Issues in enviromental reporting and current developments.

University Degree Business and Administrative studies

CORPORATE REPORTING ISSUE

Triple Bottom Line Reporting

Executive Summary 1

Introduction 2

Background 3

I. ISSUES IN ENVIRONMENTAL REPORTING AND CURRENT DEVELOPMENTS 4

The Issues 4
Underlined Limitations 4
The current development 5

II. IMPLICATIONS FOR FUTURE ACCOUNTANTS 6

The case of Fiji Sugar Corporation (FSC) 6
Implications for Accountants 7

References 8

Executive summary

To achieve sustainable development, there is an increasing pressure from a wide range group of stakeholders including government regulators, media, consumers, investors, employees, competitors and local communities to require the organizations to disclose their performance against environment, society and economy. To meet the need of the stakeholders, triple bottom line reporting, a new approach to corporate reporting, has been emerged. However, there is a great challenge for organizations to use it in a regulated and standardized way due to a lot of practical issues. This report written mainly focuses on the mostly challenged one—measurement issue in TBL reporting. This has been carried out through five part of process: background introduction, issue and current development, analysis of the issue, illustration on Shell 2002 TBL report and implications for accountants.

During the process, the issue has been fully described and its development both in Australia and international has been covered. Although key performance indicators haven been introduced for measuring organizations’ performance, there are still a lot of practical problems to standardize it due to a broad impact of factors such as stakeholders, culture difference and geographic region difference etc. This problems haven been further illustrated through an example from Shell 2002 TBL report. Finally, certain suggestions have been provided for current accountants to reach the goal and also the prospects for the future.

1. Introduction

In the old economic model, the organisations are mainly responsible for their shareholders and try to gain maximum economic benefits to reach their short-term goals. The other stakeholders’ interest has been ignored. However, with the development of global economy, organisations are having more and more increased impact on environment, society and economy. They have to be responsible for not only shareholders, but also other stakeholders. As a result, there are an increasing pressure from a broad group of stakeholders such as government, media, consumers, investors and other organizations to require the organisations to disclose their information regarding environmental, social and economic performance to achieve the sustainable development. However, the old business communication tool, financial reporting system, couldn’t meet the requirement due to its limitations. In this special circumstance, triple bottom line reporting, a new approach to corporate reporting ,has been emerged. It is strongly founded on the basis of sustainable development. Under this new reporting approach, all the company’s stakeholders could obtain a broader perspective on the overall economic impact of the activities of companies against environment, society and economy.

2. ISSUE AND CURRENT DEVELOPMENT

This is a preview of the whole essay

2. ISSUE AND CURRENT DEVELOPMENT

In the triple bottom line reporting system, corporations will have to accept their new role in society as value generators for all stakeholders and a much greater degree in corporate transparency( ). However, it is not enough for corporations to behave responsible. They must be seen and believed to be doing so. Therefore, as required by TBL reporting, all the relevant information in respect to each component of company’s economic, social and environmental performance has to be identified, assessed and reported, and finally an integrated set of accountants incorporating all the components will be disclosed as well( ). Conceptually triple bottom line reporting is extremely appealing. However, in reality, how the information can be built into communications with all the stakeholders such as customers, consumers and investors under this new reporting approach? In other words, how could the company’s performance against economic, social and environmental activities be measured, then, reported? Since some of organizations’ impacts such as social safety and human rights are intangible and non-financial, how should we measure them? Fortunately, the issues have been considered and some progress has been made both in Australia and international.

In international, under the drive of United Nations, Guideline, framework and toolkit have be developed with the purpose to achieving standardisation and consistency in triple bottom line reporting. GRI (Global Reporting Initiative ) issued his Sustainability Reporting Guidelines on Economic, Environmental and Social Performance and developed Key performance indicators(KPIs) to meet the need of measurement through a process of ongoing consultation and stakeholder engagement, which were launched at the world summit on sustainable development in Johannesburg in 2002 ( ). Built on the basis of GRI and SA 8000, AA1000 Assurance Standard focuses explicitly on determining what constitute best practice with respect to accountability, performance measurement, and revaluation().

For Australia to be globally competitive and to meet environmental and social performance standards that are sustainable, there is an increasing expectation from the community and investors that organisations are taking into account sustainability when making their business decisions (). Under the compel of federal government, the issues of triple bottom line reporting are clear on the agenda. A numerous public interest group are working to develop standards for triple bottom line reporting. As a result, The Group of 100, the organisation representing the CFOs of Australia's leading enterprises, has released a guide which addresses many of the questions including measurement issues in triple bottom line (TBL) reporting ( ). In the guideline, the key performance indicators have been introduced for organizations to measure their performance. It suggests its members to keep followed with international guidelines such as GRI and AA1000 etc.

However, there is a general absence of regulation and standardized format both in Australia and internationally requiring organizations to publicly disclose information about their performance in relation to sustainable development issues. As a result, Triple bottom line reporting is still voluntary and many of the current reporting metrics, known as indicators are fragmentary (). No standardized metrics exist for measuring an organization’s environmental and social performance. This is probably due to the lack of agreement about the metrics (and therefore the key performance indicators) and the complexity of impacts of organizations’ performance against environment, society.

3. Analysis of Measurement Issue in TBL Reporting

According to John Elkington( ), triple bottom line reporting has been defined as follows:

At its narrowest, the term triple bottom line is used as a framework for measuring and reporting corporate performance against economic, social and environmental parameters.
At its broadest, the term is used to capture the whole set of values, issues and processes that companies must address in order to create economic, social and environmental value. This involves being clear about the company’s purpose and taking into consideration the needs of all the company’s stakeholders.

From the above, the measurements of performance have to consider the needs of all the company’s stakeholders and company’s own purpose as well. According to(world business council ) , stakeholders encompass all individuals and bodies who have an interest in or are affected by (or potentially affected by) an activity. On the other hand, based on the extended generally accepted accounting principles (GAAPs), the measurements should also have the following characteristics: relevance, reliability, comparability and materiality(). Therefore, to measure the company’s impact on economic, social and environmental parameters, all the above mentioned have to be followed. However, in reality, there have a lot of practical problems to measure the company’s performance comparably, reliably and relevantly due to the impact of a series of factors.

A. Environmental Performance Measurements.

Environmental performance normally includes impacts through processes, products, or services. These may include air, water, land, natural resources, and human health. However, in practice, accountants always face the problems of cost allocation. According to Steven Schilizzi(2002),this is because it is often difficult to decide how much of an investment is “environmentally” related. On the other hand, in determining the indicators such as air quality for organization to measure its impact on external environment, as Steven Schilizzi(2002) mentioned, it is not easy to add up different physical quantities. Furthermore, every industry has their specific environmental performance, so there is variability of environmental reporting indicators across industries and geographic region due to the natural difference. (Anne Papmehl, 2002) Therefore, it is difficult to standardize and measure them consistently and relevantly according to the GAAPs.

B. Social Performance Measurements

Social performance includes treatment of minorities, equality, involvement in shaping local, national and international public policy, employee issues and community concerns. To measure the organizations’ social performance relevantly and reliably, conceptually all the stakeholders’ interests have to be considered. However, in reality, it is impossible. According to (greenwash), quantifying issues or impacts on a scale that would satisfy all stakeholders is probably impossible given the likely divergence of their perceptions and needs. Therefore, it is important for organizations to identify the key stakeholders’ response and perception about their performance. In determining the key stakeholders by organizations, it is often underpinned by corporate values and ethical conduct ().Furthermore, failure to consider the wider collection of stakeholders can result in extraordinary risks being ignored (Derek H.T.Walker,2000). At the meantime, the broad range of key stakeholders will have varied and sometimes conflicting interests and demand. Thus, as Steven (2002) stated, all the above factors could lead to a contingent liabilities with respect to organisations’ social impacts, and it is very difficult to measure and quantify a contingent liabilities. There is always a subjective element in measuring the performance. In the case for organizations to keep up with global trends in measuring the performance, it will be more complicated and different culture background between countries have to be considered as well(). Therefore, it is very difficult to measure the organizations’ performance against social activities due to the great uncertainty.

C. Economic Performance Measurements

Economic performance includes financial performance, activities related to shaping demand for products and services, employee compensation, community contributions, and local procurement policies etc. Economic performance is probably one of the most commonly used business performance measures such as Return on Average Capital (ROACE). However, in measuring the social and natural capital, it is also a great challenge due to their intangibility.

From the above analysis, due to the impacts of stakeholders, culture, geographic region and specific industry, it is not easy to measure the performance with respect to environment, society and economy. Furthermore, it will be more complicated in measuring the combined impact of the social, environmental and economic performance. There is still a long way to go.

4. Illustration---Shell TBL Reporting in 2002

In Shell’s 2002 triple bottom line reporting, GRI’s guideline has been generally followed. However, in its principle and policy statement, it is also clearly stated that successful guideline should be specific for each industry sector and meaningful measuring and reporting should combine quantitative measures with more in –depth reporting on key issues or locations. So, the framework of triple bottom line reporting is mainly built on Shell’s values and principles and brings the necessary structure and consistency to the companies’ efforts to balance economic, environmental, social and other stakeholder expectations.

In Shell’s TBL reporting, key performance indicators (KPIs) have been used to measure company’s performance attached with the in-depth case study for highlight. These key performance indicators that are developed with a broad range of stakeholders include customer satisfaction, acceptability of environmental performance and human rights etc. Six of them are global environmental and safety parameters that reflect shell’s principle worldwide impacts. Five of them are new key performance indicators that are based on people’s views of Shell’s own performance.

Compared with last year’s report, the accountability of its measurement has been improved. However, the measurement in using key performance indicators are really concerned with their own businesses and their stakeholders. To monitor and measure in the context of sustainable development, Shell has to develop metrics for performance across the triple bottom line.

5. Implications for Accountants.

From the above discussion, it is clear that certain progress has been made in triple bottom line reporting, however, there is still a lot of challenge and ongoing problems for accountants to reach the final goal. It is not just enough to solve the problems of measurement. It is important for accountants to establish a whole set of new accounting theory to meet the new requirement under triple bottom line reporting. Currently there is an increasing trend for organisations to attempt to incorporate sustainable development concepts into their reporting and decision-making processes, Hence it is necessarily and urgent for accountants to establish appropriate legislation and accounting standards as a regulatory framework for triple bottom line reporting. However, according to( ), there is a lack of enough knowledge for current accountants specially in environmental and social areas to prepare triple bottom line reporting. Therefore, the adequate academic training is required for accountants to improve company’s accountability to the society with the necessary skills in preparing triple bottom line reporting (Lodhia, 1998, p. 22). At the same time accountants may corporate with other experts in environmental and social fields to take the challenge in triple bottom line accounting.

The work of Cooper (2002, p. 1) demonstrates that the environmental and sustainability issue is one of the drivers of change that will impact on the role of accountants in the future. Therefore, accountants will have to transform from the traditional role to the new role. Accountants in the new economic model will be included in identifying, measuring, allocating of costs, and integrating of these into business decision making and communicating of the information to stakeholders of an organization” (Corrigan, J. 2001). At the same time the accountants will also face the competition in the provision for services with others specialist such as tax agents, business advisers, unqualified accountants, financial planners, engineers and various consultant. However, accountants will play an essential role in triple bottom reporting application within an organization because they can provide accountability of an organization to the public in the regards of its environmental, social and economic performance. Particularly, management accountants that have expertise in analyzing, measuring and reporting information will be in a spotlight to help assess the financial costs and risks associated with different environmental, social and economic options and train the staff in understanding sustainable development reports and concepts.

References

Corrigan, J., ‘Assessing Costs and Benefits – What role to play?’. Australian CPA, May 1998,

Cooper, B. (2002). ‘The future Accountant’. The Hindu Business Line, July 2002, [online

accessed 26/02/2003] at

Craig R. et al, Environmental Management Accounting: Introduction and Case Studies for Australia, Institute of Chartered Accountants in Australia, Feb 2003.

Lodhia, S.,‘ Environmental Accounting in Fiji- An extended case study of the Fiji Sugar Corporation’, 1998, [online accessed 2/03/03] at