April 1st, 2022 
The Emergence of Sustainability Accounting
January 20th, 2022
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PG. 2
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PG. 3
Solution
Start Here
Imagine the plot is divided into 4 quadrants and each number has the consecutive number mirrored in the opposite quadrant
For example: start here: 1 , 2, 3, 4
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Why is Sustainability a Business Issue?
Costs of environmental and social impacts
Waste, climate change, relocation of communities, etc.
Stakeholder Pressure
Opportunities of sustainable development
Renewable energy technology, infrastructure, education, healthcare, new markets
Globalization
Sustainability as a competitive factor
Why has the importance of sustainability accounting in business grown? External pressure, internal pressure
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Accounting
Accountable: Having the duty to explain how resources have been used
Resources
Financial
Employees
Inputs
….?
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Accountability
The obligation of an individual or an organization to account for its activities
To accept responsibility for the results and to disclose them in a transparent way.
Includes the responsibility for money and other entrusted resources
Agree on the definition of accountability.
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Fields of Accounting
Financial Accounting.
Cost Accounting.
Managerial Accounting.
Auditing
PG. 8
Sustainability accounting has a long history in academia and industry practices.
Reporting started in the 1920 mainly through financial reporting to produce the financial statement of corporations such as the balance sheet and profit and loss
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1920s
1960s
1970s
Financial Reporting
Social reporting
2000s
Environmental Reporting
Integrated Reporting
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Social Reporting
Working conditions
Access to health care
Occupational Health and Environmental safety
Social reporting started in the 1960s, namely in France when labour unions started employers to report on the working conditions of employees.
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1920s
1960s
1970s
Financial Reporting
Social reporting
2000s
Environmental Reporting
Integrated Reporting
PG. 10
Environmental Reporting
Carbon emissions
Pollution and waste
Energy
In the 1970s and 1980, corporations started to report on their environmental performance to gain competitive advantage and also to be good citizens
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1920s
1960s
1970s
Financial Reporting
Social reporting
2000s
Environmental Reporting
Integrated Reporting
Sustainability Accounting Systems
Transparency about an organization’s activities
encouraged by external audits and verification
Stakeholder engagement
Voluntary and mandatory systems
Driven by
Regulators
NGOs
Market mechanisms
Internalization of external costs and benefits
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Who is accountable?
Entities for which stakeholder interest exist
Traditional stakeholders
Shareholders
Lenders
Investors
Regulators
Financial accounting for a certain type of firms only
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Who is Accountable and to whom?
Shareholders
Regulators,
Financiers
Society
Intermediaries (rating agencies)
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Accountable to Stakeholders
Individuals or groups having an interest in a company because they
can affect or
can be affected
by a company’s activities
Freeman, R. E. (1984). Strategic Management: A stakeholder approach. Englewood Cliffs, NJ: Prentice-Hall.
Why is the government interested in banks’ sustainability reporting?
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Stakeholder theory explains…
…why organizations have to consider multiple interests to be a good sustainability performer
…the need of new forms of stakeholder engagement in order to achieve better sustainability performance and sustainability accountability
…the development of sustainability accounting systems
The stakeholder concept is relatively new. Therefore, we need new ways of corporate communication, such as sustainability reporting
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Types of Stakeholders
External
Shareholders, NGOs, regulators, suppliers, clients, investors, …
Internal
Employees, managers, …
What does this imply for accounting and reporting?
Conflicts (Agency Dilemma): Many managers will avoid taking any risks!
What are external stakeholders that could be interested in accounting? What are internal stakeholders? Discuss with neighbor.
Response: Different stakeholders have different needs. Reporting and accounting have to address these needs.
Primary and Secondary..
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Implication: Stakeholder Accounting
Accounting for impacts on stakeholders
Different impacts on different stakeholders
Civil Society members Vs. employees Vs. investors
Less detailed communication
Tension between PR and transparent accounting
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Example for stakeholder oriented reporting: The Equator Principles for Project Finance
Voluntary code of conduct for project financiers
Social and environmental risk management framework
Conventional view
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A stakeholder view on project finance
Project financier
Project
Environment
Affected communities
the principles
Review and categorization
Environmental and social assessment
Applicable environmental and social standard.
Environmental and social management system and action plan
Stakeholder engagement
Grievance mechanism
Independent review
Covenants
Independent monitoring
Reporting and transparency
Check the website for EP Reporting
What do they report about?
Does the reporting address stakeholders?
Who are the stakeholders?
Project risks, regions, implementation of principles
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Sustainability Accounting
Activities, methods and systems
Recording, analysis and reporting
Outside-in relation: Sustainability induced financial impacts
Inside-Out relation: Sustainability impacts of a defined economic system, such as a firm
Schaltegger, S., & Burritt, R. L. (2000). Contemporary environmental accounting: issues, concepts and practice. Sheffield: Greenleaf Publishing.
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SASB Definition of Sustainability Accounting
to evaluate the environmental, social and governance performance of companies
through an account of their management of various forms of non-financial capital associated with sustainability
environmental, human, social, governance
which they rely upon for sustained, long-term value creation.
Materiality
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Accounting Systems and Stakeholders
Based on: Schaltegger, S., & Burritt, R. L. (2000). Contemporary environmental accounting: issues, concepts and practice. Sheffield: Greenleaf Publishing, p. 33
Management
Management
accounting
Internal sustainability
accounting
Employees
COMPANY
Financial accounting
Other
accounting systems
External sustainability accounting
Other sustainability accounting
General Public
Media
Creditors
Insurance companies
Suppliers
Shareholders
Tax agency
Communities
NGOs
Regulators
First internal accounting, both management accounting and sustainability accounting
Then external accounting: Financial accounting, other accounting, i.e. governance, material sourcing
Then external sustainability accounting. Other sustainability accounting for regulators.
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Effects of Sustainability Accounting in Addition to Higher Transparency
Better employee morale, attraction and retention
Improved corporate reputation
Anticipation of future regulations
Anticipation of markets connected with sustainability
Supporting sustainable management practices
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Different Interests in Accounting
Why are managers interested in sustainability accounting and what are they interested in?
Why are stakeholders interested in sustainability accounting and what are they interested in?
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Management and Internal Sustainability Accounting
Wider field than Financial accounting
Long-term
Detailed
Facilitates
managerial decision-making
Internal accountability
Basis for external accounting
Why is internal reporting not used for stakeholder communication?
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Other Drivers for Sustainability Accounting: Costs and Benefits
Until the 1980s environmental and societal impact not a cost or benefit driver
From 1980s: Polluter pays principle
Fines (Exxon, BP)
Higher costs of impacts and lower costs for information systems: marginal cost curves
Reputation
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Marginal Costs
Costs of Sustainability Accounting
Costs of low sustainability performance
time
costs
the cost added by producing one additional unit of a product or service.
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Problems of Sustainability Accounting Systems
Wide range of addressees
No priority in management
No central unit
Sustainability data not connected with strategic objectives
High fixed costs (e.g. ISO 14000, ISO 26000)
Goodstein, E. (1995). The Economic Roots of Environmental Decline: Property Rights or Path Dependence? Journal of Economic Issues, 29(4), 1029-1043. doi: 10.2307/4227020
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Co-ordinated Collection of Sustainability Data
Environmental and societal impacts on firms are increasing
But
Opportunities and threats
Costs and revenues
Assets and liabilities
related to sustainability are not explicitly considered in conventional corporate accounting
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Challenges of Corporate Sustainability Accounting
What does corporate sustainability really mean?
Complexity of corporate sustainability leads to problems for management in operationalisation, measurement and communication
Impacts on sustainability often not reported
Information asymmetry between companies and its stakeholders
Lack of target group orientation creates a risk of information overload
No generally accepted standards
High costs for SMEs
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Asset: Renewable energy from wind turbinesSuppliers of wind turbines and other materialsLenders: BanksEquity investors:Pension fundsPurchasers: Energy utilitiesSponsors: Renewable energy firmsMaterialsSupply contractsEquity fundsReturns to investorsEquity, championingOutputPurchase contracts
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