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.