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The emerging area of sustainability reporting Associate Professor Hadrian G. Djajadikerta Program Director, School of Business Associate Director, Centre.

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Presentation on theme: "The emerging area of sustainability reporting Associate Professor Hadrian G. Djajadikerta Program Director, School of Business Associate Director, Centre."— Presentation transcript:

1 The emerging area of sustainability reporting Associate Professor Hadrian G. Djajadikerta Program Director, School of Business Associate Director, Centre for Innovative Practice Edith Cowan University

2 Main topics Sustainability Sustainable Development Corporate Social Responsibility (CSR) Corporate Reporting Global Reporting Initiative (GRI) Sustainability Reporting Findings on the Practice of Sustainability Reporting in the Australasian Region Integrated Reporting

3 The capacity to endure.

4 Sustainable Development More commonly known as the Brundtland Report, after the chair of the Commission, Gro Harlem Brundtland, the former prime minister of Norway. It defines sustainable development as development that "meets the needs of the present without compromising the ability of future generations to meet their own needs."

5 Sustainable development is about using resources more efficiently, in order for society to reduce not only its impact on the environment, but also on the economy, while improving social impacts both locally and globally to ensure a fairer and more sustainable future.

6 Social performance the entity’s impact on the social systems in its operating fields. Economic performance the traditional indicators that are commonly used in financial accounting and are expressed in monetary terms. Environmental performance the effect of organisations on natural resources, including the earth, ecosystems, air, and water.

7 (PEOPLE) (PLANET)(PROFIT) SUSTAIN ABILITY

8 Implication of Sustainability Governments and companies have to consider the impacts on the three pillars of society, environment and economy, when they are making decisions and formulating policies.

9 Challenges for companies / organisations Economically viable AND Socially and environmentally responsible  To achieve SUSTAINABILITY Can this be achieved?

10 Significance of Sustainability Cree Indian Prophecy

11 Corporate Social Responsibility (CSR) “A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.” (COMMISSION OF THE EUROPEAN COMMUNITIES, 2001) Voluntarily

12 Political Economy Theory Political economy is the social, political and economic framework within which human life takes place. Economic issues cannot be investigated in the absence of the political, social and institutional framework within which economic activity takes place. Corporate actions are a product of the interchange between the corporation and its environment. There are two theories that are derived from Political Economy Theory: Legitimacy Theory and Stakeholder Theory.

13 Legitimacy Theory Organisations seek to ensure they operate within the bounds and norms of their respective societies. Legitimacy exists when an entity’s value is congruent with the value system of the larger social system of which the entity is a part (Lindbloom, cited in Deegan, 2009, p.323) Implies that companies need to act according to the expectations of the community (Guthrie & Parker, 1989; Patten, 1989; Wilmshurst & Frost, 2000) and are expected to carry out their business activities within the boundaries of what the society accepts to be the norm (Wilmshurst & Frost, 2000)

14 Stakeholder Theory Stakeholder theory is a theory of organisational management and business ethics that addresses morals and values in managing an organisation. Stakeholder : Any identifiable group or individual who can affect the achievement of an organisation’s objectives (Freeman & Reed, 1983, p.91), hence implies that stakeholders include shareholders, creditors, employees, suppliers, consumers, government, media, interest groups and general public. Two branches of Stakeholder Theory: – ethical (moral) or normative branch – positive (managerial) branch

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16 Is sustainability good for business? Source: Schneider Electric

17 It’s good for profitability. Harvard Business Review cites more sustainable companies as outperforming their peers on net margin (+6%), return on assets (+3%), and return on equity (+11%) for the past eight years. Source: Harvard Business Review It drives growth. According to Accenture, 78% of companies agree that sustainability is vital to the future growth of their business. Source: Accenture, Long-Term Growth, Short- Term Differentiation, and Profits from Sustainable Products and Services

18 It cuts costs. In an Ernst & Young survey, 74% of respondents cited cost reduction as the principal driver of their company’s sustainability agenda. Source: Ernst & Young survey in cooperation with GreenBiz Group, Six Growing Trends In Corporate Sustainability It delivers superior stock performance. Since 2006, companies listed on the Carbon Disclosure Leadership Index (CDLI) delivered returns of 67.4%, more than double the 31.1% return of the Global 500. Source: Carbon Disclosure Project

19 Your shareholders expect it. In an Ernst & Young survey, 66% of sustainability executives report an increase in inquiries from shareholders and investors regarding sustainability-related issues. Source: Ernst & Young survey in cooperation with GreenBiz Group, Six Growing Trends In Corporate Sustainability

20 Your customers expect it. According to Accenture, consumer demand is the primary driver of investment in sustainable initiatives at 62% of companies. Source: Accenture, Long-Term Growth, Short- Term Differentiation, and Profits from Sustainable Products and Services

21 Your competition is doing it. 51% of companies surveyed by the Carbon Disclosure Project say they have a dedicated budget for energy efficiency programs; according to an Ernst & Young report, 70% of billion-dollar companies in the United States are implementing energy mix strategies. Source: Carbon Disclosure Project; Ernst & Young Report, Cleantech Matters

22 Any Tool or Guidance on CSR? 10 principles of the UN Global Compact OECD Guidelines for Multinational Enterprises ISO Standard: Guidance on Corporate Social Responsibility ILO Tri-partite Declaration of Principles Concerning Multinational Enterprises and Social Policy UN Guiding Principles on Business and Human Rights.

23 Sustainability Reporting Where can we see them?

24 Core corporate reporting Financial reporting The central part of corporate reporting is the financial reporting, which is a process of capturing economic transactions and reporting them in financial statements and accompanying notes that comply with generally accepted accounting principles (GAAP).

25 STAND-ALONE NON-FINANCIAL REPORTS: Triple Bottom Line (TBL) Report Corporate Social Responsibility (CSR) Report Corporate Social & Environmental Responsibility (CSER) Report Sustainability Report Company reports ANNUAL REPORTS: Financial Reports + Non-financial (social & environmental) disclosures Other reports: Website, Newsletter, Bulletin, etc

26 Sustainability Reporting Is it required?

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28 Since the early 2000’s, GRI, a global multi-stakeholder non-profit organization, has been promoting SUSTAINABILITY REPORTING and producing one of the most established standards for sustainability reporting, the GRI Sustainability Reporting Guidelines. These guidelines provide comprehensive principles and set out performance indicators for organisations to report on their economic, environmental and social performance.

29 VISION A sustainable global economy where organizations manage their economic, environmental, social and governance performance and impacts responsibly and report transparently. MISSION To make sustainability reporting standard practice by providing guidance and support to organizations.

30 “G4 is GRI’s fourth generation of Sustainability Reporting Guidelines and was launched in 2013, and it is the most comprehensive sustainability reporting guidance available today.“

31 “Sustainability reporting is the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development.”

32 The GRI’s Limitation Some companies have encountered difficulties in interpreting the content of the GRI guidelines  the guidelines are so broad and complex. Fonseca (2010):  even though the GRI offered standards and procedures on reporting in social, environmental and economic indicators, there is still no explanation about how to integrate these information into the report. The GRI framework does not provide a strategy for reporters to understand and consider the indicators’ relative values.

33 A. Environmental, Social and Governance (ESG) The ESG aspects have been brought to companies’ attention since the 1970s The ESG guidelines consider the particular values of each country when integrating the financial, environmental, social and governance aspects. The principles: o Integrating the ESG aspects into the investment process in companies will maximize their long-term interest. o The accomplishment of long-term value for shareholders can be supported by sustainability and good corporate governance. ESG disclosure has become mandatory for listed companies in the stock exchange. Formal guidelines on ESG disclosure have been introduced and applied by some countries such as Taiwan, Malaysia, Thailand, Sweden, France, India, South Africa, China and Australia. B. Modified GRIs C. Other created approaches. The GRI’s ‘Alternatives’

34 What did the practitioners say about Sustainability Reporting? “This survey, conducted in Hong Kong, Australia and the United Kingdom, gauges views on the emerging global frameworks for non- financial reporting, and on the readiness of the markets to adapt to the requirements embedded in these frameworks.” The respondents were stockbrokers, investment analysts, fund managers, auditors, institutional investors, superannuation trustees, and CPA Australia members.

35 Some key findings

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38 What did the stakeholders say about the GRI Sustainability Reporting Guidelines? “ This report presents the findings and analysis from the first GRI Readers’ Choice survey of readers of sustainability reports.” The 2008 Readers’ Survey was completed by a total of 2,279 people worldwide, which included businesses, consultants, civil societies, researchers/academics, investors, individuals, and public agencies.

39 Some key findings

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42 Some research findings on the practice of sustainability reporting in the Australasian region.

43 Australia The overall levels of sustainability disclosure made by Australian listed companies using the GRI framework were low, and these companies did not report on all the core GRI indicators (e.g. McGraw & Dabski, 2010; Frost et al, 2005; Larrinaga, 2007). There was a significant relationship between sustainability reporting and market returns for Australian listed companies (e.g. Reddy & Gordon, 2010). Reporting practice: Most sustainability information was incorporated in annual reports. Only a small proportion of companies produce separate sustainability reports (e.g. CPA Australia, 2005; Frost et al, 2005)

44 Australia The majority of Australian companies that reported sustainability information did not use an established framework (such as the GRI guidelines) for doing so, and reported the sustainability information in the most favourable light possible (CPA Australia, 2005). It seems that sustainability reporting has been acknowledged as an established concept by Australian companies but has a long way to go before it is accepted across the board (McGraw & Dabski, 2010).

45 New Zealand The emerging field for sustainability reporting in New Zealand appears to be related more to the institutionalization of sustainable development in general rather than with sustainability reporting (e.g. Larrinaga, 2007). New Zealand publicly listed companies had an insufficient and incorrect understanding of why they should report, what they should report and/or how they should voluntarily report environmental information (e.g. DeSilva, 2008). There was no significant relationship between sustainability reporting and market returns for New Zealand listed companies (e.g. Reddy & Gordon, 2010). Reporting practice: Most sustainability information was incorporated in annual reports.

46 Indonesia The practice of sustainability reporting in Indonesia is still at an early stage (e.g. Djajadikerta & Trireksani, 2012; Gunawan, Djajadikerta & Smith, 2008; Mirfazli, 2008). The levels of sustainability disclosure made by Indonesian listed companies were low, and the nature of disclosure was mostly descriptive. It seems that the companies still have a lack of understanding about sustainability reporting (e.g. Djajadikerta & Trireksani, 2012). Reporting practice: Most sustainability information was incorporated in annual reports.

47 Malaysia The practice of sustainability reporting is Malaysia is still at an infancy stage (e.g. Hamid, 2004; Zain & Janggu, 2006; Zain & Muhammad, 2007). The levels of sustainability disclosure made by Malaysian listed companies were low. However, some recent studies showed a higher percentage of companies making sustainability disclosure in comparison to a similar study done a couple decades ago (e.g. Ghazali, 2007; Said, Zainuddin & Haron, 2009). Reporting practice: Most sustainability information was incorporated in annual reports.

48 Thailand The levels of sustainability disclosure made by Thailand’s listed companies were low. However, some studies showed a trend of increasing amounts of sustainability disclosure (e.g. Ratanajongkol, Davey & Low, 2006) Similar to the Indonesian and Malaysian listed companies, Thailand’s listed companies were found to be more focused on social themes (i.e. human resources and community) rather than on the environment theme.

49 Sustainability Reporting: Fad or Trend? Perspectives of the academic experts Burritt and Schaltegger (2010) describe two views from the existing literature: 1.The first view maintains that sustainability accounting and reporting is a ‘fad’ that will fade over time – an opinion that is supported by Gray and Milne (Young, 2010). 2.The second view suggests that “sustainability accounting may become a trend if it is accepted that the current tools and methods are the first step in a methodological development process towards sustainability accounting providing useful and high quality information.” – an opinion that is supported by Hopwood and Bebbington (Young, 2010).

50 Assurance of Sustainability Reporting The move towards standardising social and environmental accounting practices started with the issuance of the AA1000 Standards by the Institute of Social and Ethical Accountability or AccountAbility in 1999 (Jones et al., 2005). The findings from current literature suggest that the assurance practice on sustainability reporting is still limited.

51 In August 2010, the International Integrated Reporting Council (IIRC) was formed. It consists of an international cross section of leaders from the corporate, investment, accounting, securities, regulatory, academic and standard-setting sectors and civil society.

52 “The mission of the IIRC is to create a globally accepted Integrated Reporting framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format.”

53 “An Integrated Report should be a single report which is the organization’s primary report – in most jurisdictions the Annual Report or equivalent.“

54 Responses regarding so far Supporters: “IMA supports development of International Integrated Reporting Framework.” (Business Wire, Dec 2011) “Time to recognise value of integrated reporting.” (Tiley, Chief Executive CIMA, Feb 2012) “Integrated Reporting by businesses will bring extensive benefits to organizations.” (Deloitte Touche Tohmatsu, Oct 2011)

55 Skeptics/critiques: “The latest proposals on integrated reporting published by the IIRC risk taking disclosure backwards.” (Welford, Chairman CSR Asia, Apr 2012) “Integrated reporting in Asia still some ways away.” (Lynn, The Business Times, Dec 2011) “The majority of Australian companies have a long way to go before they’re in a position to acknowledge the importance of non-financial factors in their disclosures.” (Evans, Net Balance Foundation, Feb 2012) Responses regarding so far

56 One size fits all? Will it work? We’ll wait and see … The IIRC will publish the International Framework in December 2013.

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