As part of my research work, I like to study how organisations and their management accounting practices change over time. And, I particularly like to frame my research as a story of change. I like the stories of how things change (or don’t) as these stories quite often get to the bottom of things quickly, or summarise everything that happened in a brief and concise way. Of course, when I am in research mode, there are often many thoughts flying around in my head. Recently, I was doing some work on how technology has changed the role of management accountants. I put on an old CD I had from Dire Straits (Love over Gold, 1982) and as I was listening to the first track, I realised, hang on this is a story of change. The song is Telegraph Road, here are the lyrics:
Telegraph Road lyrics
Songwriters: Knopfler, M;
Telegraph Road is nowadays US Route 24 in Michigan. The song tells the story of how what was once a dirt track, became a telegraph line route, and ultimately a highway with all the associated development. When I actually realised the story this song tells, I started to think, okay it was only written 30 years ago, but look how much has changed in even that short time. I thing it’s time Mark Knopfler wrote a new version! By the way, if you don’t know the song, it’s about 15 mins long and has some really cool guitar pieces.
Following on from my last post on what is a business model, here I recount two articles I had saved from last year on how climate change can force businesses to change – and in some cases even change the business model.
The first article comes from Time (Sep 04, 2011). It recounts how Spanish winemaker Torres are increasingly moving their crops to higher, cooler areas of Spain. Due to global warming, the hotter climate means sweeter fruit and earlier ripening. At the same time, the early ripening of the fruit is offset by the fact that the seeds and skin (which give flavour) are not ripe. Thus, as a possible solution, vines are being planted at a higher, cooler altitude in an effort to offset the warming experienced in traditional regions.
The second related article comes from The Economist (Sep 10, 2011, online). In this articles, you can read how English wine is being produced in increased volumes and better quality – with locally grown grapes. Again, it is climate change – bringing warmer climes to Southern England – meaning that more traditional grape varieties can be grown in England as opposed to the typically acidic German varieties. The result has been a product of increasing quality, and a tendency to produce higher margin sparkling wines – something that was not so easily done before. Thus, the business model of English vineyards may have changed from one where imported “grape juice” was added to make local wine, to one where high quality, high-margin product is the norm.
A year or two ago I set a hypothetical assignment for some of my students on a comparison of CO2 emissions on road freight versus rail freight. I based on the assumption that a CO2 charge would have to be paid by firms, and they could in fact save money by using rail freight. Of course the problem with rail freight is that is does not go door-to-door, but it might still be an option for transporting between cities or depots – depending on volume. At the time when I set the assignment, I did not find many examples (at least in the UK/Ireland), but I came across a Tesco press release in November last. According to the release, Tesco are expanding their use of rail services, which will mean 24,000 tons less CO2 and 72,000 less road journeys. Yes, this is a great thing for the environment, but the management accountant in me really wants to know the cost savings generated by this.
According to an article in Time (April 18, 2011), a lot of money can be saved by retro-fitting old buildings. I have written a few posts already about this, but this article gives some really good examples of the kind of money that can be saved from some relatively simple initiatives. According to the article, older skyscrapers are one of the worst type of buildings in terms of energy efficiency. Some investment in lighting, heating and insulation can make a huge difference to costs and energy efficiency. For example, the Empire State building spent $13m in 2010 on a retrofit. The result is a 38% decrease in utility bills and a payback period of less than three years. Another example is a re-fit of a federal building in Cleveland, which saves $600,000 per annum. The city of Melbourne, Australia is also mentioned. The city’s Lord Mayor sums up well – “this is not some feel-good environmental initiative. It is a hard-headed economic business decision.
Many young Irish people (and other nations too of course) are making their way to Australia to seek employment and/or better their career prospects. The Australian economy seems to be booming based in its natural resources and its closeness to the Chinese markets – who consume huge quantities of these resources. This boom may be affected somewhat by the imposition of a carbon tax from 2012 on all firms emitting more than 25,000 tons of CO2 per annum. This will increase the output costs, which may affect consumer spending. To balance the affect, the Australian Prime Minister has promised some tax reductions. Read the full story here
A recent joint survey (December 2010) from CIMA, the American Institute of CPA’s and Chartered Accountants Canada provides some very useful insights on what companies are actually doing in terms of sustainability. The survey obtained more than 2,000 responds, mainly from CFO’s. It reports on the key drivers of sustainability, with the number one driver being legal and regulatory requirements. This is followed by minimising brand risk for larger companies and cost and efficiency savings is in second place for smaller firms. An interesting finding is that CIMA members place a greater emphasis on sustainability – not surprising given they are more typically involved with the day-to-day practices of the business. The survey also reports on two cases, including UPS – the global logistics firm. The full survey report can be read at the link above.
When I worked in a paper company, health and safety was always a big concern. The machinery used in paper making could be quite lethal in the case of an accident. Quite an amount of money was spent annually by my employer to ensure the safety of all staff, but in particular those exposed to process equipment and machinery. As an accountant, one comment made by a manager on health and safety always stuck in my mind, namely that “there is not return on investment in health and safety”. I’m not going into detail here, but I’m sure you can appreciate it may be difficult to put a financial return on health and safety expenditure.
Another hot topic in business for the past decade or so is energy efficiency. Investment in energy efficient ways of working and running a business, like health and safety, is a good thing to do and probably adds to the longer term survival of a business (and the planet!). But, unlike health and safety, for accountants the return and investment can be ascertained a lot easier. For example, a recent article in The Guardian reports that many well-known UK companies are achieving definite returns on investment. DIY company B&Q saves 12% on CO2 emissions through education of staff and monitoring energy usage; hospitality group Whitbread can save 3% on energy costs just by changing behaviour. However the article also reports that companies may be seriously underestimating the return investment. recent research at the Carbon Trust in the UK took a close look at 1,000 energy efficiency projects it has been involved with and found that companies can expect to see an internal rate of return (IRR) of 48% on average and payback within three years. In the retail sector, the research shows the average IRR from energy efficiency projects leaps to 82%. Most “normal” investment projects would be happy to see a return of about 15%.
The full Carbon Trust report can be read here.
I read this article in the CIMA insight ezine recently. It reports 0n an initiative called Prince of Wales’ Accounting for Sustainability Project (A4S). The project has been developing practical tools and guidance to help ensure that organisations meet sustainability challenges. A recent publication shows how eight UK private and public sector organisations have applied the guidance developed by A4S. According to the author some common themes emerge; sustainability must be a strategic objective; executive commitment is vital; effective bottom up approaches are needed to capture insights from employees across the organisation. Click the link to read more.
The July edition of Scientific American gives a great example of some of the difficulties in tracking and accounting for carbon emissions. Most larger business now track their carbon emissions, and in most developed countries have to pay to emit carbon dioxide. So it makes business and environmental sense to reduce emissions.
The article in Scientific American tells the story of plug-in hybrid and electric cars (a plug-in hybrid has a small normal engine which means it still uses more carbon based fuel, whereas an electric car has no engine at all). A plug-in hybrid you might think is emits less carbon than a normal hybrid, and in turn a full electric car would gave zero emissions. But it’s not that simple as you have to consider how the electricity is produced. As noted in the article, the vast majority of electricity is produced by oil, coal and natural gas in the United States. Coal is the worst in terms of carbon emissions and in some states it is the main fuel source for electricity production. So in Illinois or Ohio, a zero-emission electric car would contribute more carbon emissions than a normal hybrid like a Toyota Prius. In both regions coal is used to generate 65-75% of the electricity.
What this example shows is how tricky it can be to determine your own carbon emissions or that of a business. You really have to trace things back to source to be sure you’re counting is correct. Another example I came across recently really surprised me. It was in a book called ‘ In Defence of Food ‘ by Michael Pollan. The raising of lambs for meat in the UK uses a lot of energy and carbon as land is treated with chemical fertilisers. In New Zealand, lush natural meadows remove the need to fertilise. As the manufacture of chemical fertilisers consumes a large amount of energy, it may actually be more environmentally sound to import lamb by air from New Zealand to the UK. Crazy I know, but it shows the type of thinking needed when trying to account for carbon use.
According to expert blogger Tracy de Morsella, the market for software to help global firms with carbon accounting has increased 84% in 2009 to a total global value of almost $400m. Carbon accounting means that firms account for (or keep track of) the amounts of CO2 they emit. Firms are under more pressure to be greener and reduce CO2 emissions. Pressure is not only coming from regulators, but from customers too. On top of this, smaller firms are starting to feel the pressure as suppliers to the larger firms. Predictions are, the market for carbon accounting software will continue to grow and the big players like SAP are already there. Read the full from De Morsella here.
A piece in this months Financial Management (March, 2010), the monthly journal of the Chartered Institute of Management Accountants (CIMA) in London, reports on a research report which asks the basic question why are financial managers (i.e. accountants) not getting more involved in important business issues like climate change strategy. Gillian Lees writes that businesses can be proactive or be pushed in relation to issues like climate change. Proactive seems like a much better approach for a business to be sustainable in the long-term, both economically and environmentally. Take energy costs as an example – these have and will increase as time goes on, so it makes sound business and environmental sense to control and reduce energy usage. The research reported in this piece suggests that when accountant are involved in climate-change work, the results were potentially better. As a manager at Asda ( a large UK retailer) says, “the finance team brings the right rigour to ensure that we aren’t simply doing it because it feels like the right thing to do”. Put another way, the numeric and commercial acumen of accountants can mean that climate-change can be the right business thing to do also. The full CIMA research report on Accounting for Climate Change can be found at this link.