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Chapter 11: Sustainability and environmental accounting Contemporary issue 11.1 Perfect timing for world’s first carbon neutral winery Questions Outline the potential costs and benefits of making moves towards carbon neutrality. The ‘food miles’ movement is increasing in strength in the United Kingdom, with some major retailers, for example Tesco, asking suppliers to label products with their carbon footprint. Evaluate what impact this move could have on the New Zealand wine industry. 1. Costs would include putting a system in place to measure greenhouse gas emissions before they can be managed and mitigated; changing practices and training of staff to mitigate emissions; the cost of changing agricultural practices; changing transport used; costs of certification etc. Benefits would include an increase in sales, particularly to customers specifically interested in the origin of their products; increasing marketing opportunities to different retailers, such as supermarkets signing up to a food miles program; energy savings, and therefore reduction in energy costs. 2. New Zealand wineries that embrace the carbon neutral concept and seek certification are likely to increase their market share in the United Kingdom, as they are meeting their requirements for labelling. They are likely to take market share from wineries in other countries, which are not considering these moves. It is likely to act as a marketing opportunity and increase the industry’s exposure to different markets and customers. Review questions 11.1 Explain the meaning of sustainability and outline why corporations might consider it in their business operations. Sustainability, or sustainable development, is concerned with development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It refers to three main areas – economic development, environmental development and social development. Corporations might consider their effect on sustainability as they are in control of the majority of the earth’s resources so any moves towards sustainability cannot occur without the support of business. Figure 11.1 presents reasons that BHP Billiton embraces sustainable development. These include: to reduce business risk and enhance business opportunities; to gain an maintain their ‘licence to operate’ – which is also referred to as a social contract; to improve operational performance and efficiency; improved attraction and retention of its workforce; maintain security of operations; enhanced brand recognition and reputation and to enhance their ability to strategically plan for the longer-term. 11.2 Explain the difference between eco-justice and eco-efficiency, and explain how both might relate to business activities. Eco-justice considers the ability to meet the needs of the current inhabitants, including strategies to alleviate poverty, access to basic water, food and shelter. It also takes a long-term focus where it recognizes that consumption of resources today needs to consider the effect this will have on the quality of life of future inhabitants. These two aspects of eco-justice are referred to as intragenerational equity and intergenerational equity respectively. Eco-efficiency, on the other hand, focuses on how efficiently resources are used to minimize the impact on the environment. Some businesses are larger than some governments. As such, they have a great deal of power over resources. Given businesses control the majority of the world’s resources, entities can put systems in place to contribute to the efficient use of these resources to meet eco-efficiency demands. They also have control over the extent to which resources are depleted to avoid eco-justice considerations relating to intergenerational equity. Many businesses operate globally, so are in a position to be able to assist to alleviate poverty, and ensure their employees in developing countries, and their communities have access to food, clean water and shelter. 11.3 What reasons can an entity provide for adopting sustainable development? There are a number of reasons that businesses can provide for adopting sustainable development. A good discussion is provided in Figure 11.1, which presents reasons that BHP Billiton embraces sustainable development. These include: to reduce business risk and enhance business opportunities; to gain an maintain their ‘licence to operate’ – which is also referred to as a social contract; to improve operational performance and efficiency; improved attraction and retention of its workforce; maintain security of operations; enhanced brand recognition and reputation and to enhance their ability to strategically plan for the longer-term. 11.4 Identify what information entities are likely to provide if they use triple bottom line reporting. Triple bottom line reporting is also referred to as environmental, social and governance reporting and sustainability reporting. Companies are likely to provide information about their financial performance, their environmental performance and their social performance. 11.5 Explain the difference between sustainability reporting and traditional financial reporting. Traditional financial reporting focuses on recognising the financial effects of an entity’s transactions. It follows generally accepted accounting principles and accounting standards and is audited by an external auditor. The financial report is limited to transactions that have a financial impact. Sustainability reporting however goes beyond this. It includes reporting on the environmental activities and of the entity as well as its social impacts. These are combined with financial information. 11.6 What benefits should entities expect from preparing sustainability reports? The following benefits can be gained from preparing sustainability reports: Embedding sound corporate governance and ethics systems throughout the organisation. Improved management of risk through enhanced management systems and performance monitoring. Formalising and enhancing communication with key stakeholders. Attracting and retaining competent staff. Ability to benchmark performance with other entities. 11.7 What is international integrated reporting and how does it differ from the current financial reporting system we have? Integrated reporting is designed to improve sustainability reporting and integrate it more closely with financial and governance reporting. It is designed to bring together financial, environmental, social and governance information in a clear, concise, consistent and comparable format. It differs from our current financial reporting system as it goes beyond the financial impact of activities, and a general disclosure of governance to include a framework to integrate environmental and social reporting together in an integrated way. 11.8 What is the Global Reporting Initiative, and what is its purpose? The Global Reporting Initiative was launched in 1997 as an initiative to develop a globally accepted reporting framework to enhance the quality of sustainability reporting. It provides a framework of principles and performance indicators that organisations can use to measure and report their social and environmental performance. Its purpose is to enhance the transparency, comparability and clarity of sustainability reports. 11.9 Identify four corporate stakeholders and explain how they affect a business’s operations. Table 11.2 provides examples of a range of stakeholders. These can include: Shareholders – provide funds to the entity. Their support is essential for continued success of the entity, as their support affects share price and corporate value. Customers – major users of the entity’s products and services. A continued and growing supply of customers is essential to the continued success of the entity. Fund investors – like shareholders, they buy shares in the company and support companies for which they see opportunities for growth in value. Community groups – may supply labour to the entity, but need to support the entity’s operations if the entity and community are to exist harmoniously. Media – can impact the views of other stakeholders by voicing concerns and making other groups aware of the businesses operations and activities Government and regulators – monitor mandatory reporting, impose taxes and charges and uphold legislation that the entity needs to follow. 11.10 For the four corporate stakeholders you have identified above, document how an organisation might engage with them about sustainability issues. Entities can engage with these stakeholders in the following ways: Shareholders – direct emails provide information in annual reports and stand-alone sustainability reports, website. Customers – directly through email and other written communication. The media and the corporate website would also be useful. Fund investors – direct communication through email, phone, meetings with fund managers, and through providing sustainability information in written form, for example the sustainability report. Community groups – can use the media, company website, attending community meetings, and through local government Media – media releases, direct communication through email, phone and by providing copies of sustainability reports. Government and regulators – direct reporting to show are compliant with regulations, email and phone. 11.11 Identify how ethical investment can affect corporate decision making regarding sustainable business operations. Ethical investment and the growth in ethical funds pose an increasing influence on entities’ corporate sustainability performance and reporting. Increasing demands for social and environmental performance information means that companies are seeking to satisfy their needs to attract funds and support. Being listed on a sustainability index such as one of the Dow Jones Sustainability Indexes means companies can also attract investment and support from fund managers and small investors who are driven in their investment choice by ethical, social and/or environmental considerations. 11.12 Explain what an environmental management system is and how it can be used to improve environmental performance. An environmental management system (EMS) is a system that organisations implement to measure, record and manage their environmental performance. It is useful to assist in improving environmental performance because it allows entities to measure and record their performance, set benchmarks or key performance indicators, and put in place mechanisms to meet these benchmarks. It is often said you can’t control what you can’t measure. An EMS allows an entity to measure its environmental outputs in order to look towards controlling and reducing them, thus improving performance. 11.13 Explain how emissions trading schemes are likely to affect financial reporting. An emissions trading schemes is a system designed to control emissions by allowing participants to trade excess emissions permits. This is likely to affect financial reporting because it will require companies to measure and report emissions permits it holds, through grants from government and those it purchases. There are also likely to be financial implications from the trade of permits. While there are currently no financial reporting guidelines around the operation of an emissions trading scheme it is likely that emissions permits are likely to be reported as either financial instruments or intangible assets, and both are used in jurisdictions which currently have an emissions trading scheme in place. Application questions 11.14 There are currently no formal accounting standards for the reporting of social and environmental activities. Evaluate what issues this has for preparation of financial reports. Given there are currently no formal accounting standards for the reporting of social and environmental activities this means that these activities are not going to be included in the transactions reflected in the financial statements. For example, an entity’s impact on the environment, in terms of pollution is not costed and included as an expense. While entities are required to account for the present value of future clean-up costs of contaminated sites, they do not have to account for the ongoing impact of this contamination on the environment. Similarly, entities are not currently required to account for any social cost which does not have a direct financial impact. While some disclosures are required concerning employee benefits, 11.15 In this chapter a range of stakeholders have been identified that managers should consider when determining their sustainability performance and reporting. Determine how managers should engage with each one of these stakeholders and document what sustainability issues they would be likely to discuss during this engagement process. Shareholders – direct emails provide information in annual reports and stand-alone sustainability reports, website. The entity would be likely to discuss their sustainable business activities and how these will add to firm value. This might also include how it is addressing legislation on carbon emissions. Customers – directly through email and other written communication. The media and the corporate website would also be useful. Customers may be interested in the source of products, with some actively seeking green or fair trade products. Consequently entities will communicate the environmental credentials of products including the extent to which they are sourced from sustainable sources. Fund investors – direct communication, through email, phone and meetings, with fund managers and through providing sustainability information in written form, for example the sustainability report. Some investors search out socially responsible companies to invest in. Entities will report their social and environmental activities to attract ethical fund investors. Managers will also discuss how the entity is addressing issues such as carbon emissions disclosure and reduction requirements. Community groups – can use the media, company website, attending community meetings, and through local government. Entities will discuss facilities and services provided to local community groups, and issues such as job creation, health, and emissions information relating to the local environment. Media – media releases, direct communication through email, phone and by providing copies of sustainability reports. Given the media acts as a voice that sets the agenda relating to many issues an entity will wish to advise any positive social and environmental activities. Government and regulators – direct reporting to show are compliant with regulations, email and phone. The entity will discuss the potential impacts of legislative changes relating to social and/or environmental activities. 11.16 Access the 2016 sustainability report for Toyota Motor Corporation. Prepare a report that addresses the following issues: Document Toyota’s vision and mission statement, and articulate how these might relate to sustainability, if at all. Outline Toyota’s stakeholders and explain how they have engaged each of these stakeholder groups. Outline governance mechanisms in place on the Board of Directors to address sustainability. Articulate how Toyota Australia Ltd links sustainability to its risk management systems. Outline any guidance Toyota Ltd used in implementing environmental and social performance and reporting systems. The 2016 Sustainability Report for Toyota Ltd is available from Toyota.com.au. The easiest way to locate it is to use a search engine. (a) The mission, vision and strategic direction are presented on page 5 of the report. Our vision: most respected and admired company. Our mission: we deliver outstanding automotive products and services to our guests, and enrich our community, partners and environment. Toyota’s commitment to sustainability is reflected in seven guiding principles (refer page 5), reflecting ‘a commitment to fairness in all corporate activities, the provision of clean, safe and innovative products, and respect for the environment and the culture of the communities’ in which they operate. These principles form the foundation for the vision. While the vision does not specifically relate to sustainability, the mission and core values do. In Toyota Ltd’s mission they discuss enriching the community and environment. This will lead to organizational strategies to address these sustainability issues. In addition one of the company’s core values is respect for people, implying a social focus beyond a profit motive. (b) In its sustainability report ‘Stakeholder Engagement’ is presented on pages 9 and 10. This outlines the company main stakeholders, and how they have engaged with them over the year. The primary stakeholders are identified as: their shareholder (The Toyota Motor Corporation), employees, customers or ‘guests’ as they are referred to by the company, suppliers, dealers, community groups, and government. The company also identifies a range of material issues on page 8, identifying to which stakeholders these are relevant. The following table summarizes some of the information presented in the report. Stakeholder Group Key Issues Response and Engagement in 2015/2016 Employees redundancies from closure of Australian manufacturing • redundancies lead to key challenge of connecting with and retain remaining workforce workplace productivity communication strategy Communication New Intranet site to address – The Engine Room Training and Development Key focus on transitioning to new roles outside Toyota Customers vehicle recalls Product safety and effective management of product recalls Vehicle emissions Responding to public sentiment and regulatory changes re emissions limits Dealers Future of Franchise strategy move to guest service rather than sales target focus – guest-centric mindset –Toyota for Life program Ongoing development Dealer training, including management program suppliers Viability of local vehicle manufacturing manage relationships with suppliers through transition to ceasing production in Australia Community Community sponsorship and promotions social development sponsorship and employee volunteering pilot Product safety Vehicle safety initiatives and road safety education Government Ongoing viability of Australian automotive market Regular interaction on key issues such as policy to support the automotive manufacturing industry in Australia; abolition of luxury car tax; design and impacts of proposed CO2 vehicle emissions standard, submissions to Fair Work Australia Toyota Motor Corporation Close engagement wholly owned subsidiary, close collaboration through knowledge sharing and performance improvement. (c) Under the ‘Corporate Governance and Compliance’ section (see pages 47-49) of the report the company documents that the board has risk management frameworks, a fraud and corruption control program, legal compliance training and a detailed code of ethics. An Environment Committee, which reports to the Corporate Compliance Committee, and a separate Human Resources Committee also address sustainability issues. (d) While risk management was a strong focus in earlier sustainability reports, it does not receive a great deal of attention in this report. The company merely mentions that it has a system of risk management in place (page 48). (e) The company has gained ISO14001 certification for its environmental management system so has used the guidance of the quality system in its implementation. The company also uses the Global Reporting Index (GRI) to develop and present its sustainability report. 11.17 You are the accountant of a company that is considering expanding its operations to a country in the developing world. You are to prepare a report to the CEO outlining what issues the company should consider from a sustainability perspective when making this decision. There are a range of issues the CEO needs to consider from a sustainability perspective. These include but are not limited to: Environmental impacts of the activities Access to resources using sustainable transport methods Depletion of resources to the detriment of the local community Providing appropriate wages and facilities for employees. It is likely that the company will need to provide additional support in the form of shelter, food and water to employees and their families Government regulations 11.18 Access the annual report of a company you are familiar with. Write a report outlining the corporate governance and risk management issues the company faces with respect to sustainability. A detailed solution is not possible here, given a response will relate to the company you choose to analyse. These issues will be discussed in the Directors Report, the Corporate Governance Statement and/or the Sustainability Report. 11.19 In 2013, the Rana Plaza factory in Bangladesh collapsed, claiming the lives of over 1100 workers. Major clothing brands signed an Accord to work together to ensure safe working conditions for factory workers in Bangladesh. You are to research a clothing brand with which you are familiar, and document the extent to which it has or hasn’t taken action to ensure it sources clothing from safe factories. A detailed solution is not possible here as a response will relate to the company you choose to analyse. Choice presents a thorough discussion of the issues, including an analysis of some prominent Australian companies in the following article: https://www.choice.com.au/shopping/everyday-shopping/clothing/articles/ethical-clothing Case study questions Case study 11.1 Turning the heat on Questions Outline how climate change is likely to affect Sewell’s business operations in developing countries. Evaluate the social issues likely to impact on a business operating in a developing country. Evaluate what role accountants can play in addressing climate change in a business environment. 1. Climate change affects developing countries arguably more than in developed countries for a number of reasons. Poor infrastructure is one major factor, as is a lack of resources. A lack of government regulation over business and infrastructure development means emissions are not measured or controlled. Developing countries seeking investment from foreign organisations are likely to not pay attention to the systems put in place to minimize emissions. 2. Limited education is likely to affect the skills of potential employees. Employees are also likely in many cases to be malnourished and lack transportation to get to work. This is also likely to lead to higher levels of illness amongst employees than would be the case in developed countries. Businesses are likely to have to consider supporting staff and their families through the provision of basic needs such as food, water and shelter. They are also likely to need to build infrastructure to support the local community as well as the business. 3. To manage climate change and carbon emissions entities need to be able to measure their outputs. Accountants work with the major information systems of the organization and so are in a position to contribute to the development of an information system that can measure and record emissions as a first step to managing and reducing them. They can also attempt to measure the cost to the business of incurring these emissions, particularly when an emissions trading scheme is used. Case study 11.2 Preventing a carbon bubble crash Questions Identify why you would expect the Uniting Church to have an interest in climate change. Outline potential sources of information that investors could use to gather data about companies that their superannuation fund managers invest in. Outline methods superannuation funds, on behalf of investors, could use to encourage companies to take a more active role in managing climate change. The Uniting Church is likely to be taking an interest in climate change, and investment because it may wish to be viewed as taking an ethical standpoint. From a theoretical point of view they could take this approach to maintain legitimacy (refer the Theory chapter) or because they would like to demonstrate to stakeholders (e.g. their congregation) that they are taking a lead in an area that is likely to align with the philosophy of the church. The best source of information would be the superannuation fund website. This would provide information about the mix of companies, property, cash etc., in addition to policies with respect to investment. Superannuation funds could lobby companies either jointly or individually by engaging with management to encourage them to consider climate change. They could also use their voting rights at AGMs to vote on key decisions such as remuneration of executives, or appointment of directors to display their support or objection to practices. Solution Manual for Contemporary Issues in Accounting Michaela Rankin, Kimberly Ferlauto, Susan McGowan, Patricia McGowan 9780730343530
