Reference no: EM133749810

Sustainability for Accountants
Practice Assessment
Case study

Background information
SJLS Australia and New Zealand (SJLS ANZ) is a mid-tier accounting practice that operates through ten offices in Australia and six in New Zealand, with 58 partners and 650 employees. Its offices are located in major cities, with two offices in Sydney (CBD and Western Sydney), two offices in Auckland (CBD and South Auckland), and the remaining offices located in regional centres, including Lismore in northern NSW and Nelson in the South Island of New Zealand. SJLS ANZ is part of SJLS, a global network of firms.

Governance
SJLS ANZ is governed by a management board, comprised of the managing partner from each office, and two independent directors (one from Australia and one from New Zealand). The chair role alternates every two years between the independent directors.
Values
SJLS ANZ's values are as follows:
Acting with integrity
Empowering clients
Valuing our people
Social impact

SJLS ANZ's board and partners believe their people are key to their success. This is reflected in the company's investment in its people through regular technical and professional training, flexible working arrangements, and generous leave policies.

SJLS ANZ is proud of its regional footprint. Through its connections with these regional communities, SJLS ANZ is regarded as an industry leader in Australia for its work with Indigenous organisations and communities. It developed and published its first Reconciliation Action Plan in 2010, and now works with university careers services to offer targeted First Nations/Maori/Pasifika internships at all its offices. This has resulted in several interns taking up permanent employment with SJLS ANZ, with one of the early interns being promoted to partner at the start of this year. SJLS ANZ also sponsors local community events and organisations, with the recipients of sponsorship being determined by a sponsorship committee in each office. A sponsorship committee is typically composed of the office's managing partner, another senior partner and an employee representative.

Environmental impact
Within each SJLS ANZ office, there are efforts being made to reduce power use and waste. SJLS ANZ largely operates as a paperless office. In 2022 it migrated its data onto a cloud server, with sustainability criteria included in its selection of the cloud provider.
ESG measurement and reporting
To date, SJLS ANZ's sustainability activities are largely ad hoc, and there are no goals, measures, or targets. The only reporting is for people recruitment and retention and the internship program, which are included in board reports.

However, there is increasing interest from staff and clients in sustainability related issues. This reflects the increased societal expectation that organisations act responsibly. This sentiment has grown stronger over the last year with the occurrence of severe flooding in parts of Australia and New Zealand. The Lismore and Nelson offices each experienced flooding, as were several homes belonging to SJLS ANZ's staff. These floods caused significant disruption to clients' businesses. An additional three SJLS ANZ offices have been identified as being in flood prone locations.

SJLS ANZ's board is aware that competitors in the accounting industry are making sustainability and net zero commitments, and some have issued sustainability or corporate responsibility reports.

Scenario 1: Climate-related action
SJLS's global board is debating whether its network of firms should become a signatory to the Net Zero Financial Service Providers Alliance (NZFSPA), an alliance of financial service providers committed to net zero greenhouse gas emissions by 2050 or sooner. As the net zero commitment would be binding on all SJLS network members, the SJLS global board is seeking input from its network members, including SJLS ANZ.
The eight principles underpinning the commitment are as follows:

Align all relevant services and products to achieve net zero greenhouse gas emissions by 2050 or sooner, scaling and mainstreaming Paris Agreement-alignment into the core of our business.

2. Build internal capability to understand the risks and opportunities of the net zero transition using best-practice net zero methodologies1 where they exist and, where methodologies or data are missing, proactively and collaboratively work to address those gaps.
3. Set an interim target for relevant services and products offered to be aligned to the net zero transition which is consistent with a fair share of the 50% global reduction in carbon emissions needed by 2030. Review and update such targets at least every five years with a view to increasing the proportion of services and products to achieve full alignment.
4. Address our own operational impacts by setting science-based emissions reduction targets across all operational emissions (Scopes 1 and 2 and, where material, 3) in line with 1.5°C emissions pathways. Set interim science-based reduction targets within 12 months of joining for no later than 2030 across all operational emissions.
5. Consistently raise with our key stakeholders the importance and implications of setting net zero targets and strategies across Scopes 1, 2 and 3 emissions and understanding the impact businesses can have to help reduce GHG emissions2.
6. Work to ensure our relevant services and products take into account the best available climate science, including credible emissions reduction pathways to net zero. Support innovation and prioritise our efforts where we have, or can have, the most significant impact. Support the development of products and services supporting the net zero transition.
7. Advance our efforts by proactively engaging with stakeholders and policy-makers on corporate and industry action, as well as public policies, that support a net zero transition of economic sectors in line with science and with regard to social impacts. Contribute to Glasgow Financial Alliance for Net Zero (GFANZ) efforts within the financial services provider alliance, which will aim to bring together existing tools and alliances.
8. Report progress, individually as firms signing this Commitment, at least annually, including publishing disclosures aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD)3 and climate action plans.

You have been asked to draft the SJLS ANZ board's response to the global board outlining whether SJLS ANZ supports signing up to the NZFSPA.

As part of formalising its approach to sustainability, SJLS ANZ's board has decided that climate-related risks and opportunities should be included in its enterprise risk management framework. In particular, it is interested in gaining a better understanding of potential climate-related risks and opportunities the organisation could face in the future.
As a starting point you have been asked to identify and explain these risks and opportunities by applying the TCFD risk framework.

Scenario 2: Diversity, equity and inclusion

The SJLS ANZ board has determined the time has come for SJLS ANZ to adopt a strategic, organisation-wide approach to sustainability, and has appointed a sustainability sub-committee of partners to lead this change.
As a result, SJLS ANZ has consulted key stakeholders to identify SJLS ANZ's material sustainability issues. These stakeholders are SJLS ANZ's partners and employees, directors and clients. This process identified diversity, equity and inclusion (DEI) among the top 10 material issues for the organisation, and top five among employees.
SJLS ANZ is a people-based service organisation, and its people are critical to servicing its clients. This is the reason why SJLS ANZ has a policy of investing in its people, and why ‘valuing people' is embedded in its values and culture. Despite this, SJLS ANZ, like most organisations in the accounting industry, is finding it difficult to attract and retain staff. On average, it is taking 90 days to recruit for new professional staff compared to 30 days pre-2020. In 2022, SJLS ANZ was only able to fill 85% of its graduate positions.
The sustainability sub-committee has set a goal of enhancing DEI, and is prioritising this goal given DEI is a material issue and because of the talent shortage currently challenging SJLS ANZ. To achieve this goal, the sub-committee has agreed to introduce the following initiatives over the next year:
Include women and people from diverse backgrounds on selection panels.
Offer leadership training and mentorship to professional staff, and track participation to ensure diverse staff and partners are involved as mentors and mentees. If necessary, improve diversity by targeting people for the mentoring program.
Introduce a quarterly team-building afternoon in each office, with diverse activities.
Implement mandatory online training for all employees on the importance of an inclusive workplace, and in cultural competence.

The sustainability sub-committee would like to measure its progress against these initiatives and has asked for your advice in selecting the most relevant metrics.

It is now nine months since the introduction of the initiatives, and SJLS ANZ is preparing its first sustainability report, including qualitative and quantitative information about its DEI initiatives. You have been seconded to assist with completing the DEI section of the sustainability report. Some parts of the report have already been drafted by the sustainability sub-committee, and the sub-committee has provided you with the following information.Assessment - Case study

You are the newly appointed chief sustainability officer (CSO) at FriendlyFarms Ltd (FriendlyFarms). After qualifying as a Chartered Accountant, you spent six years in sustainability assurance at a mid-tier global business services firm in Sydney. During that time, you obtained a Master of Sustainable Practice and Reporting degree. This is your third month in your new role at FriendlyFarms. You are getting to know the business and preparing sustainability disclosures for the annual report, sustainability report and website; these reports are due within the next two months. Your sustainability team consists of yourself and a sustainability officer, Sally, who is a recent graduate with a degree in environmental science. She has been with FriendlyFarms for two years. The sustainability and finance teams work together in anticipation of the introduction of mandatory sustainability reporting in Australia.
FriendlyFarms is an Australian red meat producer and food processor that specialises in premium-quality lamb, beef, venison and related products. It is a private company and owns 15 farms, 7 food processing plants and 5 distribution centres across Australia. Its supplier network is extensive: it works with over 150 farmers, mainly in Australia, but it also has suppliers in New Zealand. FriendlyFarms supplies its products into 20 global markets, including Australia, New Zealand, the United States, Germany, South Korea, Japan and China. On its website, FriendlyFarms markets its meat products based on health, taste and environmental attributes, such as ‘grass-fed', ‘organic', ‘nature-positive', and ‘net zero'. FriendlyFarms is aware that it might be obliged to support its assertions for local and global clients, who will need this information for their own sustainability reporting.
Given the increased focus on ‘greenwashing', you want to find out more about the data and documents that back up FriendlyFarms' claims. The previous CSO kept good records about sustainability-related decisions, data collection and certifications, which you have been working through and discussing with relevant staff. However, the records have not been updated since the CSO retired.

Insights from management
At a recent management meeting, you heard about increased activity by animal welfare and environmental activists in several of FriendlyFarms' key markets. The activists were advocating for consumers to avoid meat products for ‘ethical' reasons, such as supporting animal welfare and minimising greenhouse gases (GHGs) and climate change. At the meeting, FriendlyFarms' finance manager highlighted a decline in certain revenue numbers this year, which was partially attributed to the global downturn in economic conditions that have left households with cost-of-living pressures. The procurement manager shared that many farmers in the supplier network were experiencing difficult weather conditions, ranging from floods to droughts, which had led to increased concern about some suppliers' financial viability. The farming manager reported similar weather events making conditions difficult at some company-owned farms, which had led to the loss of livestock and damage to equipment.
The production manager reported that FriendlyFarms was having trouble treating the wastewater from one of its meat processing plants (abattoirs). A large volume of water is used to clean the abattoir equipment each day after use. This water contains livestock blood and other substances so it needs to be treated before it can be released onto the soil and farmlands around the abattoir. If left untreated, it can contaminate the soil. The government department dealing with environmental operating licences has been doing an audit onsite and has flagged several issues that need to be fixed or the abattoir may lose its licence. The production manager is concerned that other meat processing sites may also have similar issues.
At the same meeting, the marketing manager mentioned media reports suggesting that some farm labourers in Australia have not been paid correctly and had experienced poor working conditions. The procurement manager said that two of FriendlyFarms' farm labourer suppliers had been connected to these media reports. He added that all suppliers had signed the FriendlyFarms' Supplier Code of Conduct and are audited every two to four years based on risk. FriendlyFarms also encourages suppliers to join the externally assured Farm Sustainability Assurance Program, but the two suppliers linked to the media reports had not yet signed up.

Corporate vision, values and goals
FriendyFarms' vision, values and goals as stated on its website are as follows:
Our vision: To be the trusted source of food for families in Australia and around the world.
Values: Collaboration, curiosity and integrity.
Goals: Listening to our customers' needs; becoming a nature-positive food producer; and supporting our people.

Sustainability principles and action plan
The FriendlyFarms Board has taken sustainability (which FriendlyFarms also refers to as ESG - environmental, social and governance) issues seriously for a long time. The Board believes that managing these issues ‘makes good business sense'. FriendlyFarms has a sustainability committee consisting of managers from multiple business divisions, including accounting and finance, human resources, procurement, food processing, distribution and farming. You chair the sustainability committee, which meets monthly and reports back at the quarterly Board meetings.
FriendlyFarms has aligned its sustainability strategy to its overall corporate vision, values and goals, and to the United Nations Sustainable Development Goals (SDGs). The strategy includes a sustainability action plan, which focuses on the issues that matter most to FriendlyFarms' stakeholders (identified via a double materiality process), as shown in Figure 1.

New sustainability initiatives
FriendlyFarms has started initiatives in the last year that it plans to report to the public on the FriendlyFarms website and in reports. New initiatives include ‘net carbon zero' beef, sustainability-linked finance and a government-industry partnership.

‘Net carbon zero' beef supplied to the United States
After several years of hard work, FriendlyFarms achieved the independent certification of ‘net carbon zero' for two beef product ranges supplied to the United States (which account for 20% of its total beef product). This means that the total GHG emissions generated by each kilogram of beef product sold have been balanced to net zero, by actively growing permanent vegetation on the farms that supply the beef. The GHGs emitted are equal to the carbon sequestered by this vegetation. The GHG emissions include all stages of product emissions - from the birth of the animals, through growth, processing and transport to the United States, to how a consumer cooks the product and disposes of the packaging.
Satellite technology and machine learning helped identify on-farm permanent vegetation that absorbs the equivalent amount of carbon dioxide from the atmosphere on farms supplying the beef. FriendlyFarms contracts and purchases these carbon credits from farmers supplying the net carbon zero beef.

Sustainability-linked finance
FriendlyFarms entered into a sustainability-linked working capital financing facility. The contract states that FriendlyFarms will receive financial incentives as it delivers pre-agreed and pre-defined sustainability targets including:
Adoption of the comprehensive Farm Sustainability Assurance Program by suppliers.
Reduction of processing emissions in line with the Science Based Targets initiative (SBTi) target of 42% for Scope 1 and Scope 2.
Reduction of greenhouse gas emissions by 2030 from a 2020 baseline year.
Reduction of total waste to landfill (including organic waste) from processing sites.
Reduction of water used at processing sites.
Enhanced environmental monitoring and reporting.

Government-industry partnership
The Australian Government is currently working with the agriculture and land sector on net zero transition plans. FriendlyFarms has participated in a working group with government, Meat & Livestock Australia (MLA) and others to develop a carbon calculator to help farmers with their GHG accounting.

Sustainability reporting
FriendlyFarms has referred to the GRI Standards in its reporting for many years and publishes a modern slavery statement each year. It also has a GHG accounting consultant, who has helped with GHG emissions measurement since 2020.
Before retiring, the previous CSO documented the stakeholder engagement process relating to the current year, which identified the most important sustainability topics based on double materiality. You and Sally, the sustainability officer, have put together the following draft performance data for the 2023 year end for these topics (see Figure 2).

Part A - Written submission

Scenario 1: ESG risk management
As the new CSO, you are keen to understand FriendlyFarms' risk management process relating to sustainability (ESG) topics and their impact on the business. FriendlyFarms employs the double materiality concept in identifying ESG risks.

Scenario 2: Use of generative AI for sustainability reporting

The CEO is keen to achieve efficiencies and improvements by using generative AI. She has asked your team to test the usefulness of generative AI tools in sustainability reporting and you have asked the sustainability officer, Sally, to run the following through ChatGPT for publication on the FriendlyFarms website:
Data in Figure 2 to generate a summary of sustainability performance for the year.
Data from the ‘New sustainability initiatives' section to generate a summary of these initiatives.

Extracts of the two ChatGPT results are shown below.

Result 1

Sally entered data from Figure 2 into ChatGPT and asked ChatGPT to ‘write a summary'. It responded:
FriendlyFarms, a red meat producer, set ambitious sustainability targets across various metrics for 2023, aiming for reductions in greenhouse gas emissions, waste, water usage, and increased participation in their farmer sustainability assurance program. However, they faced challenges such as supply-chain disruptions and extended kill seasons, impacting their ability to meet some targets. Despite falling short in some areas, they exceeded waste reduction targets and made progress in signing up farm suppliers to their assurance program. Looking ahead to 2024, they're aiming for even more aggressive reductions in emissions, waste, and water usage, demonstrating a continued commitment to sustainability.

Result 2
Sally entered the ‘New sustainability initiatives' section into ChatGPT. It responded:
FriendlyFarms has implemented new sustainability initiatives to further their commitment to environmental stewardship:
Net Carbon Zero Beef Supply:
Achieved independent certification for beef product ranges, ensuring that the GHG emissions associated with each pound of beef sold are balanced to net zero. This is achieved through carbon sequestration on farms supplying the beef, with satellite technology and machine learning used to identify on-farm permanent vegetation that absorbs carbon dioxide.
Sustainability-Linked Finance:
Entered into a sustainability-linked working capital financing facility, tying financial incentives to the achievement of pre-agreed sustainability targets. These targets include the adoption of a comprehensive Farm Sustainability Assurance Program by suppliers, reduction of processing emissions in line with Science Based Target Initiative (SBTi) goals, reduction of total waste to landfill
from processing sites, reduction of water usage at processing sites, and enhanced environmental monitoring and reporting.
Government-Industry Partnership:
Engaged with the Australian government and industry stakeholders, including Meat & Livestock Australia (MLA), in a working group focused on transitioning to net zero. This collaboration involves the development of a carbon calculator to assist farmers in accounting for greenhouse gas emissions.

Scenario 3: Decision-making using ESG criteria

FriendlyFarms' management is trying to decide between two high-cost, multi-year purchases of food processing machines. The accountant has asked for your input and recommendations to the Board so it can holistically evaluate the decision based on financial and sustainability considerations. The finance manager has given you the following data after discussions with the machine suppliers and FriendlyFarms' GHG accounting consultant.

Scenario 4: GHG emissions management practices

The Australian red meat industry has set a target to be net zero by 2030. While FriendlyFarms already produces ‘net carbon zero' beef as part of its overall operations, additional actions will be required if it wishes to achieve this industry target. The Board wants a more detailed understanding of GHG emissions management in the context of FriendlyFarms and has asked you investigate mitigation strategies it could incorporate in its Sustainability Action Plan.

Your research has identified two possible GHG mitigation strategies:

Net zero focuses on reducing GHG emissions as much as possible. The overall aim is to eliminate the emission of carbon entirely and only offset unavoidable, residual carbon (CO2) as a last resort. A business is ‘net zero' when the total GHGs emitted through its operations are equal to those removed.

Carbon neutral attempts to limit any increase in future CO2 emissions in organisational operations by using carbon credits or offsets (e.g.‘carbon sinks' such as forests) to neutralise existing emissions.

You have also come across the ‘carbon mitigation hierarchy' (refer to Figure 3), which outlines four approaches an organisation can take to manage GHG emissions: avoid, reduce, restore, offset.

Part B - Video presentation

One of FriendlyFarms' corporate goals is ‘becoming a nature-positive food producer'. The business would like to upskill its staff and farmer suppliers so they better understand what is meant by ‘nature-positive'.

The FriendlyFarms Board is aware of the recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD). Please see the TNFD recommended disclosures in Figure B1.

The TNFD was formed after the success of the Taskforce on Climate-related Financial Disclosures (TCFD). The TCFD guidance is widely adopted and informed the development of IFRS S2 Climate-related Disclosures from the International Sustainability Standards Board (ISSB). Please see the TCFD recommended disclosures in Figure B2.

As shown on page 83 of the Recommendations of the Taskforce on Nature-related Financial Disclosures published in September 2023, ‘Climate change' is a sub-topic of ‘Nature'. Table 6 (page 83) and Table 7 (page 88) provide TNFD core global disclosure indicators and metrics for nature-related dependencies, impacts, risk and opportunities, which show the disclosure topics that the TNFD requires for Nature.