We currently use 1.7 times more resources than Earth can regenerate each year. But by integrating natural, social and human capital into the strategic management process, organisations can manage their impact on Earth’s resources, ensuring hopefully long-term viability.

Traditionally, strategic management, the administration of a company’s resources, has focused on financial success, with natural, social and human capital treated implicitly as infinite resources. But it’s now clear this is not the case. The critical interdependence among economic, social and ecological systems is increasingly recognised and it is essential to find ways of acknowledging this in company accounts.

Accountants are involved in each stage of the strategic management cycle and are well-placed to lead a move towards a more sustainable approach. Moreover, it is essential for organisations to adopt sustainable practices not just for compliance but to gain competitive advantage and ensure long-term viability.

By setting planning guidelines, including budgeting and resource allocation approaches, coordinating detailed financial planning, and monitoring actual and forecast performance, finance professionals can play a vital role in integrating sustainability into strategic management.

Critically though, by fully integrating social, natural and human capital into a business’s strategic management, companies have much to gain, including improved risk management, lower-cost capital, resilience and brand loyalty, as well as improving profitability by unlocking new avenues for financial growth.

Richard Spencer, Head of Sustainability, ICAEW, says: “At ICAEW we have a vision that our members enable the world of sustainable economies. We’re taking the view that this is a huge business and economic issue. It’s important from the perspective of our businesses thriving and succeeding that we ensure that the planet succeeds.”

Triple bottom line

By integrating all the types of capital a company relies on, its focus is transformed from the ‘bottom line’ to the ‘triple bottom line’ in which economic success, social improvement and environmental protection (profit, people and planet) share equal billing.

There are a number of things accountants can do to set up this approach, such as:

•  extending strategic planning timeframes to capture long-term sustainability risks and opportunities; 
• setting goals that capture desired outcomes in all areas of the triple bottom line,
• expanding identification of risks and opportunities; and
• adjusting budgeting processes to ensure short- and long-term sustainability factors are captured.

According to Spencer, integrating sustainability into strategic management stretches accountants’ views beyond that of financial capital and produced capital, to thinking about social, human and natural capital and how to maintain those – because by maintaining them, businesses and economies will thrive and prosper.

“In many respects, it’s a story of resilience,” he says. “We must ensure that our businesses are resilient. We can do that by making sure that the planning and its people succeed.”

Looking to the long term

Typically, strategic plans focus on a three- to five-year period, or less, and tend to focus on short- to medium-term economic challenges. This means many companies fail to capture long-term macro trends, including key sustainability risks and opportunities.

Climate change is an example of a macro trend that is affecting the environment, economies and societies around the world, and can be seen across multiple timeframes. The increase in frequency and intensity of extreme weather events has been recorded over years, while the melting of glaciers takes place over decades. The rise in sea levels is being seen over centuries.

The appropriate timeframe for long-term planning will differ by sector and by the nature of the sustainability risks and opportunities to which an organisation is exposed. But timeframes of 25 years and more are increasingly being used to drive effective strategic planning.

For SMEs a 25-year timeframe may seem unthinkable. As a business adviser, though, accountants need to think about long-term macro trends over an appropriate extended timeframe for SME clients, then translate that into a timeframe they can make sense of.

Horizon scanning

A good starting point for such planning is to assess sustainability risks and opportunities. Using existing internal risk assessment and valuation approaches will drive consistency and comparability to other risks and opportunities. 

There are frameworks that can help with this process. PESTLE (Political, Economic, Sociological, Technological, Legal and Environmental) offers a holistic assessment of six external factors that can affect your organisation. SWOT (Sustainability Strengths, Weaknesses, Opportunities and Threats) can extend to focus on sustainability; this can be useful to ensure a balanced approach that also covers an organisation’s strengths and opportunities. 

Another good starting point, particularly for an SME, is to use the SDG (Sustainable Development Goals) Action Manager. This free UN tool will help members align their strategy to the 17 UN SDGs.

The International Futures Forum ‘Three Horizons Model’, as outlined in ICAEW’s Sustainability Accelerator Programme, is another good place to start. It’s only 13 pages long and comprehensive enough to help practitioners get started.

This framework helps members think about: 

• how and why the way things are currently done might not work in the future; 
• in what ways emerging trends might shape the future; 
• what an ideal future could look like; and 
• the kinds of visionary actions that are needed to get closer to that future.

Naturally, the most appropriate approach depends on the size, complexity and nature of an organisation, but some form of hybrid approach involving action taken by leadership (top-down) and by individuals (bottom-up) will often be the best choice. 

Key activities for finance teams when modifying the approach to support sustainability could include engaging a broader set of stakeholders, identifying and escalating mismatches between sustainable goals and initiatives and proposed budgets.

Ring-fence or shadow price?

A ring-fencing approach to budget allocation in sustainability can also help focus minds. By designating specific funds exclusively for sustainability projects, members can ensure they are protected from being used for other purposes. This method guarantees that sustainability initiatives receive consistent financial support, crucial for achieving long-term environmental and social goals. This approach requires clear identification of sustainability priorities, ongoing stakeholder engagement, and rigorous financial planning to avoid potential conflicts with other budgetary needs. And it requires a robust governance framework.

Shadow pricing is another way of integrating sustainability targets into strategic management. This is a method of estimating the social and environmental costs that are not currently reflected in the market price. For example, organisations could charge an internal fee to teams based on their current carbon emissions, which can be pooled and then reallocated to fund priority carbon reduction initiatives. 

Some larger organisations, such as BP and Microsoft, have successfully implemented shadow pricing and internal carbon markets, but it is likely to be overly complex for smaller organisations to fully adopt.

Ultimately, successful implementation of sustainable strategic plans relies on effective team engagement and commitment. Mutually agreeing annual and medium-term non-monetary measures that align with long-term sustainable goals is key to success.

Integrating sustainability into strategic management shifts the focus to a triple bottom line, ensuring long-term success and addressing the critical interdependence among different types of capital. There is now an abundance of tools to help members refocus their organisations. The time to start is now.