Beyond the balance sheet: Accounting for sustainability

As climate change and ESG concerns climb the corporate agenda, accounting is being pulled into new territory.

Once a discipline focused squarely on financial results, it is now expected to explain how a business creates value — and where it is exposed to risk.

In my discussions with executives, academics and policy thinkers, one thing keeps coming up: sustainability is no longer an afterthought.

It is fast becoming central to how companies operate, how they measure performance, and how they communicate with the outside world. 

But the shift is not straightforward. What should be reported? Who needs the information? And how can companies make sure their disclosures are credible, rather than just noise?

Accounting has always been about giving decision-makers structure and confidence.

That job has not changed — but the scope has. Today, the numbers need to speak to a broader set of questions, and a wider group of people.

Accounting's growing mandate

For over two decades, companies — particularly in high-risk, high-profile sectors like energy, mining, food and fashion — have been producing standalone sustainability or CSR reports.

These documents, usually released alongside the annual report and based on voluntary frameworks, were rarely linked to financial reporting.

For many companies, they served a largely symbolic role — a way to show that sustainability was on the radar, even if it was not yet embedded in the business.

But that’s no longer enough. Investors, regulators, employees — and the public — are now asking tougher questions.

The focus is shifting away from surface-level disclosures. What matters now is how sustainability is built into the business model.

Accounting, in this context, becomes more than a tool for compliance or comparison. It becomes a test of credibility. The profession has taken note. 

Firms like EY, PwC, KPMG and Deloitte are expanding their sustainability practices, hiring climate scientists, human rights specialists, and data analysts to support a new wave of clients. 

Services now stretch from carbon footprint verification to supply chain audits — all designed to help businesses stay ahead of mounting pressure to report clearly, and convincingly, on sustainability. 

But the real challenge runs deeper. Before anything can be measured or assured, companies need to answer a more basic question. What, exactly, should they be accounting for?

Materiality matters - but so does perspective

The answer largely comes down to how you define “materiality”. Two main schools of thought have emerged. 

The first, backed by financial standard-setters like the International Financial Reporting Standards (IFRS), focuses on financial materiality — what matters to the company’s bottom line.

This approach means companies focus their reporting on sustainability issues — like labour conditions, water use, or carbon emissions — only when those issues could have a financial impact on the business.

The idea is to help investors understand the risks and make more informed choices about where to invest.

The second approach, called impact materiality, takes a broader perspective. It looks beyond how sustainability issues might affect the company, and asks how the business itself is affecting people and the planet.

With this way of thinking, a company might still report on its climate impact even if it is not directly exposed to climate-related risks. For example, a tech firm that does not manufacture goods might report on its energy-intensive data centres and their significant contribution to emissions.

In reality, plenty of companies are trying to cover both bases in their sustainability reporting. 

Nestlé is one example. As one of the biggest food and drink firms globally, it is under pressure from investors to manage risks like deforestation, while also being watched closely by consumers for its broader impact. 

Its reports now try to address both: showing how ESG issues could affect profits, and how the business affects the planet and society. 

It is not a simple task — this kind of dual reporting takes more time, effort and judgement — but it is a more honest reflection of the pressures that companies are facing.

Creating a framework for sustainability accounting

For sustainability accounting to be useful, it needs a framework — something clear, credible and consistent. Without one, reporting risks drifting into two extremes: glossy greenwashing, or overwhelming data with no clear purpose. 

Choosing a framework is not about ticking regulatory boxes. It is a strategic choice.

Who is the report really for? Investors? Regulators? Customers? Civil society? The answer shapes what gets measured — and what gets left out. 

But even before collecting the relevant data, companies need to get their arms around the basics. That means mapping the value chain, understanding where their responsibility starts and ends, and drawing clear boundaries around what they control and what they influence. 

This gets particularly complicated with emissions. Greenhouse gases are split into three categories, or “scopes”:

• Scope 1: direct emissions from owned or controlled sources
   
• Scope 2: indirect emissions from purchased electricity
   
• Scope 3: all other indirect emissions across the value chain

Scope 3 — the emissions tied to suppliers, customers, and how products are used — is where companies can enter a veritable rabbit hole.

The data is patchy, the boundaries are fickle, and the risk of greenwashing is highest. But this is also where the bulk of many firms’ environmental impact sits. And where scrutiny is only going to increase.

There are three areas of sustainability information every company should get to grips with.

1 Financially-material ESG risks

Firms should pay particular attention to ESG risks that pose long-term threats to the business model.

To grasp these risks, companies need to understand their business model beyond the financial ins and outs.

They need to understand the vulnerabilities in their supply chains, the use of their products and services, and the sustainability of the markets on which they are selling them.

The risk might be highest where the cost of social and environmental impacts are not immediately apparent and therefore are not yet priced in.

2 Resource dependencies

Companies may be dependent on a range of resources, from water use, energy intensity, and supply-chain ecologies to community goodwill and reputation.

These can become existential risks if not addressed. On this basis, the gathering of business intelligence needs to go well beyond the boundaries of any individual enterprise.

Even the most competent accountant will not be able to gather this intelligence without the help of external stakeholders.

3 Feedback loops

Companies need to be aware of feedback loops between environmental impact and business performance and the case for sharing that information with investors.

One example is how the degradation of natural capital may affect supply chains, production costs, or regulatory exposure.

This is where businesses might be at a particular loss if they fail to engage with the people on whom they depend – from suppliers and users to those who are affected by production.

Sustainability reporting is not a branding exercise. It is not about repackaging data to look good in a slide deck at the end of a reporting period.

Done properly, it should sharpen strategic thinking around the creation of value and improve how decisions get made. Anything less risks wasting time, trust, and money.

Further reading:

Why firms need to start measuring Scope 3 emissions

How co-ops and mutuals can measure their social impact

Five steps for companies to deliver the UN Sustainable Development Goals

Six ways businesses can maximise their social impact

Hendrik Vollmer is Reader of Accounting. He leads the MSc Accounting and Sustainability programme and teaches Accounting for Sustainability, People, and Planet on our undergraduate programmes.

Develop your career and be part of the change you want to see with the MSc Accounting and Sustainability at Warwick Business School.

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