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.”87 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
LO 13.1Which agreement did 196 nations adopt in December 2015?
- Oslo Accord
- Paris Climate Agreement
- Kyoto Agreement
- Copenhagen Accord
LO 13.1The 2015 Paris Agreement on Climate Change aimed to limit the increase of global temperatures to ________.
- 0.5 °C
- 1.0 °C
- 1.5 °C
- 2.0 °C
LO 13.1Good corporate citizenship ________.
- is expensive to implement and does not guarantee returns
- must have management’s sincere convictions behind it in order to succeed
- is more relevant in countries with less regulation.
- makes good business sense
LO 13.1According to the World Commission on Environment and Development, how is sustainable development defined?
- It meets the needs of the future without compromising the ability of the present generations to meet their own needs.
- It applies the fairness doctrine that no generation, present or future, will be disadvantaged in their ability to meet their own needs.
- It meets the needs of the present without compromising the ability of future generations to meet their own needs.
- none of the above
LO 13.1Sustainability reporting can incorporate which of the following?
- environmental reporting
- social reporting
- business viability reporting
- all of the above
LO 13.1What caused Union Carbide’s deadly gas leak in Bhopal, India, which killed 3,000 and injured 42,000?
- a combination of low staff levels, corruption, pay-offs to employees to keep quiet, and the manager going on vacation the day before the leak
- diversion of funds and resources to a Northern India project that also took staff from the Bhopal plant, plus many safety issues, including fines imposed on community members who camped too close to the plant
- employees’ deciding to have lunch before dealing with the pressure buildup inside the tank and bribes paid to the government employees who inspected the plant
- a combination of low staff levels, numerous safety issues, and a lack of immediate employee attention to the problem as pressure built up inside the tank
LO 13.1Nestlé’s reputation was damaged when the company was accused of which of the following?
- forcing mothers to buy baby formula within days of delivering their babies
- promoting inadequate nutrition in developing countries
- providing cheap formula to mothers in developing countries, but more expensive to mothers in developed countries
- selling poor quality bottled water to developing countries
LO 13.1Which form of energy is renewable?
LO 13.1Which of the following types of reporting does the Triple Bottom Line not incorporate?
LO 13.2Which of the following best defines stakeholders?
- investors and lenders
- environmental groups
- anyone directly or indirectly affected by the organization
- groups or individuals financially impacted by the organization
LO 13.2Which of the following statements is most often the case?
- Socially responsible businesses tend to post higher profits than those not focused on social responsibility.
- Companies that are not socially responsible will have better profits, but have a moral obligation to society.
- Socially responsible investing gives poorer returns than non-socially responsible investing.
- Investors are more short termed focus and so socially responsible investing should not be a factor in their investment portfolio.
LO 13.3Which standards are considered universal under the GRI?
- economic, environmental, social
- foundation, general disclosures, management approach
- foundation, economic, general disclosures
- management approach, economic, social
LO 13.3The SASB view on materiality has been adapted from which of the following?
- the U.S. Executive branch
- the GRI definition
- a determination by U.S. Congress
- the U.S. Supreme Court
LO 13.3The fundamental tenets of SASB’s Approach are considered ________.
- evidence-based, industry-specific, and market-informed
- industry-specific, interest-based, and value creating
- consensus-based, industry-specific, and actionable
- interest-based, value creating, and market-informed
LO 13.3How many broad categories of capital are identified by the Integrated Reporting Framework?
LO 13.1What is sustainability and how might corporations incorporate sustainability practices into their business?
LO 13.1What is the value of triple bottom line reporting to users? What is the cost to the company to provide this extra information?
LO 13.1What type of information do you think an oil company should include in their sustainability report? What about a car manufacturer? A large retailer?
LO 13.2Identify four different stakeholders in need of sustainability information and show how their actions might affect a business.
LO 13.2Contrast the investment risk potentials of an electric vehicle manufacturer whose shares have a PE ratio of 10:1 and a coal company whose stock has a PE ratio of 2.5 to 1.
LO 13.2There are currently no formal mandatory environmental accounting standards firms must adhere to. Given the lack of regulation, should accountants even bother with preparing sustainability reports? Why or why not?
LO 13.3Explain the role and purpose of the Global Reporting Initiative.
LO 13.3Explain the role and purpose of the Sustainability Accounting Standards Board.
LO 13.3Explain the role and purpose of the Integrated Reporting Framework.
LO 13.2Obtain the 2016/2017 sustainability report for Ford Motor Company. Prepare a report that addresses the following issues:
- How do the vision and mission statement on the company’s website relate to its definition of sustainability, if at all?
- Who are Ford’s stakeholders? Do you think that the company has addressed the information needs of each stakeholder group?
- What type of governance processes are in place to ensure that the Board of Directors’ values are aligned with sustainability?
- How does Ford tie sustainability to its risk-management system? What potential risks does Ford face that could harm the company, the environment, or the community?