Green Accounting and Accounting for Sustainability Development - Essay Example

?Green Accounting Introduction Accounting for Sustainability Development Sustainability Accounting is a tool which can be employed to assist companies in becoming more sustainable. It identifies the importance of financial information in the transformation and shows how traditional methods of accounting can be extended to take account of sustainability impacts at the organisational level (Sigma Projects, 2003). The main objective is to extend the range of monetised information which covers social, environmental and economic impact on which decisions are made. Sustainability accounting has been defined as the generation, analysis and use of monetarised environmental and socially related information in order to improve corporate environmental, social and economic performance (Sigma Projects, 2003). It is based on the existing financial accounting standards. In United Kingdom it is a combination of a company law and company accounting standards framed by the regulatory bodies which is utilised by the accounting professionals of UK (Sigma Projects, 2003). Different countries follow different kinds of GAAP (Generally Accepted Accounting Principles) accounting principles based on their regulatory and legal frameworks. Sustainability and sustainable accounting have different meanings and applications. The concept was first coined by Brundtland Commission and published in the report Our Common Future in the year 1987 (Christofi and Sisaye, 2006). It involves the effective and optimum utilisation of resources and reducing carbon emissions, wastage, environmental impacts. Sustainability accounting on the other hand helps in the financial reporting and communication about the sustainability initiatives and actions to the shareholder’s and stakeholders of the company. As per the European Commission fifth action programmes, every company requires to 1) disclose their annual report details of their environmental policy and activities 2) detail the expenses incurred on the environmental awareness programmes and activities 3) to make provision of their accounts for environmental risks and the future environmental expenses to be incurred should be taken into consideration. For example, it is suggested that product pricing is considered as a full cost approach taking the consumption of environmental resources into consideration. The global climate change has been the result of the industrialisation process that has caused carbon emissions, global warming and weather extremities such as drought and floods (Khan, 2011). It has helped companies to identify their past and potential future environmental impacts and benefits in addition to the historical and financial outcomes from their business activities. It also provides forward-looking information to help the companies implement and formulate strategic solutions to strengthen the business performance and to respond to the sustainability challenges that the environment faces. Sustainability accounting also helps in the risk management through identification and analysis of sustainability related risks and opportunities. Interdisciplinary relationships between ASD practices and organisational success The main purpose of sustainability accounting reporting is measuring, disclosing and being accountable to the stakeholders of the company to evaluate the organisational performance. Sustainability accounting is a broad term used for describing financial reporting on the environmental, economic, social impacts (World Commission on Environment and Development, 2006). A sustainability accounting report should be able to provide a relevant and balanced representation of the sustainability performance of the company (World Commission on Environment and Development, 2006). The various purposes of sustainability report are as follows 1) Demonstrating how the organisation is influenced and influences by expectations about the sustainable development. 2) Benchmarking and analyzing the sustainability performance of the company with respect to the norms and regulations of the regulatory body. 3) Comparing the organisational performance within the organisational departments and between different organisations over time (World Commission on Environment and Development, 2006). It contains certain standard disclosure that should be included in the sustainability reports. It should contain information that is relevant to the stakeholders and to most of the organisations. 1) Disclosure that would help the stakeholders in understanding the company performance such as corporate governance, strategy and profile 2) Disclosure that covers how much a company addresses a particular topic in order to understand the company performance in a specific company area. 3) It acts as an indicator that helps in comparing information on the economic and social performance of the company (World Commission on Environment and Development, 2006). We can observe that sustainability accounting reporting recognises the viable relationship existing between an organisation’s performance and its environmental and social activities (Christofi and Sisaye, 2006). It has been primarily used as a dialogue to frame strategy as managers. It provides them a framework to view the business as having interdependence in the local and regional as well as international communities for continued growth and profitability. Sustainability accounting focuses on social, ethical and environmental reporting and is used as a proxy for quality of the management as well as sources of discussion and dialogue between the managers and investors of the company. According to authors Rennings and Ziegler, there are two measures of sustainability environmental performances (Christofi and Sisaye, 2006). The first measure evaluates the environmental and social risks of the industry to which a company belongs. The second measures analyze and evaluates the environmental, social activities of a corporation relative to the industry average. These activities become sources of social awareness to minimise the negative environmental consequences that includes the emission of harmful substances that would result in regulatory penalties due to the non compliance. These authors observed that a company with a lower degree of environmental risk had a positive impact on the monthly stock return during the tenure 1996-1001. According to these authors, investments in corporations with a high social and sustainability performance seem to be a good investment option compared to the other corporations (Christofi and Sisaye, 2006). Since sustainable accounting includes both social and environmental sectors, they can restructure their investment option. Stakeholder inclusiveness is important in sustainability accounting because they can provide useful financial and non financial inputs for various management related decisions on environmental accounting. For example, stakeholder engagement process is necessary for the compliance with the Global Reporting Initiative Standards (GRI) or informing about the organisational company process. Failure to engage stakeholders in sustainability accounting will result in preparation of inaccurate and inappropriate environmental reports (World Commission on Environment and Development, 2006). The stakeholder’s approach to corporate sustainability takes into consideration the multi fiduciary obligations of the company by recognising that their responsibility goes beyond the management shareholder relationship (Gadenne et. al., 2002). The extent to which the management recognises the responsibility for meeting the needs and demands of the different stakeholder’s interests will have a direct effect on the corporate sustainability (Ekwueme, Egbunike and Onyali, 2013). Accounting for Sustainable Development Tools One of the most important framework and tools used to assess the management of development programs is the Social Sound Analysis (SSA) and its social impact on the shareholder’s and stakeholders, employees, organisation, customers as well as the society (Christofi and Sisaye, 2006). SSA is based on the principles of continuous improvement of services and projects. SSA is based on the principles of continuous improvement of projects so that the information is disseminated and becomes an integral part of the operating activities of those organisations that sponsored the projects (Christofi and Sisaye, 2006). It has been applied to design and delivery of banking operations. This tool is basically used by the National Marine Fisheries Service and the Forestry department of various countries (Christofi and Sisaye, 2006). SSA theory also assessed the impact of the World Bank which supported economic operations on forty-two social projects; the report addresses topics like the beneficiary assessment, design of various development projects and limitations while implementing these projects. These development projects are designed especially for the poor population (Christofi and Sisaye, 2006). Triple Bottom Line theory is an approach that aims to report and analyse the organisational performance in relation to sustainability accounting. The term Triple Bottom Line (TBL) was coined by John Elkington in the year 1980 to highlight the importance of accounting for the non financial aspects and non market of performances in the companies (Christofi, 2006). The theory focuses on the economic, social and the social value (Potts, 2004). This tool is used for measuring and reporting the performance of the company against social, economic and environmental parameters (Slaper, 2011). TBL is one of the measurement tools that include managing, measuring and publicly reporting the performance and integrating with the performance of the company (Potts, 2004). TBL incorporates three types of performance: social, financial and environmental. This differs from the traditional method of accounting as it includes ecological and social measures that can be a difficult means to assign appropriate means of measurement. The three P’s of TBL theory are planet, planet and profits (Slaper, 2011). They do not have common unit of measurement, and hence, it is difficult to measure the 3 P’s (Slaper, 2011). Although profit can be measured in dollars, but there is no measurement unit for social capital and planet. As per a recent survey conducted by International Council for Local Environmental Initiatives (ICLEI), it was observed that the concept of sustainability was incorporated by 66 percent of the companies; however, majority of these companies did not measure their activities against the plans (Potts, 2004). Strength and limitations of Triple Bottom, Stakeholder and Legitimacy Theory We have observed that Triple Bottom Line theory encourages the managers to think beyond the traditional financial accounting methods in terms of society, environment and community. It reflects the company’s transparency and accountability in its public financial reporting and disclosure with regards to how a company entity performs in its social, environmental and economic dimensions. However, like any other theory, Triple Bottom Line theory also has its disadvantages. Firstly, the framework does not prioritise among the requirements of the different groups of stakeholder (Robbins, 2006). Secondly, it does not help the manager of the company to trade off the wishes of one group of stakeholder to another when the needs of the different groups of stakeholder’s are in conflict (Robbins, 2006). Thirdly, there is no standardisation of accounting rules and regulations, and this leads to irregularities while measuring the economic, social and environmental concepts (Robbins, 2006). There is not a single unit of accounting that helps in measurement within a single dimension or the multiple dimensions. For example, the unit of currency varies from different countries, and so it becomes impossible to measure and compare the economic value of the company. Various economists doubt the originality of the “Triple Bottom Line” concept because it is difficult to estimate whether it is a conceptual theory or a management fad (Robbins, 2006). Either way, the theory has a considerable influence on the international business. The managers of various companies are doubtful whether it is required to report more than the financial information because it challenges the traditional method of accounting to provide relevant information about the non financial consequences of the business activities. The stakeholder theory was formulated by the R.E Freeman in the year 1984 as a proposal for the strategic management of various organisations (Mainardes, Alves, and Raposo, 2011). The stakeholder theory was not fully modified and has been gradually been modified and adopted by various organisations as means of management tool. Initially, when the stakeholder theory was developed, it was praised for its simplicity and clarity. However, later it was criticised for its ambiguity and vagueness in the management literature and business practice (Mainardes, Alves and Raposo, 2011). The theory lays emphasis on how the various stakeholders of different groups form a group and help in the management decision making. As mentioned before, the stakeholder theory went through various modifications in the 1990 with a lot of research being conducted by various academists and researchers. Firstly, there was a debate among various economists and researchers with the definition of the word ‘stakeholder’ used in the theory (Mainardes, Alves and Raposo, 2011).The theory was used and defined in various ways and approaches and was based on diverse range of contradictory arguments. Secondly, the theory laid emphasis on technical core concepts rather than theoretical concepts and models (Mainardes, Alves and Raposo, 2011). The stakeholder theory did not explain the entire process clearly, and the interlinking with the external and internal variables of the model was incomplete and inaccurate. It fails to focus on the system within which the companies operate and well as analysis within the system (Mainardes, Alves and Raposo, 2011). Thirdly, the stakeholder theory revolves around the stakeholders but it fails to focus on the needs and wants of the stakeholders given the fact that they hold a vital importance from the perspective of the stakeholders (Mainardes, Alves and Raposo, 2011). Fourthly, another new concept was introduced within the theory that focused on interlinking and connecting the variables and does not predict the behaviour of the company or the external factors. Fifthly, the theory also had other loopholes like the incomplete relationship between the stakeholders/ actors and the model suggests that stakeholder groups may be identified as separate entities, which leads to a loss of complexity in their real relationships (Mainardes, Alves and Raposo, 2011). The stakeholder theory focuses that debt capital should be used extensively to lower the risk of the company; however, the utter dependence of the companies on the debt capital has led to the demise of many companies in the UK. For example, in the year 2006 many companies of the UK collapsed due to their overdependence on debt capital; however ‘Northern Rock’ and ‘HBO’ was among the fastest growing banks in the world, and this is due to their excellent growth strategy and not overdependence of debt capital (Tees, 2011). The stakeholder theory was also criticised for being similar to the Political Pluralism Theory. This theory believes that there is no tension and arguments between the stakeholders and the management of the company (Mainardes, Alves and Raposo, 2011). Legitimacy theory claims to disseminate information related to social responsibility activities performed by the company. Corporate Social Responsibility (CSR) information is a part of its dialogue with the society and community (Lanis and Richardson, 2013). The management of the company need to show that the company is adhering to the rules and regulations of the corporate social responsibility charter. Although the Legitimacy theory has become one of the most coveted theories of managers, there is scepticism related to the theory. Firstly, the theory has not been adequately specified, and the term itself has a vague definition and is used loosely (Tilling, 2003). The failure to identify and specify the theory has been identified by the author Suchman, who observed that the term was used by various authors, and researchers but a few were unable to define the term (Tilling, 2003). An important issue which needs to be pointed out is that the theory is divided into two major sections, which is macro theory at the institutional level and organisational level (Tilling, 2003). From the organisational level, legitimacy is viewed as an operational resource that the organisations extract from their cultural environment and to achieve their objectives. The theory fails to recognise that the low legitimacy will have negative impact on the company, which could ultimately lead to the forfeiture of the operation of the company (Tilling, 2003). The legitimacy theory is an abstract concept itself which is driven by various factors of the social and economic environment (Tilling, 2003). References Christofi, P., 2006. Accounting for sustainable development performance. University of St Andrews, [e-journal] 2 (15). Available through: < http://www.cimaglobal.com/Documents/Thought_leadership_docs/Tech_ressum_accounting_for_sustainable_development_performance_Jan2007.pdf> [Accessed 30 April 2013]. Christofi, P., and Sisaye, S. 2006. Is there a relationship between sustainable reporting and organizational performance? An examination of corporate performance indicators [pdf] Available at: < http://www.decisionsciences.org/Proceedings/DSI2008/docs/103-2584.pdf> [Accessed 30 April 2013]. Ekwueme, J.M., Egbunike, C.F. and Onyali, C.L., 2013. Benefits of Triple Bottom Line disclosures on corporate performance: An exploratory study of corporate stakeholders. Canadian Center of Science and Education, 3(2), p.79-88. Gadenne, D., Mia, L., Sands, J., Hooi, G., and Winata, L. 2002. The influence of sustainability performance management practices on organisational sustainability performance. Journal of Accounting & Organizational Change, 8(2), p.210-235. Khan,T., 2011. Sustainability accounting courses, talloires Declaration and academic research. Emerald Group Publishing Limited, 14 (1), p.42-55. Lanis, R., Richardson, G. 2013. Stakeholder theory: Issues to resolves. Emerald Group Publishing Limited, 26 (1), p.75-100. Mainardes, E.W., Alves, H. and Raposo, M., 2011. Stakeholder theory: Issues to resolves. Emerald Group Publishing Limited, 49 (2), p.226-252. Potts, T., 2004. Triple Bottom Line reporting - A tool for measuring, communicating, and facilitating change in local governments. [pdf] Available at: < http://www.environment.nsw.gov.au/resources/cee/tavispotts.pdf> [Accessed 30 April 2013]. Robbins, F., 2006. The challenge of TBL: A responsibility to whom? [pdf] Available at: < http://web.sau.edu/RichardsRandyL/business_ethics_filing_cabinet_Robins%20triple%20bottom%20line.pdf> [Accessed 30 April 2013]. Sigma Projects, 2003. The sigma guidelines- Toolkit [pdf] Available at: < http://nbis.org/nbisresources/accounting_and_green_banking/signma_sustainability_accounting.pdf> [Accessed 30 April 2013]. Slaper, T.F., 2011. The Triple Bottom Line: What is it and how does it work? [pdf] Available at: < http://www.ibrc.indiana.edu/ibr/2011/spring/pdfs/article2.pdf> [Accessed 30 April 2013]. Tees, T., 2011. Shareholder and stakeholder theory: After the financial crisis. Emerald Group Publishing Limited, 3 (1), p.51-63. Tilling, M., 2003. Refinements to Legitimacy Theory in social and environmental accounting [pdf] Available at: < http://www.flinders.edu.au/sabs/business-files/research/papers/2004/04-6.pdf> [Accessed 30 April 2013]. World Commission on Environment and Development, 2006. Sustainability reporting guidelines [pdf] Available at: < https://www.globalreporting.org/resourcelibrary/G3-Sustainability-Reporting-Guidelines.pdf> [Accessed 30 April 2013]. Read More