BA422 Module

Sustainability Accounting
Reporting
Tools
Five Questions about Sustainability
1. What is sustainability?
2. Is the goal of sustainability compatible with
maximizing long-run financial performance?
3. Can corporate strategies accommodate
multiple long-run objectives?
4. Does the balanced scorecard accommodate
5. What is the relationship between reporting
on sustainability and investing in
sustainability?
Reporting
Tools
sustainability?
Sustainability
“We do not inherit the earth from our
ancestors. We borrow it from our
children.”
Sustainability
children.”
- David Brower
Sustainability
children.”
- Antoine de Saint-Exupéry
Sustainability
children.”
- Haida Proverb
Sustainability
Sustainable development “meets the
needs of the present without
compromising the ability of future
generations to meet their own needs.”
- 1987, World Commission on Environment and

Development (a.k.a the Brundtland
Commission)
Sustainability
Sustainability: “using, developing and
protecting resources in a manner that
enables people to meet current needs and
provides that future generations can also
meet future needs, from the joint
perspective of environmental, economic
and community objectives.”
- “The People of the State of Oregon”

Chapter 918 of Oregon Laws 2001
Sustainability
“We desperately need to recognize that we are the
guests not the masters of nature and adopt a new
paradigm for development, based on the costs and
benefits to all people, and bound by the limits of
nature herself rather than the limits of technology
and consumerism."
- Mikhail Gorbachev
- President of Green Cross International
sustainability?
sustainability?
Is sustainability compatible with
maximizing long-run financial
performance?
The business case for sustainability investment is

gaining momentum ….
“The positive correlation between sustainability
and financial performance will provide an
enormous boost to the sustainable investment
sector,” said Markus Knisel, director of Morgan
Stanley Private Wealth Management.
performance?
“We are convinced that high sustainability

performance stems from superior company
management and will in the long run manifest
itself in improved financial performance,” said …
Oekom’s managing director.”
performance?
“The shares of companies that do business in an
environmentally and socially more compatible
way have a lower risk of share price fluctuations
than companies from the same industry …,”
states a 2002 study conducted by Switzerland-
based Bank Sarasin.
performance?
“The study posits some possible reasons for the
positive correlation of financial and sustainability
performance. It speculates that good
sustainability performance leads to good financial
performance through the integration of
sustainability criteria into corporate strategy; for
example, increased energy efficiency leads to
lower costs.”
- William Baue, Dec. 05, 2003
performance?
“Recent attempts to make an economic case for
corporate attention to human rights … have a
shoehorned quality. The typical argument, which
relies on the purported reputational and
marketing benefits of respecting human rights, is
shaky at best. The experience of Nike, the
footwear giant recently taken to task for its
suppliers’ workplace practices, is a case in point.”
performance?
“It strains credulity to suggest that Nike would
have benefited financially from requiring its
suppliers to meet higher standards at the
inception of its then-novel overseas
manufacturing program in the 1960s. Insistence
on adult workers (no children), safe working
conditions, and reasonable hours and pay would
have cost Nike real dollars and cents.”
performance?
“Prior to the 1990’s, when workers and
consumers in industrialized countries awakened
to the conditions of workers overseas, it would
have been difficult to cite even minimal
reputational benefits from such a stance.”
performance?
“By the 1980s, Nike already had a glowing
reputation and spectacular earnings. Far from
being a cause for embarrassment, its strategy of
outsourcing production to cheap Asian labor was
praised as an innovative way to drive down costs,
beat the competition, and create shareholder
value.”
- Lynn Sharp Paine, 2000
Harvard Business School
sustainability?
sustainability?
Corporate Finance
“Success is usually judged by value:
Shareholders are made better off by any
decision which increases the value of
their stake in the firm.”
- Brealey and Myers,

Principles of Corporate Finance (1988)
Economics
“… When we model the behavior of firms,
we will want to describe the objective as
profit maximization and the constraints
as technological constraints and market
constraints.”
- Hal Varian, Microeconomic Analysis (1984)

Corporate Mission Statements
“Do a great job for our customers, employees,

and stockholders by being the preeminent
building block supplier to the worldwide digital
economy.”
- Intel
“We will become the world's most valued

company to patients, customers, colleagues,
investors, business partners, and the
communities where we work and live.”
- Pfizer
“GM’s vision is to be the world leader in

transportation products and related services.
We will earn our customers’ enthusiasm
through continuous improvement driven by the
integrity, teamwork and innovation of GM
people.”
- General Motors
“Nike’s corporate responsibility (CR) mission is simple
and straightforward. It is clear acknowledgement that
CR work should not be separate from the business –
but should instead be fully integrated into it. Our CR
mission:
– We must help the company achieve profitable and

sustainable growth.
– We must protect and enhance the brand and
company.”
- Nike
Motivation for Adopting
Sustainable Practices
PwC 2002 Survey
Source: PriceWaterhouseCoopers,2002 Sustainability Report. August 2002.

sustainability?
Reporting
Tools
Accounting
“The search for new and better means of
meeting economic problems has resulted
in the development of various kinds of
institutions … aimed at improving the
allocation of resources and the
application of human effort toward the
satisfaction of human wants. Accounting
is one of these institutions.”
- William Vatter (1950)

Accounting
“Accounting is thus concerned with the
translation of business events into the
language of money-units. It is the
simplest and most effective way yet
discovered to collect information about
the operations of enterprise and to
transmit that information to interested
persons.”

Accounting
“Accounting reports serve a great number of
purposes … . For example, there are accounting
reports that serve to tally valuables entrusted
to custodians against the stewardship expected
of them. … Thus, accounting is not necessarily
confined to the situation of measuring gains
and losses; it is basically a means of meeting
the requirement that custody and management
of property carries with it an obligation to
account for it.”

Accounting
“Of course, the accounting reports of
business enterprises serve many other
uses. The information presented in
financial statements may be used by
present or prospective investors … ..”

Accounting
“Financial reporting should provide
information that is useful to present and
potential investors and creditors. … The
primary focus of financial reporting is
information about earnings and its
components.
- FASB (Statement of Financial

Accounting Concept #1)
Stewardship
• A working definition: the
responsibility for taking good care of
resources entrusted to one.
Reporting
Tools
Reporting Tools
• The Triple Bottom Line
• The Balanced Scorecard
• Third party reporting and criteria
Reporting Tools
• In 2002, 45% of the 250 largest global
companies prepared environmental
and social responsibility reports, as
compared to 35% in 2001.
Reporting Tools
The Triple Bottom Line
• Disclosure (reporting) is a key part of doing
sustainable business.
• Sustainability reporting is broader in scope than
traditional financial reporting.
• The Triple Bottom Line (TBL) is one way to report
on sustainable business activity.
• TBL defines sustainability in terms of three
separate elements: economic, environmental,
and social perspectives of operations.
Three Elements of the
Triple Bottom Line
Economy – reflects activities related to shaping demand
for products and services, employee compensation,
community contributions, local procurement policies, and
other monetary issues related to company activities.
Triple Bottom Line
Society - reflects activities in shaping local,
national and international public policy,
equality, treatment of minorities, employee
issues and public concern. That is,
organizational citizenship.
Triple Bottom Line
Environment – reflects the impact made
through processes, products or services that
affect the environment. These may include air,
water, land, natural resources, flora, fauna and
human health.
Example of a
Triple Bottom Line Report
• The following TBL report is excerpted from
Noranda’s 2002 sustainability report.
• The company is a one of the world’s largest
producer of zinc, nickel, and other mineral
products. Total assets were $8.2 billion in
2003.
• Noranda is a Canadian company whose shares
are listed on the Toronto and New York Stock
Exchanges (NYSE:NRD).
Example of
Economy
Source: Noranda sustainability report, 2002

Example of
Society

Example of
Environment

Reporting Tools
sustainability?
The Balanced Scorecard
• A performance measurement tool and a
performance management system.
• Created in 1992 by Robert Kaplan and
David Norton.
• Emphasizes financial measurement, but
adds non-financial measures.
• Theory behind the balanced scorecard is
that most financial measures are
backward-looking, while many non-
financial measures are forward-looking.
• The balanced scorecard explicitly
recognizes that firms have multiple
stakeholders.
• Four components of the balanced
scorecard:
– The Learning and Growth Perspective
– The Internal Business Process Perspective
– The Customer Perspective
– The Financial Perspective
• Each component would have specific
performance measures associated with it.
• The Sustainability Balanced Scorecard
adds sustainability issues into the
Balanced Scorecard.
• Popularity of the Balanced Scorecard.
– A survey of 100 large U.S. companies indicates
that 60% use some variation of the balanced
scorecard.
– The same survey found that 80% of the adopters
are using or planning to use the scorecard for
incentive compensation purposes.
– The same survey found that on average, the
financial performance measure was given a 55%
relative weight, and the other three measures
totaled 45%.
sustainability?
Reporting Tools
sustainability?
Reporting on Sustainability
• Reporting on sustainability is not synonymous
with engaging in activities that promote
sustainability.
– Neither is reporting on profitability synonymous with
being profitable.
• No “GAAP” for reporting on sustainability.
• Guidelines have been issued by governmental
entities and other groups.
– The Environmental Protection Agency (EPA)
– The Global Reporting Initiative (GRI)
– ISO 14000
• Independent reporting agencies have emerged.
Environmental Protection
Agency
• Leading authority on environmental
guidelines and regulations in the U.S.
• Industry-specific guidance
• Corporate violation of EPA regulations
can result in significant financial
liabilities.
Global Reporting Initiative
• The Global Reporting Initiative (GRI) has
emerged as a prominent source of guidance for
reporting under the Triple Bottom Line.
• The GRI is a collaborating center of the United
Nations Environment Program.
• The GRI incorporates participation of
representatives from business, accountancy,
investment, environmental, human rights,
research and labor organizations from around
the world.
Global Reporting Initiative
• At the time of this writing the GRI reports

database listed 509 organizations world
wide and 60 domestically who used GRI
guidelines.
• Organizations in the United States were
mostly large, publicly traded companies
such as 3M, AT&T, and Advanced Micro
Devices.
International Organization for
Standardization
• Organization de Standards International (ISO)
is an important management practice standard
setting body.
– Founded in 1947 in Amsterdam.
– Sets a variety of standards for various products and
production processes.
– A network of the national standards institutes from
148 countries.
– Conformance with ISO standards is a contractual
requirement by some customers.
• ISO 14000: provides a framework for
measuring environmental performance.
Motivation to Report on
Sustainability
• Sustainability reporting is largely voluntary
– Exceptions: France and Japan
• Motivations to disclose sustainability information
– The desire to avoid added complex and costly
government regulation or negative attention from the
government.
• For example, GAO 2004 study
– The desire to improve public relations and company
image.
• For example, CalPERS
Acceptance of Sustainability
and TBL Concepts by the
Business Community
• Because sustainability reporting is largely
voluntary, the attitudes of business leaders
towards sustainability is important.
• Some evidence from two studies in 2002:
– Allen Group - Triple Bottom Line Measurement and
Reporting in Australia: Making it Tangible (top 50
Australian companies)
– PriceWaterhouseCoopers - 2002 Sustainability
Report (140 large US companies)
Objections to Adopting Sustainable
Business
Practices and Reporting
• Not all organizations have adopted sustainable
business practices and/or reporting.
• Based on the Allen Group report and PwC survey,
major objections may be categorized as:
– Unconvinced of the benefits associated with
sustainability reporting:
• Triple Bottom Line and sustainability are fads.
• Triple Bottom Line disclosures do not apply to their business.
– Existing disclosure practices are sufficient.
– The Triple Bottom Line is a good concept, however,
implementing it is low on the priority list.
Sustainable Business Practices
PwC 2002 Survey
Adoption of sustainable business practices precede or
accompany adoption of sustainability disclosures.
PwC surveyed major US Companies about their
sustainable business practices in 2002. Of the 140
respondents to a survey by PwC:
– 75% state that they had adopted sustainable business practices
in some form.
– 89% feel that in five years there will be more emphasis on the
issue of sustainability than in 2002.
– 72% rated the importance of sustainability to their business as
being 6 or higher on a scale of 1 to 10.
Independent Reporting
Agencies
• Oekom Research is one such company.
• Oekom is a German company, active in the
sustainable investment field since 1993.
• Coverage: approximately 750 international large and
mid-cap companies from all important industries.
Over 100 small caps with particularly sustainable
products and services.
sustainability?

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Sustainability Accounting

- 1987, World Commission on Environment and

- “The People of the State of Oregon”

The business case for sustainability investment is

“We are convinced that high sustainability

- Brealey and Myers,

- Hal Varian, Microeconomic Analysis (1984)

“Do a great job for our customers, employees,

“We will become the world's most valued

“GM’s vision is to be the world leader in

– We must help the company achieve profitable and

Source: PriceWaterhouseCoopers,2002 Sustainability Report. August 2002.

- William Vatter (1950)

- William Vatter (1950)

- William Vatter (1950)

- William Vatter (1950)

- FASB (Statement of Financial

Source: Noranda sustainability report, 2002

Source: Noranda sustainability report, 2002

Source: Noranda sustainability report, 2002

• At the time of this writing the GRI reports

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