22748 Financial
Reporting + Analysis
FRA Module: Sustainability
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Module: Sustainability
Sustainability – what is it?
Sustainability is the idea that we should operate without
impairing our resource base.
 In accounting, this used to be called capital maintenance
– the idea that you haven’t got a profit unless you are at
least as well off this year as you were last year.

Sustainability is different from capital maintenance in 2 ways:
1)
the definition of “our” is now broader
2)
it is not just a financial concept
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Definition of sustainability
Sustainability is
the use of resources, whether social, environmental or
economic, in such a way that human needs can be met
now, while also ensuring that those needs can be met in
future.
 Sustainability is now no longer solely about the
organisation/business.
 We can talk about operations being sustainable if they
do not impair the resource base of the environment, the
country, the planet, the people
 Resource base can mean financial capital, human
capital, planetary resources.
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Does sustainability happen?
There is an argument that operation (i.e.
commerce) can simultaneously target all three
effects of performance: financial, environmental
and social
It can be argued that targeting aspects of
performance which do not bring the organisation
direct costs or benefits (environmental and
social) will not happen …
… except possibly for publicity reasons, i.e.
legitimacy – the implied social contract giving the
firm a “licence to operate”.
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Incentives
What incentives exist for organisations to target
environmental and social effects of their
operations?
 Absence of institutional drivers / costs / benefits
/ clarity (except for internalising of externalities
through mechanisms such as the Australian
Emissions Trading Scheme)
 Presence of need to “legitimise” the organisation
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Role of Accounting + Auditing
in Sustainability
Accounting
Sustainability is an argument for the Triple Bottom Line
 measure 3 dimensions of business activity
1) economic performance; may include
 conventional financial reporting (profit, etc.)
 reporting of constructs such as Economic Value Added
2) environmental performance
3) social performance
 how you treat people specifically
 how you respond to society's expectations in general
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Role of Accounting + Auditing
in Sustainability
Auditing
 Just as there is a demand for external reviews (audits) of
financial reports, we would expect to find a demand for third
party assurance of social and environmental reports
 Quality of assurance work remains low relative to financial
statement audits
 Improvements needed – there are no legal sanctions around
either reporting or assurance.
Auditors are trying to define sustainability assurance as within
their remit
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What governs TBL reporting
 No conceptual framework for social and environmental
reporting—although the Global Reporting Initiative is
attempting to develop a coherent framework
 It’s hard to set a consistent set of reporting
requirements that would apply to all organisations (e.g.
“tell us how many hospitals you funded in Equatorial
Guinea this year”)
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What governs TBL reporting
 Variety in approach to disclosing social and environmental effects

Checklist approach
 Report against lists of disclosures from a chosen reporting
guide
Target-based reporting
 Reports against environmental targets
Eco-balance approach
 Flow diagrams to depict inflow and outflow of raw materials
and other inputs, output of products, waste, recycling, and
other emissions
None of these incorporate figures into the financial reports
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Where is sustainability now?
 In accounting, sustainability reporting is purely
voluntary/free-market.
 Do you think that unregulated reporting will generate
meaningful, comparable information?
 Akerlof’s “Market for lemons” – only people with good
news will disclose it.
George A. Akerlof, ‘The Market for "Lemons": Quality
Uncertainty and the Market Mechanism’, The Quarterly
Journal of Economics 83 no.3. (Aug., 1970), pp. 488-500
 Until there is institutional backing, sustainability reporting
will just be a form of marketing/PR/spin
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