Environmental and Sustainable accounting Lecture 10 Chapter Since ancient time, the practice of accounting has been anchored in the traditional of reporting on the annual performance of an entity’s affairs This reporting has been almost entirely backward-looking Until the Industrial Revolution involved a significant level of narrative and descriptive reporting interspersed with quantitative reporting, of both financial and general numerical information In these early accounting systems there was little measuring of efficiency or productivity, nor was there any marked concern for other factors beyond those described above However, since the Second world War, and in the past 25 years particularly, there has been an increasing move to accountability There are many definition of the term “accountability” but it essentially means reporting to a wider stakeholder audience on matters arising from the activities of an organisation and typically includes many non-traditional areas of performance These areas include: Effects on local community Forward planning and business objectives Staff training and safety Gender, age and race Environment These areas are collectively grouped under the heading of corporate social responsibility accounting and environmental reporting Therefore, the discussion concerning environmental accounting should be seen as part of a much broader shift in the nature of accounting Over the past 30 years, accounting has been largely liberated from the clerical recording function and has now moved into the general area of business advice, management and finance Furthermore, the expectations of society have changed dramatically in the past 30 years to embrace a much more global and environmental concern and concern for future generation, while at the same time society demands much greater accountability by those organizations that have either material (or potential) effect upon the environment, and the apparent espousal of a New Right and minimalist government intervention approach Definition of Corporate Social Reporting Gray, Owen and Maunders (1987) offer the following definition of corporate social reporting: “… the process of communicating the social and environmental effects of organisations’ economic actions to particular interest groups within society and to society at large As such, it involves extending the accountability of organisations beyond the traditional realm of providing a financial account to the owners of capital, in particular, shareholders Such an extension is predicated on the assumption that companies have wider responsibilities than simply to make money for shareholders” Triple bottom line reporting TBL Reporting is an accounting concept directly aligned with sustainable development It is a new form of corporate disclosure which integrates the: Economic component, Environmental component and Social component TBL Reporting provide a wider perspective of information to stakeholders that may show: employees as assets externalities like damages to ozone layer, environmental (air, water and land) pollution, etc values important in non-western cultures (like rest time for employees) The triple bottom line reporting approach suggests: Financial reporting will improve if: Companies recognise more social responsibility Financial reporting of companies adopting this approach reflects this increased range of responsibilities (i.e beyond profit maximisation for share-holders) Aim of triple bottom line reporting: Sustainable value creation Extended time horizon for business decision-making Acknowledgement and management of a full range of costs: Economic, social and environmental costs Environmental reporting in New Zealand The legal authority for environmental issues in New Zealand is currently the Resource Management Act 1991 The Act purports to contain all-encompassing legislation for the sustainable management, and control, of natural and physical resources The Act makes provision for individual punishment where the offence is of a serious nature; and, on the face of it, shows a strong commitment by the government to care for the environment As a result, we might expect to see a growing awareness of environmental issues by business management What is environmental accounting? Gray (1993) states that environmental accounting seeks to: Recognise and seek to mitigate the negative environmental effects of conventional accounting practice Separately identify environmentally-related costs and revenues within the conventional accounting systems Take active steps to set up initiatives in order to ameliorate existing environmental effects of conventional accounting practice Devise new forms of financial and non-financial accounting systems, information systems and control systems to encourage more environmentally benign management decisions Identify, examine and seek to rectify areas in which conventional (financial) criteria and environmental criteria are in conflict Experiment with ways in which sustainability may be assessed and incorporated into organisational orthodoxy New Zealand accountants’ view on environmental accounting: not believe there is any good reason, nor is it desirable, to separate environmental reporting and accounting procedures (Gray, 1990 and Rubinstein, 1992) Rather, environmental considerations need to be seen as an across-the-organization issue, probably involving an environmental steering committee and running in a matrix fashion rather than on a functional basis In other words, environmental accounting is an activity that all must be aware of and that will touch all elements of the organization Moving to environmental systems in New Zealand Necessary to establish: An environmental group or department An environmental policy and mission statement(s) Key areas of control for each department Identification, monitoring and reporting systems for environmental factors Environmental audit procedures Emerging environmental issues ‘alert’ procedures See also Ten Steps to Environmental Excellence Steps to Environmental Excellence Develop and publish an environmental report Prepare an action programme Organise and staff Allocate adequate resources Invest in environmental science and technology Educate and train Monitor, audit and report Monitor the evolution of the green agenda Contribute to environmental programmes 10 Help build bridges between the various interests One of the challenges of environmental reporting is to avoid dealing with the issues in a technical sense then putting them aside and turning to something else Rather, environmental accounting must be an ongoing activity, addressed at all levels of the business There is probably no better way to raise corporate environmental consciousness than by having a mixture of both strong environmental legislation and a tradition of detailed environmental reporting, thereby leading to transparency and accountability One way to formally integrate environmental factors is through environmental auditing which, in the first place, should seek to ensure that all mandatory requirements with respect to the business operation’s environmental considerations are met, but at a broader level should seek to ensure that corporate environmental policy is upheld by its operatives It is likely that environmental auditing will be associated with any major product developments as well as taking place on a regular or annual basis By building environmental audit procedures into the corporate on a cross-departmental (cross-functional) basis, a major move can be made towards the genuine integration of environmental considerations into decision making The following definition of environmental auditing is from the Confederation of British Industry (1990): “… the systematic examination of the interactions between any business operation and its surroundings This includes all emissions to air, land and water; the effects on the neighbour community; landscape and ecology; and the public’s perception of the operating company in the local area … environmental audit does not stop at compliance with legislation nor is it a “green washing” public relations exercise … rather it is a total strategic approach to the organization’s activities” Integrated Reporting The past 10 years has seen a move to a broader-based approach and sees a wider stakeholder and value-creation proposition as the future of a business The birth of the integrated report, which is captured in the 2013 Exposure Framework document The International Framework, is gaining significant “traction” around the world This development integrates the key areas of CSR, financial and broader stakeholder reporting within a single document that emphases all-party value creation and sustainability A concluding comment At this stage you might say, where have we come to? You might rightly say that many years ago we had environmental reporting, which has since grown to include social as well as governance reporting – and with this a huge growth in the volume of reporting required Some of this is handled through subsidiary reports that sit “behind” the annual report, while others have attempted an integrated approach, but either way there has been a significant increase in the volume of reporting You might indeed raise the question of who reads it! In recent times there have been calls for a more consistent approach along with clear reporting guidelines At the same time, there have been calls for reporting only the core material which might be more “available” for the reader Some annual reports now number more than 400 pages, and even allowing for excited and interested readers it is a big ask for someone to read this much material ... of environmental issues by business management What is environmental accounting? Gray (1993) states that environmental accounting seeks to: Recognise and seek to mitigate the negative environmental. .. Zealand accountants’ view on environmental accounting: not believe there is any good reason, nor is it desirable, to separate environmental reporting and accounting procedures (Gray, 1990 and. .. existing environmental effects of conventional accounting practice Devise new forms of financial and non-financial accounting systems, information systems and control systems to encourage more environmentally