Discuss about the Accounting for Sustainability Reporting.
Creation of value is very significant for companies that can assist in maintaining effective stakeholder relationships. In order to obtain such objective, proper systems like Corporate Sustainability Reporting is required so that companies can measure or control their own activities to evaluate whether the requirements of stakeholders are adequately addressed. (Cairns, 2000) Besides, use of traditional corporate reporting is mainly described as public relations products instead of an effective measure to manage and control the performance of corporates. Therefore, sustainability reporting is not only an enhanced methodology than traditional corporate reporting but also a cost effective and beneficial approach that can measure environmental management of various processes (Perrini & Tencati, 2006). It assumes a place of vital importance as it reflects the ability of the company in supporting the environment. Nevertheless, provision of more than financial information is very crucial to achieve enhanced corporate performance.
Due to various criticisms, traditional corporate reporting has now been disregarded by most of the companies. This is because such approach cannot supply material information that is both qualitative as well as quantitative in nature. Besides, these indicators can assist in establishing a kind of sustainability dashboard that surpasses the traditional financial information. As per Perrini & Tencati (2006) traditional corporate reporting does not accommodate material information that can assist the stakeholders in their decision-making process. Besides, since corporate sustainability reporting takes into account both financial and non-financial information in lieu of the needs or requirements of stakeholders, it is a more enhanced methodology to manage and control the performance of corporates. Moreover, traditional corporate reporting is not capable of tracking and monitoring the overall performance of companies, as it cannot go beyond past-oriented financial data (Kalpan & Norton, 2004). On a whole, traditional corporate reporting cannot aggregate different management approaches like environmental reporting, social reporting, etc, into one comprehensive methodology. This is the key reason why there is an urgent requirement for a new system of measuring outcomes of companies based on the framework of stakeholders. Stakeholders are concerned for information from all around and hence, a new system will provide a better exposure (Cairns, 2000).
Since sustainability reporting can surpass traditional reporting in measuring corporate performance; it is more suitable for companies and stakeholders as a whole. However, it is not sufficient for corporates to get involved in CSR activities, but it is also relevant to make information about such activities available to stakeholders. The information about the activities needs to be reflected as it projects the duty of the company towards the environment and the role it played in the context of creating wealth (Perrini & Tencati, 2006). This is the reason why the need for disclosure of non-financial information has significantly enhanced over the years, as it is viewed as an attempt to enhance transparency in relation to corporate affairs regarding environmental and social issues. The theories that are used to describe such CSR disclosure practices include stakeholder theory, legitimacy theory, etc. According to the stakeholder theory, the success of corporates is effectively influenced by the relationship of firms with their stakeholders. The stakeholders are the parties who are related and if they are not satisfied it will ultimately lead to a decline in the goodwill of the company (Albuquerque et. al, 2013). In addition, the capacity of a firm to create sustainable wealth can be determined by its relationships with the stakeholders. This theory is utilized to evaluate those groups to whom a firm must be liable. Such theory is a significant aspect of CSR wherein companies interact with the society with their own particular sets of requirements, anticipations, and demands (Kruger, 2015). This is the reason why a sustainability-oriented company is completely aware of its duties towards its several stakeholders and adopts approaches and measures to enhance its ecological and social performance.
On the other hand, legitimacy theory provides that companies make ways to ensure they function within the prescribed norms and rules of their respective communities. This is the reason why competitive and financial success, effective utilization of natural resources and social legitimacy are intertwisted based on the objectives of the company. Moreover, this is also the reason why companies try to legitimize their affairs by getting involved in CSR activities in order to obtain societies’ approval (Kruger, 2015). Besides, such theory is directly associated with the stakeholder theory because the legitimacy of a firm relies on the maintenance of effective relationships with the stakeholders. In this way, the SERS (Sustainable Evaluation and Reporting System) assist an organization and its management to sustain relationships with the stakeholders, and cater to their information requirements, together with their issues regarding environmental and social matters (Perrini & Tencati, 2006).
According to studies, corporate sustainability can assist in opening the door to new and less costly sources of finance. In other words, sustainability efforts can signal general quality of firms and assist in minimizing its cost of equity. Therefore, leading to a variety of opportunities for the company. In addition, collecting information and framing a sustainability report can assist in developing new means of collection of data, and offers innovative ways for long-term development. It helps in tracking the progress of the company and ensures a better stakeholder relationship (Burritt et. al, 2002). Moreover, firms that produce sustainability reports have been witnessed to be performing well by releasing their reports, as it assist them in engaging with the stakeholders, international and local communities, and indulge in inclusive discourse that can result in benefitting the firms and its environment as a whole (Ballot et. al, 2006). Nevertheless, corporate sustainability reporting can not only assist in minimizing the firm’s cost, but also can also result in its positive differentiation, thereby resulting in an enhanced performance, competitive leverage, and enhanced trust and goodwill. Overall, the concept of sustainability is linked to performance, goodwill, and opportunities. If the practices of the company are strong it will lead to a better relationship and will cater to its goal.
All such mentioned benefits can be attained only when companies provide more than financial information in their annual reports. This is because financial information can assist in strengthening the norms regarding financial accounting to ensure enhanced transparency levels and fairness in reporting activities, but in lieu of stakeholder’s viewpoint, such information is insufficient to cover every perspective of corporate performance. Financial information is surely relevant for accountants and other users, but qualitative information regarding the company’s activities can result in an enhanced company performance. Even given the role of financial information, it is notable that in reality, such information relates to the past that assists in making decisions regarding the future (Sustainability reporting, 2012). Therefore, unless such past information is an appropriate predictor of future, the information can have limited value. Moreover, in the current scenario, due to impacts of things like innovations, changes in technology, changing inflation and tastes, etc, the past is more likely to be an unwanted predictor for the future. Thus, provision of more than financial information comes into context so that users can obtain every relevant detail regarding the company’s activities, thereby attaining a chance of effective decision-making.
Conclusion
On a whole, sustainability reporting can assist in establishing trust and resilience by catering to the requirements of stakeholders. Moreover, the influence of stakeholders on the creation of business value and viability cannot be disregarded in the current scenario. Corporate sustainability reporting can not only endow infinite benefits to a company but also has an advantage over traditional corporate reporting that has become complicated with the increasing complexities in the current scenario (Investor & sustainability, 2014). Besides, provision of more than financial information in the annual reports can play a key role in enhancing the corporate image and performance.
References
Albuquerque, R., Durnev, A & Koskinen, Y 2013, Corporate social responsibility and firm risk: theory and empirical evidence, Boston University.
Ballot, B., Heitger, D. L. & Landes, C. E. 2006, ‘The future of corporate sustainability reporting: A rapidly growing assurance opportunity’, Journal of Accountancy, vol. 20, pp. 65-74
Burritt, RL, Hahn T, Schaltegger S 2002, ‘Towards a comprehensive framework for environmental management accounting – links between business actors and environmental management accounting tools’, Australian Accounting Review vol. 12, no. 2, pp. 39–50.
Cairns, R. D. 2000, ‘Sustainability accounting and green accounting’, Environment and Development Economics, vol. 5, no. 1, pp. 49-54.
Investor & sustainability 2014, Do investors care about sustainability? Seven trends provide clues, viewed 25 April 2017 https://www.pwc.com./gx/en/issues/sustainability.jhtml.
Kaplan RS, Norton DP. 2004. Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Harvard Business School Press: Boston, MA.
Kruger, P 2015, ‘Corporate goodness and shareholder wealth’, Journal of Financial economics, pp. 304-329
Perrini, F & Tencati, A 2006, ‘Sustainability and Stakeholder Management: the Need for New Corporate Performance Evaluation and Reporting Systems’, Business Strategy and the Environment, vol. 15, pp. 296-308
Sustainability reporting 2012, Using sustainability to drive business innovation and growth 2012, viewed 25 April 2017 https://www.deloitte.com/view/en_IN/in/index.htm
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