Chapter 6
Sustaining the good health of the earth is in large part dependent on the actions of businesses, governments, and individuals that strive for sustainable development, or “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Scientific evidence of climate change and the projected consequences are cause for great concern for everyone. Human activities that are responsible for climate change, environmental pollution, and wasteful use of resources (natural and human) have had profound effects on the earth’s health. The consequences are being felt now and are likely to get worse without concerted efforts from everyone. This means that more businesses, governments, and individuals must respond soon; humans have no other planet to go to. In order to protect the health of the planet for human life, it is essential for everyone to address the problems created by the past and current practices of businesses, government, and individuals. These problematic practices are often short term in focus. In business, the focus on short-term profits without regard for the future has been harmful. These profits have been frequently at the expense of the health of the environment, workers, communities, and companies. For governments, many past policies and practices regarding the protection of the environment have dealt with legal compliance rather than proactive policies such as requiring green buildings for government facilities. Individuals in many industrial countries have participated in a consumer society that has encouraged one-use disposable goods. Examples of this waste can be seen in the plastic bottles and bags that litter the land and oceans. The collective enormity of this litter can be seen in the Pacific Ocean, where a 700,000 square kilometer (270,270 square miles) mass known as the Eastern Garbage Patch has formed.1 This is slightly larger than the state of Texas.2 It is one thing to see the numerous bags and bottles strewn across the countryside but quite another to see this trash in such an enormous section in the ocean. The sheer size of this mass has major health implications because harmful chemicals from the plastic containers are leeching into the ocean. The contamination of the oceans has dramatic consequences for the fishing industry and the people who depend on fish for food.
Many businesses, countries, and individuals worldwide are attempting to address the problems of an expanding population facing finite and stressed resources, but many more need to do so as well. For businesses, operating in unsustainable ways is unlikely to be profitable. Companies that continue to waste resources will cease to be competitive because the cost of waste will become too expensive. Rather than be forced into sustainable activities, many organizations have chosen to engage in sustainable activities on their own accord. These organizations have seen the benefits that accrue from a sustainable approach. Many companies are reporting their activities and seeing the both internal and external rewards.
Benefits Analysis
Sustainability reporting provides the opportunity to identify the organization’s biggest challenges for the future. For many companies, sustainability reporting helps them identify what they need to change to become more sustainable. Some companies may find it necessary to develop eco-efficient manufacturing processes in an effort to reduce greenhouse gas (GHG) emissions. It also may mean adapting to increased demands to produce environmentally friendly products. Innovation to meet challenges can give an organization the opportunity to become a leader in its industry. A company that is adaptive and innovative can instigate changes in an industry. Interface Inc. has been successful in turning its carpet and upholstery business into more than a business whose only goal is to make a profit. It has transformed itself into a company that leads the industry in sustainable processes and products. It has shown that this approach is profitable in economic, environmental, and social ways. Identifying the sustainability challenges in advance is part of good strategic management.
Sustainable development is multifaceted, and, as a result, it requires a systematic approach. This can have important implications for establishing and implementing a unifying sustainable development strategy throughout the organization. Sustainability accounting and reporting provide a systematic way to collect the necessary information to evaluate an organization’s economic, social, and environmental risks. Once a system is in place, benchmarks for performance can be established and prioritized. Actual performance can be compared to these benchmarks. The feedback from sustainability reporting enables both internal and external monitoring of progress toward sustainability.
Sustainability reporting is not only for internal monitoring but also for communicating progress toward sustainability. This communication serves many purposes. Goodwill is generated when organizations communicate with their stakeholders. The goodwill is valuable to establishing cooperative relationships with stakeholders. Cooperative relationships can lead to direct conversations with their stakeholders—customers, investors, suppliers, and anyone that is affected by the organization. Stakeholders can provide valuable input that allows the organization to be proactive rather than reactive to problems. Companies can use stakeholder engagement meetings to educate stakeholders about their product innovations along with their products in development. Stakeholders can provide suggestions to improve the products. This open dialogue generates goodwill that improves relationships with stakeholders.
Sustainability reporting can enhance an organization’s reputation. Ball Corporation’s reputation was enhanced with the publication of its first report covering the year 2007. Ceres and the Association of Chartered Certified Accountants (ACCA) awarded Ball Corporation as a cowinner of Best First Time Reporter Award as part of the 2009 Ceres-ACCA North American Sustainability Awards. The award is for Ball Corporation’s comprehensive approach to sustainability and commitment to stakeholder engagement in addition to its strategy for manufacturing sustainable packaging and for promoting recycling. Ball Corporation is receiving international attention for its efforts toward sustainable development and the quality of its reporting.
Cost Analysis
There are several cost considerations for sustainability accounting and reporting. The tangible costs include system design, data collection, report design, and expertise. With an increase in reporting, there has been an increase in firms that specialize in assisting organizations with their reporting needs. The demand for this service is on the rise and will lower the cost of the service. Organizations should seek competitive bids before contracting for this service. These costs should be part of an organization’s budgeting process.
The intangible cost is the risk of reporting unfavorable outcomes. If positive outcomes enhance an organization’s reputation, there is the risk of harm from negative ones. This risk should be compared to the risk of not reporting. Not reporting puts an organization in a reactive posture rather than a proactive one. Wal-Mart’s labor problems are a good example. Lawsuits over unfair labor practices have put Wal-Mart on the defensive. Employees are distrustful of Wal-Mart’s claims that the company is working to correct its past actions. Organizations that engage with their stakeholders and develop trusted relationships are better able to mitigate these risks.
Standardization
Standardization of reporting and assurance services may prove beneficial to the credibility of sustainability reporting. This standardization should be in the form of basic guidelines with requirements that would be common to all organizations. However, reporting standards should be flexible enough to allow for differences in organizations. This approach may be useful to help users understand the importance of the report contents as they relate to a specific organization’s progress. Reports prepared on a basic set of guidelines will allow for comparability across time. Sustainable progress or the lack of it will be evident. For the organization issuing the report, consistency of reporting can reduce costs. Another added benefit is that assurance providers will have a standard set of criteria against which to provide assurance. The training of assurance providers will be easier if the reporting principles are standardized. The cost of assurance services will also be less if the assurance process is relatively standardized. Organizations need to become involved in the standard-setting process to ensure that their interests are represented.
As more standardized reports emerge, conducting research on sustainability reporting may provide useful analyses of the effects of these reports on internal and external decision making. This includes research involving managerial accounting tools and sustainability indicators. More research needs to be conducted on the effects of sustainability reporting on long-term stock price performance. As companies adopt more standardized guidelines for reporting, studies of these reports may provide better comparisons across time and companies.
Predictions for the Future
Sustainable development will continue to be adopted worldwide as an operational strategy for many organizations. As organizations adopt this strategy, sustainability reporting will continue to increase in importance. The reporting process will evolve as more participants become invested in producing reports. Accounting professionals are in a good position to be leaders in assisting their clients with the adoption of sustainability accounting and reporting systems. Their knowledge of traditional financial and managerial accounting will serve this end well.
Sustainability reporting is not likely to reach the same level of standardization as financial reporting, but there is likely to be a commonly accepted set of guidelines similar to the current Global Reporting Initiative (GRI) Reporting Framework. One set of guidelines will probably not be all things to all organizations so sector guidelines are likely to be the next growth area of report development. This growth will be a natural progression as members of each sector find that they have special sustainability reporting needs. Each sector (e.g., utilities, manufacturing) has some sustainability concerns that are more pressing than others. The risks and opportunities in each may need to be addressed separately to make sustainability reporting more useful to the preparers and readers. The GRI has already begun creating sector guidelines for reporting. This process presents a great opportunity for many professions to be more involved in the development of these reports.
There will be many career opportunities in sustainable development. To be a part of these opportunities, knowledge of the three dimensions of sustainability and their impacts on organizations’ long-term success will be critical to developing expertise in sustainability. Established business professionals will need to acquire the skills necessary to adopt, report, and analyze sustainability information. Various professional organizations like the American Institute of Certified Public Accountants (AICPA) have begun to provide information to the public and its members about sustainability reporting.3 In addition, new business students should be introduced to these concepts and practices in their formal education. This will require that business schools include more offerings in all the business functions—accounting, finance, marketing, and management. This movement is already beginning to take shape. There are several universities and colleges (e.g., University of Michigan, Presidio World College Sustainable Management, University of North Carolina) that have incorporated sustainable development into their business courses and programs.4 In some cases, the curriculum has been changed to reflect this growing need. The Association to Advance Collegiate Schools of Business (AACSB) is supporting sustainability in higher education. It sponsored a conference where the major focus was sustainability education with sessions on building sustainable business schools and curriculum.
The future looks bright for sustainability accounting and reporting. This includes the incorporation of sustainability indicators in managerial accounting reports. As more organizations adopt sustainable development as part of their strategy, more managerial accounting tools will be adapted to make assessments of progress. As more organizations adopt sustainability reporting, readers of these reports will demand assurance that the reports reflect an organization’s true progress toward sustainability. External assurance is likely to become a major part of the reporting process and the accounting profession. Adopting sustainable development for the future health and wealth of the planet and its people is an exciting prospect. This approach is not only the right thing to do but also the smart thing to do.