Traditional accounting systems are indispensable in managing financial risk; they allow you to slice and dice the data from your operations to gain a quantitative understanding of risk.
We believe an Environmental Accounting system should be able to do the same.
Here we discuss options to link and embed some of your environmental risks into your overall business risk management process with quantitative support. By doing so, you will not only improve your risk management but will also assure your disclosure regime and help operationalise the environmental function.
One of the outputs of your risk assessment process is your risk register; we have created a ‘XYZ Mining’ example below for discussion purposes.
We have added the risk categories down the left hand side as our suggested groupings to help tie the environmental risk indicators into the overall business risk framework. (We would be surprised if none of these categories appeared on the business risk register.)
We have also added the relevant GRI indicators in the column on the right. CDSB and GRI provide assistance with mapping from GRI to other disclosure frameworks such as ICMM, SASB, CDP, etc.
Our analysis of the plethora of ESG/CSR reporting frameworks created over the last 10 years indicates that other than differences in scope and audience there is a not so surprising degree of commonality on what substance risks you are being asked to manage (and asked to disclose how you are managing it, which is often not done and creates risk in itself – see Peabody Energy in the USA on disclosing climate change risk.)
The common high profile substances are:
|Chemical Formula||Anthropogenic Sources||Atmospheric Lifetime1(years)||GWP2 (100 Year Time Horizon)|
|CO2||Fossil-fuel combustion, Land-use conversion, Cement Production||~1001||1|
Industrial processes, Combustion
|Tropospheric Ozone||O3||Fossil fuel combustion, Industrial emissions, Chemical solvents||hours-days||N.A.|
|Sulfur Hexaflouride||SF6||Dielectric fluid||3,200||22,800|
(You will notice that the example anthropogenic sources are business operational activities – ergo being asked to report on these substances implies that they are perceived as a risk and being asked to disclose them assumes you have a risk process to manage them.)
High profile pollutants that are also subject to CSR/ESG disclosure are Mercury, TVOCs, PM10, SoX, Cyanide and Lead depending on Industry, discharges to water and so on.
How can a systems approach to accounting for high profile substances help the risk management process?
Underneath your risk register you will have tools such as Quantitative Risk Analysis sheets and risk treatment tools such as Bow-tie to help you manage and make accountable the individual risks.
Let’s take PM10 as an example.
If we look at your environmental accounting system we can ask the question, where are you generating PM10?
As you can see from the above, the primary sources in this case are crushers and conveyors. (In other cases it may be open areas or diesel combusted, for example.)
We now know that the majority of the PM10 is from dust, we have a risk identifier for dust in our risk register, we probably have a bow-tie for it, (with operations as the owner?) and we may even have a QRA to help quantify our investment decisions for risk controls.
There are methods to calculate the expected impact of controls such as conveyor hoods and sprays and we are now able to directly link a risk management process to a disclosed substance. We can easily provide transparency and auditability and information such as trend analysis and benchmarking for performance improvement. (You might want to think about selecting some of them for your dashboard?)
Suggested presentations are by activity or borrowing from the USA EPA Title V by asset to enable better alignment with financial accounts, for example:
- Potential emissions (100% operation)
- Calculated emissions (actual operation)
- “Controlled” emissions (risk modified)
- Actual emissions (direct monitoring if prudent)
Another advantage of the systems approach to environmental accounting that cannot be achieved from siloed functions and spreadsheets is that the impact of decisions across the company is automatically reflected in the accounts. A decision to switch from diesel electricity generation to gas will automatically flow through to lower PM10 as well as lower GHG numbers and reduced carbon risk.
A decision to progressively rehab will not only reduce your MCP and MRF liability but will also flow through to PM10 and so on.
It’s all linked
It’s all linked – and the numbers can help you understand how it links. The coal industry is now facing the first cases of Black Lung disease in 20 years (dust and PM10 the culprit) and the financial and reputational costs will be substantial. A more integrated accounting approach may have helped raise the red flag earlier?
We will continue to develop our accounting system approach to helping you manage your environmental risk within your overall business risk management framework and look forward to your comments on how to improve system alignment and useability.