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Natural capital

Calculating the true cost and value of doing business

By
Bronte McHenry
September 12, 2024
September 3, 2024
8
min read

Every day, business leaders use financial data to guide decision-making. But this financial data, and therefore these decisions, rarely account for the true cost of doing business, or the true value a business can create.

So, what is the true cost of doing business?

In 2013, environmental consultancy Trucost was tasked with tallying up the unpriced natural capital consumed by the world’s top industrial sectors, finding most costs are from greenhouse gas emissions (38%), followed by water use (25%), land use (24%), air pollution (7%), land and water pollution (5%) and waste (1%).

According to Trucost’s analysis, this unpriced natural capital amounts to US$7.3 trillion a year. This number is so enormous it’s actually difficult to visualise.

Now, take the true value a business can create.

In today’s world, businesses further social movements, campaign for legislation, shape popular culture and give employees purpose and community. Businesses arguably contribute as much to society as individuals do.

The takeaway here is that financial accounting can’t accommodate the breadth and power of businesses in the 21st century… which is why the non-financial accounting movement is gaining momentum.

Sumday co-founders Jess Richmond and Lindsay Ellis, in particular, and are on a mission to make non-financial accounting the norm in every organisation.

Non-financial accounting looks at a company’s activities beyond profits, losses and cash flow, measuring and reporting on impact on climate change and biodiversity loss, social impact, governance practices and employee wellbeing.

A good precursor to widespread non-financial accounting is robust and mainstream carbon accounting, Jess says, because unlike biodiversity or DEI (diversity, equity and inclusion), carbon already has a universal metric with a dollar equivalency.

“Carbon accounting will drive a real shift in the economics of how you value a business. But it’s just the first step. Once carbon accounting is working and you've activated the profession, it’ll become a blueprint for natural capital and social impact too,” Jess explains.

With this roadmap in mind, the pair founded a boutique carbon accounting firm in 2021.

But as their knowledge expanded, so did their ambitions.

As an accounting firm, they were limited in how many clients they could work with, but as a startup, they could work with multiple accounting firms, and through them, every company, bringing about true systemic change.

“The ability to actually do non-financial accounting work is fundamental to driving change, and ultimately, saving the world,” Lindsay says.

“A lot of stakeholders overlook accountants as a partner. But you need people in businesses and on the ground who can actually embed this thinking and do the reporting.”

And so, Sumday was born in 2022 — joining the Wedgetail portfolio one year later.

Sumday co-founders Lindsay Ellis and Jess Richmond. Credit: supplied.

Carbon accounting’s complexity

Carbon reporting is mandatory for large companies in Canada, the United States, Mexico, most EU member states, Japan, South Korea, New Zealand and Australia.

When reporting, a company’s emissions fall into three buckets: scope one, two and three.

Scope one emissions are directly generated by a company — think factories, power plants and company vehicles.

Scope two emissions are indirectly generated via the energy a company purchases — think electricity, heating and cooling.

Scope three emissions encompass everything a company is indirectly responsible for up and down its value chain — think purchased goods and services, transportation, waste generated in operations, business travel and employee commuting.

Credit: GHG Protocol.

Scope one and two are relatively easy to calculate, as companies already have all the necessary information. But reporting on scope three is logistically complex, requiring a company to get emissions data from every organisation in its supply chain — a number often in the thousands for large organisations.

In addition to being more complex, scope three is also the biggest source of most company’s emissions, with a study showing eight supply chains — food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services and freight — account for more than 50% of global emissions. In the chart below, you can see cement and steel are scope-one-heavy industries, while the construction, mining, oil and gas, food and beverages and chemical industries have the majority of their emissions in scope three.

Measuring, reporting and then reducing scope three emissions tends to be the most impactful thing a company can do — which is why Jess and Lindsay were so alarmed when they realised most companies calculate scope three using averages, rather than getting actual data directly from suppliers.  

“It was 3am, we’d pulled up every sustainability report we could find, and we’re going through the fine print, and we realised the whole world was determining the emissions of supply chains using old datasets and industry averages. It was the lowest-fidelity work under the sun,” Jess says.

"We said to each other, ‘if we really want the ESG sphere to drive market behaviour, and for organisations to be valued on more than just profit, there's just no way accounting can be done at this level’.”

The pair’s alarm makes sense. The difference between averages and actual data is far from a rounding error. A 2023 UNSW study analysed 1,200 company reports, for example, finding companies were under-reporting their scope three emissions by up to 44%.

Jess’ and Lindsay’s experiences support these findings too. When companies start carbon accounting with actual data, they tend to be pretty shocked with what they find, Jess says.

“Lindsay is a therapist more than an accountant on the accounting-support desk, because when they use actual data, company emissions go through the roof, and people freak out,” she says.

“We tell them it’s a sign of progress and that their first goal shouldn’t be to make their emissions as small as possible. Their first goal should be to correctly measure emissions so they can make real changes and credibly track progress.”

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“Education is critical”

At its core, fluffy carbon accounting isn’t a technology problem, or even an accountability problem, it’s an education problem, Jess says.

“There are standards, guidelines and frameworks being developed left, right and centre. But if you go and talk to the people that would traditionally do the accounting — the CFOs, the accountants, the other advisers — and you press them on how they would incorporate emissions data into the financials to influence decision-making, they’ll likely have a very surface-level understanding,” Jess explains.

As a result, companies send out surveys without knowing what data they need or what questions to ask.

Often, large organisations will send out an Excel form or CDP questionnaire to 1,000 suppliers or more, Jess says, one of three things will happen:

  • The response rates will be terribly low;
  • They'll be overwhelmed with inbounds asking for help and clarification; or
  • The questionnaire will be meaningless, asking yes-or-no questions such as ‘do you have a net-zero target?’, while ignoring the fact that net-zero targets are meaningless without baseline data or allocated resources.

It’s overwhelming and disheartening for the people sending and receiving the survey, and, as a result, most companies don’t bother, using industry averages instead.

Theoretically, people understand carbon accounting, but practically, there’s a massive skills gap, Jess explains, which is why Sumday is both an education company and a technology platform.

“We have an extensive online academy to train people up in the specifics of carbon accounting so they can embed this within normal business practices,” Lindsay says. “Education is critical.”

“We don’t talk at a high level about ‘what ESG is’ or ‘what carbon is’. We teach people how to do carbon accounting for a client or organisation in a way that aligns with global standards,” Jess adds.

“People get to the end and ask: ‘Why has no one explained that like this before?’”

Using technology to enable scale

In addition to offering carbon accounting courses, Sumday has a technology platform that supports big and small companies alike in collecting, calculating and sharing emissions data.

“Collecting information needs to be relatively frictionless," Lindsay says.

Practically, this means when a large organisation asks for data, every question is accompanied by a guide and free support. Through the process, suppliers can learn why they’re being asked each question, what the broader context is, and what information they’d typically need to answer each question.

In this way, Sumday helps suppliers to get value out of the process too, supporting them to collect their data once, and share it multiple times.

A sample carbon ledger from the Sumday platform. Credit: supplied.

Sumday’s long-term goal is to create a run-on effect.

“If their existing accountant can do this work, if it’s affordable, if their customers are continuously asking for it, then this becomes normal,” Jess says.

“If it becomes normal, and companies are willing to share this data with their customers and potentially the world, over time, you start to have a global database of actuals, rather than averages.”

And if it becomes normal, then we will see true change, Jess says.

“Conversations about carbon and natural capital accounting often happen in very privileged rooms. But 90% of the companies in the world are small and medium businesses. This means we all miss the chance to hear from different voices that could transform the way things are done,” she says.

“I don't want non-financial accounting to be something that only large organisations or consultancies get to drive or understand. I want this to be as normal as it comes. Because I think when it's normal, you get a ground-up swell, and that’s when real change happens.”

Sounds impossible?

Jess and Lindsay are on a mission to change the way business leaders assess risk and opportunity and make decisions. It’s a huge mission — so huge, in fact, that it would be easy to dismiss it as idealistic or impossible.

This is a trap we all fall into. The world we’re in is the world we know and it’s hard to imagine something different, let alone something better. But things that once seemed impossible can be entrenched just a few generations later.

Take timekeeping, for example.

Today, we take our global system of timekeeping for granted. We have 24 time zones, rippling outward from Greenwich, and a year of 12 months, divided into 52 weeks. But just three generations ago, this idea was both inconceivable and unwanted.

In 1875, American railways recognised 75 different local times, three of which were in Chicago. If a passenger was leaving from Germany, they had to check if departures were using Berlin, Munich, Stuttgart, Karlsruhe, Ludwigshafen or Frankfurt time. It wasn't until 1950 — just 74 years ago — that modern time as we know it was the global standard.

The fact that widespread change requires everyone to alter their behaviour — individuals and businesses alike — isn’t as daunting as it might seem. For centuries, humans have been successfully transforming entire systems and business practices, so, it’s reasonable for Jess and Lindsay to believe that normalising non-financial accounting is well within our reach.

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