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An Overview of Sustainability Reporting Practices

Article · March 2014

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 R E S P O N S I B I L I T I E S & L E A D E R S H I P
research

An Overview of Sustainability
Reporting Practices
Results of Related Research and Recommendations for the Future

By Silvia Romero, Beixin (Betsy) Lin,

Agatha E. Jeffers, and Laurence A.
DeGaetano

ustainability reporting has been an

S important topic for more than two

decades. The demand for environ-
mental, social, and governance
(ESG) disclosures has grown with the pub-
lic awareness of such issues. At the same
time, more and more governmental orga-
nizations, industry groups, and corporations
are voluntarily producing sustainability
reports in order to project an image of social
responsibility. Reporting on sustainability
has become so important to stakeholders
that it has evolved into a marketing tool,
to the extent that some companies adver-
tise green initiatives in order to win public
acceptance, even if their day-to-day activ-
ities do not reflect those practices (Jahdi
and Acikdilli 2009; full citations are avail-
able in the sidebar, References).
Even though such reporting practices
have been adopted all over the world, there
are differences in their development. This
discussion reviews relevant research on the
reporting practices that have been con-
ducted in the sustainability arena. This
information can provide an appreciation for
the development of sustainability reporting
and can be useful to managers, stakehold-
ers, practitioners, researchers, and others as
they evaluate the enactment of sustain-
ability initiatives in organizations.
increase in the scattered information in the Global Reporting Initiative (GRI), which
Background financial reports, the author did not find any was created in 1997 by the Boston-based
During the last three decades, voluntary substantial increase in independent sustain- nonprofit Ceres and the Tellus Institute,
disclosure regarding sustainability initiatives ability reports. This trend is changing, but with the purpose of developing global stan-
has increased, accompanied by mandatory a unified set of rules still does not exist. dards. For years, the GRI database has been
disclosures in different countries (Gray One of the most important standards set- experiencing a constant increase in the
2013a); however, despite finding an ters for reporting on sustainability is the number of countries and companies report-

68 MARCH 2014 / THE CPA JOURNAL

ing on their sustainability initiatives green gross domestic product (GDP). ine the measurement of green initiatives in
(KPMG 2008). In 2010, a GRI office Economic researchers are concerned, how- corporations, Jeffers discussed the need for
opened on Wall Street, aimed at increas- ever, about the issues associated with the a framework to identify and measure the
ing the awareness on sustainability stan- use of GDP as a measure of economic associated environmental variables in order
dards. Since then, the number of U.S. com- health, and they have stressed the need to to enhance planning, control, and decision
panies releasing sustainability reports to the develop a more appropriate measurement making, as well as assess their financial
public has increased. According to a of wealth—for example, see the World impact on the corporation’s bottom line
December 2013 KPMG press release, 83 Bank’s green accounting overview web- (2007). Using metrics acknowledged in the
of the top 100 U.S. companies by rev- page. Similarly, Daly discussed the prob- traditional cost accounting literature, Jeffers
enue now report on sustainability (KPMG lems of using traditional economic mea- identified the variables that should be
News Release, Dec. 9, 2013). sures to define weak and strong sustain- considered when developing a framework
The development of sustainability reg- ability; he suggested changes in practices to measure and present green initiatives in
ulation varies around the world. For exam- to achieve more sustainable economies financial statements and management
ple, in Asia, the Hong Kong Stock (2005). reports. She also highlighted the need for
Exchange recently introduced new sus- Post-Keynesian economists have broad- all corporations to prepare and release sus-
tainability reporting requirements. ened the term “economic sustainability” to tainability financial reports to the public.
Australia, Japan, and the United Kingdom include the protection of natural resources Building on this paper, Jeffers examined
enacted legislation that requires disclosure and ecological systems (Holt 2005). This the financial and managerial implications
of sustainability initiatives by corpora- definition raises questions of how to mea- of accounting for green initiatives and its
tions (Dagiliene 2010). The European sure environmental impact. Given that mar- effects on corporate reports. She noted
Union (EU) proposed what is known as kets do not reflect the full social cost of the need to identify, estimate, and measure
the “Europe 2020 Strategy” (European production, measures of limited resources relevant variables in order to quantify the
Commission 2010), a new model of busi- are inaccurate (Kinzig et al. 2011). This financial and other impacts of environ-
ness based on sustainable growth made economists propose frameworks to mental initiatives (2008).
(Martinuzzi et al. 2010). In the United price the consumption of natural resources In terms of the quality and transparen-
States, the Sustainability Accounting (Courvisanos 2005). cy of reports, there is a body of literature
Standards Board (SASB) was developed The implementation of sustainability mea- examining the differences in reporting
and incorporated in 2011. This not-for- sures requires international efforts. Both the among industries and countries. The indus-
profit organization is engaged in the devel- World Bank and the United Nations are tries that have been most frequently stud-
opment of a framework and standards for addressing sustainability issues. To this ied were those perceived as environmen-
use by publicly listed corporations to ben- end, in 2000, the United Nations released the tally sensitive (Fernandez-Feijoo et al.
efit investors and the public. But despite Handbook of National Accounting Integrated 2013)—for example, oil companies were
all of these efforts, there is a lack of guide- Environmental and Economic Accounting. among the first groups to report on envi-
lines and consistency regarding sustain- This publication provides a framework for ronmental issues (Alali and Romero
ability accounting and reporting. defining and linking economic statistics. In 2012; Deegan 2002; Deegan and Gordon
addition, in 2012, the United Nations 1996). Deegan and Gordon found an asso-
Overview of Research adopted a System of Environmental- ciation between Australian companies’
Despite the growing importance of the Economic Accounting (SEEA) as a standard industries and their environmental disclo-
sustainable development agenda, there for producing internationally comparable sures (1996). They also found an increase
has been very little research within the statistics on the environment and economic in environmental disclosures between 1980
accounting education literature (Gray issues. Following this lead, the World Bank and 1991. A similar industry effect is found
2013b). This sparseness creates difficulty published the Little Green Data Book in among German companies (Gamerschlag
in addressing such an important topic in 2013, which includes the adjusted net sav- et al. 2011), Spanish companies (Prado-
the literature and in the classroom. ings (ANS) indicator. The ANS (also Lorenzo et al. 2008), and U.S. companies
As noted above, the idea of reporting called genuine savings) measures the rate (Holder-Webb et al. 2009). Furthermore,
sustainable practices emerged just within of savings in an economy after taking into using a sample of 1,047 companies in 11
the last few decades. Consequently, the account investments in human capital, deple- countries and 38 industries, Fernandez-
evolution of reporting started at the tion of natural resources, and damage caused Feijoo et al. found that the pressure of
macroeconomic level, migrated to the by pollution. stakeholders in an industry has an effect
microeconomic level, and is now focus- Microeconomic research on sustain- on the transparency of the sustainability
ing on increasing shareholder value through ability accounting. Research on a micro- reports (2013).
sound sustainable practices and reporting. economic (corporate) level includes the
Macroeconomic research on sustain- definition of metrics and the determinants Sustainability Initiatives and
ability accounting. This type of research of quality and reliability of reports. Some Company Value
attempts to incorporate sustainability variables used to measure sustainable Sustainability initiatives have become an
accounting in national measures in order (green) accounting on a macro level may important factor in corporations’ decision
to achieve a “green” national product or a also be useful at a micro level. To exam- making. These initiatives require a huge

MARCH 2014 / THE CPA JOURNAL 69

 initial capital investment and force com-
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and Competitiveness in Europe’s Industrial Sectors, Research Institute for Managing Sustainability: Vienna, 2010 Furthermore, Lourenço et al. found that
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kets are prepared to realize lower returns.

70 MARCH 2014 / THE CPA JOURNAL

 Overall, research in the area of sustain- In 2005, Hasan et al. found that large In addition, as suggested by Gray, the
ability reporting has found a lack of con- audit firms do not provide high-level assur- gap in the accounting educational literature
sistency in the variables used to measure ance services because of the lack of appro- regarding sustainability issues will have
and report sustainability initiatives. In addi- priate criteria or performance standards. to be bridged (2013a). This will encourage
tion, whereas some researchers found a pos- Similarly, in 2011, O’Dwyer conducted a important interactions between sustain-
itive market reaction for companies with longitudinal case study on the evolution of ability and other related disciplines to be
high-quality reporting, others found no rela- assurance of sustainability reports with two adequately addressed and developed in the
tionship. A positive relationship has been Big Four audit firms. He found that prac- classroom as well as cultivate innovation.
found between sustainability initiatives and titioners have limited guidance from assur-
a company’s value with respect to some ance standards and have been restrained by Looking Back and Looking Ahead
accounting and market variables, whereas their overreliance on traditional auditing The above discussion reflects the cur-
no significant relationships were found with techniques. The audit firms in the study rent status and challenges faced by orga-
others. These mixed findings might result proposed a coupling of an external expert nizations in the measurement and report-
from researchers using different definitions stakeholder assessment of reporting relat- ing of sustainability initiatives. Over the
of sustainability, country and industry ed to “completeness” with traditional audit past 20 years, the field has evolved from
effects, and inconsistent variables, as well assessments related to “data reliability” in broad economic concepts to annual cor-
as the evolution of sustainability over time. order to overcome these difficulties. In porate reporting in the form of corporate
addition, auditors questioned the extent to social responsibility (CSR) reports.
Implications of Sustainability Reporting which the requirements for sustainability Standards-setting organizations have been
The recent string of natural disasters has assurance can be aligned with the opera- established to facilitate reporting.
highlighted the need to protect the envi- tional capabilities of audit firms. Sustainability has captured media and con-
ronment and increased the demand for It is apparent that there will be an sumer attention. Furthermore, the belief
environmentally friendly products and ser- increased demand for better identification, that, beyond the social good, economic
vices. As awareness and demand grow, more consistent measurement, and value exists with respect to sustainability
companies of all types in every industry enhanced reporting of inputs and outputs reporting appears to be validated by the
will be forced to adjust their strategies related to sustainability initiatives. This will marketplace. More and more evidence
and increase their sustainability initia- undoubtedly lead to a demand for a stan- has pointed to the fact that sustainability
tives. They will also be compelled to com- dardized set of high-quality global stan- has become a strategic priority for busi-
ply with sustainable legislation and regu- dards and procedures for sustainability nesses.
lation or face ever-increasing fines and reporting and assurance. But in order for industries and compa-
penalties, as well as other consequences. nies to integrate sustainability programs
This demand for sustainability initiatives Recommendations into their business strategy, several chal-
will also have a significant impact on CPAs will need to become more lenges remain. One major challenge will
accountants and auditors because it will involved in the development of rules for be to develop appropriate metrics and
require them to gain expertise in the mea- measuring and assuring sustainability benchmarks, along with an integrated sys-
surement, reporting, and auditing of sus- reports in order to ensure that they are in tem to measure and report the progress
tainability initiatives. Failure to properly harmony with acceptable accounting stan- of sustainability efforts. From a stake-
measure and report on these initiatives dards. Accountants also need to receive holder’s perspective, assessments and
could potentially lead to allegations of training to expand their expertise from audits of sustainability reports are needed;
material omissions or misstatements in traditional financial accounting and audit- from the academic perspective, more
the financial statements. ing to environmental and efficiency report- research is needed.
ing and auditing. It is hoped that this brief overview of
Future of Sustainability Reporting and Researchers will need to find measures to the research in sustainability reporting,
Assurance better assess the variables in order to evalu- along with the accompanying references,
The reliability of sustainability reporting ate sustainable initiatives and reporting. can assist managers, stakeholders,
is currently compromised. Oelschlaegel has Because corporate reporting often contains researchers, and practitioners as they select,
referred to the absence of a systematic pro- qualitative and certificate-based measures, develop, and report on sustainability strate-
cedure to assess the competence of assur- scaling or indexing methods might be use- gies and practices. q
ance providers (2004). Furthermore, ful for researchers to measure the degree of
O’Dwyer and Owen have raised concerns sustainability adoption by companies. In addi-
regarding the independence of assurance tion, longitudinal and cross-sectional data Silvia Romero PhD, is an assistant pro-
providers and the quality of assurance prac- should be collected at the company level, the fessor, Beixin (Betsy) Lin, PhD, is an
tice (2005). In addition, there is a high degree industry level, and the country level in order associate professor, Agatha E. Jeffers,
of management control over the measure- to conduct comparative analysis. Furthermore, PhD, CPA, is a professor, and Laurence
ment and assurance process, which is evi- case studies may be effectively utilized to A. DeGaetano, CPA, is an instructional
denced by its reluctance to address the assur- assess the financial impact of sustainability specialist, all at Montclair State University,
ance statement to specific constituencies. initiatives in companies. Montclair, N.J.

MARCH 2014 / THE CPA JOURNAL 71

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