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13.6: Summary and Key Terms
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13.1 Describe Sustainability and the Way It Creates Business Value
- Users of financial reports want to know whether businesses are making appropriate decisions not only to increase shareholder wealth, but also to sustain the business, and the world around it, into the future. This management goal is called business sustainability.
- Although the U.S. has pulled out of the Paris Climate Agreement, many companies have announced their own commitment to maintain the spirit of the Agreement.
- Early ventures into sustainability practices and reporting often arose in response to negative events and even tragedies as communities demanded more accountability by companies that operated within those communities.
- Many businesses have chosen to develop sustainable business practices because they realize doing so can provide positive benefits, not just to society and the environment, but also to the long-term viability of their own business.
13.2 Identify User Needs for Information
- Users of sustainability reporting information are not just primary users such as shareholders and lenders but can also be secondary users such as employees, customers, the community, governments, and regulators.
- Shareholders concern themselves with the future viability of the company and want profits to be sustained or increased over the long term.
- Lenders want to know the company borrowing from them does not have any going-concern risks that could affect its ability to repay the loan.
- Employees and potential employees want assurance that they will be fairly compensated, that the workplace is safe and the employer ethical, and that all employees have equal rights and opportunities, regardless of gender, race, religion, or sexual orientation.
- Customers want to know the companies to which they give their money reflect their own values and beliefs.
- Governments and regulators want to be able to see that a company is behaving responsibly.
- Communities want to know the organization is behaving at the level of society’s expectations. This information need reflects the existence of a social contract, the expectation that companies will hold to an unwritten contract with society as a whole.
13.3 Discuss Examples of Major Sustainability Initiatives
- Materiality describes how significant an event or issue is to warrant its inclusion or discussion.
- The not-for-profit Global Reporting Initiative (GRI) provides companies with guidance about how to report sustainability and identifies common themes and components for reports and in 2016 produced its first set of global reporting standards. According to GRI, \(92\%\) of the Global 250 produced sustainability reports in 2016.
- The Sustainability Accounting Standards Board (SASB) was established in 2011 to develop standards for disclosure of material sustainability information to investors. SASB adopted the view of materiality taken by the US Supreme Court, that information is material if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”1 SASB standards are available for \(79\) industries across \(10\) sectors.
- The International Integrated Reporting Council (IIRC) was formed in 2010 to improve the quality of information provided to investors and lenders, promote a more cohesive and efficient approach to corporate reporting which draws on different reporting strands, enhance accountability and stewardship for six types of capital (financial, manufactured, intellectual, human, social and relationship, and natural), and support integrated thinking, decision-making and actions so as to create value.
13.4 Future Issues in Sustainability
- Innovation, security risks, and globalization mean that businesses must adapt quickly or risk becoming obsolete.
- Artificial intelligence is predicted to significantly change our lives in the future. Some of those changes may threaten the stability of employment for white collar workers. Workers must learn to be multi-skilled, more innovative and possess a good analytical mind.
- Brundtland Commission Report
- report issued after the 1987 World Commission on Environment and Development that laid the groundwork for the concept of sustainable development
- business sustainability
- actions taken to sustain the business so that it survives and thrives well into the future
- carbon footprint
- measure of the amount of CO2 generated by an individual, group or organization
- carbon output
- measure of carbon dioxide emissions into the atmosphere
- climate change
- change in climate patterns due to the increased levels of carbon dioxide in the atmosphere which is attributed mainly to the usage of fossil fuels
- corporate social responsibility (CSR)
- actions that firms take to assume responsibility for their impact on the environment and social well-being
- environmental sustainability
- situation in which rates of resource use can be continued indefinitely without permanently depleting those resources
- equity issues
- related to the fairness of pay and job promotions, regardless of gender, sexual orientation, race or religion
- full-cost accounting
- accounting that recognizes all costs related to the provision of a product or service; this includes all economic, environmental and social costs
- life-cycle accounting
- similar to full-cost accounting, this assesses all costs related to the production of a product from the extraction of raw materials used to the final disposal of the product at the end of its life
- how significant an event or issue is to warrant its inclusion or discussion
- non-renewable resources
- resources that, once used, are depleted, and not able to be used again
- P/E ratio
- company’s stock price divided by the company’s earnings per share and indicates the amount investors are willing to pay for one dollar of earnings
- Paris Climate Agreement
- 2015 agreement between 196 nations to strive to limit the increase of global temperatures to 1.5 degrees Celsius
- renewable energy
- energy that is not depleted once used, for example, tidal energy, wind energy or solar power
- social contract
- expectation that companies will hold to an unwritten contract with society as a whole
- person or group with an interest or concern in some aspect of the organization
- meeting the needs of the present generation without compromising the ability of future generations to meet their own needs by being aware of current economic, social, and environmental impacts
- sustainability report
- report that presents the economic, environmental or social impacts that a corporation or organization was responsible for
- sustainable development
- development that meets the needs of the present without compromising the ability of future generations to meet their own needs
- triple bottom line (TBL)
- expansion of traditional reporting that is focused on economic performance, to include social and environmental performance
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