Sustainability Accounting

and Reporting
 What is the Fundamental Role of
Accounting?

Firm
What is Sustainable
Reflect Sustainable Firm
Firm Value
Value?
Value
Planet

Communities

People

Reliable and
Verifiable
Production Cost Production
and Revenue Cost and
Function Revenue
Function
 Relevance for Decision Making
Myopic focus a threat to the market's viability

The obsession with short-term financial results by investors, asset management firms

and corporate managers collectively can lead to unintended consequences such as the
destruction of long-term value, decreased market efficiency, reduced investment
returns and the obstruction of efforts to strengthen corporate governance.  Financial
Times, 2007

Short-term financial focus a flawed view, Financial

Times 2011

Stop Maximizing Profit and Start Maximizing Value

What is Sustainability Accounting?

Sustainability Sustainability
Reporting Management

Sustainabilit
y Accounting

Sustainability Sustainability
Scorecards Governance
 Why is Sustainability Accounting
Important?
External Internal
Reporting Management

Environmental Costs are

Legal Requirements
Real

Voluntary External
Reporting
Potential Revenue
[IIRC, GRI, DJSI, TruCost,
Source of Differentiation
CDP, Corporate
Sustainability Reports]
 Sustainability Reporting
SEC

• Staff Accounting Bulletin (SAB) 92

EPA and Regulatory Reporting

• Toxic Release Inventory (TRI)
• Resource Recovery and Conservation Act (RCRA)
• Manufacturing Energy Consumption Survey (MECS)

Global Reporting Initiative (GRI)

• Voluntary Triple bottom line reporting

 Sustainability Reporting - SEC

Staff Accounting Bulletin (SAB) 92

– Disclosure of
material effects of environmental regulations
pending legal proceedings and likely impacts
– Co-ordination with EPA for liabilities
information
Insufficient disclosure may lead to SEC
fines ($500K for each violation)
 Sustainability Reporting - EPA
Toxic Releases inventory(TRI)
– Quantities of toxic chemicals, pollution
prevention, disposal
Resource Recovery and Conservation Act
(RCRA)
– Hazardous materials/wastes cradle to grave
accounting through manifest system
Manufacturing Energy Consumption Survey
(MECS)
Greenhouse Gas Reporting (2010)
 Voluntary Disclosure

Models:
– Global Reporting Initiative (GRI),
– International Integrated Reporting Council
(IIRC),
– Sustainability Accounting Standard Board
(SASB).
Sustainability Reporting – Global Reporting
Initiative (GRI)
http://www.globalreporting.org
Goal
– to produce a report that “reflect[s] the organization’s
economic, environmental and social impacts” and
should include all material information
materiality is defined as information that could “substantively
influence the assessments and decisions of stakeholders”
UNEP sponsored but independent
Facilitate comparisons
– over time
– across organizations
 GRI

Social

Environmental Economic
 Reporting Model for GRI

FASB
GRI
A IASB B

Annual Report Reporting CSR Report

Entity

Link A: US GAAP or IFRS

Link B: G4 – Sustainability reporting
 GRI
https://g4.globalreporting.org/introduction/how-to-use-g4-online/Pages/default.aspx

Part 1 – Reporting Principles

and Guidance
– Content: materiality, stakeholder
inclusiveness, sustainability
context, and completeness.
– Quality: balance, comparability,
accuracy, timeliness, reliability,
and clarity.
– Guidance on how to set the report
boundary.
Part 2 – Standard Disclosures
– Strategy and Profile
– Management Approach
– Performance Indicators
Implementation Manual
 GRI Performance

Sectors covered
 Financial services sector
 Electric utilities sector
 Mining & metals sector
 Food processing sector
 NGO sector
 Media
 Oil and gas
 Airport operators
 Construction
International Integrated Reporting Council (IIRC)

Integrated reports
Six Capitals
“An integrated report should
provide concise information
that is material to assessing
the organization’s ability to
create value in the short,
medium, and long term”
Materiality: “information that
could substantively affect the
organization’s ability to create
value in the short, medium, or
long term”
 Reporting Model for IIRC

FASB
IIRC
IASB
A B

Financial Integrated
Report CSR Report
Report

Link A: US GAAP or IFRS

Link B: International <IR> Framework
Integrated Reporting is enhancing the way organizations

Plan
Think
Report

the story of their business

It help businesses to think holistically about

strategy and plans

make informed decisions

manage key risks

to build investor and stakeholder confidence and

improve future performance
The Capitals and Value Creation
Sustainability Accounting Standards
Board (SASB)

FASB SASB
IASB B
A

Annual
Financial Annual Report CSR Report
Report

Link A: US GAAP or IFRS

Link B: Industry Sustainability Reporting Standards
 Materiality Thresholds
GRI IIRC SASB

• Information • Information • Information

that could that could that could be
substantively substantively viewed by the
influence the affect the reasonable
assessments organization’s investor as
and decisions ability to having
of stakeholders create value in significantly
the short, altered the
medium, or total mix of
long term information
made available
Sustainability Management
Accounting – Environment
 Why Environmental Management
Accounting
Environmental costs are real business costs
Potential Revenue Sources
Improved decisions
– Product pricing, responsibility accounting,
negotiations
Current accounting systems are not designed for
identifying and managing environmental costs
 Types of Environmental Costs

Conventional costs of compliance,

– Installation and operation of pollution treatment
equipment
Other changes to the firm’s production technology
– Substitution of raw materials
– Changes in type of energy used
– Other process changes, e.g., operating parameters
General administrative expenses
Changes in productivity growth rate
Environmental Regulations and Firms’
Accounting Systems
Field studies indicate that firms’ costing systems do not
sufficiently capture environmental costs (Epstein, WRI
Green Ledgers).
Joshi et al. (TAR 2001) found hidden costs 8-10 times
the reported costs
Case Studies of specific product-lines in firms indicating
that regulatory costs are about 15% - 20% of total cost,
of which only about 2% are separately identified.
Price-Waterhouse survey of 445 companies, 49%
responded that they do not identify all costs of
compliance.
 Calibration of Hidden Environmental Costs
• Steel industry claimed:
“Environmental regulations in the US make it hard to compete with
steel from Japan and Korea.”
• Steel 10Ks showed:
Reported cost of environmental regulations ~ $5/ton
• Difference in margin between US steel and imported steel: $70.

• Question: How much of the regulatory overhead costs are

hidden?
 ISO 14000 System

Environmental Management

Environmental Management
Systems Life Cycle Assessment

Environmental Environmental Environmental Environmental

Performance Auditing Labeling Aspects in Product
Evaluation Standards

Organization Evaluation Product Evaluation

ENVIRONMENTAL MANAGEMENT SYSTEM

Continual Improvement

Management review
Environmental policy

Planning
Checking and
Implementation
corrective action
and operation
 What should a firm do for ISO 14K
certification?
Design an Energy Management System (EMS) system
(4.1)
Formulate an environmental policy (4.2)
List its environmental impacts (4.3.1)
– Be specific to process, equipment, pollutant.
Identify all legal and other requirements (4.3.2)
Establish environmental objectives, targets and plan for
achieving them (4.3.3)
Define, document, and communicate roles,
responsibilities and authorities (4.4.1)
– Structure, resources (human, physical, financial),
 What should a firm do for ISO 14K
certification? (cntd.)
Identify needs and carry out training (4.4.2)
Establish and maintain procedures for internal and
external communication (4.4.3)
Develop and make available documentation applicable to
EMS (4.4.4)
Provide for control and maintenance of documentation
(4.4.5)
Ensure that procedures associated with significant
environmental impacts are carried out under specified
conditions (4.4.6)
Establish and test procedures for emergency
preparedness (4.4.7)
 Plans for Environmental Planning
Continuous Policy
Improvement

Auditing and Objectives and

Management Targets
Reviews

Records Resources
Management
Accounting

Non- Awareness
Conformance

Communicatio
n
Monitoring
and
Measurement

Emergency Operational Documentation

Planning Control and Control
Triple Bottom Line Sustainability
How do all these fit into business strategy?

How do we monitor strategic performance?

 Balanced Scorecard
Financial Perspective
How do we look
How do customers Goals Measures to Shareholders?
See us?

Vision and Internal Business

Customer Perspective Perspective
Strategy
Goals Measures
Goals Measures

What must we
Can we continue to Innovation and Excel at?
Improve and create Learning Perspective
value?
Goals Measures

20-30 measures for the 4 perspectives, providing a sufficient set of

“instruments” to monitor and drive an organization’s competitive strategy
Sustainability Score Card (SSC)

Linking and integrating environmental, and social

performance with overall business strategy
Identifying value drivers for environmental and social
performance
Designing performance measures which are “instruments”
to monitor and drive competitive strategy
Testing, validating, and refining SSC
 Research Opportunities in Sustainability accounting

Value relevance of sustainability performance disclosures

– Event studies, market studies
Long run relationships between sustainability performance and firm
performance
Convergence/divergence of sustainability reporting standards
The Entity vs. beyond the entity
– Extended accounting for sustainability
Accounting implications of Extended Producer Responsibility (EPR)
Accounting for stranded carbon assets
Accounting for new emerging environmental goods and commodities
Motivations and drivers of diffusion of sustainability accounting systems
Social Value Added (as opposed to Economic Value Added)
Sustainability accounting courses

Sustainability management systems (GRI,

IIRC, ISO etc.)
Sustainability risk management
– liability, supply chain, regulatory
Sustainability management accounting
– legal compliance, compliance cost
management, risk management, product
pricing, supporting environmental claims
 Accounting is the Core of
Sustainability Management
Sustainabilit
Sustainability y
Reporting Managemen
Sustainability t
Accounting
Sustainabilit Sustainability
y Governance
Scorecards
 Change
Accountability

Disclosure
The world we have created today as a
result of our thinking thus far has
problems which can not be solved by
thinking the way we thought when we
created them.…….
Albert Einstein
QUESTIONS?