Chapter 11 Sustainability and environmental accounting ©2018 John Wiley & Sons Australia Ltd Learning objectives After studying this presentation, 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 Learning objectives 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 Learning objectives 11.6 evaluate the implications of climate change for accounting. Presentation overview What is sustainability? • Sustainable development: – ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’. –This definition relates to three main areas: • economic development • environmental development and • social development. What is sustainability? • Eco-justice: –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. What is sustainability? • Eco‐efficiency: –a focus on the efficient use of resources to minimise their impact on the environment. Sustainability reporting • A variety of terms are used for sustainability reporting. – For example corporate social reporting, triple bottom line reporting, environmental reporting, etc. – Sustainability reporting is the most common term. Sustainability reporting • A sustainability report presents information about the: –economic value of an entity –environmental and social value of an entity. Sustainability reporting • Benefits: – Embedding sound corporate governance and ethics systems throughout all levels of an organisation. – Improved management of risk through enhanced management systems and performance monitoring. – Formalising and enhancing communication with key stakeholders such as the finance sector, suppliers, community and customers. Sustainability reporting • Benefits: – 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. Sustainability reporting • Integrated reporting: –A recent initiative designed to: • improve sustainability reporting • integrate sustainability reporting more closely with financial and governance reporting. –Followed the global financial crisis. Sustainability reporting • International Integrated Reporting Council (IIRC): –Formed by the merger of the Prince of Wales’ Accounting for Sustainability Project (A4S) and Global Reporting Initiative (GRI). –IIRC members represent a cross‐section of society. • Including non-governmental organisations (NGO) and intergovernmental organisations (IGO). Sustainability reporting • International Integrated Reporting Council (IIRC): –The mission is: • ‘to establish integrated reporting and thinking within mainstream business practice as the norm in the public and private sectors’. –In 2013, the International Integrated Reporting Framework (International <IR> Framework) was developed. • Guiding principles and content elements. Sustainability reporting • Environmental reporting: – 1970s: • Social reports. – 1980s: • Environmental issues, such as emissions and waste generation. – 1990s: • Disclosures began to consider social and environmental dimensions. Sustainability reporting • Environmental reporting: – Environmental disclosure: • Involves a large body of research. • Examines disclosure from the perspective of legitimacy theory. Sustainability reporting • Environmental reporting: – Environmental disclosure: • Legitimacy theory: –Based on the notion of a social contract. –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. Sustainability reporting • Environmental reporting: – Environmental disclosure: • Legitimacy theory: –This means that an organisation must appear to consider the rights of the public at large, not just its shareholders. Guidelines for sustainability reporting • A range of guidelines which have emerged to provide direction on appropriate sustainability reporting. • THE UN Global Compact: – Entities report annually. – The Global Reporting Initiative’s reporting framework is preferred. Guidelines for sustainability reporting • In 2008, the United Nations Conference on Trade and Development (UNCTAD) produced guidance on the use of corporate sustainability indicators in annual reports. – Provides detailed guidance on the preparation of reports using selected indicators. • The Organisation for Economic Co‐operation and Development (OECD): – Guidelines for Multinational Enterprises. Guidelines for sustainability reporting • The International Organization for Standardization (ISO) has developed standards dealing with a range of issues. • The Sustainability Accounting Standards Board (SASB) has developed a range of standards to assist US companies provide disclosures adequate to meet 10‐K and 20‐F requirements. Guidelines for sustainability reporting • Global Reporting Initiative: – Launched in 1997 as an initiative to develop a globally accepted reporting framework to enhance the quality of sustainability reporting. – A joint initiative of the Coalition of Environmentally Responsible Economies (CERES) and the United Nations Environment Program (UNEP). – The aim is to enhance transparency, comparability and clarity, amongst other principles. Guidelines for sustainability reporting • Global Reporting Initiative: – Sustainability reports based on the GRI Framework can be used to: • ‘Demonstrate organizational commitment to sustainable development, to compare organizational performance over time, and to measure organizational performance with respect to laws, norms, standards and voluntary initiatives’. Guidelines for sustainability reporting • Global Reporting Initiative: – Sustainability Reporting Guidelines: • G4 Guidelines. • G3: application levels. Guidelines for sustainability reporting • Mandatory sustainability reporting requirements: – There are increasing instances of mandatory ESG reporting requirements around the globe. – Australia: • the Corporations Act 2001 and the National Greenhouse and Energy Reporting Act 2007. – Canada: • Canadian Environmental Protection Act 1999 (CEPA 1999). Guidelines for sustainability reporting • Mandatory sustainability reporting requirements: – Denmark: • Danish Act of 16 December 2008. – Norway: • White paper titled Corporate social responsibility in a global economy. – United States: • The US Environmental Protection Agency proposed a mandatory GHG reporting rule, which became effective on 29 December 2009. Stakeholder influences • Contemporary entities now consider a range of stakeholders in their decision making. • Entities following GRI are required to undertake stakeholder assessment as part of their reporting process. • Entities identify and engage with stakeholders as a means of reducing risk and managing reputation. –Stakeholders are increasingly concerned with issues of sustainability. –Stakeholder theory. Stakeholder influences • Ethical investment: –Growing influence on corporate sustainability performance and reporting. –Many institutional investors become signatories to the Carbon Disclosure Project (CDP). • Voluntary effort. • Encourages standardised reporting. Environmental and social management systems • Environmental management systems (EMSs): – Also known as interest systems. – Allow companies to measure, record and manage their social and environmental performance. – An environmental management tool. – Facilitates the organisation’s communication to stakeholders. – Governed by the international standard ISO 14001 Environmental management (released in 1996). Climate change and accounting • Kyoto Protocol: – Negotiated in 1997. – Commits signatories to achieve specific greenhouse gas (GHG) or carbon emission reduction targets. • Emissions reduction schemes: – Emission trading scheme or a carbon tax. – Varies globally. Climate change and accounting • Accounting for carbon emissions: – Currently no guidance on how to account for carbon pollution permits or emissions trading activities. – The IASB project on accounting for carbon emissions is on hold. • Referred to by the IASB as ‘Pollutant Pricing Mechanisms’. • Pending further work on the Conceptual Framework. Climate change and accounting • Accounting for carbon emissions: – Carbon trading schemes: • Organisations required to account for both purchased and allocated emissions allowances. • How to report annually? –Fair value or at cost? • Allocated vs purchased emission allowances. • Hedge accounting to reduce the risk of allowance asset and emissions liability. Climate change and accounting • Accounting for carbon emissions: – Climate also impacts the value of assets and asset impairment decisions. • For example, land and assets which produce products that are no longer considered ‘green’. – Disclosure of risk and risk management strategies are also impacted. Summary • The meaning of sustainability and why an entity might embrace sustainable development practices. • The methods used to report on sustainability and environmental performance. • Commonly used guidelines for sustainability reporting and how they can assist corporate reporting of sustainability performance. • The range of stakeholders that can influence sustainable business practice, and how entities can engage with these stakeholders. Summary • How entities can use environmental management systems to improve environmental performance and reporting. • The implications of climate change for accounting.
