Sustainability Accounting

Introduction

This paper discusses sustainability accounting. Sustainability accounting arises from the need to ensure that accounting contributes to societal and environmental continuity. This concern led to the early development of sustainability accounting. This article offers a conceptual contribution to the development of sustainability accounting.

Think of two similar companies -Company A and B. Company A makes a turnover of $13million a year from extracting mineral resources from the environment. The activities of Company A degrade the environment and makes it unsustainable for people living in the immediate community. Company A does nothing about the environment and goes on to plan for next year's extraction activities. On the other hand, Company B also makes a turnover of $13million a year from extracting mineral resources from the environment. The activities of Company B also degrade the environment. Company B takes action to protect the environment and discloses information to insiders and outsiders about what it is doing to reduce harm to the environment and minimize the hardship its activities may bring to members of the immediate community.

From the two scenario above, which of these two companies will be more valuable to investors? And which of the two companies will have greater legitimacy to operate in the environment and in the community? The answer is rather obvious -Company B. The behaviour of Company B demonstrates in part what sustainability accounting is all about.

In simple terms, sustainability accounting is defined as accounting that integrates social, environmental and economic facets of organization's activities (Lamberton, 2005;Schaltegger and Burritt, 2006b;Thomson, 2007). Sustainability accounting is the contribution of accounting to sustainable development (Schaltegger et al, 2006). Sustainability accounting is considered to be the branch of accounting that require organizations to pay attention to environmental, social and governance matters by disclosing non-financial information about the organization.

For example, an organization should disclose information about wage inequality because employees may want to know whether the CEO earns up to 10times more than the average employee. Also, an organization should disclose information about its environment protection activities because members of the community may want to know whether the organization ejects Electronic copy available at: https://ssrn.com/abstract=3803384 harmful waste into the environment, and may want to know what the organization is doing to reduce harm to the neighborhood. Also, an organization should disclose information on nonfinancial performance because investors may want to know the level of customer satisfaction, the level of employee satisfaction, board gender diversity and corporate reputation. The examples above demonstrate how sustainability accounting can address the interest of multiple stakeholders.

Practitioners and academics have used several titles to describe sustainability accounting such as environmental accounting (Larrinaga-Gonzalez and Bebbington, 2001;Lamberton, 2005;Jones, 2010), environmental reporting (Gray et al, 1995;Sahay, 2004;Clarkson et al, 2011), social accounting (Dillard, 2014;Retolaza et al, 2016;Perkiss and Tweedie, 2017), social and environmental accounting (Ball and Craig, 2010;Cormier et al, 2011;Brennan and Merkl-Davies, 2014), corporate social reporting (Sotorrío and Sánchez, 2010;Carnevale et al, 2012), corporate social responsibility reporting (Bouten et al, 2011, Belal andCooper, 2011;Dhaliwal et al, 2011); non-financial reporting (Stolowy and Paugam, 2018;La Torre et al, 2018;Dagilienė and Nedzinskienė, 2018). This paper contributes to the literature that examine the role of accounting in assessing the social and environmental outcomes and impacts that affect organizations and society (see, for example, Gray et al, 1995;Sahay, 2004;Clarkson et al, 2011;Khan and Ozili, 2021). This paper also contributes to the literature that offer conceptual insights on how organizations can use sustainability accounting to address environmental issues.

The rest of this paper is structured as follows. Section 2 discusses the objectives and motivation of sustainability accounting. Section 3 presents the literature review. Section 4 identifies some tools of sustainable accounting. Section 5 discusses some future directions, and section 6 concludes.

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Objectives and motivations for sustainability accounting

Objectives of sustainability accounting

There are three objectives of sustainability accounting. The first objective is to prepare accounts concerning organizations' interactions with society and the natural environment (Peršić et al, 2017). The second objective of sustainability accounting is to disclose financial and non-financial information about an organization's performance in relation to society and the environment. The third objective is to extend traditional financial accounting to take into account a wide range of monetized information, covering environmental, social and economic impacts, on which organizational decisions are made (Elkington, 1999;Bent and Richardson, 2003).foot_0

Motivation for sustainability accounting  To avoid greenwashing

Greenwashing is a concept used to describe a situation where an organization spends more time and money on advertising themselves as environmentally friendly when they are not.

Organizations can use several tactics to mislead or persuade the public that their products, objectives and policies are designed to promote a sustainable environment and society (Delmas and Burbano, 2011;Seele and Gatti, 2017). They make people believe that the organization is doing a lot more to protect the environment than it is actually doing. Sustainable accounting, or sustainability reporting, has emerged to mitigate greenwashing. Sustainability accounting ensures that organizations are truly doing what they claim to be doing to protect the environment. Sustainability accounting provides an opportunity for organizations to report the exact steps or actions they are taking, or have taken, to protect the environment.

 Mimicry and industry pressure

Another motivation for sustainability accounting is mimicry and industry pressure. There is a global shift towards sustainability in almost every industry. Several industries have begun to incorporate sustainability considerations into their practice. For example, the banking industry in sustainable banking, the marketing industry in sustainable marketing, and the development sector in sustainable development. Each industry is mimicking the other industry to avoid the criticism that the industry does not care about protecting the environment and the society at large. There is increased pressure for the accounting profession, and the accounting discipline, to incorporate all relevant social and environmental factors into all aspects of accounting, and to understand how these factors affect the performance of organizations.

 Legislative pressure

Another motivation is legislative pressure. Legislative pressure occurs when legislation is passed that require organizations to comply with certain sustainability disclosure and reporting requirements (Guia Arraiano et al, 2017). In some countries, sustainability reporting is backed by legislation through the securities and exchange commission in the United Kingdom, United States, China and India. In other countries, sustainability reporting is not backed by legislation because it is difficult to legislate on which sustainability information is decision-useful to investors at each point in time since the usefulness of sustainability information is timedependent. For example, environmental disclosures may become highly decision-useful during a climate crisis, and less decision-useful under stable climate conditions. Therefore, imposing legislation for sustainability reporting may lead to the disclosure of information that investors do not find useful.

 Stakeholder pressure and gaining legitimacy

Another motivation for sustainability accounting is stakeholder pressure and legitimacy.

Environmentally-conscious stakeholders can pressure organizations to shift from traditional accounting to sustainability accounting. Making a shift from traditional accounting to sustainability accounting will help organizations to reaffirm their legitimacy in the environment and society. Also, the involvement of stakeholders in sustainability accounting can help to align accounting with sustainable development (Schneider, 2015). It will ensure that sustainability accounting takes into account both economic, social and environmental considerations.

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Literature review

Several studies have examined issues in the sustainable accounting literature. Adams and Larrinaga-González (2007) observes that the academic literature in the field of sustainability accounting has largely ignored sustainability accounting practice within organizations. They suggest that further research engaging with organizations is needed to identify how accounting and management systems might reduce their negative sustainability impacts. Passetti et al (2014) points out that sustainability accounting is in the early phase of development and the lack of engagement by most organizations is negative for the construction of a more balanced relationship between business, environmental and social issues. Schaltegger and Burritt (2006a) state that the development of sustainability accounting can be achieved by a top-down approach and the stakeholder approach. The top-down approach to sustainability accounting development starts with the broadest definition of sustainable development and corporate sustainability. Then, the term 'sustainable development' is broken down into partial indicators and measurements in the most systematic way possible. Meanwhile, the stakeholder driven approach to sustainability accounting is determined through stakeholder engagement processes. Gabrusewicz (2013) and Richardson (2013) show that the triple bottom line (TBL) concept is a common framework used to describe sustainability accounting in organizations because it recognizes that corporations not only add economic value to society, they also add social and environmental value to society. Schaltegger et al (2006) suggest that sustainability accounting is a crucial trigger for management towards corporate sustainability. They argue that if corporate sustainability is seen as being the result of management attempts to address sustainability challenges, then it makes sense for management to use sustainability accounting as a basis to address sustainability challenges. Burritt and Schaltegger (2010) show that two factors: (i) raising awareness about sustainability, and (ii) management decision making, through problem solving and scorekeeping, are crucial for the development of sustainability accounting. They suggest that the development of sustainability accounting should be orientated more towards improving management decision Electronic copy available at: https://ssrn.com/abstract=3803384 making. Kaur and Lodhia (2018) observe that stakeholder engagement in the sustainability accounting process of Australian local councils is important, and is achieved through the development of strategic plans, sustainability indicators, measuring sustainability performance and the preparation of sustainability reports. Huchzermeier (2019), in a case study, examines Puma's decision to create an 'Environmental Profit and Loss account' to increase the sustainability of their business. PUMA is a leading sportswear and sports lifestyle products manufacturer with three main product categories: footwear, apparel, and accessories. They measured the activities that harmed nature (loss) and those that benefited nature (profit). In this way, corporate decisions are founded on impacts on the environment and profitability. Larrinaga et al (2018) show that, in 2011, the Spanish government made sustainability accounting a mandatory requirement for public sector organizations in Spain. The outcome was very disappointing. This adds to the argument that making sustainability accounting a mandatory requirement for organizations may not be a good idea.

Some tools of sustainability accounting

Sustainability accounting tools are the tools used by organizations to become more sustainable.

The demand for information about the economic effects of environmental and social activities have led to the development of sustainability accounting tools for use in corporations (Schaltegger and Burritt, 2010). Some sustainability accounting tools include:

1.

Corporate sustainability reporting (CSR)

2.

Triple-P reporting, also known as reporting on People, Planet and Profit. This is also known as the Triple bottom line reporting (Elkington, 1999). Triple bottom line reporting is the disclosure of information on how business performance affects 'people', 'profit', and the 'planet (Slaper and Hall, 2011).

3.

The Global Reporting Initiative (GRI)foot_2 . The objective of the GRI is to ensure that environmental and social reporting is comparable to financial reporting. It achieves this by developing reporting principles and information qualities similar to those used in corporate financial reporting (Roberts and Koeplin, 2007).

Future directions for sustainability accounting

Pay more attention to social and governance matters

The sustainability accounting discourse needs to pay more attention to social and governance matters not just environmental matters. Currently, much priority is given to environmental impact. Organizations are placing high importance on carbon neutrality and waste reduction in their supply chains. Organizations need to also pay much attention to social and governance matters such as wage inequality, female representation on the Board, employee ethnic diversity matters, customer satisfaction, human capital quality disclosure, and community acceptance.

Future studies should undertake further research on the social and governance matters underlying sustainability accounting.

Exploring the need for new standards of sustainability accounting and reporting

There is a debate about whether we need a separate standalone sustainability reporting standard or whether existing accounting standards should be expanded to incorporate sustainability accounting requirements. It is difficult to determine which approach is more appropriate due to cost, conflict of interest, political economy and country-specific issues. Further research is needed to explore the possibility of setting a new standard for sustainability accounting and reporting. Such studies should take into account the benefit of creating a standalone sustainability accounting standard and the challenges that might be encountered.

Exploring the limitations of sustainability accounting

Sustainability accounting, often considered to be the accounting profession's response to sustainable development and climate change risk, has its limits. The biggest limitation is that it focuses only on disclosure and reporting of environmental, social and governance (ESG) matters.

It does not provide organizations with the financial resources they need to make a meaningful contribution to the environment or society. An organization that is short of cash, or financially constrained, may be unable to make a significant ESG contribution, and is likely to make disclosures that analysts consider to be below-the-benchmark ESG performance, thereby making the organization look bad both in its ESG disclosures. Therefore, it is important for the accounting profession to recognize this limitation of sustainability accounting and other limitations. Future research should examine other limitations of sustainability accounting in relation to the sustainable development agenda.

Developing relevant sustainability performance indicators for stakeholders

Several efforts are ongoing to develop key performance indicators for sustainability reporting (Gnanaweera and Kunori, 2018). Some performance indicators will be more relevant to stakeholders while other performance indicators will be less relevant to stakeholders. Future studies should determine, based on certain criteria, the key performance indicators that are most relevant and important to stakeholders.

Conclusion

This paper discussed sustainability accounting at the conceptual level. It highlighted the definition, motivation and tools of sustainability accounting. It showed that sustainability accounting can help organisations to identify and assess environmental and social challenges.

The findings are significant in that they show that sustainability accounting can provide a reporting framework that allows organizations to commit significant resources to promote continuing sustainability in the interest of society and the environment. The first step to develop sustainability accounting standards is to first understand what sustainability accounting really is -this is the goal of this short paper. Although significant innovations have emerged in

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sustainability accounting in the last two decades, the concept of sustainability accounting is still relatively new in some countries, while its development in other countries is still patchy. As more organisations continue to embed societal and environmental considerations into their business processes, it will hasten the development of accounting for sustainability in many countries.

https://davidbent.files.wordpress.com/2013/01/sigmasustainabilityaccounting.pdf Electronic copy available at: https://ssrn.com/abstract=3803384

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https://www.globalreporting.org/ Electronic copy available at: https://ssrn.com/abstract=3803384