The Perspectives of Sustainability Accounting

We recently had the opportunity to meet Jeffrey Unerman, Professor of Accounting and Corporate Accountability at Royal Holloway-University of London and past-Head of Royal Holloway’s School of Management.

Prof. Unerman's research and public policy work focuses on the role of accounting and accountability practices in helping organizations become more sustainable, recognizing the interdependencies between economic, social and environmental sustainability. A particular emphasis of this research is the potential and actual use of accounting in making the social and ecological impacts of organizational activities more transparent and in encouraging the embedding of sustainability within organizational decision-making.

We discussed with Prof. Unerman about the the perspectives of sustainability accounting, a topic that Impresa Progetto is also exploring in its series of workshops on performance management in organizations (the relative documents are available in issues 2015-3 and 2016-3 of the Journal).

An increasing number of documents delivered by international bodies (ISO 26000, UN Global Compact, UN Guiding Principles for Business and Human Rights, OECD MNE Guidelines, GRI Sustainibility Reporting Guidelines, IIRC Integrated Reporting Framework, WICI Intangibles Reporting Framework) have been recently tackling Corporate Social Responsibility from the perspective of Sustainability Accounting.

What was the role played by the possible key drivers behind this trend, such as: the stakeholders' needs for wider and better information about economic, social and environmental impacts of business activities; a growing managerial awareness about the relevance of these impacts for the business organizations' survival; or the interest of institutional and professional bodies to become front-runners in this niche?

In my opinion, the key drivers behind these trends are a combination of factors, including the factors that you mention in your question. There has been growing awareness in recent years of the economic impacts of social and environmental opportunities and risks. There has also been growing awareness among a broad range of stakeholders about the social and environmental impacts arising from the pursuance of profit-maximising activities. These stakeholders are often in a position to exert informal pressure on organisations to improve their social and environmental sustainability performance.

I think that dichotomies very rarely exist in practice. My experience is that the position that different organisations are at on the various continuums that motivate sustainability reporting and accounting will vary from organisation to organisation. Therefore the precise motivators for each organisation to engage with sustainability accounting and reporting will differ. Similarly, the response from standard-setting bodies and the accounting profession more broadly will vary according to their perception of the demands from their members and other constituents/stakeholders for guidance and standardisation on sustainability accounting and reporting.

GRI Sustainability Reporting Guidelines and IIRC Integrated Reporting Framework are the most popular Sustainability Reporting models at the moment. The first one aims at fostering high quality information for stakeholders; the second one’s ambition is to outline a new view on value creation including the organizations' impact on either financial, manufactured, intellectual, human, social, relational or natural capital in order to support a better allocation of financial resources. What are the strengths and the weaknesses of these approaches?

While I agree that both the GRI sustainability reporting guidelines and the IIRC's integrated reporting framework are perhaps the best known current models, I disagree that they are both sustainability reporting models. The GRI guidelines are clearly focused on sustainability reporting and provides a well-used framework that an increasing number of organisations in many countries are relying upon to provide a framework for their sustainability reporting. In contrast, while one of the IIRC’s founding principles was developing a framework for sustainability reporting, this element of its founding principles reduced considerably in prominence and importance from about 2012-2013 onwards. Now, the IIRC's integrated reporting framework primarily focuses upon the provision of an integrated picture of an organisation's economic, social and environmental capitals and values to inform long-term financial investors about the financial prospects of the company/organisation.

In practice, research that I and others have undertaken has indicated that very few disclosures within UK integrated reports focus on non-financial capitals or the provision of value-related information to any stakeholders are other than financial investors. For me, this reinforces the view that the IIRC’s integrated reporting framework project cannot really any longer be considered a sustainability reporting framework or model.

Although provision of long-term information to help investors judge the long-term economic risks and opportunities of the organisation is a welcome development from, and strength in, the IIRC's integrated reporting framework, its move away from a more balanced and integrated picture of social, environmental and economic sustainability drivers is, I believe, a weakness from a sustainability accounting and reporting perspective.

In contrast, the GRI sustainability reporting guidelines are drawn up using a multi-stakeholder consultation approach and cover a broad range of social, environmental and economic sustainability factors. They therefore provide a comprehensive framework to guide consistent sustainability reporting. This is a strength of the guidelines, along with the strength of the multi-stakeholder consultation process that is used to derive guidelines. However, a weakness of the GRI sustainability reporting guidelines is that because they are so comprehensive they often result in very long and very detailed sustainability reports. Although reporting organisations are expected to apply a materiality filter in deciding which elements of the GRI reporting guidelines they should include within their reports, many GRI compliant sustainability reports are very long and therefore become increasingly difficult for stakeholders who are not experts to read and comprehend.

The "enlightened long-term investor" is recalled as a "deus ex machina" able to foster business models' sustainability from an economic, social and environmental point of view. Yet who actually is the "enlightened long term investor"? Is such a recall just a  wishful thinking or a real option in these times of persisting "short-termism"?

The IIRC have put a lot of work into developing and realising the notion of an enlightened long-term investor. From some research in which I have been involved, it appears that the construction of a 'long-term investor', or persuading potential preparers of reports that there is a sufficiently large number of long-term investors, is a necessary element to persuade organisations that they should engage in integrated reporting.

I like your characterisation of this as 'deus ex machina'. I remain to be convinced that there is currently a large enough body of the enlightened long-term investors for whom an integrated reporting will be a significant priority. However I believe that in moving towards a society that is more sustainable over the longer-term (or is less unsustainable), it is vital that organisations are able to operate in an environment where they can take long-term perspectives – as many social and environmental risks become economic risks over the longer term. I therefore applaud the IIRC's efforts to develop the ‘enlightened long-term investor’ and hope that these efforts will shift investment horizons to continually longer-term perspectives. If organisations are pressured by investors to take a longer-term perspective, to run their businesses for the longer term rather than just to make short-term quarterly profit forecasts, then I believe this would be a major advance in moving us to more socially and environmentally sustainable economy.

What is in your opinion the future of Sustainability Accounting? Could UN 2030 Agenda, Sustainability Development Goals as well as the EU Directive 2014/95 play a role in shaping its perspectives? Can we expect a convergence of the current approaches to Sustainability Accounting? Can we expect an integration of Sustainability Management and Sustainability Accounting models?

The EU Directive 2014/95 sets out some broad areas where organisations should provide information in their corporate reporting. However these are very broad and I remain to be convinced that they will take us much further towards meaningful action on (and accountability for) social and environmental sustainability than existing guidelines and protocols.

In contrast, I believe that the UN Sustainable Development Goals have much greater potential for advancing sustainability and sustainability accounting.  These Goals comprise 169 targets across 17 goals and were agreed by all UN member states in 2015 – as a follow up to the UN Millennium Development Goals which had a target date of 2015. The Sustainable Development Goals came into force in January 2016 and seem to have acted as a catalyst for developing sustainability commitments from numerous different types of organisations at many levels – from governmental and intergovernmental bodies to professional bodies and individual businesses. The Sustainable Development Goals therefore seem to be proving to be a powerful framework that has the potential to develop coherent sustainability policies and practices between numerous different organisations in a way that should help in moving us towards sustainability.

The accounting profession have embraced the Sustainable Development Goals and have proposed different ways in which to help their realisation over the duration of the goals (2016 to 2030).

In 2015 PWC conducted a Sustainable Development Goals Engagement Survey. The results of this survey provide a very encouraging picture of the level of commitment of business organisations to use the Sustainable Development Goals to help promote sustainability within their businesses. Among the results, the survey showed that 92% of respondents were aware of the Sustainable Development Goals and 71% had already started taking action to prepare their organisations to respond to the Sustainable Development Goals while 41% of the businesses indicated that they planned to use the Sustainable Development Goals to help in defining their strategy. Remember that this survey was undertaken in 2015, before formal launch of the sustainable development goals at the beginning of 2016.

In one of the questions the survey asked how businesses planned to assess their impact on the Sustainable Development Goals. Over three quarters of the businesses surveyed indicated that they planned to assess the impact of their operations on the Sustainable Development Goals in some way. Over half of the businesses indicated that they were working on identifying the Sustainable Development Goals that are the most relevant to their organisation, and more are expected to do so in the coming few years.

At the level of the accounting profession, in November 2016 IFAC published a report entitled "The 2030 agenda for sustainable development: a snapshot of the accountancy profession’s contribution" which explored various roles that the accounting profession and professional accounting bodies can play in helping to further the Sustainable Development Goals. IFAC identified eight of the 17 sustainable development goals where they argued that the accountancy profession could have the greatest impact. These are clearly in addition to the same and others of the 17 Sustainable Development Goals that accountants working within individual organisations will be addressing through their own organisations’ identification of the Sustainable Development Goals that are the most relevant to their strategy and operations.

These are only two examples of recent developments in the accounting arena related to progress towards realisation of the Sustainable Development Goals. I believe that academic accountants have a significant role to play in helping the accounting profession, and organisations more broadly, realise the potential of the UN Sustainable Development Goals.

Sustainability reporting will play a role in this, and this is an area where a substantial proportion of academic effort has been focused in the past. I am concerned, however, that we develop academic expertise in social and environmental management accounting as a lot of the efforts towards realising the UN Sustainable Development Goals will require the type of information and risk assessments that management accounting, and management accounting scholars, have considerable expertise in developing and refining.