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The Emergence of Sustainability Accounting

January 20th, 2022

PG. 2

PG. 3

Solution

Start Here

Imagine the plot is divided into 4 quadrants and each number has the consecutive number mirrored in the opposite quadrant

For example: start here: 1 , 2, 3, 4

Why is Sustainability a Business Issue?

Costs of environmental and social impacts

Waste, climate change, relocation of communities, etc.

Stakeholder Pressure

Opportunities of sustainable development

Renewable energy technology, infrastructure, education, healthcare, new markets

Globalization

Sustainability as a competitive factor

Why has the importance of sustainability accounting in business grown? External pressure, internal pressure

Accounting

Accountable: Having the duty to explain how resources have been used

Resources

Financial

Employees

Inputs

….?

Accountability

The obligation of an individual or an organization to account for its activities

To accept responsibility for the results and to disclose them in a transparent way.

Includes the responsibility for money and other entrusted resources

Agree on the definition of accountability.

Fields of Accounting

Financial Accounting.

Cost Accounting.

Managerial Accounting.

Auditing

PG. 8

Sustainability accounting has a long history in academia and industry practices.

Reporting started in the 1920 mainly through financial reporting to produce the financial statement of corporations such as the balance sheet and profit and loss

1920s

1960s

1970s

Financial Reporting

Social reporting

2000s

Environmental Reporting

Integrated Reporting

PG. 9

Social Reporting

Working conditions

Access to health care

Occupational Health and Environmental safety

Social reporting started in the 1960s, namely in France when labour unions started employers to report on the working conditions of employees.

1920s

1960s

1970s

Financial Reporting

Social reporting

2000s

Environmental Reporting

Integrated Reporting

PG. 10

Environmental Reporting

Carbon emissions

Pollution and waste

Energy

In the 1970s and 1980, corporations started to report on their environmental performance to gain competitive advantage and also to be good citizens

1920s

1960s

1970s

Financial Reporting

Social reporting

2000s

Environmental Reporting

Integrated Reporting

Sustainability Accounting Systems

Transparency about an organization’s activities

encouraged by external audits and verification

Stakeholder engagement

Voluntary and mandatory systems

Driven by

Regulators

NGOs

Market mechanisms

Internalization of external costs and benefits

Who is accountable?

Entities for which stakeholder interest exist

Traditional stakeholders

Shareholders

Lenders

Investors

Regulators

Financial accounting for a certain type of firms only

Who is Accountable and to whom?

Shareholders

Regulators,

Financiers

Society

Intermediaries (rating agencies)

Accountable to Stakeholders

Individuals or groups having an interest in a company because they

can affect or

can be affected

by a company’s activities

Freeman, R. E. (1984). Strategic Management: A stakeholder approach. Englewood Cliffs, NJ: Prentice-Hall.

Why is the government interested in banks’ sustainability reporting?

Stakeholder theory explains…

…why organizations have to consider multiple interests to be a good sustainability performer

…the need of new forms of stakeholder engagement in order to achieve better sustainability performance and sustainability accountability

…the development of sustainability accounting systems

The stakeholder concept is relatively new. Therefore, we need new ways of corporate communication, such as sustainability reporting

Types of Stakeholders

External

Shareholders, NGOs, regulators, suppliers, clients, investors, …

Internal

Employees, managers, …

What does this imply for accounting and reporting?

Conflicts (Agency Dilemma): Many managers will avoid taking any risks!

What are external stakeholders that could be interested in accounting? What are internal stakeholders? Discuss with neighbor.

Response: Different stakeholders have different needs. Reporting and accounting have to address these needs.

Primary and Secondary..

Implication: Stakeholder Accounting

Accounting for impacts on stakeholders

Different impacts on different stakeholders

Civil Society members Vs. employees Vs. investors

Less detailed communication

Tension between PR and transparent accounting

Example for stakeholder oriented reporting: The Equator Principles for Project Finance

Voluntary code of conduct for project financiers

Social and environmental risk management framework

Conventional view

A stakeholder view on project finance

Project financier

Project

Environment

Affected communities

the principles

Review and categorization

Environmental and social assessment

Applicable environmental and social standard.

Environmental and social management system and action plan

Stakeholder engagement

Grievance mechanism

Independent review

Covenants

Independent monitoring

Reporting and transparency

Check the website for EP Reporting

What do they report about?

Does the reporting address stakeholders?

Who are the stakeholders?

Project risks, regions, implementation of principles

Sustainability Accounting

Activities, methods and systems

Recording, analysis and reporting

Outside-in relation: Sustainability induced financial impacts

Inside-Out relation: Sustainability impacts of a defined economic system, such as a firm

Schaltegger, S., & Burritt, R. L. (2000). Contemporary environmental accounting: issues, concepts and practice. Sheffield: Greenleaf Publishing.

SASB Definition of Sustainability Accounting

to evaluate the environmental, social and governance performance of companies

through an account of their management of various forms of non-financial capital associated with sustainability

environmental, human, social, governance

which they rely upon for sustained, long-term value creation.

Materiality

Accounting Systems and Stakeholders

Based on: Schaltegger, S., & Burritt, R. L. (2000). Contemporary environmental accounting: issues, concepts and practice. Sheffield: Greenleaf Publishing, p. 33

Management

accounting

Internal sustainability

accounting

Employees

COMPANY

Financial accounting

Other

accounting systems

External sustainability accounting

Other sustainability accounting

General Public

Media

Creditors

Insurance companies

Suppliers

Shareholders

Tax agency

Communities

NGOs

Regulators

First internal accounting, both management accounting and sustainability accounting

Then external accounting: Financial accounting, other accounting, i.e. governance, material sourcing

Then external sustainability accounting. Other sustainability accounting for regulators.

Effects of Sustainability Accounting in Addition to Higher Transparency

Better employee morale, attraction and retention

Improved corporate reputation

Anticipation of future regulations

Anticipation of markets connected with sustainability

Supporting sustainable management practices

Different Interests in Accounting

Why are managers interested in sustainability accounting and what are they interested in?

Why are stakeholders interested in sustainability accounting and what are they interested in?

Management and Internal Sustainability Accounting

Wider field than Financial accounting

Long-term

Detailed

Facilitates

managerial decision-making

Internal accountability

Basis for external accounting

Why is internal reporting not used for stakeholder communication?

Other Drivers for Sustainability Accounting: Costs and Benefits

Until the 1980s environmental and societal impact not a cost or benefit driver

From 1980s: Polluter pays principle

Fines (Exxon, BP)

Higher costs of impacts and lower costs for information systems: marginal cost curves

Reputation

Marginal Costs

Costs of Sustainability Accounting

Costs of low sustainability performance

time

costs

the cost added by producing one additional unit of a product or service.

Problems of Sustainability Accounting Systems

Wide range of addressees

No priority in management

No central unit

Sustainability data not connected with strategic objectives

High fixed costs (e.g. ISO 14000, ISO 26000)

Goodstein, E. (1995). The Economic Roots of Environmental Decline: Property Rights or Path Dependence? Journal of Economic Issues, 29(4), 1029-1043. doi: 10.2307/4227020

Co-ordinated Collection of Sustainability Data

Environmental and societal impacts on firms are increasing

But

Opportunities and threats

Costs and revenues

Assets and liabilities

related to sustainability are not explicitly considered in conventional corporate accounting

Challenges of Corporate Sustainability Accounting

What does corporate sustainability really mean?

Complexity of corporate sustainability leads to problems for management in operationalisation, measurement and communication

Impacts on sustainability often not reported

Information asymmetry between companies and its stakeholders

Lack of target group orientation creates a risk of information overload

No generally accepted standards

High costs for SMEs

Asset: Renewable energy from wind turbinesSuppliers of wind turbines and other materialsLenders: BanksEquity investors:Pension fundsPurchasers: Energy utilitiesSponsors: Renewable energy firmsMaterialsSupply contractsEquity fundsReturns to investorsEquity, championingOutputPurchase contracts