INTERNATIONAL CORPORATE REPORTING
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International Corporate Reporting
Introduction
In the contemporary world, businesses, organizations and companies keen on progressive growth and development are integrating social and environmental interventions in their operational models to ensure that they directly contribute to the sustainability of the environment and the communities that they serve. Organizations and companies are no longer judged, only by the quality of their products and services, but also, by the contributions they are making to ensure a sustainable environment and the degree of their corporate social responsibility in which they give back to the society. With the high influx of companies and the increasing population of the world, pollution emanating from the operations of companies has increased hence the need for environmental sustainability by businesses. The United Nations has further rolled out sustainable development goals to ensure that companies are at the forefront of environmental sustainability that ensures a safe environment for all living organisms. The Association of Chartered Certified Accountants in collaboration with the Chartered Financial Analyst Institute, in their research on social and environmental value creation, suggest that a good social and environmental performance leads to a business that is well managed and more integrated with the immediate society within which it operates. To conclusively examine this statement, this paper shall asses the reasons as to why corporate reporting on ESG data and sustainability is always incomplete and inconsistent, examine the conflict between the drive for short term profit and long term action, assess the roles the accounting profession can play in ensuring sustainable businesses and finally assess the demands that societies are laying on business in the context of social and environmental sustainability.
Inconsistency in ESG data and sustainability Reporting
Sustainability reports that include economic, social and environmental impacts of organizations due to their day to day activities have gained traction with some countries making the reports mandatory (Aggarwal, 2013). However, in most countries, these reports are voluntary as companies and organizations release the required information in time. Companies that fail to release their sustainability and corporate reports consequently suffer reductions on their market shares since more people are sensitive to the environmental and social contributions of companies. The sustainability reports have numerous benefits as they aid organizations in measuring and comprehending their economic, social, environmental and governance impacts on the immediate societies (Kotsantonis and Serafeim, 2019). These evaluations are later used by organizations in setting goals and effectively managing their operations to ensure that organizational goals are met within the set time frames.
Despite many companies adhering to sustainability reporting, there have been growing concerns on the consistency and efficiency of the sustainability reports data. Investors have lamented on the inaccuracy of the data of sustainability reports leading to poor investment decisions (Kotsantonis and Serafeim, 2019). Since companies now know the significance of the sustainability reports, some companies are submitting sustainability reports that have doctored data to ensure that their reputations are not dented. Some of the reasons for inconsistent and inaccurate data on ESG and sustainability are the absence of a standard, Measurement uncertainty, Different measures of materiality and Inconsistent reporting methods.
Absence of common standard: There is a lack of a common standardization for the sustainability reports. Although in some countries, there are government agencies that ensure that companies and organizations submit their sustainability reports, there are no single standard for measuring the various dynamics of sustainability and ESG (Siew, 2015). Just like in the energy industry, in some countries, the consumption rate of different sources of energy is measured in gigajoules and kilowatts per hours in other countries. This shows lack of standardization hence inconsistency in energy reports. A similar challenge faces the sustainability reports where some companies may use headcount and working hours to measure their social muscles while some may use factors like injury rates among the employees. Lack of standardization, therefore, makes it difficult for companies to come up with accurate and valuable information on their sustainability (Kotsantonis and Serafeim, 2019).
Uncertainty in measurements: Most information that is included in sustainability reports cannot be measured with a high degree of accuracy due to lack of appropriate measurement tools or the information being incomplete among other factors (Siew, 2015). The Global Reporting Initiative that oversees reporting on sustainability by various companies across the globe has, therefore, urged companies to describe the circumstances surrounding the accuracy of the date in their reports. Companies are this expected to include information like the process they followed to arrive at the data in their reports (Kocmanová et al., 2011). This aids the general public and investors to understand and gauge the efficiency of the sustainability reports.
Inconsistent methods of tabling reports: Currently, companies and organizations use a variety of methods to table their sustainability reports. The many methods used result into inconsistent data that is inaccurate. Some of the methods of tabling sustainability reports are stand-alone reports, shareholder resolutions and questionnaires from investors (Aggarwal, 2013). As some companies may be using questionnaires, some may adopt the use of stand-alone reports and thus grading two companies on the basis of the best sustainability practises becomes difficult. The stand-alone reports that many corporates have resorted to using have been regarded as marketing and public relations tools meant to sway the general public and build a company’s reputation rather than table real-time and accurate results on sustainability schemes (Siew, 2015).
Conflict between long-term action and the drive for short-term profit.
As the publication of ESG and sustainability reports is gaining momentum, there has been a heated conflict between long-term actions instigated by a business and the drive to secure short-term and quick profits (Fulton et al., 2012). Long-term action in this case refers to the measures that businesses put in place to ensure environmental, social and governance responsibility as per the demands of sustainability. Global, regional and national bodies keen on the sustainability actions of business have encouraged businesses to adopt new operational mechanism and look beyond the bottom line of short-term goals and quick profits that continue to pose harm to the environment (Gary, 2019). Of course, businesses that have abode by the ESG principles have been able mitigate risks that threaten their progressive growth and thus drive profitable and sustainable growth. The onus of the task lies with business leaders and the management of various corporations to come up with ways of amicably balancing their short-term goals and long-term priorities that directly contribute to the ESG principles.
The race to expedite economic growth and improve the performance of both small and large businesses has created stress on the environment leading to imbalances on the ecosystem. The survival of the planet is therefore labelled to be at stake with the detrimental effects of climate change and global warming (Hill et al., 2016). In some parts of the world, these effects are already being felt by the occupants of such regions. Global warming has already led to the penetration of ultra violet rays that cause uncurable health conditions. Global warming has further led to rising sea levels leading to the displacement of thousands of people and destruction of farming fields. More conversations on sustainability and the profitability of businesses should thus be staged to save the world from looming disaster. For the longest time in history, business leaders have always fixed their minds and put their focus on the ways of maximizing on the capital investment by shareholders with no regards for the strains they have put on the environment (Gary, 2019). To further emerge out as the perfect and excellent business leaders, they have shunned and conversations on environmental sustainability that will ultimately slash the profits of their organizations with no immediate returns. They have therefore adopted short term goals that have immediate returns to enable them stamp their authorities of power and control (Fulton et al., 2012). It is however worth noting that with the recent developments in the business world, GDP and profit turn over, are not the only metrics through which the performance of businesses is measured. Sustainability and ESG reports having gained much traction, are also used to measure the performance of businesses. This has forced businesses to divert their attention from the short-term drive for profits that is short-lived and focus and also focus on long term goals that abide by the ESG requirements (Hill et al., 2016).
Businesses and organizations are being encouraged to make investments in ESG for a better future and for long term profits (Fulton et al., 2012). There is a direct correlation between the adoption of sustainable practise and the performance of businesses. From a 2018 report on global asset survey, it was noted that more than half of those owning global assets are integrating the principles of ESG into their corporations. Most of them noted that they were doing so due to the exemplary company performance associated with adhering to the ESG requirements. Also, in the year 2018, The Bank of America in its survey noted the companies that elaborate and good ESG records had high stock turn overs for a record period of three years as compared to those companies that had shunned ESG and majored on short term profits (Gary, 2019. Further still, businesses with elaborate ESG principles tend attract the best talents drawn from different parts of the globe further leading to exemplary performance.
Role of the Accounting profession in fuelling business sustainability.
Over the last couple decades, the role of the accounting profession has been evolving to incorporate various developments on sustainability (Soh et al., 2015). As of today, the accounting profession is not only concerned with financial reporting but also reporting on the ESG strides that companies make. In the 1960s, the role of the accounting profession was purely financial while in the 1980s, accounting reporting started integrating environmental issues into its reporting. At the onset of the 21st century between 2000 and 2010, corporate social responsibility reports had found their way to the accounting profession. However, this has not been enough as recent developments have led to an integrated reporting that includes CSR reports and ESG reports.
Many professional accounting bodies and non-accounting organizations have come under one umbrella to ensure that companies improve their financial, social, environmental and governance performance and responsibilities (Soh et al., 2015). The big four global accounting firms have been approved to be members of the consortium that is deemed to revise the framework of the Global Reporting Initiative, that determines the content and quality of ESG reports across the globe. The AICPA in collaboration with the ACCA (Association of Chartered Public Accountants) and the big four accounting firms have formed a conclave through which they rally and drum support for the Accounting for Sustainability Forum (A4S).
The accounting profession has been propagating the idea of sustainable accounting through the International Federation of Accountants (IFAC). The IFAC has come up with a sustainable framework to provide guidance to professional accountants working in various companies in different sectors like the manufacturing sector, the transportation sector and the agricultural sector among others (Park and Ravenel, 2013). This framework educated professional accountants on the vital roles they ought to play as change agents. The framework urges professional accountants to influence their companies and organizations into abiding by the ESG principles and integrating all the concepts of sustainability into their operations. After the integration of the sustainable practises into their operations, it is upon the professional accountants to generate sustainability and ESG reports as per the guidelines of the Global Reporting Initiative (Bean, 2013). To succeed in being change agents of propelling sustainable organizations, IFAC advises professional accountant to work hand in hand with finance departments due to the role of finance in providing sustainability accounting (Park and Ravenel, 2013). IFAC further notes that accounting professionals have the ability of influencing the decisions of organizations in incorporating sustainable strategies and plans into their operational models.
Another emerging role of the accounting profession in driving sustainable business processes is the concept of green accounting. The term green accounting, though it appears to be similar to sustainability accounting, is a totally different concept. Green accounting aims at measuring the social and environmental expenditures of companies as well as the associated financial costs unlike sustainability accounting that just integrates financial and non-financial reporting into one comprehensive model. The non-financial reports in this case include social and environmental information. Further still, Soh et al. (2015) opines that green accounting has a raft of concepts and procedures that measure actual sustainability and consumption mechanisms. Therefore, ideal green accounting financial statements have all internal and external costs like emissions of toxic gases into the atmosphere, pollutions water and land by the company wastes and the underlying health of workers among others (Park and Ravenel, 2013). Green accounting therefore seeks to answer the question on whether companies will actually contribute to a green environment.
‘Societies’ point of view
Members of the public that form societies have continued to demand for ESG reports from companies owing to the awareness on the effects that the operations of companies are having on the immediate environment (Serafeim, 2020). Societies want businesses, companies and organizations to be liable for the strain they are causing on the environment by directly contributing to the process of securing the environment. To ensure that companies abide by the growing social, environmental and governance concerns, companies have to publish their ESG reports that are used to gauge their commitment to ensuring a healthy environment free from strain and pollution. Firms adhering to the ESG demands propelled by the public are reaping big in many dynamics. There is a direct relationship between ESG performance and the market valuation of firms. Firms that have an epic ESG performance have a high market valuation as compared to firms that have a poor ESG performance (Serafeim, 2020). It has been noted that an increase in the ESG performance of a firm may increase the market valuation of a firm aby at least two times the original valuation due to the positive sentiments from the public. On the other hand, a decrease in an organization’s ESG performance leads to a decrease in its market valuation due to negative and dented reputation.
The rising prices of corporate sustainability and implementing various schemes of ESG has proved to be very expensive thus threatening the performance of various firms. Firms have been forced to ignore public decry on their ESG performance and go back to the drawing board to determine if the ESG investments they have been making are really worth the price (Czerwińska and Kaźmierkiewicz, 2015). Most of the corporate sustainability schemes cost organizations large chunks of money that fail to elicit returns in some cases. Competition among corporates to get endorsement from the public as having the best ESG schemes has also contributed to the high costs of the sustainability schemes. Although sustainability schemes have a raft of benefits to organizations, the management of organizations must ensure that these schemes do not deprive them of their hard-earned profits but rather play a role in the progressive development of companies.
Conclusion
The roles of the Accounting profession in the contemporary world have diversified into reporting on the social and environmental responsibilities of companies. Accounting is no longer just reporting on the financial dynamics of companies but also contributing directly to sustainability in a scheme dubbed sustainable and green accounting. The change of roles of accounting can be traced back to the 1980s when the accounting profession started integrating CSR reporting into financial turn over reports. ESG reporting by companies is critical in mitigating the risks associated with the strain associated that companies and organizations have put on the ecosystem in attempt to achieve a better economy. This paper has established that better social and environmental performance leads to better corporate performance.
References
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