Week 4

1. Week 4 Sustainability and environmental accounting

2. Learning Objectives • Upon completing this topic you should be able to: • Explain the meeting of sustainability and why an entity might embrace sustainable development practices; • Explain sustainability reporting and describe a range of methods used to report on sustainability and environmental performance; • Describe the commonly used guidelines for sustainability reporting, and articulate how they can assist corporate reporting of sustainability performance; • Evaluate the range of stakeholders that can influence sustainable business practice, and how entities can engage with these stakeholders; • Explain how entities can use environmental management systems to improve environmental performance reporting; • Evaluate the implications of climate change for accounting.

3. Where does this fit into unit learning goals? • apply a range of theories of accounting to explain financial accounting and reporting practices and appreciate the judgements, estimations and assumptions influencing accounting numbers; • critically assess and appreciate changing influences in standard setting; the compliance regime in capital markets and impacts of regulatory requirements on financial reporting practices; • assess the role of financial accounting in sustainable development and corporate social and environmental performance reporting; • analyse a range of financial reporting issues, including intangible assets, financial instruments and foreign currency transactions, from both a practical and theoretical perspective; and • demonstrate effective individual research skills to produce professional quality business documents to solve financial accounting problems; and demonstrate in individual summative assessment tasks the acquisition of a comprehensive understanding of the topics covered by this unit.

4. What is Sustainability? • Sustainable Development is‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’ (BrundtlandCommission)

5. What is Sustainability? • Encompasses issues such as • Intergenerational Equity • IntragenerationalEquity • Eco-Justice • Eco-Efficiency • These are important national questions but also have siginficant corporate and individual elements.

6. Sustainability Reporting • Also known as • Corporate Social Reporting • Corporate Social Responsibility Reporting • Triple Bottom Line Reporting • Sustainability Reporting • Environmental Reporting • Social Audit • Environmental, Social and Governance Reports • Stakeholder Reports.

7. Sustainability Reporting • A sustainability report refers to a report that not only presents information about the economic value of an entity, but provides information upon which stakeholders can also judge the environmental and social value of an entity. • Useful not only for reporting purposes but also performance measurement, accounting, auditing and reporting.

8. Benefits of Sustainability Reporting for Companies • Embedding sound corporate governance and ethics systems throughout all levels of an organisation. • Improved management of risk through enhanced management systems and performance monitoring.

9. Benefits of Sustainability Reporting for Companies • Formalising and enhancing communication with key stakeholders such as the finance sector, suppliers, community and customers. • Attracting and retaining competent staff by demonstrating an organisation is focused on values and its long-term existence. • Ability to benchmark performance both within industries and across industries.

10. Activity 1 • Read the newspaper article which relates to benefits of triple bottom line for an Australian company • Consider the benefits for the company’s reputation and access to capital

11. Integrated Reporting • An initiative of the International Integrated Reporting Committee with the aim of • To create a globally accepted integrated reporting framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format. • To help with the development of more comprehensive and comprehensible information about organizations, prospective as well as retrospective, to meet the needs of the emerging, more sustainable, global economy.

12. Environmental Reporting • Environmental reporting is a subset of sustainability reporting. • To date, research has not drawn any clear conclusions as to the relationship between environmental performance and environmental disclosure. • Legitimacy theory would propose that entities with poor environmental performance would more likely produce greater levels, or higher quality environmental information to address potential legitimacy threats.

13. Environmental Reporting • A number of studies however have found a relationship between more extensive quantifiable environmental disclosures and • good environmental performance • good economic performance

14. Guidelines for Sustainability Reporting • Arange of guidelines which have emerged to provide direction on appropriate sustainability reporting. • The United Nations (UN) has produced a number of reporting initiatives. • Other groups that have provided guidelines include: • The Organisation for Economic Cooperation and Development (OECD) • The International Organisation for Standardisation (ISO)

15. Overview of Selection Indicators

16. Global Reporting Initiative • Launched in 1997 as an initiative to develop a globally accepted reporting framework to enhance the quality of sustainability reporting • A joint initiative of the Coalition of Environmentally Responsible Economies (CERES) and the United Nations Environment Program (UNEP) • The aim is to enhance transparency, comparability and clarity, amongst other principles.

17. Global Reporting Initiative • Sustainability reports based on the GRI Framework can be used to: ‘demonstrate organizational commitment to sustainable development, to compare organizational performance over time, and to measure organizational performance with respect to laws, norms, standards and voluntary initiatives’

18. Global Reporting Initiative • THE GRI includes 55 core indicators and 29 additional indicators across environmental, economic and social performance areas (see Table 11.2). • In addition the GRI has an Application Levels system • These indicate the extent to which The Guidelines have been applied in sustainability reporting. • They communicate which part of the reporting framework has been addressed and reflect the degree of transparency in reporting.

19. Mandatory Sustainability Reporting Requirements • Australia • The Corporations Act 2001 requires directors to outline the company’s performance in relation to environmental regulations. • The National Greenhouse and Energy Reporting Act 2007 (NGER Act) introduced a national framework for reporting and dissemination of information about greenhouse gas (GHG) emissions and energy use by certain corporations.

20. Mandatory Sustainability Reporting Requirements • Canada • The Canadian securities regulators require public companies to produce an Annual Information Form that reports on the current and future financial and operational effects of environmental protection requirements. • Denmark • The Danish Act of 16 December 2008 requires Denmark’s largest companies to include their ESG activities in their annual reports or justify the absence of this information.

21. Mandatory Sustainability Reporting Requirements • Norway • The government has proposed that large companies should report their social and environmental performance to stakeholders. • United States • The US Environmental Protection Agency proposed a mandatory greenhouse gas reporting rule, which became effective on 29 December 2009. • The Securities and Exchange Commission (SEC) requires disclosure of some general information, including disclosure of capital expenditure for environmental control facilities, and about environmental claims.

22. Stakeholder Influences • Contemporary entities now consider a range of stakeholders in their decision making. • Entities following GRI are required to undertake stakeholder assessment as part of their reporting process. • Many businesses identify and engage with stakeholders as a means of reducing risk and managing reputation. • Stakeholders are increasingly concerned with issues of sustainability.

23. Stakeholder Interests in Corporate Sustainability

24. Ethical Investment • Ethical investment and ethical investment funds are increasingly taking an interest in corporate sustainability performance and reporting. • More broadly many institutional investors are concerned about the economic, financial and regulatory risks of global warming.

25. Environmental Management Systems • An EMS is a system that organisations implement to measure, record and manage their environmental performance. • In addition to providing organisations with an environmental management tool they also facilitate the organisation’s communication to stakeholders.

26. Environmental Management Systems • International standard ISO 14001 Environmental managementgoverns EMSs. • It covers the development and audit of EMSs, and requires certifying companies to establish and maintain communication, both internally and externally. • It also requires companies to develop policies, objectives and targets, and assess environmental performance against these requirements.

27. Climate Change and Accounting • The Kyoto Protocol is an agreement that commits signatories to achieve GHG or carbon emissions reduction. • Under the Kyoto Protocol countries were allocated allowed emissions in the form of assigned units that corresponded to their agreed emission targets.

28. Emissions Reduction Schemes • Many countries have (are) developing emissions reduction schemes to mitigate, or reduce climate change. • Two approaches are used • Emissions trading scheme (ETS) are designed to control emissions by allowing participants to trade excess emissions permits. • Carbon taxes where a levy is paid based on the amount of emissions or GHGs.

29. Emissions Reduction Schemes • Australia has decided to implement a ETS. • An ETS provides a mechanism by which economic activities of an organisation can be linked to climate change benefits. • These are expected to be significant costs including: • Reporting requirements such as compliance and monitoring costs. • Investments to mitigate and manage emissions. • Re-evaluation of corporate strategies, operational and control systems.

30. Activity 2 • Complete Contemporary Issue 11.1 • Examines considerations of carbon footprint in the wine industry

31. Accounting for Carbon Emissions • There is currently no guidance on how to account for carbon pollution permits or emissions trading activities. • In the short term, organisations are required to account for both purchased and allocated emissions allowances. • How should they be valued? • Are they intangible assets or financial instruments?

32. Accounting for Carbon Emissions • How should organisations account for their obligation to deliver allowances to the government at the end of the reporting period to ‘pay’ for their emissions. • Should organisations be permitted to use hedge accounting to reduce the risk associated with their allowance asset and emissions liability. • See Table 11.4 for Accounting approaches for the EU ETS

33. Next Week • Review problems with this topic • Question provided in class • Corporate governance • Relies on our discussions of theories earlier in the semester • Examines board roles etc.