CHAPTER 11

Sustainability and
environmental
accounting
LEA RNIN G OBJE CTIVE S

After studying this chapter, you should be able to:

11.1 explain the meaning of sustainability and why an entity might embrace sustainable development
practices
11.2 evaluate a range of methods used to report on sustainability and environmental performance
11.3 describe the commonly used guidelines for sustainability reporting, and evaluate how they can assist
corporate reporting of sustainability performance
11.4 evaluate the range of stakeholders that can influence sustainable business practice, and how entities
can engage with these stakeholders
11.5 explain how entities can use environmental management systems to improve environmental
performance and reporting
11.6 evaluate the implications of climate change for accounting.
 What is
sustainability?

Integrated Environmental
reporting reporting

Sustainability
reporting

Environmental
Stakeholder
management
influences
systems

Guidelines for
sustainability
Ethical reporting
investment
Climate change
and accounting

Mandatory
Global reporting
reporting
initiative
requirements

Emissions Accounting for

reduction schemes carbon emissions

314  Contemporary issues in accounting

The issue of sustainability reached a milestone in 2015, with crucial agreements across the international
community, including the Sustainable Development Goals (SDGs) and the Paris Agreement on Climate
Change Action. These goals now need to be put into action. Sustainability issues have an increasing
influence on the business environment and, in turn, on the role of accountants. A need to measure and
report on social and environmental performance and to consider how greenhouse gas emissions are gen­
erated by the entity affects its information systems and reporting practices.
In this chapter we examine sustainability and how it has an impact on the accounting profession.
Sustainability reporting is introduced, we consider some of the mandatory requirements for sustaina­
bility reporting globally and evaluate guidelines to assist in preparing sustainability reports. While share­
holders are traditionally seen as the most important stakeholders with regard to financial performance,
sustainability and environmental accounting tend to consider a broader range of stakeholder interests.
How environmental management systems can be used to assist in documenting, measuring and reporting
environmental performance is also examined. A range of mechanisms used or proposed globally in the
accounting for carbon emissions are also evaluated.

11.1 What is sustainability?

LEARNING OBJECTIVE 11.1 Explain the meaning of sustainability and why an entity might embrace
sustainable development practices.
Before considering how sustainability affects the contemporary business environment and the
accounting profession, the meaning of sustainability needs to be clarified. Sustainable development
was identified as a significant issue by the General Assembly of the United Nations in 1987, when it
commissioned a report — Our Common Future — to foster a global solution to ongoing pressures on
the environment. The report was presented by the United Nations World Commission on Environment
and Development (known as the Brundtland Commission after its Chair, Gro Harlem Brundtland) and
subsequently became known as the Brundtland Report. The report defined sustainable development as
‘development that meets the needs of the present without compromising the ability of future generations
to meet their own needs’.1 This definition relates to three main areas: economic development, environ­
mental development and social development.
The Brundtland definition highlights the importance of both intergenerational and intragenerational
equity. Intergenerational equity has a long‐term focus and recognises that consumption of resources
should not affect the quality of life of future generations. Intragenerational equity relates to the
ability to meet the needs of all current inhabitants. This means strategies need to consider poverty and
access to basic food, water and shelter for all inhabitants. Together, intragenerational and intergenera­
tional equity have been termed eco‐justice. The above sustainability definition also considers what is
known as eco‐efficiency — a focus on the efficient use of resources to minimise their impact on the
environment. While the definition of sustainability has received widespread debate, there is general
agreement that it involves preservation and maintenance of the environment and involves some duty
of social justice.2
While the definition of sustainability initially considered global development at a government level, it
is intended to also relate to organisations and companies. Given corporate entities are in control of the
majority of the earth’s resources, any moves towards sustainability will not happen unless corporations
consider how their operations affect the environment and society. While it is essential for an organisation
to make a profit in order to continue operations, if it is to do this sustainably, management needs to con­
sider how to do so without causing any damage to the environment and society. Embracing sustainability
could make good business sense for an entity.
Figure 11.1 demonstrates how BHP Billiton has considered why it embraces sustainable development
from the perspective of a business case. BHP goes further, however, to incorporate factors beyond the
business case.

CHAPTER 11 Sustainability and environmental accounting  315

 FIGURE 11.1 Why BHP Billiton embraces sustainable development

The business case for sustainable development

Our bottom‐line performance is dependent on ensuring access to resources and securing and maintaining our
licence to operate and grow. Maximising the bottom‐line is, however, about recognising the value protection
and value add that can be achieved through enhanced performance in HSEC aspects. Delivery of this
enhanced performance is a core expectation of our management teams. This is termed our sustainability value
add and the value it can bring to our business is recognised through the following.

Reduced business risk and enhanced business opportunities

Understanding and managing risk provides greater certainty for shareholders, employees, customers and
suppliers, and the communities in which we operate. By managing our business risk we can be better
informed, more decisive and can pursue growth opportunities with increased confidence.
  The aim is to embed risk management in all critical business systems and processes so that risks can be
identified and managed in a consistent and holistic manner.

Gaining and maintaining our licence to operate and grow

Access to resources is crucial to the sustainability of our business. Fundamental to achieving access to
resources is effectively addressing heightened political and societal expectations related to the environmental
and social aspects of our business.

Improved operational performance and efficiency

Many key operational performance indicators are inextricably linked to sustainability performance. For
example, improving energy efficiencies reduces both costs and greenhouse gases; increasing plant life
reduces  maintenance cycles, which then reduces requirements for consumables and replacement items.
Reducing wastes immediately eliminates operational costs. The application of innovation and business
improvement processes can not only improve operational efficiency and performance but also deliver
sustainability gains.

Improved attraction and retention of our workforce

Our workforce is an essential element of our business, and being able to attract and retain a quality workforce
is fundamental to our success.
  Maintaining a healthy and safe workplace is a universal value of all employees. Effective employee
development and training programs, attractive remuneration packages, addressing work/life balance,
and  providing a fair and n
­ on‐discriminatory work environment all contribute to employee attraction and
retention.

Maintained security of operations

Asset security is a critical element that can be significantly impacted by the nature of relationships with host
communities. Trusting and supportive relationships can lead to reduced security risks, whereas distrustful
relationships can lead to heightened security risks. This is particularly critical for our operations in parts of the
world with politically unstable environments.

Enhanced brand recognition and reputation

The benefits of enhanced brand recognition and reputation are many but often difficult to quantify.
Understanding what our stakeholders perceive as responsible behaviour, meeting these expectations and
achieving recognition from financial institutions, investors and customers can deliver value.
  For example, enhanced reputation may foster an increased belief that the Company has the credibility and
capabilities to deliver on its commitments. This can promote shareholders’ faith in proposed investments,
communities’ faith in community development plans, governments’ faith in successful delivery of projects, and
business partners’ faith that we are reliable and competent in all that we do.

Enhanced ability to strategically plan for the longer term

By anticipating and understanding trends in society — new regulations, heightened societal expectations and
improved scientific knowledge — and assessing these against our business models, our ability to proactively
plan for the longer term is improved. This includes entering emerging markets, revising product mixes or
changing operational technologies.

316  Contemporary issues in accounting

 Beyond the business case
Beyond the business case described above, there are also many clear societal benefits that flow from our
ability to integrate aspects of sustainability into our business. These benefits include, but are not limited to,
contributing to improved standards of living and self‐sustaining communities.
  The diagram below illustrates the many facets of value creation at BHP Billiton.

Company value
Reduced
Societal value business risk
and enhanced
business
opportunities
Gaining
Enhanced and maintaining
brand our licence to
recognition Improved Improved
stakeholder trust standards of living operate and
and reputation grow

Enhanced economic Self-sustaining

contributions communities
Value
creation
Enhanced Improved
ability to operational
strategically plan performance
for the longer and
term Enhancement efficiency
of biodiversity Enhanced resource
conservation
Improved
work/life balance

Improved
Maintained
attraction and
security of
retention of our
operations
workforce

Source: BHP Billiton 2006.3

11.2 Sustainability reporting
LEARNING OBJECTIVE 11.2 Evaluate a range of methods used to report on sustainability and
environmental performance.
With the increasing importance of sustainable development to business, reporting on sustainable per­
formance has also increased. Given the primarily voluntary nature, a variety of terms are used for
­sustainability reporting. It has been referred to as corporate social reporting, corporate social responsi­
bility reporting, triple bottom line reporting, sustainability reporting, environmental reporting, social
audit, environmental, social and governance (ESG) reports and stakeholder reports. Many of these terms
are used interchangeably. While the term triple bottom line reporting was commonly used until approxi­
mately 2006 and ESG appears to be emerging as a more prominent term, the use of the term ‘sustaina­
bility reporting’ is still the most common and will be used in this chapter.

CHAPTER 11 Sustainability and environmental accounting  317

 The term ‘triple bottom line’ reporting was initially coined by John Elkington in reference to the
three main areas that are the focus of sustainable development: economic, environmental and social
development.4 A triple bottom line report (TBL) or sustainability report refers to a report that not
only presents information about the economic value of an entity, but provides information upon which
stakeholders can also judge the environmental and social value of an entity. Elkington points out that it
not only reflects reporting requirements, but can be used as a model to assist with performance measure­
ment, accounting, auditing and reporting.5 This means that a well implemented sustainability reporting
system can be used as part of a broader framework to integrate sustainability into business management
decisions.6
Sustainability reports are presented by a large range of organisations from most sectors, including
not‐for‐profit entities and the government sector. The Australian government, in producing guidelines to
assist Australian entities determine appropriate environmental indicators, identified the following ben­
efits of sustainability or TBL reporting.

• Embedding sound corporate governance and ethics systems throughout all levels of an organisation.
Currently many corporate governance initiatives are focused at the Board level. TBL helps ensure a
values‐driven culture is integrated at all levels.
• Improved management of risk through enhanced management systems and performance monitoring.
This may also lead to more robust resource allocation decisions and business planning, as risks are
better understood.
• Formalising and enhancing communication with key stakeholders such as the finance sector, sup-
pliers, community and customers. This allows an organisation to have a more proactive approach to
addressing future needs and concerns.
• Attracting and retaining competent staff by demonstrating an organisation is focused on values and its
long‐term existence.
• Ability to benchmark performance both within industries and across industries. This may lead to
a competitive advantage with customers and suppliers, as well as enhanced access to capital as the
finance sector continues to consider non‐financial performance within credit and investment decisions.7

Sustainability, TBL or corporate social responsibility (CSR) reports have been presented by a range of
companies and not‐for‐profit entities, both in Australia and globally. In Australia, these include Westpac,
L’Oreal, Rio Tinto, BHP Billiton, CSR, Lion, Vodafone and Greenpeace. While the extent of organ­
isations presenting sustainability reports has increased, there has been limited legislative guidance on
appropriate methods to develop sustainability reports.8
Reporting in many countries is currently voluntary (more information on reporting guidance in dif­
ferent jurisdictions will be presented later in the chapter) and it is the responsibility of the organisation
to develop their own measurement and reporting format. A widely accepted format for the integration
of sustainability concepts into business and reporting of sustainability aspects is reflected in the Global
Reporting Initiative (GRI). GRI is discussed later in the chapter.
An increasing body of research has examined sustainability reporting and determinants of either the
extent or quality of reporting. Hahn and Kühnen reviewed this diverse body of research and synthesised
a range of determinants of sustainability reporting.9 The most frequently investigated determinants of
sustainability reporting that are considered to be ‘internal’ to the organisation include its size and finan­
cial performance. Larger firms are more likely to adopt sustainability reporting, with research finding
that large firms are likely to have greater impacts, are more visible and are therefore likely to be subject
to more scrutiny and pressure by stakeholders.10 Research examining the relationship between finan­
cial performance and sustainability reporting is mixed. On one hand, research has found that a high
level of debt or leverage can mean less ability to bear the costs of sustainability reporting or to bear
the costs associated with disclosing potentially damaging information.11 On the other hand, sustaina­
bility reporting has the potential to legitimise corporate activities towards creditors and shareholders,
therefore, providing an incentive to engage in reporting.12 Sustainability performance may also affect
sustainability disclosure. Again, research presents mixed views. Companies may want to signal good

318  Contemporary issues in accounting

performance by presenting higher quality or a greater extent of sustainability disclosures,13 while com­
panies with weaker sustainability performance are likely to face pressure from stakeholders, therefore
are more likely to engage in sustainability reporting to reduce legitimacy threats.14
Research exploring external determinants of sustainability reporting has focused on industry and the
country of origin of the firm. If companies operate in industries with high social and environmental impacts,
they are more likely to produce sustainability reports to respond to stakeholder pressure in that specific
sector. Alternatively, organisations may mimic other firms in the industry, even when there are no specific
legitimacy threats or stakeholder pressure.15 Cultural and social norms across countries and regions can also
affect sustainability disclosure.16 Pressure from international lenders such as the International Monetary
Fund is a common factor influencing reporting in developing or emerging economies.17

Integrated reporting
Integrated reporting is a recent initiative designed to improve sustainability reporting and integrate
it more closely with financial and governance reporting (that is, reporting on the rules, processes and
laws within which an organisation operates or is governed). The development of integrated reporting
followed the global financial crisis and resulted from a perceived need for a new economic model to
protect a range of stakeholders (for example, businesses, investors, employees and society) from sub­
sequent crises. Governments and business leaders recognise that there needs to be a change in emphasis
of corporate reporting given it currently does not adequately reflect material environmental, social, and
governance factors such as resource usage, social impacts, human rights and how businesses may con­
tribute to climate change.18
In 2010, the Prince of Wales’ Accounting for Sustainability Project (A4S) and Global Reporting
­Initiative (GRI) formed the International Integrated Reporting Council (IIRC). The IIRC members rep­
resent a cross‐section of society, including members from the corporate, accounting, securities, regula­
tory, non‐governmental organisation (NGO), intergovernmental organisation (IGO) and standard‐setting
sectors. The mission of the IIRC is ‘to establish integrated reporting and thinking within mainstream
business practice as the norm in the public and private sectors’. The IIRC believes integrated thinking
and reporting will result in efficient and productive capital (resource) allocation, being forces for finan­
cial stability and sustainability.
In 2013, the IIRC developed its International Integrated Reporting Framework, known as the
­International <IR> Framework. The framework requires information about organisations’ strategy,
governance, impacts, performance and prospects, and aims to ‘secure the adoption of Integrated
Reporting by report preparers and gain the support of regulators and investors’.19 Figure 11.2 lists the
framework’s guiding principles and content elements.20
However, beyond these principles and elements, there is limited guidance regarding the specific format
and detail expected in these reports. Hence, until more detailed guidance or regulation is introduced,
comparability seems unlikely. At present the IIRC is focused on testing the framework and seeking to
promote early adoption by reporting organisations. Further information about the IIRC can be found on
its website, [Link].

Environmental reporting
Entities, when presenting sustainability reports, generally include information about their environmental
and social performance and impacts. Information about these activities could be found as a separate sec­
tion of the annual report, in a separate environmental report or as part of a comprehensive sustainability,
ESG, CSR or TBL report. Reporting dedicated to social and environmental impacts pre‐dates more
comprehensive sustainability reporting. From a historical perspective, in the 1970s traditional financial
reporting was sometimes complemented by social reports.21 The focus moved to environmental issues
such as emissions and waste generation in the 1980s, with disclosures beginning to consider social and
environmental dimensions simultaneously by the end of the 1990s.22

CHAPTER 11 Sustainability and environmental accounting  319

 FIGURE 11.2 International Integrated Reporting Framework guiding principles and content elements

Guiding principles
The following Guiding Principles underpin the preparation of an integrated report, informing the content of the
report and how information is presented:
• Strategic focus and future orientation: An integrated report should provide insight into the organization’s
strategy, and how it relates to the organization’s ability to create value in the short, medium and long term,
and to its use of and effects on the capitals
• Connectivity of information: An integrated report should show a holistic picture of the combination,
interrelatedness and dependencies between the factors that affect the organization’s ability to create value
over time
• Stakeholder relationships: An integrated report should provide insight into the nature and quality of the
organization’s relationships with its key stakeholders, including how and to what extent the organization
understands, takes into account and responds to their legitimate needs and interests
• Materiality: An integrated report should disclose information about matters that substantively affect the
organization’s ability to create value over the short, medium and long term
• Conciseness: An integrated report should be concise
• Reliability and completeness: An integrated report should include all material matters, both positive and
negative, in a balanced way and without material error
• Consistency and comparability: The information in an integrated report should be presented: (a) on a basis
that is consistent over time; and (b) in a way that enables comparison with other organizations to the extent
it is material to the organization’s own ability to create value over time.
Content elements
An integrated report includes eight Content Elements that are fundamentally linked to each other and are not
mutually exclusive:
• Organizational overview and external environment:  What does the organization do and what are the
circumstances under which it operates?
• Governance: How does the organization’s governance structure support its ability to create value in the
short, medium and long term?
• Business model: What is the organization’s business model?
• Risks and opportunities: What are the specific risks and opportunities that affect the organization’s ability to
create value over the short, medium and long term, and how is the organization dealing with them?
• Strategy and resource allocation: Where does the organization want to go and how does it intend to get
there?
• Performance: To what extent has the organization achieved its strategic objectives for the period and what
are its outcomes in terms of effects on the capitals?
• Outlook: What challenges and uncertainties is the organization likely to encounter in pursuing its strategy,
and what are the potential implications for its business model and future performance?
• Basis of presentation: How does the organization determine what matters to include in the integrated report
and how are such matters quantified or evaluated?

Source: International Integrated Reporting Council.

A large body of research has explored environmental disclosure.23 Much of this research has examined
disclosure from the perspective of legitimacy theory, which is based on the notion of a social contract,
and argues that organisations can only continue to exist if the society in which they operate recognises
they are operating within a value system that is consistent with society’s own.24 This means that an organ­
isation must appear to consider the rights of the public at large, not just its shareholders. This theory is
discussed in more detail in the chapter that looks at theories in accounting. If you refer to figure 11.1,
BHP Billiton refers to its ‘licence to operate’, which equates to meeting the terms of its social contract.
To date, research has not drawn any clear conclusions about the relationship between environ­
mental performance and environmental disclosure. Legitimacy theory would propose that entities with
poor ­environmental performance would more likely produce more, or higher quality, environmental

320  Contemporary issues in accounting

information to address potential legitimacy threats. Entities that have been subjected to environmental
threats such as prosecutions due to emissions or large spills have been found to provide greater levels
of environmental information.25 Al‐Tuwaijri, Christensen and Hughes II took a holistic approach to
examine how management’s overall strategy jointly affects environmental disclosure, environmental per­
formance and economic performance. They found that good environmental performance is positively
associated with both good economic performance and more extensive quantifiable environmental dis­
closures of specific pollution measures. In doing so, Al‐Tuwaijri et al. indicated that managers should
change their strategic outlook from fixating on the cost of regulatory compliance to considering the
opportunity costs of environmental pollution and the consequent positives associated with good environ­
mental performance.26
Clarkson, Li, Richardson and Vasvari in an examination of discretionary environmental disclosures by
a sample of US firms from the most polluting industries, found a positive association between environ­
mental disclosures and environmental performance.27 The authors conclude that their results support
an economic‐based voluntary disclosure theory which predicts that firms that are good performers will
more likely present greater levels of disclosure to differentiate themselves from poor performers.28 The
results of Clarkson et al. do not support a legitimacy argument where poor performers are more likely
to increase disclosure to detract attention from their poor performance.29 These theories are discussed in
more detail in the chapter on theories in accounting.
Another factor that could affect environmental reporting is firm reputation and strategic risk manage­
ment.30 Managers have a desire to manage stakeholder views of environmental performance in an effort
to portray the firm as environmentally and socially responsible, with the expectation that environmental
or social risk management will lead to maximising earnings potential and investment in the company.
Bebbington, Larrinaga and Moneva explore this issue and conclude that reputation risk management,
while not a competing explanation to legitimacy motives, can further add to our understanding of the
motivations for social and environmental reporting.31
In the following sections we examine both voluntary guidelines and current global mandatory reporting
requirements that might be used to guide corporate sustainability reporting.

11.3 Guidelines for sustainability reporting

LEARNING OBJECTIVE 11.3 Describe the commonly used guidelines for sustainability reporting, and
evaluate how they can assist corporate reporting of sustainability performance.
There are a range of guidelines which have emerged to provide direction on appropriate sustaina­
bility reporting. The United Nations (UN) has been responsible for a number of these initiatives.
The UN Global Compact is a strategic policy initiative for businesses that are committed to aligning
their operations and strategies with principles in the areas of human rights, labour, environment and
anti‐­corruption.32 ­Entities joining the Global Compact are required to annually communicate on their
progress, with the Global Reporting Initiative’s reporting framework being the preferred method of
[Link] United Nations Conference on Trade and Development (UNCTAD), in 2008, produced
guidance on the use of corporate sustainability indicators in annual reports. The objective of the docu­
ment, which was developed with reference to the Global Reporting Initiative Guidelines and Inter­
national Financial Reporting Standards, is to provide detailed guidance on the preparation of reports
using selected indicators. In doing so the guidance discusses key stakeholders and their information
needs, including an overview of users and their uses for corporate responsibility reporting, and selection
indicators along with detailed guidance on reporting each of these indicators. The selection indicators
chosen are presented in table 11.1.33
The Organisation for Economic Co‐operation and Development (OECD) includes, as part of
its ­Guidelines for Multinational Enterprises, a section on ‘Disclosure’, which encourages multi­
national enterprises to provide disclosures on their non‐financial performance in addition to financial
performance.34

CHAPTER 11 Sustainability and environmental accounting  321