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Unformatted text preview: Running head: SUSTAINABILITY REPORTING Sustainability Reporting: Expanding the Scope of Disclosures Student’s Name: Institutional Affiliation: 1 SUSTAINABILITY REPORTING 2 Sustainability Reporting: Expanding the Scope of Disclosures Sustainability reporting has developed as a common practice among businesses of the 21st century. A sustainability report is a statement issued by an organization or corporation about the environmental, economic, and social effects resulting from it daily business operations. It also reveals a company’s values and governance model and shows the connection between its strategy and its obligation to a sustainable worldwide economy. Currently, investors, shareholders, and customers are pushing for data and evidence about organizations’ sustainability performance; thus, sustainability reports have emerged as an integral part of companies’ disclosures. The Sustainability Accounting Standards Board (SASB) develops the specific standards and principles for corporate sustainability disclosure with the aim of ensuring that the disclosure is decision-useful, material, and comparable. Although companies have issued sustainability reports in the past, the methods that they have used only focused on sustainability issues. Therefore, with SABS standards, companies will publish a single document that will comprise all the necessary financial and nonfinancial information. Business Sense of Integrated Sustainability Report Integrated sustainability reporting makes good business sense because it adds value to companies by revealing to the shareholders, clients, employees, and regulators the ESG (Environmental, Social, and Governance) data. Today, most investors require companies to present them with this non-financial data. However, it is difficult for the investors to understand the non-financial data when presented exclusively. Shareholders and investors cannot understand how the EGS factors add value to the business. Therefore, the integrated sustainability reporting helps to decode the non-financial information into a manner that the investors and shareholders SUSTAINABILITY REPORTING 3 can easily understand. Consequently, this increases the business’ communication with the investors about their environmental and social impacts. Integrated sustainability reporting also enhances a firm’s access to capital. Studies reveal that financial reports may expose a company to new and affordable financing. By combining its sustainability reports with its financial reports, a company may succeed in convincing potential investors that it is a competitive and low-risk investment. Investors are increasingly favoring businesses that that are transparent; thus, sustainability disclosure provides them with more information connected to the companies’ cash flow from operations and return on assets. Additionally, integrated sustainability reporting often indicates a company’s value and assists to reduce its cost of equity, mainly in competitive markets. Firms in competitive sectors always tend to incorporate numerous sustainability initiatives; for that reason, integrated sustainability reporting differentiates a company from its rivals. Engaging in integrated sustainability reporting also helps businesses to forecast and manage different threats that may arise from their sustainability-linked scopes of business. For instance, it allows firms to anticipate and prepare for any challenges that may originate from their areas of operation. Additionally, it helps companies to increase their swiftness in process improvement. It also provides organizations with a better understanding of their externalities and risks, which allows them to lessen the risks and build rigidity in their primary business strategies. For that reason, integrated sustainability reporting makes a good business sense. Responsibility for Sustainability and its Reporting to the Outsiders The Chief Executive Officer (CEO) should have responsibility for sustainability and its reporting to those outside the company. According to Accenture and UN Global Compact survey, about 93 percent of chief executive officers perceive sustainability as an essential factor in the SUSTAINABILITY REPORTING 4 success of their businesses (Kanal, 2011). A CEO plays a critical role in ensuring that a business becomes environmentally responsible. Most employees often do not consider certain changes as relevant to the company (Kanal, 2011). Thus, the employees may fail to connect the business’s mission and sustainability if they do see the CEO’s leadership on the matter. The leadership of a CEO often accelerates the employees’ effort. When the chief executive officers talk about sustainability as of strategic business importance, they set the tone for the whole company. Additionally, Priya Haji, the co-founder and CEO of SaveUp, points out that always, the CEO is the chief sustainability officer in any organization and the absence of deliberate action towards fostering sustainability may result in inaction by the other employees in the company (Mangan, 2013). Similarly, Bob Annibale, the City Community Development, and Microfinance’s global director, explains that the CEOs should take the responsibility and leadership in investing in projects and business models that entrench the principles of sustainability (Mangan, 2013). Therefore, they are the best placed to guarantee that sustainability develops to be part of a firm’s rubric and a primary driver of its business approach. The CEO should also be responsible for sustainability and its reporting to those outside the company because he or she often establishes mutual trust and accountability with all the stakeholders, such as investors, communities, employees, and the society. The CEO also builds a corporate identity focused on the social issues and the organization’s unique proficiencies. Often in the sustainability reports, the CEO writes a letter to the outsiders indicating the company’s sustainability achievement and contributions to the society. Therefore, the CEO should have the obligation for sustainability and its reporting to the organization’s internal and external shareholders. Standardization of Sustainability Reporting SUSTAINABILITY REPORTING 5 Sustainability reporting can be standardized across all businesses and industries. The disclosure of a firm’s sustainability report to the investors and different stakeholders in now widely accepted across a wide range of businesses and sectors. Therefore, various governmental and non-governmental organizations are developing policies, standards, and guidelines for sustainability reporting (Lydenberg, Rodgers, & Wood, n.d.). In the past, companies have displayed a wide disparity in the contents of their sustainability reports, which has led to comparability, continuity, and credibility concerns among the users of the reports. To eliminate these diversities, the Global Reporting Initiative (GRI), Sustainability Accounting Standard Board (SASB), and the International Integrated Reporting Council (IIRC) have developed integrated frameworks and industry-specific standards. The Sustainability Accounting Standard Board indicates that the sustainability reporting can be standardized across all industries by evaluating the financial risks, regulatory drivers, competitive issues, stakeholder concerns, and opportunity for innovation (Lydenberg, Rodgers, & Wood, n.d.). The financial risks should be assessed because they often affect the long-term and short-term activities of the company. Moreover, the analysis of the legal and regulatory drivers can enable the standardization of the sustainability reporting in all the industries (Lydenberg, Rodgers, & Wood, n.d.). The government policies often shape the operations businesses in different sectors. Therefore, the sustainability reporting can be standardized across all industries because the financial risks and regulatory policies affect all sectors. Competitive issues and industry norms should also be evaluated when considering the standardization of the sustainability reporting. Additionally, all businesses consider the societal trends and stakeholder concerns as critical to their success (Lydenberg, Rodgers, & Wood, n.d.). According to SASB, an assessment of these factors helps in the development of a standardized SUSTAINABILITY REPORTING 6 framework for sustainability reporting across different businesses and sectors (Lydenberg, Rodgers, & Wood, n.d.). Accommodation of a Single Reporting Framework that Includes Nonfinancial Information on Sustainability Issues The traditional audit and assurance services help to fulfill the shareholder’s demand for executive accountability. Moreover, the services help the reporting entities to enhance their operational performance. However, the audit and assurance of the nonfinancial information on sustainability issues is a challenging task for most auditors. Contrary to the financial statements, the data in sustainability reports are less measurable and more qualitative in nature. Thus, companies that publish the nonfinancial reports find it difficult to assign independent audit and assurance services that stimulate the same level of reliability, consistency, and trust as do auditors’ reports of the financial reports. Altering the traditional audit and assurance services to accommodate a single reporting framework that includes nonfinancial information on sustainability issues can improve the credibility of the reports and help the shareholders and boards of directors in accomplishing their monitoring responsibilities. This can be achieved by developing a set of policies and guidelines that identify the parts of the reports that should be the focus of the audit engagement and provide a foundation for describing how assurance is delivered over the material elements of the reports (Jones, 2010). The auditors and the individuals responsible for governance may help to develop the guidelines and policies. Since the traditional audit and assurance services focused more on the financial reports; accommodating a single reporting framework that includes nonfinancial information on sustainability will force auditors to consider the stakeholder relationships, materiality, reliability SUSTAINABILITY REPORTING 7 and completeness, and connectivity of information among others (Jones, 2010). Additionally, in their audit and assurance work, the auditors should ensure that integrated report of the financial and nonfinancial reports does not contain information that contradicts the company’s financial statements. Similarly, auditors need to alter their traditional audit and assurance services to focus more on the objective elements in the financial statements. However, the International Auditing and Assurance Board (IAASB) have not come up with the standards and guidelines for mixed reports that include information on sustainability issues (Jones, 2010). Incorporating Sustainability Reports into the Traditional Financial Reporting Framework Sustainability reporting cannot be successfully integrated into a more traditional financial reporting framework. Currently, companies are under pressure from investors and shareholders to disclose to be transparent and accountable by disclosing all the information about their operations, including sustainability. The International Integrated Reporting Council (IIRC) has proposed various changes in the manner that companies report their activities by combing the sustainability reports with the traditional financial reports to form the integrated reports. Although there is no accepted format of an integrated report; it is clear that the sustainability reports cannot be incorporated successfully into the traditional financial reporting framework. While the introduction of the integrated reports is a remarkable advancement, it is unlikely that they will lead to a single report that substitutes the current financial statements with the same level of reporting and audit standards. The sustainability and financial reports have some differences that make it difficult to integrate the two reports into a single publication that is accepted by all the users as is the case with the financial statements (Soderstrom, 2013). For instance, the Financial Accounting Standards allows a particular level of complexity of the SUSTAINABILITY REPORTING 8 financial statements to the users, which helps to reduce the amount of explanation required in the reports. Additionally, the financial reports are compulsory, adhere to the prescribed accounting standards, and must be audited (Soderstrom, 2013). These features of financial statements improve their reliability and interpretability. However, the sustainability reports do not have these characteristics. Incorporating sustainability reporting into a more traditional financial reporting framework is also difficult because of the nature of the social and environmental performance. These environmental and social performances differ significantly between sectors and businesses; thus, it is hard to integrate them into a single reporting framework that can be compared easily across different industries and companies. According to the U.S. standardsetters, corporate lawyers, and industry lobbyists, a resulting report from the combination of the financial and sustainability reporting should be basic (Soderstrom, 2013). Thus, the integrated report is unlikely to disclose the kinds of sustainability information that shareholders require because it is hard for companies to report their unique approaches to sustainability and data of financial performance in a single report. The Reporting Frameworks Currently Used for Sustainability Reporting Some of the reporting framework that is currently being used or sustainability reporting include the CDP, Dow Jones Sustainability Indexes, Global Reporting Initiative, Sustainability Accounting Standards Board, and GRESB (Measurabl, 2014). CDP is a non-profit organization that runs the worldwide disclosure system for shareholders and investors that help organizations, states, cities, and companies to measure and manage their environmental impacts. It focuses mainly on the GHG emissions. The organization is the largest holder of GHG production and SUSTAINABILITY REPORTING 9 energy use data in the world. More than 800 institutional investors support CDP (Measurabl, 2014). The Dow Jones Sustainability Index (DJSI) was the first sustainability benchmark in the world. It is provided by S & P Dow Jones Indices and RobecoSAM. It is an industry-specific reporting framework that is important to investors (Measurabl, 2014). Additionally, its framework is one of the most refined ESG reporting index solutions for companies. Conversely, the Global Reporting Initiative is a worldwide independent organization that assists companies and businesses to understand and communicate their sustainability issues to their shareholders and potential investors. The UN Global Compact declared it as the official sustainability standard; thus, it is the default reporting framework for most organizations (Measurabl, 2014). It boasts of approximately 5,800 related companies (Measurabl, 2014). GRESB, on the other hand, is an investor-driven entity that centers on evaluating the environmental, social, and governance performance of real assets worldwide. This reporting framework focuses primarily on the real estate sector only (Measurabl, 2014). Equally, the Sustainability Accounting Standards Board provides a reporting framework for the public companies in the United States only. It develops and publishes sustainability accounting standards that assist corporations to reveal relevant sustainability data to shareholders and investors. The standards set by SASB allow investors to link peer performance and benchmarking within a particular industry (Measurabl, 2014). SASB focuses primarily on providing the information that the investor need to enable them to increase their earnings. However, the Global Reporting Initiative aims at revealing what firms are doing to the world to make it less or more sustainable. The GRI reporting framework was developed to help companies provide their stakeholders with transparent information about SUSTAINABILITY REPORTING 10 their operations and sustainability issues. SASB, founded in 2011, sets standards and policies for sustainability reporting for companies with the aim of helping investors to make more money. What it will take for Students to learn the “Language of Sustainability The student will be forced to undergo an additional study to enable them to learn the “language of sustainability accounting” since it is a new concept that does not relate much with the traditional financial reporting. Students will have to learn the fundamental concepts of sustainability accounting and the effects of sustainability issues on a firm’s financial reporting and bookkeeping practices. Additionally, students need to learn the different frameworks that companies are currently using in their sustainability reporting. However, more emphasis should be put on the Global Reporting Initiative and SASB’s frameworks. The students should also have a brief overview of a business’ sustainability report to enable them to understand what a sustainability report entails. Minimizing the traditional “language of accounting” as the focus of reporting shifts to a more general structure will not help the students understand the concept of sustainability reporting. The two reporting systems have different concentrations. Therefore, the students need to understand them exclusively. A thorough understanding of the traditional financial reporting framework and the current sustainability reporting framework will provide the students with comprehensive knowledge about the “language of sustainability accounting.” For that reason, the student will need additional study. The concept of sustainability reporting has developed as a common practice among businesses of the 21st century making it a critical factor in the success of any company. The integrated sustainability reporting makes a good business sense because it enhances a firm’s access to capital. Thus, the CEO should be responsible for sustainability and its reporting to SUSTAINABILITY REPORTING 11 those outside the organization. Various organisations, such as GRI and SASB have proved that sustainability reporting can be standardized across all industries and businesses. For that reason, it will take students additional study to learn the “language of sustainability reporting.” SUSTAINABILITY REPORTING 12 References Jones, H. (2010). Sustainability reporting matters: what are national governments doing about it? Kanal, V. (2011). Just How Important is the CEO to Sustainability? Greeb Biz. Retrieved from Lydenberg, S., Rogers, J., & Wood, D. (n.d). From Transparency to Performance: Industry-based sustainability reporting on key issues. SASB. Mangan, B. (2013). Should CEOs act as Chief Sustainability Officers? LinkedIn. Retrieved from Measurabl. (2014). The Top 5 Sustainability Reporting Frameworks you should Know. Retrieved from Soderstrom, N. (2013). Sustainability Reporting: Past, present, and trends for the future. ...
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  • Spring '16
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