MBC3813

GREEN ACCOUNTING
AND REPORTING

CHAPTER 3:
BUSINESS SUSTAINABILITY AND
ACCOUNTING INITIATIVES, REPORTING AND
ASSURANCE
 BUSINESS SUSTAINABILITY AND
ACCOUNTING INITIATIVES,
3.1
AUDITING AND ASSURANCE
Multiple bottom-line dimensions of business sustainability
3.2 Usefulness of sustainability information
3.3 The sustainability reporting process
3.4 Sustainability reporting in action
3.5 Promotion of sustainability reporting
3.6 Future of sustainability reporting
3.7 Mandatory versus voluntary sustainability reports
3.8 Sustainability assurance
3.9 Continuum of assurance on sustainability information
3.10 Internal control relevant to sustainability performance
3.11 Sustainability risk management
 LEARNING
OUTCOMES
At the end of the topic, students should be able to:
• To describe multiple bottom line dimensions of business sustainability.
• To discuss the sources of sustainability information.
• To list the usefulness of sustainability information.
• To illustrate the process of sustainability reporting.
• To explain the principles of sustainability reporting.
• To elaborate the importance of sustainability assurance.
• To identify methods in promoting sustainability reporting.
3.1 Multiple Bottom-line Dimensions of
Business Sustainability
● Although primary focus of corporate reporting continues to be financial, the inclusion
of social, ethical and environmental performance is gaining momentum. In fact, there
is a growing understanding that sustainability efforts positively impact the bottom line.
● Example:
○ by promoting environmentally friendly practices today, the organization can
avoid the unnecessary future costs of remediating environmental damage.
○ By investing in the community, the organization develops goodwill in its
customers, driving market share.

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Business sustainability is driven by:
○ increasing consumer demand for sustainable products
○ improved efficient practices, emerging social responsibilities
○ ever-increasing scarcity of resources
○ ever-growing environmental concerns
○ recent global economic downturn
○ increasing pressures from the public and regulators

(Chapter 1, 1.2)
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● Sustainability efforts at an organization may put various stakeholders at odds with one
another.
○ A shareholder may believe that the purpose of the company is to create value in
order to generate a desired return on investment.
○ Customers, may expect that the company not only provides the product or
service advertised but also gives back to society in a meaningful way.
● Customer satisfaction, business reputation, brand value, environmental initiatives, and
social responsibility are often considered intangible assets that cannot be adequately
described in purely economic terms.
● As such, these assets and their value should be linked to related economic value over
the long term.
● Shareholders are better off in the long term to recognize the various financial benefits
derived from the intangible business assets generated through sustainability efforts and
development.

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There are 3 significant ways that firms can create value through sustainability
development and efforts.
i. By adopting sustainable practices, an organization can be prepared for the inevitable policy
and initiatives enacted by governments.
• climate change conversation garners increase attention, legislation will certainly be enacted
to penalize those organizations that do not have sustainable business practices. Those firms
that are ahead of the curve will already have practices in place and will be ready to meet the
requirements of stricter legislation, earning them an advantage over lagging competitors.

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There are 3 significant ways that firms can create value through sustainability
development and efforts.
ii. Sustainability practices are generally viewed as positives by current and prospective
stakeholders, providing an edge over competitors.
• When 2 firms produce essentially the same product, customers would generally prefer to do
business with the firm that appears to be more socially responsible and environmentally
conscientious.
iii. 1 of the most important parts of an organization, its employees, are inspired by socially
responsible initiative that can lead to longer and more engaged staff tenure

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 IIRC – International
Integrated Reporting
Council

● Corporate reporting can be used to illustrate the environmental impact of their products and
the processes undertaken to become more sustainable. The concept of a connected reporting
framework (CRF) provides direction for reporting strategically important financial and
nonfinancial sustainability KPIs.
● The framework is intended to provide a mechanism by which EGSEE sustainability
performance can be communicated to all stakeholders.
● The CRF also recommends a three-phase decision-making model of assessing the potential
impacts of the organization’s products and services, the life cycle of each product and
service, and ways that sustainability performance can be improved.

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 3.2 Usefulness of Sustainability
● Investors Information
○ Particularly institutional investors who typically have a long term investment
horizon, are demanding corporate disclosures beyond conventional financial
information, including more sustainability information.
○ Traditionally, socially responsible investors have focused on sustainability
information, whereas such interest is gaining global attention as more investors
consider the planet, its people, and profits. For example, Colin Monks, Head of
European Equity Research of HSBC, stated in 2005 that, “it is becoming
increasingly clear that sustainable development will be one of the major drivers
of industrial change over the next 50 years”.

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Availability of Sustainability Information
● The most common & standardized – Governance Dimension
● Currently more demand and regulatory requirements for disclosing standardized
environmental information
● Less standardized and regulated – Social responsibility information.

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Sustainability Information Sources:

1. Companies
• Websites and/or in the management discussion and analysis (MD&A) section of their
annual reports.
• Sustainability is contributing to the profit and consider to have sustainability permanently
on their management agenda.
• Business sustainability is gaining momentum in 2012 and onwards and will continue to be
the main theme of corporate boardrooms.

2. Data Providers:
• A growing number of data providers including financial data stalwarts Thomson Reuters and
Bloomberg offer sustainability information that are being used by buy and sell side analyst as a
factor in their recommendations for the holding or selling of equities.
• Between Reuters and Bloomberg they provide information to over 800,000 financial terminals.

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3. Sustainability Research Firms
 A growing number of research firms provide sustainability performance information.
 Example: MSCI, Jantzi Sustainalytics, Governance Metrics International, EIRIS, etc
4. Pension Consultants
 For example, Mercer (financial advisory firm business of March and McLennen) has
developed a pool of sustainability ratings regarding environmental, social and governance
spanning all asset classes.
5. Investment Firms with Sustainability Products
 Sell-side or broker research firms such as Goldman Sachs, Deutsche Bank, and Citi among
numerous others provide sustainability research reports that are available to the market.

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6. Non-governmental Organizations (NGOs)
 Example: CERES, World Resources Institute, and the Pembina Institute, World Wildlife
Fund – regularly research and present sustainability-related information.
7. Academic Institutions
• Example: Harvard Business School, ERB School of Michigan, MIT, Cambridge, etc.

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The Purpose of Reported Sustainability Information

Providing risk and return potential

Evaluating management quality

Engaging with companies and inform proxy voting

Developing customized investment products or portfolios

Assessing asset managers

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 3.3 The Sustainability Reporting Process
● Business are searching to find an effective, efficient and feasible way to improve the quality of
their financial reporting while ensuring compliance with all applicable rules, laws, regulations and
standards,
● Sustainability reporting can offer solutions to emerging and widening corporate reporting
challenges facing businesses.
● The sustainability reporting process is very similar to the conventional reporting process
consisting of 3 elements of inputs, process and outputs.

Source documents, events, transactions Measures, recognizes and reports Sustainability reports on performance
pertaining to performance activities in accordance with sustainability that disclose both financial & non-
reporting guidance financial KPIs

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● The purpose of sustainability reports (GRI)

i. Benchmarking & assessing sustainability In compliance with applicable law, rules, regulation
codes, standards, norms and guidance and best practices of sustainability initiatives.
ii. Demonstrating how the organization affects and is affected by emerging sustainability
developments and initiatives.
iii. Comparing sustainability performance within an organization and across different organizations
over time
iv. Indicator Protocols defining key performance indicators of performance to ensure consistency
of sustainability reports.
v. Sector Supplements of complementing the Sustainability Reporting Guidelines and the
applications of Guidelines to specific sectors including key performance indicators of the
sectors.
vi. Technical Protocols in providing technical details and guidance on issues (reporting boundary)
pertaining the application and implementation of the Sustainability Reporting Guidelines.

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Sustainability reporting should reflect both positive and negative aspects of performance by
disclosing:
i. Key success and shortcomings
ii. Overriding organizational risks and opportunities
iii. Significant changes in the reporting period to better reflect EGSEE performance
iv. Major policies, strategies and procedures to achieve sustainability goals
v. Key obstacles and ways to mitigate their effects

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● Sustainability reporting principles for non-financial performance (GRI):
i. Materiality
ii. Stakeholder inconclusiveness
iii. Context
iv. Completeness and accuracy
v. Measurability
vi. Verifiability
vii. Transparency
viii.Standardization

(these principles are applicable to both financial and non-financial dimensions of

sustainability reporting)

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3.4 Sustainability Reporting in Action
Big Four accounting firm have promoted variations of sustainability reporting.
○ PwC – launched a comprehensive integrating reporting (CRI).
■ disclosed both financial and non-financial KPIs.
■ Focuses on capturing and disclosing relevant information on strategic
corporate objectives and performance in:
● Assessing opportunities and risk
● Ensuring sustainable performance
● Maintaining a good reputation
● Being good citizen

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Big Four accounting firm have promoted variations of sustainability reporting.
● EY – study
○ > 2/3 of the Fortune Global 500 companies publish some form of sustainability report
○ It is expected that a growing number of entities including business corp, NGOs, private
companies will provide some sort of sustainability & accountability reports >
conventional report.
○ > 3,000 companies worldwide currently prepare and disclose sustainability reports
including US companies Microsoft, Cisco, Ford, Johnson & Johnson etc.
○ Suggest that equity analysts increasingly consider sustainability practices such as climate
change and CSR strategies when valuing and rating public companies.

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● Sustainability Assurance
○ As sustainability gains widespread acceptance and is used by many high-profile companies
in almost all industrial sectors, the reliability, relevance and comparability of sustainability
reports become crucial.
○ As rating agencies and financial analyst in particular utilize sustainability information,
reasonable assurance plays an important role in the accuracy of their ratings and valuations,
which eventually affect the company’s cost of capital and stock value.
○ Thus, the third-party audit and assurance reports on sustainability disclosures can beneficial
to all stakeholders, including companies, investors, creditors, suppliers, customers,
government and society.
○ Public accounting firms have traditionally provided audit reports on mandated financial
statements and they are well qualified and prepared to provide assurance reports on all
EGSEE dimensions of sustainability and accountability performance.

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3.5 Promotion of Sustainability Reporting
● Guidelines – GRI’s Integrated Reporting Framework and Accountability for Sustainability’s
Connected Reporting Framework.
● Market forces – the most effective and natural way; investors and other stakeholders will drive
demand.
● Policy makers and regulators to mandate a range of measures to promote compulsory
sustainability reporting which could be achieved through 4 different methods:
i. Regulatory measures and reforms intended for corporations to comply with.
ii. Regulatory endorsement and strong encouragement of the adoption of GRI sustainability
guidelines by organizations and particularly by business corporations worldwide.
iii. A process of complying with a set of mandatory sustainability reporting measures or explaining
why not.
iv. Requiring stock exchanges to establish sustainability reporting listing standards (e.g. Singapore
Exchange)

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3.6 Future of Sustainability Reporting

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● Value-relevant
○ For both external and internal users.
○ Investors and other stakeholders (suppliers, customers, government and society) can
have more transparent information about performance, which enables them to make
more informed decisions.
● Improve internal management practices
○ Enabling companies to establish better relationships with investors, customers,
suppliers, employees, regulators and society.
● Create more incentives
○ For management to refocus its goals, strategic decisions and actions from a short term
and long term prospective.
● As a tool for more effective risk management
○ Identifying both opportunities and risks associated with operations.
○ Thus, more transparent sustainability disclosures on performance create opportunities
to identify and correct operational inefficiencies as well as reputational and financial
risks that would improve economic performance.

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Best practices of sustainability suggest that companies that ignore their social, governance,
ethical and environmental dimensions often suffer in a number of ways:

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 The format and content of existing sustainability reports are not standardized and range in
quality and reliability.
There are 6 major improvements needed in sustainability disclosures:

Format Availability
standardizatio Comparability and Timeliness Reliability Analysis
n Transparency

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The International Integrated Reporting Committee (IIRC) has developed its integrated
reporting as a framework for sustainability reporting that intends to meet the following 5
criteria:

1. Satisfy the information needs of long term investors by presenting sustainability

information that affects long term decision making.
2. Make the link between sustainability and economic value by focusing on
interrelationships between all aspects of business performance including social,
financial and environmental.
3. Present the framework for social and environmental factors to be considered in
reporting and decision making.
4. Refocus performance metrics from short term to long term and broader sustainability.
5. Bring corporate reporting closer to information needs of management in managing the
business.
 3.7 Mandatory Versus Voluntary
Sustainability Reports
● There is no mandatory guidance at this time for sustainability reporting.
● However, there are several voluntary guidelines including the reporting frameworks released by GRI,
the Connected Reporting Framework and the reporting publications of AccountAbility.
● Establishment of business sustainability and corporate accountability best practices or codes (ISOs).
○ ISO 9000
• Defined as a set of international standards on quality management and quality assurance developed to help companies effectively document the quality
system elements needed to maintain an efficient quality system.
○ ISO 14000
• Defined as a set of standards created to help companies around the world reduce their adverse impact on the environment. It's a framework for improved
and more environmentally-conscious quality management systems by organizations large and small.
○ ISO 26000
• Defined as defined as the international standard developed to help organizations effectively assess and address social responsibilities that are relevant and
significant to their mission and vision. It is intended to assist organizations in contributing to sustainable development.
○ ISO 31000
• It is the international Standard for risk management, created by ISO. It creates a framework of best-practice processes that enable an organisation to manage
risks, protect it from internal and external threats and improve overall crisis management.

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Mandatory Sustainability Reporting
 Negative
 Over-burdensome legislation that will impose unneeded and costly obligations
on public companies for providing sustainability performance disclosures.
 Positive
 Improve the quality, reliability, consistency, timeliness, transparency and
usefulness of sustainability performance information.
 Encourage the use of sustainability performance by all stakeholders including
regulators, institutional investors, companies and other financial market
participants.
 The benefits of disclosing sustainability information which are often hard to
quantify, should exceed preparation costs, which are easy to measure.

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Mandatory Sustainability Reporting
Regulators initiatives
● Regulators worldwide have taken initiatives to make at least some elements of sustainability
reporting mandatory for public companies.
● Examples:
i. Guidelines for external reporting by state-owned companies in Sweden and the Danish
Financial Statements Acts in Denmark.
ii. Mandatory integrated reporting (e.g., the King Code III in South Africa and the Granelle
II Act in France)
iii. Singapore Exchange in July 2011 – Sustainability Reporting Guide for its listed
companies which requires disclosure of accountability for conducting business in a
sustainable manner.
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Mandatory Sustainability Reporting
● Examples:
iv. SEC, US in Feb, 2010 released an interpretive guide regarding climate change
disclosures in management’s discussion and analysis.
v. Regulators in Canada required corporate disclosures for both quantitative and
qualitative environmental, social and governance information.
vi. IASB – guidance on management commentary that recommends sustainability
disclosures in some dimensions of sustainability performance.

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● Companies typically report on variety of dispersed financial and non-financial
sustainability KPIs and use a wide range of formats, structures and metrics for
disclosing them across different time horizons.
● Currently, disclosed sustainability reports are not adequate and effective in providing
systematic, uniform and comparable sustainability information.

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An alternative mandatory sustainability report should be considered to accomplish the
following:
● Standardize dispersed sustainability reports that are currently issued.
● Establish a globally accepted reporting framework for sustainability information.
● Create uniformity in objectively reporting all 5 dimensions of EGSEE performance.
● Ensure that a wide range of users, including investors, have access to uniform and
comparable sustainability reports.
● Facilitate uniform sustainability assurance.
 3.8 Sustainability Assurance
● As more organizations produce sustainability reports to meet the needs of a variety of
stakeholders, while complying with regulatory measures, the assurance on these
reports becomes more credible.
● Corporate stakeholders may demand assurance on sustainability reports even if it is
not legally required by the regulator or standard setter.
○ Assurance services can play a vital role in helping stakeholders obtain
performance information that is as reliable, accurate and timely as they desire.

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● The objectivity, reliability, transparency, credibility and usefulness of sustainability
reports are important to both internal and external users of reports.
● Sustainability assurance can be provided internally by the internal audit function of
the organization or by external assurance providers.

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A. Internal
○ Internal auditors are well qualified to assist management in the preparation of
sustainability reports and provide assurance on the integrity and credibility of the
reports.

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B. External
● External users of sustainability reports may demand more independent and objective
assurance. This type of assurance must be provided by certified public accountants
(CPAs), professional assurance providers or equivalent accredited individuals, groups
or bodies.
● Financial statements have traditionally been accompanied by an audit report from a
third-party independent auditor who provides an opinion on the fair presentation of
financial statements in compliance with accounting standards.
● As third-party assurance has been an integral component of corporate reporting, it
makes sense to require the same level of third-party assurance on all performance
dimensions of sustainability.
● Consequently, more credible sustainability information improves the level of trust and
confidence that stakeholders have in a company’s disclosure.

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Key qualities of external assurance on sustainability reports (GRI):
 Sustainability assurance is provided to the organization by competent, external professional
groups or individuals.
 Assurance providers have conducted their work in systematic, documented and evidence-
based procedures.
 Assurance providers can render independent and impartial opinions on sustainability
reports.
 Assurance providers assess the extent to which the sustainability report is prepared in
compliance the GRI reporting framework.
 Assurance providers submit a written report expressing their opinion on the sustainability
report and their relationship to the report preparer.

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B. External
Factors that may influence the company’s decision to obtain third-party assurance:
○ Type of assurance – review of sustainability data or audit of sustainability data
○ Cost of assurance
○ Ability and availability of accounting and consulting firms to audit or review all
dimensions of sustainability performance.

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Assurance Standards

● AA1000’s 2008 Assurance Standard (AS)

○ was established by the not-for-profit professional institute AccountAbility (AA),
which provides assurance –related services to its members.

● The International Standard on Assurance Engagements (ISAE 3000)

○ is intended to offer a basic framework for audits associated with financial & non-
financial data.
○ Was developed to further address governance and ethical requirements, quality
control, engagement acceptance, planning, expert materials, evidence-gathering
processes, documentation and preparing assurance reports.

● AT101 – American Institute of CPAs (AICPA)

● Handbook Section 5025 - Canadian Institute of Chartered Accountant

Types of Assurance Opinions
1. Negative assurance
■ Occurred when the accountants opine that they are not aware of any modifications that
need to be made to sustainability performance disclosures to ensure compliance with a set
of globally accepted sustainability standards (e.g., ISO 26000)
2. Positive assurance
■ Occurred when accountants opine whether or not sustainability performance disclosures
are fairly presented in conformity with a set of globally accepted sustainability standards
3. Integrated and/or universal audit
■ Occurred in which accountants provide limited assurance as to compliance with all
applicable sustainability standards based on agreed-upon procedures. This type is filed
with an international public registry.

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3.9 Continuum of Assurance on
Sustainability Information
● The concept of a continuum of assurance, where the level of assurance is determined
by a set of integrated factors.
● The level of assurance from limited to high-level, is determined by the
interrelationships among 4 variables:
i. Subject matter
ii. Reported criteria
iii. Auditing aspects (nature, timing and extent of procedures)
iv. Quality and quantity of evidence available
● This concept of continuum assurance is relevant and applicable to sustainability
performance information. 43
 ● For example, audit of financial statements
reflecting economic sustainability performance
requires an integrated audit on both financial
statements and internal control over financial
reporting. An integrated audit requires auditors
to gather sufficient and competent evidence in
order to provide reasonable assurance about the
reliability of financial statements and the
effectiveness of internal control over financial
reporting.
● Examination of CSR performance requires
assurance providers to offer limited assurance
• In general, obtaining assurance requires an indicating the third provider is not aware of
objective examination of subject matters and noncompliance with stated social criteria.
gathering of sufficient and competent evidence to ● Thus, economic performance audited by an
provide an impartial assurance on the subject independent auditor is more reliable than
matter. internally prepared reports on social and ethical
performance.

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3.10 Internal Control Relevant to
Sustainability Performance
1. Internal control over financial reporting (ICFR)
○ ICFR standards are well established, globally accepted, and widely practiced.

2. Internal control over non-financial sustainability performance

○ Governance, ethics, social and environmental issues
○ Related reporting and auditing have yet to be established and globally practiced.
○ Nonetheless, such internal controls need to be adequately designed and effectively implemented
to ensure the credibility, integrity, transparency and reliability of the process and content of
sustainability reporting.
○ Such controls are important are important in improving stakeholders’ confidence.

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 3.11 Sustainability Risk Management
● Risk management is an overriding component of managerial functions affecting every transaction,
economic event and all dimensions of sustainability performance.
● Management’s educated risk-taking and risk tolerances have a great impact on growth and
stability of the organization.
● Example:
○ The Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued
its framework for enterprise risk management (ERM) in 2004 to assist organizations in
managing their risk while achieving sustainable strategic objectives, creating shareholder
value and protecting stakeholder interest.
○ The International Organization for Standardization (ISO) released its ISO 31000 standards
entitled “ Risk Management- Principles and Guidelines” in 2009.
■ Offers principles and guidelines on risk management in all areas of sustainability
EGSEE performance.

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ERM and ISO 31000 frameworks enable organizations to accomplish the following:
• Assess risks
• Monitor risk and develop policies and procedures to address risk
• Communicate risk assessment policies and procedures to managers throughout the
organization.
• Encourage managers to manage their risks relevant to their business strategies,
operations, customer satisfaction, reputation and stakeholder trust.
• Take educated risk in minimizing business failures while achieving desired growth.

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Risks relevant to Sustainability

1. Strategic risks associated with business

sustainability are those risks pertaining to
long-term objective-setting, marketing
position and changing consumer demand,
strategic investments, investor relations
and stakeholder communications.

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2. Operation risks are those related to business operations that impact sustainability
performance, including risks associated with IT, the supply chain and production facilities.
3. Compliance risks are those pertaining to failures to comply with local, national and
international laws, rules and regulations and standards, dealing with issues ranging from
climate change to social responsibility and financial activities.
4. Reputational risk are associated with an organization’s reputation and brands, and its failure
to meet the expectations of a range of stakeholders including investors, competitors, society,
employees, customers, suppliers, local communities and the media.
5. Financial risks are risks that adversely affect the organization’s financial performance. This
can be caused by a lack of commitment by the board and management in achieving
sustainable performance.

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THE END
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