Sustainability Accounting, What it is and is not

Sustainability Accounting, What it is and is not Ali Khozein Department of Accounting, Aliabad Katoul Branch, Islamic Azad University, Aliabad Katoul, Iran. khozain@yahoo.com Abstract- Sustainability Accounting and Reporting provides an up-to-date overview of the most current views, developments, costs and benefits in environmental and sustainability accounting and its links to reporting. The book discusses new developments in environmental accounting and investigates topics in and links between corporate environmental and sustainability issues as well as between strategy, measurement and information management, and between accounting and reporting. Corporate sustainability reporting quality has been frequently criticized as being unbalanced, presenting an overly positive view or failing to address material issues. Sustainability Accounting is a tool used by organizations to become more sustainable. The most known widely used measurements are the Corporate Sustainability Reporting and the triple bottom line accounting. Keywords: Sustainability Accounting, Sustainability Reporting, Environment, Social, Corporate Sustainability Introduction The number of companies voluntarily producing environmental or sustainability reports has increased dramatically since Shell Canada produced one of the first environmental reports in 1991 (Maharaj & Herremans, 2008). According to the 2011KPMG benchmarking survey (KPMG, 2011) 95 percent of Fortune Global 250 (G250) companies now disclose social and environmental information either in a standalone or in an integrated report compared to just 35 percent of G250 companies undertaking environmental reporting in 1999 (KPMG, 1999). Scholarly research in this area has also 726

grown significantly with sustainability reporting quality in particular being the subject of research and benchmarking studies (Adams, 2004; Dong & Burritt, 2010; Günther, Hoppe, & Poser, 2007; Guthrie, Cuganesan, & Ward, 2008). The overall consensus of this research is that although the number of sustainability reports has increased, reporting quality remains poor. For example Dong and Burritt (2010) found that a large gap exists between reporting by Australian oil and gas companies and the industry benchmark with reporting quality well below that which would be expected. Comparing reporting by Greek companies to the Global Reporting Initiative (GRI) reporting guidelines, Skouloudis et al. (2009) found major gaps in the comprehensiveness of reports with important indicators such as those concerning environmental performance, human rights and product responsibility being omitted. Günther et al. (2007) found that reporting quality was particularly low for quantitative indicators such as greenhouse emissions. In relation to materiality, it was observed by KPMG in their 2008 study that many companies in at risk sectors such as automotive, construction and transport are lagging behind when it comes to reporting on climate change risk, one of the biggest global environmental problems (KPMG, 2008). Regarding balance, Deegan and Rankin (2002) found that Australian companies successfully prosecuted for violations of environmental regulation did not disclose this information, focusing instead on more positive aspects of their operations. Even within this overall poor quality, it has been found that there is a wide range of qualities depending on geographical location, company size and industry sector with typicallylarger companies in more polluting sectors producing better quality reports (Brammer & Pavelin, 2008). This research has led to sustainability reporting being labeled as little more than an impression management tool (Jones, 2011) or a smokescreen diverting attention from core issues of ethical and moral accountability (Owen, 2005, p. 397).The motivation for companies to produce sustainability reports as well as the quality and extent of reporting has been examined in the literature using several theoretical perspectives. Two widely adopted perspectives are legitimacy and accountability. The legitimacy perspective is management orientated. It supports the view that companies use sustainability reports as a legitimizing tool to demonstrate to stakeholders and to society 727

that their activities and behaviors are within the accepted norms. This perspective also supports the view that sustainability reports are used to respond to negative external pressures or events by increasing the extent of disclosure as well as the amount of positive disclosure (Deegan et al., 2002). From this perspective sustainability reporting appears as symbolic action so that reports may not be an accurate reflection of company performance but are used to present a socially responsible image and manage public perceptions (Bansal & Clelland, 2004; Jones, 2010). The accountability perspective views sustainability reporting as the duty of organizations to provide an account of their activities, even if they are not in the best interests of the company (Gray, 2007). The accountability perspective recognizes the gap between what companies are reporting and what is required, and also be-moans the current quality of sustainability reports. Issues such as lack of regulation in the reporting process as well as information asymmetry between the company and its stakeholders (Brammer & Pavelin, 2008) have been identified within this literature as obstacles to high reporting quality. What is Sustainability Accounting? Sustainability accounting (also known as social accounting, social and environmental accounting, corporate social reporting, corporate social responsibility reporting, or nonfinancial reporting) was originated about 20 years ago (Tilt, 2007) and is considered a subcategory of financial accounting that focus on the disclosure of non-financial information about a firm's performance to external parties such as capital holders, mainly to stakeholders, creditors and other authorities. These represent the activities that have a direct impact on society, environment and economic performance of an organization. Sustainability accounting in managerial accounting contrast with financial accounting in that managerial accounting is used for internal decision making and the creation of new policies that will have an effect on the organization's performance at economical, ecological and social (known as the triple bottom line or Triple-P's; People, Planet, Profit) level. 728

Sustainability Accounting is a tool used by organizations to become more sustainable. The most known widely used measurements are the Corporate Sustainability Reporting and the triple bottom line accounting. These recognize the role of financial information and shows how traditional accounting is extended by improving transparency and accountability by reporting on the Triple-P's. As a result of the triple bottom level reporting, and in order to render and guarantee consistency in social and environmental information the GRI (Global Reporting Initiative), was established with the goal to provide guidelines to organizations reporting on sustainability. In some countries guidelines were developed to complement the GRI. The GRI states that "reporting on economic, environmental and social performance by all organizations is as routine and comparable as financial reporting". Corporate Sustainability Corporate Sustainability is a business approach that creates long-term consumer and employee value by not only creating a "green" strategy aimed towards the natural environment, but taking into consideration every dimension of how a business operates in the social, cultural, and economic environment. Also formulating strategies to build a company that fosters longevity through transparency and proper employee development. Corporate sustainability is an evolution on more traditional phrases describing ethical corporate practice. Phrases such as corporate social responsibility (CSR) or corporate citizenship continue to be used but are increasingly superseded by the broader term, corporate sustainability. Unlike the other phrases that focus on "added-on" policies, corporate sustainability describes business practices built around social and environmental considerations. The challenge for many businesses in this new field is to quantify the positive impacts of sustainability. A business thought leader in this area openly shares resources to help sustainability champions build the case for sustainability. Sustainability can increase revenue, reduce energy expenses, reduce waste expenses, reduce materials and water 729

expenses, increase employee productivity, reduce hiring and attrition expenses, and reduce strategic and operational risks. Deals with the idea that by having an engaging and open environment within the company as well as the community will improve performance and increase profits. It is an open culture that promotes employee involvement in regards to the innovation and creative processes. Reaching out to the community creates a much bigger team, is extremely cheap, and provides evaluation from all angles. Companies are looking inward and realizing changes must be made to fulfill environment needs such as energy efficiency, limiting product waste and toxicity, and designing innovative products. Reporting formats The concept of sustainability accounting is being carried out in an international setting with a vast and growing level of experience in the measurement of sustainable development. This new financial accounting tool is used by organizations to become more sustainable. It recognizes the role of financial information and shows how this can be extended to the social and environmental level. Although there isn't an established framework of reporting the content of a company's report can be largely determined by factors and reporting standards, guidelines and regulations. This trend offers companies a greater flexibility than financial statements, but an effective report needs to deliver information aligned to the company's overall objectives and engage with the audience in a manner that promotes the exchange of ideas and communication. Nowadays, there are several ways and mechanisms of reporting, such as assurance statements, environmental, social and economic performance reports, that have been noted. Some of these reports include shorter and more concise reports. Some companies are including in their reports a combination of hard copies and online resources as well as downloadable PDF files. Some examples can be found at the GRI, which is the most popular framework for companies that are looking for help and assistance in how to create their sustainability report. (GRI Downloadable report, 2011) As the trend to produce 730

sustainability reports increases, so too do the guidelines and frameworks to report on the social environmental information. Frameworks Sustainability accounting continues to develop. It is therefore of importance that companies understood the scenery of reporting frameworks, standards and guidelines that may affect the form and content of their reports. There are several organizations that offer services to companies that want to change the traditional financial statement disclosure for sustainability reporting. In mostly all countries around the world, there are currently no governmental requirements for companies to prepare and publish sustainability reports. Companies that have started to adopt this new method of reporting have faced new challenges in reporting due to the lack of experience. Failing to report accordingly to the guidelines and frameworks provided (see OECD and GRI) would lead them to potentially reduce their credibility of published information. The GRI, OECD and UNCSD (United Nations Commission on Sustainable Development) are some of the main actors in integrating a policy framework for better integrating the three dimensional level of sustainability by decoupling economic growth from environmental pressures. The GRI is a multi-stakeholder organization that is committed to developing and maintaining the "Sustainability Reporting Guidelines." The goal is the continuous improvement of sustainability reporting, this is only a protocol that approaches the application levels, there are three levels of reporting A, B and C, but these are not yet legally ratified fundamentals and are only used to assist companies with their sustainable reports. On the one hand the UNCSD focuses only on the environmental dimension of the sustainability accounting. On the other hand the OECD (Organization for Economic Cooperation and Development) focuses only focuses only in two frameworks: (Kee and de Haan, 2012) the analytical and accounting frameworks. 731

Leading sustainability companies display high levels of competence in addressing global and industry challenges in a variety of areas: Strategy: Integrating long-term economic, environmental and social aspects in their business strategies while maintaining global competitiveness and brand reputation. Financial: Meeting shareholders' demands for sound financial returns, longterm economic growth, open communication and transparent financial accounting. Customer & Product: Fostering loyalty by investing in customer relationship management and product and service innovation that focuses on technologies and systems, which use financial, natural and social resources in an efficient, effective and economic manner over the long-term. Governance and Stakeholder: Setting the highest standards of corporate governance and stakeholder engagement, including corporate codes of conduct and public reporting. Human: Managing human resources to maintain workforce capabilities and employee satisfaction through best-in-class organizational learning and knowledge management practices and remuneration and benefit programs. Corporate sustainability performance is an investable concept. This is crucial in driving interest and investments in sustainability to the mutual benefit of companies and investors. As this benefit circle strengthens, it will have a positive effect on the societies and economies of both the developed and developing world. Analytical frameworks Analytical frameworks are important for linking information from different areas. Various types of frameworks are being used nowadays depending on the purpose of measurement. These frameworks seek to: 732

Integrate the economic, environmental and social dimensions of sustainable development Have sound foundations and to maintain key information needed to improve sustainable development measurements Clarify relationships between different indicators and policies. Some examples of analytical frameworks are; Pressure State Response (PSR) model which is based on one of its variants Driving Force Pressure State Impact Response used by the European Environment Agency (EEA) or the Driving Force State Response. (Kee and de Haan, 2012) Sustainability requires a company to look both internally and externally to understand their environmental and social impacts. This requires the engagement of various stakeholders to understand impacts and concerns. A business can address sustainability internally by educating employees and seeking to reduce impacts through waste reduction, energy efficiency, etc. Employee engagement can be a powerful motivator by having a philanthropy committee or a green team. As a company looks externally, stakeholders include customers, suppliers, community, and non-government organizations. Accounting frameworks In the other hand the accounting frameworks seek to quantify information in the three dimensions of sustainability accounting. The System of National Accounts (SNA) has proven that measuring sustainable development with the conventional system of financial reporting is inadequate. (Kee and de Haan, 2012) The accounting structure imposes a more systematic approach that is not too flexible in comparison to the standards and frameworks that offer the GRI and OECD among others. Accounting for sustainability therefore requires an extension of its standard framework. The OECD offers two different approaches to the accounting framework for sustainability accounting. 1. measuring environmental-economic-social interrelationships 2. Wealth-based approaches 733

Measuring environmental-economic-social interrelationships needs a clear understanding of the relationships that exists between the natural environment and the economy. It is not possible without understanding the physical representation. The physical flow accounts are helpful in showing the characteristics of production and consumption activities. Some of these accounts focus on the physical exchange between the economic system and natural environment. Wealth-based approaches to sustainability refer to the preservation of stock of wealth. Sustainability is observed as the maintenance of the capital base of a country and therefore potentially measured. A number of environmental changes are contained also in these financial statements that are measured during an accounting period of time. The GRI offers advanced material to help organizations of all types to create their accountability reports. This published material lead organizations through the reporting process with main idea of becoming more sustainable in their practices in everyday business. Conclusion In contrast to financial reporting, the history of sustainability reporting (SR) is comparatively recent. The proposition that organizations, and business organizations in particular, should supplement their financial accounting with accounting on their environmental, social and other non-financial performance or sustainability reporting first emerged in the 1990s. At the time of the 1992 UN Conference on Environment and Development (UNCED), relatively few companies engaged in SR in any form. Responding to increasing media attention to environmental problems, most reports focused on environmental policies and performance. If businesses and other organizations are to meet the many and complex challenges of sustainable development, then they all, both public and private, need to embed sustainability considerations into their decision-making and reporting. However, the translation of this aspiration into effective action is often inhibited by the lack of systems 734

and procedures that take sustainability into account. Sustainability Accounting is a tool used by organizations to become more sustainable. The most known widely used measurements are the Corporate Sustainability Reporting and the triple bottom line accounting. the context of sustainable development, sustainability reporting is arguably one of the best examples of how action taken by a partnership of stakeholders since the 1992 Earth Summit has helped to create and put into operation an entirely new sustainability practice. Together with other multi-stakeholder sector initiatives such as the Carbon Disclosure project, the Global Reporting Initiative has created a new level of awareness, information and engagement around the sustainability performance of organizations. Although promising, however, the practice is not yet widely or deeply enough observed to achieve sustainable development. References 1. Adams, C. A. (2004). The ethical, social and environmental reporting-performance portrayal gap. Accounting, Auditing & Accountability Journal, 17, 731 757. 2. Brammer, S., & Pavelin, S. (2008). Factors influencing the quality of corporate environmental disclosure. Business Strategy & the Environment, 17, 120 136. 3. Deegan, C. (2002). Introduction: The legitimizing effect of social and environmental disclosures a theoretical foundation. Accounting, Auditing & Account-ability Journal, 15, 282 311. 4. Dong, S., & Burritt, R. (2010). Cross-sectional benchmarking of social and environmental reporting practice in the Australian oil and gas industry. Sustainable Development, 18, 108. 5. Gray, R. (2007). Taking a long view on what we now know about social and environmental accountability and reporting. Issues in Social & Environmental Accounting, 1, 169 198. 6. GRI Downloadable report (2011). "The Santander Annual Report presents the bank s economic, social and environmental performance in Brazil for 2010", (PDF)", 735

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