FAR 04 - Sustainability Reporting PDF

Page 1 of 6 FAR EASTERN UNIVERSITY INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE DEPARTMENT OF ACCOUNTANCY AND INTERNAL AUDITING AUD1207 – INTEGRATED INTERNAL AUDITING REVIEW...

Page 1 of 6 FAR EASTERN UNIVERSITY INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE DEPARTMENT OF ACCOUNTANCY AND INTERNAL AUDITING AUD1207 – INTEGRATED INTERNAL AUDITING REVIEW COURSES SECTION B – FINANCIAL ACCOUNTING AND REPORTING FAR 04 – SUSTAINABILITY REPORTING MR. CHRISTIAN ANDREI G. UTANES, CPA, CMA, MBA units NOTE TO STUDENTS: These handouts are of property of the reviewer. Unnecessary sharing and uploading of these materials are not allowed. LEARNING OBJECTIVES Upon completion of this chapter, you should be able to: 1. Understand and define Sustainability 2. Understand and define Sustainable Development 3. Understand WBC’s three pillar model 4. Understand and define Sustainability Reporting 5. Explain the development of Sustainability Reporting LECTURE NOTES DEFINING SUSTAINABILITY AND SUSTAINABLE DEVELOPMENT The notion of sustainability is rooted in the wider concept of sustainable development. There have been numerous attempts to define what is meant by sustainability and sustainable development. However, the most widely used definition was first developed in 1987 by the World Commission on Environment and Development – also known as the Brundtland Commission – in an UN-sponsored study entitled Our Common Future, which is used by many governments and organizations: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” It contains within it two key concepts: ▪ the concept of ‘needs’, in particular the essential needs of the world’s poor, to which overriding priority should be given; and ▪ the idea of limitation imposed by the state of technology and social organization on the environment’s ability to meet present and future needs. This report also implored the present generation to take immediate action to avert the risk of irreversible ecological damage.  Page 2 of 6 Although the definition of sustainable development is broad, the report valuably points out that: “Sustainable development is not a fixed state of harmony, but rather a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are made consistent with future as well as present needs.” Sustainable development in these terms can be seen as a global aspiration. The use of the Brundtland definition by many organizations in their management and reporting on sustainable development and CSR signals a widespread consensus on the central role organizations have in ensuring future generations can meet their own needs. It evidences an acceptance that sustainable development requires the political will of governments, organizations, and communities. This definition also requires organizations to consider the wider and longer-term consequences of decisions. This is the route to achieving long-term sustainable value for investors and stakeholders and involves considering the impact of economic activities – things bought, investments made, waste and pollution generated – on the natural and human resources on which they depend, to avoid irreparable damage to the productive capacity of these resources. Practically, this requires organizations to consider the consequences of economic decisions on the natural environment, on economic development, and on the social conditions in which people live and work. The World Business Council for Sustainable Development’s three-pillar model of economic growth, ecological balance, and social progress is also a useful reference point for understanding sustainability. This reinforces the message that long-term maximization of shareholder value for public companies will undoubtedly be intertwined with their environmental, social, and economic performance, where: ▪ Social performance reflects an organization’s impact on people and social issues, which include (a) health, skills, and motivation on the people side, and (b) human relationships and partnerships on the social side. ▪ Environmental performance relates to the natural resources consumed in delivering products and services. ▪ Economic performance continues to include financial performance but will increasingly reflect an organization’s wider impact on the economy. This allows organizations and stakeholders to recognize that profitability, growth, and job creation lead to compensation and benefits for families, and tax generation for governments. The term ESG, is also used extensively, particularly by the investment community, reflects the view that managing environmental and social topics is a governance issue for organizations, a proxy for the quality of their management teams, and a process to assess whether they are positioned for long-term success. The combination of these three terms also provides a more tangible and easily understood set of concepts that does not carry any other connotations currently held for the term “sustainability” or “corporate responsibility”. The terms environmental, social and governance can be explained as follows: Environmental Social Governance The E, or environmental, The S, or social, component The G, or governance, component of ESG information of ESG includes information component of ESG encompasses how a company about the company’s values incorporates information about is exposed to and manages and business relationships. a company’s corporate risks and opportunities related For example, social topics governance. This could to climate, natural resource include labor and supply-chain include information on the scarcity, pollution, waste, and standards, employee health structure and diversity of the other environmental factors. and safety, product quality board of directors; executive and safety, privacy and data compensation; critical event security, and diversity and responsiveness; corporate inclusion policies and efforts. resiliency; and policies on lobbying, political  Page 3 of 6 contributions, and bribery and corruption. SUSTAINABILITY REPORTING Sustainability reporting is a term commonly used to describe a range of practices where organizations provide information on sustainability matters, in accordance with globally accepted standards. Such disclosures enable organizations to measure, understand and communicate their ESG performance and then set goals, and manage change more effectively. Often, they go hand in hand with the setting of performance targets related to ESG impacts. Sustainability reporting can relate to the reporting to stakeholders of an organization’s strategies, priorities, policies and practices concerning sustainability issues, the sustainability performance of an organization and how sustainability impacts the operations. Sustainability reporting can also, among other things, discuss how an organization is dependent upon and manages the environment, society and governance, the risks and opportunities associated with these dependencies, as well as an organization’s sustainability related responsibilities and accountabilities. Sustainability reporting has become a widespread feature across societies, and it is now standard practice in many large organizations, particularly in the business world. Sustainability reporting practices are diverse as sustainability reporting remains largely a voluntary practice. Organizations can choose whether they publish a sustainability report, how they prepare it, what information they include, as well as the form and medium they publish the information. Expectedly, sustainability reporting differs substantially from traditional financial reporting which is based on strictly and largely mandatory frameworks and enforcement mechanism for non-compliance. The sustainability reporting landscape has also gone through substantial changes and continues to evolve. What started several decades ago with some pioneering companies preparing inexperienced attempts at environmental reports has over the years developed into a standard practice. Sustainability reporting attracts interest across stakeholder groups, ranging from NGOs to investment bankers. As sustainability reporting has become more widespread and grown in prominence, an increasing number of regulatory initiatives have emerged in different countries and regions. These initiatives place various expectations on organizations and the reports they published. In addition, the reporting landscape is strongly shaped by several reporting frameworks prepared by non-state organizations seeking both to help organizations prepare their reports and to create a more standardized practice. DEVELOPMENT OF SUSTAINABILITY REPORTING Sustainability reporting can be put into a continuum of developments since the 1980s. In the late 1980s, the first voluntary environmental reports were published. Companies with environmentally sensitive operations, especially large polluters, started to develop sustainability reporting. This was done partly as a response to pressure from non-governmental organizations that criticized the power of multinational companies. This indicates the importance of sustainability reporting as a tool in communicating with stakeholders and managing business reputation. At the same time, the development of voluntary codes of environmental conduct and eco-auditing led to the development of environmental management systems (EMS) and the creation of standards, such as the ISO 14000 standard series. The ISO 14001 standard, which provides requirements for environmental management systems, was first launched in 1996. The European Union soon launched its own Eco-Management and Audit Scheme, EMAS.  Page 4 of 6 EXHIBIT 4.1 Development in Sustainability Reporting: From Single Issue Reports to Holistic Sustainability Reporting Since the mid-1990s, sustainability reporting has developed in various directions. Companies with socially sensitive operations started to develop corporate social responsibility (CSR) reporting, which had some roots in earlier philanthropic movements. The European Union, for instance, currently defines CSR simply as “the responsibility of enterprises for their impacts on society”. One of the drivers of CSR reporting was concerns about labor conditions in supply chains that were becoming more complex while human rights and particularly the use of child labor had become concerns for consumers. Sustainability reporting developments have taken different forms, one of them being triple bottom line (TBL) reporting, where the three dimensions are social, economic and environmental, or people, planet and profit. At the same time, global organizations supporting sustainability reporting were founded. One of them is the Global Reporting Initiative (GRI), which has developed a voluntary sustainability reporting framework. In addition, there are country-specific initiatives, such as Connected Reporting, developed in the United Kingdom, which aims to provide a new approach to corporate reporting and improve annual reports and accounts. The social emphasis of sustainability is visible in the UN’s Global Compact, which was launched at the turn of the millennium. It encourages businesses worldwide to adopt sustainable and socially responsible policies and to report on their implementation. It concentrates on the areas of human rights, labor, environment, and anti-corruption. The OECD also has Guidelines for Multinational Enterprises that are recommendations by to governments, aimed at providing voluntary principles for responsible business conduct. One example of changing concerns is that the 2000 update of these Guidelines added recommendations on the elimination of child labor and forced labor, and new chapters on combating corruption and consumer protection, whereas the 2011 update contained a new chapter on human rights. Also, the attention paid to climate change issues is now more pronounced. Another development was the launch of the ISO 26000 guidance for social responsibility in 2004. It is voluntary guidance and is not used as a certification standard unlike other ISO standards. According to the ISO 26000 guidance, the objective of social responsibility is to contribute to sustainable development. Social responsibility has the organization as its focus and concerns its responsibilities to society and the environment. According to ISO 26000, the core subjects of social responsibility are issues related to organizational governance, human rights, labor practices, the environment, fair operating practices, consumer issues, and community involvement and development. ISO 26000, however, notes that as society’s concerns change, its expectations of organizations also change, and therefore the elements of social responsibility are liable to change. In addition to wider social and environmental reporting, the growing concern about climate change has made carbon reporting more popular. One example is the Carbon Disclosure Project, which has encouraged companies and cities around the world to measure and disclose their greenhouse gas emissions, climate change risks and water strategies. The first reports labeled as “sustainability reports” were mostly single-issue reports that focused on environmental performance. The reason for this was partly the high priority given to environmental concerns and partly the difficulty in grasping the multidimensional concept of sustainability. Since the  Page 5 of 6 turn of the millennium, the number of more holistic sustainability reports has increased while the share of environmental reports has decreased. Even so, in many cases sustainability reporting practices have focused largely on environmental issues and eco-efficiency. So far, sustainability reporting has taken many different forms. There are stand-alone reports that can be published annually or biannually. Alternatively, sustainability reporting can happen via a suite of reports that are also published online. Although currently it is most common for organizations to publish environmental or social information in separate reports, there are also approaches that combine them with the annual financial report. This is reflected in the most recent and forceful development in the reporting field, the initiative of the International Integrated Reporting Council (IIRC), which is promoting the development and use of an integrated reporting framework. On the one hand, various developments indicate that there is a demand for sustainability reporting. This need has been expressed through many stakeholders who are developing sustainability reporting frameworks. On the other hand, the variety of concepts, frameworks and actors has caused some confusion about concepts and even competition between developers of reporting frameworks.  Page 6 of 6 MULTIPLE CHOICE QUESTIONS 1. It is a broad term that describes managing resources without depleting them for future generations. a. Sustainability b. Sustainability reporting c. Sustainability development d. Sustainability performance 2. You are asked to evaluate the following statements: Statement I - Communities where an organization has a significant presence are also potential audiences for sustainability reporting. Statement II - Advocacy groups (including non-governmental organizations) and media are also important audiences because their assessments of organizations can create a multiplier effect that influences guest and other stakeholder perceptions, and overall reputation. a. Only statement I is correct. b. Only statement II is correct. c. Both statements are correct. d. Both statements are incorrect. 3. It was mainly confined to large, publicly traded companies receiving requests from shareholders and fellow large-company customers. a. Sustainability b. Sustainability reporting c. Sustainability development d. Sustainability performance 4. Sustainability information includes both a. Qualitative and non-qualitative information. b. Quantitative and non-quantitative information. c. Financial and non-financial information. d. Qualitative and quantitative information. 5. Which of the following is true? a. Sustainability reporting on economic point of view is tangible while financial reporting is intangible. b. Sustainability reporting and financial reporting are the always the same. c. Sustainability reporting focus on non-financial aspect while financial reporting focus on financial aspect. d. Sustainability reporting are being used by stakeholders while financial reporting are being used by stockholders and investors. GOODLUCK, FEUture CIAs! ---END--- “Many of life’s failures are people who did not realize how close they were to success when they gave up” – THOMAS A. EDISON