Wk 3: Ch17 Sustainability and management accounting

• Sustainable development: ‘Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.’ (UN, 1987)
• Sustainable development focuses on achieving three interrelated outcomes- a sustainable economy, a sustainable environment and a sustainable society
• Recognises eco-justice in the use and distribution of the planet resources:
• –Intergenerational equity (future generations)
• –Intragenerational equity (within generation/current time) (developed vs poor nations

• Sustainability: an approach that requires organisations to consider the interrelated impacts of their activities on the economy, the environment and society.
• Core elements of sustainability:
• 1. Concerned with the future and with the ability to maintain certain values, assets or capabilities over the long term.
• 2. Involves decisions that address the interaction between environmental, social and economic domains.
• 3. Requires choices that take account equity within society and across generations.

• Corporate social responsibility (CSR) involves organisations taking into account the social and environmental impact of corporate activity when making decisions
• Awareness and reporting of sustainability is growing
• –By 2013, 83% of top Australian companies (N100) produced stand-alone sustainability reports, up from 57% in 2011 and 23% in 2005

• Stakeholders: Individuals or groups who can influence the business or be influenced by it
• Identifying relevant stakeholders and assessing their influence on the broader business environment is an important part of risk management.

• Why do businesses worry about sustainability now? Changing demands of organisations' stakeholders. Because of the pressure from stakeholders in different capacities. 
• Law and regulatory requirements
• A desire to enhance their brand
• Managing the risks associated with sustainability issues
• The search for cost reductions

Traditionally, businesses focused primarily on the needs of shareholders. More recently, increasing both shareholder and customer value has been the focus. This is based on the rationale that satisfied customers drive sales revenue, which drives profitability and therefore increases shareholder value.

• Customers: an increasing number of customers are seeking 'green' products
• Shareholders: some shareholders value sustainability
• Employees: some employees want to work for organisations that care for the environment and the community
• Investors: some investors prefer socially responsible investments (SRIs)
• Banks: some of the world's major banks have signed the equator Principles (EPs), which ensure that projects that are funded by banks are socially responsible and reflect sound environmental management practices.
• Suppliers: anywhere in the supply chain, a supplier's demands for sustainable practices can pressure all preceding suppliers in the chain to adopt their own sustainable practices. In some cases 'preferred supplier' status may be conferred on those who can demonstrate environmental and social performance.
• Community groups: community groups can influence businesses to meet local needs, such as the creation of local jobs or restoration of the local environment.
• NGOs: NGOs often play the role of the protector of the environment and communities
• The media: the media can act in its own right or become the voice of other stakeholders. The growth of the internet has greatly increased this form of influence.
• Governments and regulators: some countries have legislation and regulations that monitor environmental and/or social outcomes, require mandatory reporting of impacts and levy sanctions for violations.

• Sustainability reports: reports that measure and communicate the economic, environmental and social impacts of an organisation's activities.
• Sustainability strategy: select performance measures, set performance targets and design systems to monitor and improve their sustainability performance.
• Sustainability performance can be reported in the annual report or as stand-alone sustainability reports.
• Voluntary in Australia however has been steadily increasing

• Global Reporting Initiative (GRI) framework: a reporting system that provides performance measures and methods for measuring and reporting sustainability-related impacts and performance, to enable greater organisational transparency and accountability.
• Most widely recognised and regarded as the global standard.
• Using the same framework leads to a consistent approach to reporting and quality across reports.
• Many companies also seek external assurance for their sustainability disclosures, in order to increase the credibility of their reporting and stakeholder confidence. 
• Much more than a reporting framework; it also encourages organisations to monitor and improve their economic, environmental and social performance and impacts.

• Presentation of a report under G4 (4th gen GRI) requires each organisation to:
• 1. Define material aspects- issues that are significant to the organisation's economic, environmental and social impacts that may substantially influence the assessment and decisions of its stakeholders- and explain why these aspects are material.
• 2. Assess the boundary for each aspect- that is, whether the impact of each aspect lies inside or outside the organisation.
• 3. Describe how the organisation is managing each material aspect
• 4. Report performance indicators that explain how each material aspect is being assessed.
• Thus, GRI reporting goes beyond data gathering and reporting by encouraging organisations to set goals, measure their performance against those goals and implement and manage change.

GRI Sustainability Reporting Standards are required for all reports published after 1 July 2018

GRI Sustainability Reporting:

• Universal standards (applies to all types of companies)
• –Foundation (ten reporting principles eg. materiality)
• –General disclosures (Contextual information of the business. Eg size of company, impact on community)
• –Management approach (how you will manage the different effects. How they will mitigate risks)

• Topic-specific standards
• –Social (if it affects community, eg. community health)
• –Environmental (eg. management of soil/water environment)
• –Economic

a= aspect   b=performance indicator

• Environmental
• a) materials b) % of materials used that are recycled input materials
• a) products and services b) initiatives ti mitigate environmental impacts of products and services, and extent of impact mitigation

• Integrated report: a concise communication about how an organisation's strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.
• Broader focus than sustainability reports but not intended to replace them
• Primary purpose is to explain how an organisation creates value over time
• Value creation or diminution is defined in terms of six kinds of capital-
• 1. Financial: the funds available to produce goods or services, obtained through financing or generated through operations or investments.
• 2. Manufacturing: physical objects available for use in the production of goods and services, such as buildings and equipment.
• 3. Intellectual: includes intellectual property, such as patents and licenses, and organisational capital, such as knowledge, systems and procedures.
• 4. Human: employees' competences and experiences
• 5. Social and Relationship: the institutions and the relationships within and between communities, groups of stakeholders and other networks, and the ability to share info and enhance individual and collective well-being.
• 6. Natural: all renewable and non-renewable environmental resources processes that provide goods or services that support the past, current or future prosperity of an organisation.

• Organisations depend on the various types of capital for their success. Organisations need to consider trade-offs they need to make between these types of capital.
• Not all types will be equally relevant or applicable to an organisation.

Current reporting cycles are short term, back-looking, complex doesn't show holistic image, excessive focus on financial information

1. Identify environmental and social changes that impact on the organisation and its stakeholders (opportunity to find out opportunities and challenges)

2. Develop a strategy to manage risk and opportunities

3.Create innovative new products and services (involves a lot of background research about how the market is moving, consumer preferences, you become agile and can take advantage of the market, consumer preferences)

4.Engage in actions to grow their market share (by moving in the direction the market/stakeholders want)

• Vehicle for ‘green wash’ (exaggerating their performance and adoption of sustainability principles in sustainability reporting)
• However, with large number of companies adopting GRI guidelines for their reporting and inc numbers obtaining external assurance, it is becoming more difficult to deceive stakeholders.

The adoption of sustainability reporting may drive the implementation of sustainability practices in organisations to enable them to meet their sustainability goals.

From a management accounting perspective, the greater focus on sustainability requires defining, tracking and recording new types of costs, defining and measuring environmental and social performance measures, and incorporating these costs and performance measures into a range of decision contexts, including those concerned with supply chain management and capital investment.

• Applying sustainability principle to reporting and management decision making requires the identification and management of environmental, social and economic performance.
• Environmental performance: the impact of an organisation's activities on the environment including natural systems such as land, air and water, as well as on people and living organisms.
• Social performance: the impact of an organisation's activities on society, including the broader community, employees, customers and suppliers.
• Economic performance: include financial measures such as profit-based measures and cost performance, but can also include broader measures of economic impacts, such as the organisation's impact on the organisation's infrastructure and the organisation's financial relationship with the government.

• 1. future ecological and social issues are not always known
• It is not clear which aspects of the environment and society will be valued by future generations. Possible that today's work practices and operations will have future impacts that we are not currently able to assess. eg. GMOs
• 2. many costs and benefits are external to the organisation (externalities)
• Limiting the assessment of eco, enviro and social effects to within the organisation may cause us to overlook many long-term sustainability issues that an organisation may create.
• 3. many costs and benefits are difficult to measure in financial terms.

• Externality: the ‘… failure of the material decision-making process to consider all the cost of producing and distributing the product.’
• Externalities are difficult to identify and measure.
• They exist if:
• –negative or positive impacts are generated by an economic activity and imposed on others
• –The impact is not priced in the market place

• Internalised costs: cost of coal/fuel, capital costs, labour costs
• Externalised costs: community health (respiratory illness via particular matter, sulfur dioxide, nitrous oxide), ecosystem health (acid deposition), infrastructure degradation (eg. roads), global warming (greenhouse gas emissions), acid rain (sulfur dioxide), smog (sulfur dioxide, nitrous oxide transformations)

• If there are externalities, the ‘invisible hand’ of the market will not arrive to an optimal outcome for society
• Invisible hand: Through individual self-interest and freedom of production as well as consumption, the best interest of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade. the approach holds that the market will find its equilibrium without government or other interventions forcing it into unnatural patterns.
• What does not have a price (i.e. it is free) is over consumed
• Externalities will be minimised if internalised into an organisation’s cost structure. How?
• –Emission Trading Scheme (ETS)
• Australia used to have one but no more!

Consists of management accounting systems and practices that provide information about the environmental impact of an organisation’s activities 

• EMA Includes
• −life cycle costing systems
• - environmental cost accounting
• −Assessment of environmental benefits
• −Environmental performance measurement systems
• - Strategic planning for environmental management (including CAPEX decisions)

EMA will encompass financial information on environmental costs and savings as well as physical information about the use, flows and outcomes of energy, water and materials, including waste.

• EMA: costing systems what’s the purpose?
• EMA costing systems contribute to the effort to make environmental costs of organisations visible to decision makers.

• Environmental costs can influence estimates of product and process costs which can inform managers' short-term (tactical) and long-term (investment appraisal) decisions.
• Environmental costs: the costs that an organisation incurs to prevent, monitor and report environmental impacts, and the cost of failing to comply with environmental regulations.

• The US Environment Protection Authority (US EPA) has defined five tiers of environmental costs, from Tier 1 to Tier 5.
• Tier 1 Conventional costs: can be found in the accounting systems of most organisations. These include the costs of purchasing equipment and plant that will prevent environmental impacts. Direct costs
• Tier 2 Hidden costs: hidden regulatory costs of monitoring and reporting activities to comply with regulations. These costs can also be found in the accounting system but are often hidden in the various overheard accounts and in the cost of wages and salaries.
• Tier 3 Contingent costs: include costs that may be incurred in the future, depending on future events. Reported in internal or external report if there is a high probability that an organisation will be obliged to pay the costs in the future and if they are material. Often limited to costs that may arise from existing legal actions. Eg. liabilities arising from failure to clean up contaminated sites
• Tier 4 Relationship and image costs: less tangible costs and benefits that relate to consumer perceptions, and employee and community relations. Rarely measured in standard information systems and are difficult to measure objectively.
• Tier 5 Societal costs: costs that organisations impose on others (the environment and society) for which they may not be held legally responsible and which cannot be compensated for in the legal system. Difficult to recognise and measure because of the cost of estimating impacts and the specialised environmental knowledge that might be needed to do so.

• Life Cycle Costing (LCC)
• Life cycle analysis can include the costs of suppliers, customers and the environmental and social impacts associated with a product

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• Whether our footprint has positive environmental impact or not

• Organisations may work with suppliers and customers to reduce the adverse environmental and social impact of products
• –e.g., Emissions, waste disposal, packaging, fuel used

• Organisations can initiate formal supplier evaluation program
• Sometimes customers may be willing to pay more for a more environmentally friendly product- opportunity for strategic positioning!

• EMA and activity based costing (ABC)
• –Brief article on EMA, environmental ABC

Environmental cost accounting/ full cost accounting

• Cost items in all of the above systems can be categorised as per the US EPA as follows:
• Tier 1: Conventional costs- direct costs
• Tier 2: Hidden costs- hidden regulatory costs such as monitoring and reporting of environmental activities
• Tier 3: Contingent cots- liabilities arising from failure to clean up contaminated sites
• Tier 4: Relationship and image costs- less tangible costs and benefits that relate to consumer perceptions, and employee and community relations
• Tier 5: Societal costs- costs that organisations impose on others (the environment and society) for which they may not be held legally responsible and which cannot be compensated for in the legal system.

• Within EMA, performance measurement systems can be influenced/guided by external reporting framework, ISO and internal performance measurement systems:
• –Global Reporting Initiative (GRI): The standard GRI framework enables organisations to benchmark their sustainability performance globally, particularly within industry sectors.
• –Dow Jones Sustainability Index (DJSI): a tool for evaluating the sustainability performance of the world's largest companies
• –Various ISO series: 140XX an international standard that gives organisations advice and guidance on how to identify environmental performance measures.
• –Sustainability Balanced Scorecard (BSC)

• Sustainability balanced scorecard can
• –Integrate sustainability measures within the four BSC perspectives; or
• –Add sustainability as a fifth perspective; or
• –Include only sustainability measures

• Adding a sustainability perspective may be appropriate where:
• Sustainability is considered part of the business' core strategy and important to creating competitive advantage
• This additional perspective is needed to focus managers' attention on sustainability as a core corporate value.
• A business has important sustainability issues, from the point of view of reputation or impact
• Resources allocated to sustainability are large

• Strategy maps may be developed to
• –Identify cause and effect relationships between objectives, strategies and to guide the selection of performance measures

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• As with any other investment evaluation, the focus is on identifying the relevant costs and benefits over the project life (or the product's life cycle).
• Inclusion of environmental costs and benefits may affect the attractiveness of a project
• Weighting given to environmental factors depends on the organisation’s values and preferences
• Some capital expenditures are driven by the need or want to be environmentally and socially responsible- hurdle rate may not be strictly applied

• Both quantitative and qualitative data are typically included in capital expenditure analyses, as some relevant costs cannot be easily expressed in financial terms.
• Key sustainability data in capital investment proposals included occupational health, safety and environment (OHS&E) compliance, employee health and wellbeing effects, the impact on brand and reputation, energy and water consumption, environmental fines and penalties, clean-up and remediation costs, and supply chain
• impacts.
• A reason for not including sustainability costs in analyses was a belief that sustainability was a corporate-wide issue, rather than one relating to individual projects. Some companies believe that projects that generated financial returns below
• financial hurdle rates could still be acceptable for investment when sustainability benefits are significant.

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• Productivity: product quality, production throughput, production flexibility, production reliability, worker absenteeism, worker morale
• Potential liability: business shutdown costs, non-compliance fines, site clean-up costs, legal costs
• Future regulation: stricter enforcement of current regulations, modification of current regulations, new regulations
• Insurance: worker's health insurance, worker's compensation, general property fire insurance, general liability/hazard, environmental liability, unemployment
• Company image: access to customers and markets, access to financing, public relations.

• First step in the analysis is to estimate the financial costs and benefits of the purchase. 
• There may be other costs savings that can be identified but may be difficult to quantify such as:
• Material-handling costs: the reduction in the use of paint and solvents results in a substantial reduction in the costs of handling and storing the materials.
• Waste handling and storage: less waste means fewer costs in handling toxic waste products
• A full cash flow analysis can then be prepared for the life of the asset, using evaluation tools such as net present value, internal rate of return or the payback period. This analysis would take into account the initial cost of the mixer, as well as the annual cost savings.
• In addition, there are other intangible factors that need to be considered in this decision, which cannot enter into the formal financial analysis: Benefits to the environment: The reduction in toxic emissions and the dumping of waste paint may result in significant benefits to the environment. It may also lead to local residents developing a more positive attitude towards the plant.
• Improved labour attitudes: The elimination of the dangerous job of cleaning up toxic waste not only reduces workers’ compensation insurance premiums, but may result in a positive impact for employees who no longer engage in risky and unpleasant tasks.

The final decision will involve considering these additional intangible factors alongside the results of the financial analysis. The final outcome may well rest on how much management values the benefits to the environment and to the community.

• The systems that organisation's put in place to manage their environmental performance. It is the organisation’s physical, formal and systematic process for guiding, measuring and benchmarking their environmental impact
• −May include recycling systems, systems to monitor and control levels of liquids, material and atmospheric discharge and waste

• ISO 14001: an international standard for environmental management systems and their audit
• The growth of EMSs and the adoption of ISO14001 require environmental  performance be measured against policies, objectives and targets
• By incorporating internationally recognised standards, an organisation can receive certification for its environmental performance (e.g., ISO certifications).

• EMA works in partnership with an organisation’s physical EMS.
• EMA provides financial and non-financial measures of environment related performance monitored by EMS and beyond
• –Physical measures (for example, kilograms of noxious waste emissions, kilowatt hours of electricity used, decibels of noise) and monetary measures (e.g., environmental costs, revenues, CAPEX; environmental product costing)

• Corporate sustainability involves considering the economic, environmental and social impacts of an organisation’s activities
• The major framework that guides sustainability is the Global Reporting Initiative (GRI) framework
• Changing stakeholder demands is causing increasing adoption of sustainability practices and reporting though costs and benefits are difficult to measure in financial terms
• Environmental management accounting (EMA) provide information about environmental impacts
• Environmental and social costs can be integrated into cost analysis to improve management decision making, including capital expenditure analysis
• Performance measurement systems, including SPMS (e.g., BSC) can be adapted to include environmental and social measures