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English, D. M. and D. K. Schooley. 2014. The evolution of sustainability reporting. The CPA Journal (March): 26-35.

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Social Accounting Main Page | Environmental Cost Main Page

The purpose of this paper is to discuss the factors that are motivating firms to address sustainability issues, how the Global Reporting Initiative's (GRI's) latest guidelines are utilized, the movement towards integrated reporting, opportunities for consulting and assurance services, and best practices in the area of sustainability reporting.

Factors that drive corporate sustainability reporting include regulation, pressure from investors and customers, internal commitment to environmental responsibility, the desire to remain competitive, and the goodwill that social reporting generates. Many terms are used including sustainability, corporate social responsibility, and the triple bottom line. Companies are using the GRI's latest guidelines (G4) as a starting point to sustainability reporting.

The Case for Sustainability Reporting

A company's sustainability reporting reflected in the Dow Jones sustainability index helps build a company's reputation for transparency and tends to result in higher stakeholder returns. A company's emphasis on environmental and social issues can also improve stock price performance and lower stock price volatility.

A Strategic Decision

Sustainability reporting is a strategic decision in that integrating sustainability issues with financial reporting provides both management and stakeholders with more comprehensive information for decisions. Some have recommended integrating sustainability measures throughout the balanced scorecards four perspectives as the best way to recognize its' strategic importance. (See MAAW's Balanced Scorecard topic).

Getting Started Using the G4 Guidelines

There is a wide range of how companies are engaged in the movement towards sustainability. Some companies do not provide any information at all related to sustainability issues while companies at the other end of the reporting continuum provide sustainability and operating performance information in an integrated report including a discussion of the strategic importance of their sustainability initiative. Other companies in the middle provide separate reports for their financial performance and sustainability efforts.

The Global Reporting Initiative (GRI) provides reporting guidelines including principles and indicators used to measure performance. The fourth generation of their reporting guidelines (G4 released May 2013) emphasizes materiality, i.e., the influence on stakeholders assessments and decisions.

The G4 guidelines are two tiered including core reports and comprehensive reports. Core reports include standard disclosures for all material issues with at least one indicator for each issue. Comprehensive reports must include all indicators for each material issue as well as disclosures related to the organization's strategy, governance, ethics and integrity.

Their are two types of standard disclosures including general disclosures and specific disclosures.

General disclosures include those related to:

Strategy and analysis,

Organization profile,

Stakeholder engagement,

Report profile,

Governance, and

Ethics and integrity.

Specific disclosures are organized into 3 categories including:

1. Economic - economic performance, market presence, indirect economic impacts, and procurement practices. The following details are from Exhibit 3 on p. 31.

Economic performance indicators include EC1 Direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings, and payments to capital providers and governments. EC2 Financial implications and other risks and opportunities for the organization's activities due to climate change. EC3 Coverage of the organization's defined-benefit plan obligations. EC4 Financial assistance received from government.

Market presence indicators include EC5 Ratios of standard entry-level wage by gender, compared to local minimum wage at significant locations of operation. EC6 Proportion of senior management hired from the local community at significant locations of operation.

Indirect economic impacts indicators include EC7 Development and impact of infrastructure investments and services supported. EC8 Significant indirect economic impacts, including the extent of impacts.

Procurement practices indicators include EC9 Proportion of spending on local suppliers at significant locations of operation.

2. Environmental - materials, energy, water, biodiversity, emissions, effluents and waste, products and services, compliance, transport, overall, supplier environmental assessment, and environmental grievance mechanisms.

3. Social - labor practices, human rights, society and product responsibility.

Labor practices and decent work aspects include employment, labor/management relations, occupational health and safety, training and education, diversity and equal opportunity, equal remuneration for women and men, supplier assessment for labor practices, and labor practices grievance and mechanisms.

Human rights aspects include investment, nondiscrimination, child labor, forced or compulsory labor, security practices, indigenous rights, assessment, supplier human rights assessment, and human rights grievance mechanisms.

Society aspects include local communities, anticorruption, public policy,, anticompetitive behavior, compliance, supplier assessment for impacts on society, and grievance mechanisms for impacts on society.

Product responsibility aspects include customer health and safety, product and service labeling, marketing communications, customer privacy, and compliance.

The specific disclosures listed above appear in Exhibit 2 (p. 30) with an example of each indicator. Some example indicators include: economic performance measured by direct value generated, energy measured by energy consumed, emissions by direct greenhouse gas emissions, employment by hires and turnover by age, and nondiscrimination by incidents of discrimination.

An additional exhibit (Exhibit 4, p. 32) shows where the economic indicators EC2, EC3 and EC7 appeared in 29 companies annual reports, i.e., in notes to the financial statements, letters to shareholders, summary after shareholder letter, management discussion and analysis, or 10-K.

The Next Phase: Integrated Reporting

Companies will begin to combine financial and sustainability reports as recommended in the International Integrated Reporting Council's (IIRC) framework published in December 2013. The International Accounting Standards Board (IASB) has an agreement with the IIRC to cooperate in the development of an integrated framework.

Opportunities for Consulting and Assurance Services

Sustainability reporting using the GRI standards does not require external assurance, but some companies are engaging auditors to validate the reports and this trend is expected to continue. Sustainability reporting has also generated many opportunities for consulting services.

Best Practices

This section of the paper describes the corporate sustainability reporting by United Parcel Service (UPS), and indicates that their best practice can serve as a model for companies that are considering or just beginning their sustainability journey.

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