment in relation to each of these issues, it's very unlikely that they will onboard you as a supplier. There are other companies that have made specific announcements in recent months. Many people will have heard that Amazon recently announced, like Coles, that it was going to be updating its supply chain standards and its suppliers are now going to have to report their carbon emissions and also set reduction targets. Many people may have also heard that SAP is doing the same thing.

Jacqueline Blondell:
But it tends to be their larger suppliers. Will this percolate down to smaller companies?

Ashley Bleeker:
I think it has to over time. And the goal here, and one of the drivers for the larger corporates doing this is they're trying to reduce their carbon footprint over time. And when you look to reduce your carbon footprint, the obvious places to start is where you have significant emissions. And so if you're working with a large supplier that's supplying a lot of goods and services to you, chances are they're producing more carbon because they're delivering you more goods and services. So it makes sense to start with the larger suppliers, but ultimately the expectation is that most organisations, no matter how big or small, will ultimately be caught by this.

Jacqueline Blondell:
What about the regulatory environment? You said that we've got some carbon emission rules to play by, is that prompting these moves?

Ashley Bleeker:
I think in some cases it is, but in Australia and even in New Zealand still, although this is changing next year, the reporting requirements haven't started yet. They'll start next financial year. And so everything that's happened to date, including the Coles announcement and everything else that's taken place, it's all been driven by reasons other than regulatory pressure. So organisations are making commercial decisions around this. And so what's happened so far is for whatever reason, these organisations are making decisions that think this is the right thing to do. And I suspect in some cases that commercial drivers for business decisions are probably stronger than compliance reasons in some cases. And what's happening with a lot of these businesses is they're realising, particularly those that are consumer facing, they're realising that their consumers spending trends are changing over time and that shoppers are looking to shop with organisations that are demonstrating more responsibility in this area. And so these organisations are making decisions based on their access to markets and their access to consumers and customers, not so much because of regulators telling them to do it.

Jacqueline Blondell:
It's a reputational issue. Could it be a potential to save money, to be more effective in the way that you manage your supply chains and your business overall?

Ashley Bleeker:
Yeah, it absolutely is. And this is what I find really interesting about this space, is for many years people looked at sustainability or ESG or carbon accounting as a cost or a burden or a necessary evil. But what a lot of people are realising now is that often these things will ultimately create cost savings along the way. And the classic is electricity usage that generates CO2 emissions, one of the best ways to reduce your carbon footprint is to reduce the amount of electricity you use. And so people are investing in more efficient technologies and more efficient machinery. And in addition to using renewable energy, they're using less energy, which is costing them less money in the longterm.

Jacqueline Blondell:
It's a win-win, as they say. Why should accountants and other finance professionals in the companies they work in be paying attention to these announcements?

Ashley Bleeker:
I think one of the main reasons is because the finance teams are often the first port of call for any queries that come into this space, or their advisors are, so the accountants that advise the finance teams. The reason for that is because often this process starts with spend data and the finance team are typically the custodians of all the supplier spend, all the accounts receivable, all the accounts payable, everything else. And so the first place people go looking for information is the general ledger. And once they find information, and we can talk a bit about the type of data that's useful, organisations often start with spend data, but then try and increase the accuracy of their measurements over time, and they move from spend data to things like activity data or consumption data. So not what was the price of our electricity bill last month, but how much electricity did we consume last month? So how many kilowatt-hours of electricity did we consume? That'll give them a more accurate measurement over time. And so while finance teams may not say, "Well, we understand kilowatt-hours better than anyone else," what they do understand is where the data starts in the business, where it sits, the kind of systems that you need to capture that data and the kind of reporting that you can run on it. And then also the skills that are required to communicate financial performance or even non-financial performance to various stakeholders.

Jacqueline Blondell:
And that would account for these smaller accountants who have clients who may somewhere down the track be in a supply chain where their major client asks them to calculate their carbon footprint. What would you do if you're a small to medium accountant who gets that kind of query?

Ashley Bleeker:
And it's happening already. We are aware of many accountants in public practise that have SME clients that are already being asked these questions. And the answer is, the problem's not going away. Small to medium businesses will have to start measuring their carbon footprint more often and more regularly because they'll be required to do that to keep trading and staying in business. Therefore, they have to turn to their advisors for help normally, and often one of their key advisors will be their accountant. And so in the first instance, they're often turning to their accountants. In some cases, the accountants have already decided to invest in understanding carbon accounting, how to do it, what's involved, and they're able to help their clients when they get asked. The difficulty arises where an SME, an accountant is asked a question by a client, they don't know how to answer it, and they have to either say nothing or refer them to another third party advisor. The unfortunate reality is more and more accountants are getting up the curve the longer this goes on, and so many of these SME businesses are being referred onto to other SME accountants who can do this. And lo and behold, an SME accountant that can offer carbon accounting services generally can also offer traditional financial accounting services. So there's a huge leakage risk here for public practitioners that are going to have to refer their clients elsewhere to solve these kinds of problems.

Jacqueline Blondell:
So how do accountants encourage their leadership teams, the boss, to get on board with this carbon footprint caper?

Ashley Bleeker:
In my experience, I think the thing that works best with leadership teams and if we're thinking about corporate entities here, is to couch everything in terms of enterprise value. So what's in the best interest of the enterprise value of the business in the long term? And what we're seeing is for those organisations that aren't doing this for compliance reasons, they're doing it for access reasons. And what I mean by that is they're looking to access capital, markets and/or people. And so all of these things have an impact on enterprise value. And so if you're a business that needs funding, your ability to secure that funding and the price of that funding is changing depending on the types of commitments that you're making in and around your carbon footprint or ESG more broadly. We've already talked about markets, your ability to access customers, markets, new contracts with new clients will be heavily dependent on the type of footprint or activities that you're committing to in this area. And the last big one is access to people. A lot of organisations today talk about the challenge around attracting and retaining good people. And for the people that are entering the workforce today, many more of them are asking questions around the corporate purpose of their prospective employer, what they're doing for employers, what they're doing for customers, what they're doing for the communities on which they rely. And if organisations don't have answers to these questions, then they're feeling it in their recruitment costs and their ability to attract and retain good people.

Jacqueline Blondell:
Did you also mention funding, like banks financing? Is that a big area that might in the future be a consideration of lenders to your business?

Ashley Bleeker:
It's a consideration today. There are a huge amount of funds being set up that are directing investment dollars into businesses that have some kind of track record in sustainability or are focusing on low carbon alternatives and outcomes. Separate to that, a lot of debt providers, so banks are offering things that are called sustainability linked loans. And so the price of your debt changes depending on what kind of sustainability commitments you're making and you are able to achieve over the life of your loan. Many people will have already experienced the fact that their interest rate on their mortgage might change depending on whether they can make modifications to their house around solar panels and other things as well.

Jacqueline Blondell:
Let's talk nuts and bolts, what actually is carbon accounting in two sentences? I'm joking, you can have more than that.

Ashley Bleeker:
And two sentences is a great start. So all it is is calculating your carbon emissions across your business, but doing it in a way that's accurate and consistent and comprehensive and using a verifiable methodology to do it. And the great news is that the Greenhouse Gas Protocol tells us all exactly, well, not exactly, but generally how to do this. And then we can use estimates based on where we sit in the world or within different countries, we can apply different emissions factors to work out how to actually calculate these numbers as accurately as possible.

Jacqueline Blondell:
And do accountants already have those skills, finance professionals?

Ashley Bleeker:
I would say they do, because a large part of what's going on here is the things that are driving best practise in financial accounting and communication of financial performance are the things that are going to drive best practise in communicating non-financial performance. And so because these sustainability standards have been drafted by the accountants, so the IFRS Foundation that's responsible for setting the accounting standards globally is also now responsible for setting the sustainability standards. And so they're applying the same types of principles that would ordinarily be applied to accounting standards, which everyone would be aware of. So these concepts of relevance, completeness, consistency, transparency, accuracy, they all apply to the carbon accounting exercise as much as they apply to the financial accounting exercise. The only difference being that in this case, the accountant might say, "Well, I'm not the subject matter expert here." And that's probably true today, but it might not be true in 12 months time or two years time or five years time. There'll be many traditional financial accountants that will have also become carbon accountants once they master the subject matter because they have the skills to do it comprehensively and effectively.

Jacqueline Blondell:
So it could be a specialised career avenue for accountants in the future, to be a carbon accountant, as well as being part of the armoury of a general accountant's role?

Ashley Bleeker:
I think that's right. And often it will depend on the resourcing requirements of any particular business. But I suppose if you just look at history, the bigger that organisations get, whether they be professional services firms, accounting firms, or whether they be corporates, the bigger they get, the more specialised roles get within those businesses. And so you can certainly see how certain corporates or certain public practise accounting firms will have specialists that work in these areas, in part because there will be a sufficient volume of work to justify a person being dedicated to this type of activity and building efficiency and competence in this area.

Jacqueline Blondell:
Is it too early to calculate the growth of this as a professional area of advice? Do we know how quickly it'll grow, this specific role of a carbon accountant?

Ashley Bleeker:
I'd love to give you a statistic, but as they say, 62.3% of statistics are made up on the spot. So there's no actual number that I'm aware of that's been produced for this, at least in Australia or New Zealand and perhaps not globally. I suppose what we can point to is the growth in the number of organisations that are starting to report on this. And obviously what we'll see is in addition to the organisations that have chosen to report for non-regulatory reasons, there will be a huge number of organisations that now start to report because of regulatory reasons. And as they report, they will need help, and the help, I think, will clearly be coming in part from the accounting profession.

Jacqueline Blondell:
It's probably a good trigger for younger people coming into the profession today to consider this as an area that they should be skilling up on.

Ashley Bleeker:
I think so. And for those people that are thinking about careers and where their career needs to meet certain personal goals or personal objectives of theirs, I think the great thing about this is carbon accounting is about helping organisations measure their carbon footprint, but ultimately the reason we're measuring it is because we want to improve it. And so helping businesses improve their carbon footprint is obviously something that works well for the environment and works well for all of us over time.

Jacqueline Blondell:
All right, lastly, before we wrap up, let's look at the risk of ignoring these changes if you're a finance professional or an accountant, say in a public practise firm, it's not an area I know about or need to know about, it's something that might happen in the future. You talked about client leakage, but what other risks are there?

Ashley Bleeker:
I suspect many of the micro risks sit under that banner. Where I would start with this is organisations that provide professional services, accountants are otherwise, typically prosper or succeed or have a sustainable business model if what they're doing adds value to their client's business. And client needs are changing over time, and so organisations will need this service, this carbon accounting service over time. It's definitely not going away and it's started a little bit, but it's going to increase dramatically in the next couple of years. And for those organisations that make a decision to not invest in this area, and there are many reasons why you would do that, for those organisations that choose not to invest in this area, they'll end up in a position where their clients will be looking for this service elsewhere and they'll be looking for it from organisations that offer this service and other services. And so the biggest risk here is effectively losing clients that choose to go elsewhere for this and other services.

Jacqueline Blondell:
And perhaps losing customers as well if you're in a commercial operation.

Ashley Bleeker:
Absolutely. Yeah.

Jacqueline Blondell:
Oh, that's great. Thanks for joining us today, Ashley.

Ashley Bleeker:
My pleasure.

Jacqueline Blondell:
And thanks for listening.

Garreth Hanley:
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