1. Sustainability Reporting
Ranjani Krishnan
Michigan State University

2. Agenda Role and relevance of sustainability accounting
Sustainability reporting
Mandatory
SEC
EPA
Voluntary
GRI
IIRC
SASB
CDP
Sustainable Management Accounting
Sustainability Management Systems
ISO 14000
ISO 26000
PWC: Total Impact Measurement and Management (TIMM)
Teaching and research opportunities

3. What is the fundamental role of accounting?
Reflect Sustainable Firm Value
Reflect Firm Value
What is Sustainable Firm Value?
Planet
Communities
People
Production Cost and Revenue Function
Reliable and Verifiable Production Cost and Revenue Function

4. Relevance Relevance for Valuation versus Relevance for Decision Making
Learning Curves
Cost Elasticity
B to B Contracting
20% Material – using a particular model of market behavior

5. Relevance for Decision Making
Myopic focus a threat to the market's viability
The obsession with short-term financial results by investors, asset management firms and corporate managers collectively can lead to unintended consequences such as the destruction of long-term value, decreased market efficiency, reduced investment returns and the obstruction of efforts to strengthen corporate governance.  Financial Times, 2007
Short-term financial focus a flawed view, Financial Times 2011
Stop Maximizing Profit and Start Maximizing Value

6. What is Sustainability Accounting?
Reporting
Sustainability Management
Sustainability Scorecards
Sustainability Governance

7. Why is Sustainability Accounting Important?
External Reporting
Legal Requirements
[SEC,FASB,EPA/TRI, PACE]
Voluntary External Reporting
[IiRC, GRI, DJSI, TruCost, CDP, Corporate Sustainability Reports]
Internal Management
Environmental Costs are Real
Potential Revenue
Source of Differentiation

8. Sustainability Reporting
SAB 92
SEC
TRI
RCRA
MECS
EPA and Regulatory Reporting
Voluntary Triple bottom line reporting
GRI

9. Sustainability Reporting - SEC
Staff Accounting Bulletin (SAB) 92
Disclosure of
material effects of environmental regulations
pending legal proceedings and likely impacts
Co-ordination with EPA for liabilities information
Insufficient disclosure may lead to SEC fines ($500K for each violation)
SAB 92 :Disclose liability both the following criteria are met:
* It is probable that a liability has been incurred, and
* The amount of the loss can be reasonably estimated.
Discounting rules
Offsetting: In SAB 92, the SEC staff has taken the position that reporting probable liabilities net of probable recoveries is inappropriate
and will no longer be permitted. For some companies, the separate display of contingent liabilities and expected recoveries could be significant. Although a
somewhat different situation was involved, Kodak's application of offsetting provides a good illustration. In that case, Kodakoffset its accrued litigation settlement with an equal related asset, cash deposited in escrow to secure payment of the finaljudgment. Separate presentation of the two amounts would have increased total assets by 4% and total liabilities by 5%. In
fact, the billion dollar obligation amounted to 13% of Kodak's stockholders' equity. Thus, reporting it among the company'snoncurrent liabilities (since it was funded with restricted cash) would have raised the debt-equity ratio accordingly.
Uncertainties: company cant delay till one number is achieved

10. Sustainability Reporting - EPA
Toxic Releases inventory(TRI)
Quantities of toxic chemicals, pollution prevention, disposal
Resource Recovery and Conservation Act (RCRA)
Hazardous materials/wastes cradle to grave accounting through manifest system
Manufacturing Energy Consumption Survey (MECS)
Greenhouse Gas Reporting (2010)

11. MODELS – GRI, IIRC, SASB
Voluntary reporting

12. Sustainability Reporting – Global Reporting Initiative (GRI)
Goal
to produce a report that “reflect[s] the organization’s economic, environmental and social impacts” and should include all material information
materiality is defined as information that could “substantively influence the assessments and decisions of stakeholders”
UNEP sponsored but independent
Facilitate comparisons
over time
across organizations

13. GRI
Social
Economic
Environmental

14. Reporting Model for GRI
FASB
IASB
GRI
Reporting Entity
Annual Report
CSR Report B A
GRI was founded in 1997, and provides guidance to international public and private entities that wish to produce sustainability reports. The scope of issues covered in their standards includes economic, environmental, social and governance topics. GRI’s reporting objective for entities following their standards is to produce a report that “reflect[s] the organization’s economic, environmental and social impacts” and should include all material information, where materiality is defined as information that could “substantively influence the assessments and decisions of stakeholders” (GRI 2013, p. 17). Thus, as depicted in Figure 1, firms that follow GRI can be thought of producing two primary reports. An annual report of their financial operations, perhaps prepared in accordance with financial accounting rules as established by the Financial Accounting Standards Board (FASB) or the International Accounting Standards Board (IASB), and a sustainability report prepared in accordance with GRI standards
Link A: US GAAP or IFRS
Link B: G4 – Sustainability reporting

15. GRI https://g4. globalreporting
Part 1 – Reporting Principles and Guidance
Content: materiality, stakeholder inclusiveness, sustainability context, and completeness.
Quality: balance, comparability, accuracy, timeliness, reliability, and clarity.
Guidance on how to set the report boundary.
Part 2 – Standard Disclosures
Strategy and Profile
Management Approach
Performance Indicators
Implementation Manual

16. GRI Performance Sectors covered Financial services sector
Electric utilities sector
Mining & metals sector
Food processing sector
NGO sector
Media
Oil and gas
Airport operators
Construction

18. https://www. globalreporting

19. IIRC

20. Reporting Model for IIRC
FASB
IASB
IIRC
Financial Report
CSR Report B A
Integrated Report
International Integrated Reporting Council
In contrast, the IIRC (founded in 2010), provides guidance on how firms can produce integrated reports, which include not only financial information, but also information on manufactured, intellectual, human, social and relationship, and natural capitals, which make up the what IIRC refers to as the “Six Capitals”. According to the IIRC, “[a]n integrated report should provide concise information that is material to assessing the organization’s ability to create value in the short, medium, and long term” (IIRC 2013, p. 5) and defines materiality as being information that “could substantively affect the organization’s ability to create value in the short, medium, or long term” (p. 33). The primary intended users of integrated reports are the providers of the financial capital, though integrated reports are believed to be useful for all stakeholders (p. 7). Thus, as depicted in Figure 2, firms following the guidance of the IIRC would produce an integrated report that includes financial information along with non-financial information (perhaps drawing on GRI or others for guidance on producing the non-financial information and FASB or IASB standards for producing financial information).
Link A: US GAAP or IFRS
Link B: International <IR> Framework

21. International Integrated Reporting Council (IIRC)
Integrated reports
Six Capitals
“An integrated report should provide concise information that is material to assessing the organization’s ability to create value in the short, medium, and long term”
Materiality: “information that could substantively affect the organization’s ability to create value in the short, medium, or long term”

22. SASB

23. Sustainability Accounting Standards Board (SASB)
FASB
IASB
SASB
Annual Financial Report
CSR Report B A
10 K Report
Sustainability Accounting Standards Board (SASB)
In some ways, SASB combines the objectives of GRI and the IIRC (see Figure 3). Founded in 2012, SASB is in the process of developing standards for the reporting of environment, social, and governance issues, similar to GRI. Like the IIRC, however, SASB’s model is one of integrated reporting. In particular, SASB’s aim is to aid U.S. public companies in meeting the requirement of Item 303 of Regulation S-K to disclose material information in the management discussion and analysis section of their 10-K and 20-F filings regarding known trends and uncertainties that could affect a registrant’s operations. However, unlike GRI, which has less of an industry focus, SASB aims to provide standardized accounting metrics for industry-level material sustainability issues. Another key difference is that, whereas GRI’s materiality threshold is set around stakeholder decision making, SASB is focused on equity and debt investors, and so follows U.S. securities law, which defines materiality as information that could be viewed by the reasonable investor as having significantly altered the total mix of information made available (SASB 2013). SASB, therefore, provides what is arguably the most restrictive definition of materiality, potentially minimizing the set of non-financial information to be disclosed.
Link A: US GAAP
Link B: Industry Sustainability Reporting Standards

24. SASB Integrated reporting
Aid U.S. public companies in meeting the requirement of Item 303 of Regulation S-K to disclose material information in the management discussion and analysis section of 10-K and 20-F filings
Known trends and uncertainties that could affect a registrant’s operations
Aims to provide standardized accounting metrics for industry-level material sustainability issues.
While GRI’s materiality threshold is set around stakeholder decision making, SASB is focused on equity and debt investors,
SASB follows U.S. securities law
materiality as information that could be viewed by the reasonable investor as having significantly altered the total mix of information made available .
Most restrictive definition of materiality, potentially minimizing the set of non-financial information to be disclosed.

25. Materiality Thresholds
GRI
Information that could substantively influence the assessments and decisions of stakeholders (GRI 2013, p. 17).
IIRC
Information that could substantively affect the organization’s ability to create value in the short, medium, or long term (p. 33)
SASB
Information that could be viewed by the reasonable investor as having significantly altered the total mix of information made available (SASB 2013).

26. CDP

27. Reporting Model for CDP
Corporations
Investors
Survey
Responses
Signatories
CDP
Surveys
The CDP, founded in 2000, has both the most limited focus of the entities being discussed here and also has the most unique reporting model (see Figure 4). Whereas the focus of GRI, IIRC, and SASB are all on entity-level reporting directly to users, the CDP follows a completely different model in which firms report directly to CDP on certain environmental issues, and CDP then produces a set of reports and also provides access to the database of their survey data. Using the data from their surveys, CDP produces three sets of primary reports, related to greenhouse gas emissions, water management, and climate change strategies, with the objective being to provide information so that “investors and cities are better able to mitigate risk, capitalize on opportunities and make investment decisions that drive action towards a more sustainable world.”
Thus, the two standard setting bodies with greatest overlapping agendas are the GRI and SASB as they are both engaged in developing reporting metrics for sustainability issues. Nevertheless, substantial differences remain with respect to user focus and materiality threshold (stakeholder vs. investor), the degree of metric specialization (entity vs. industry segment), primary reporting outlet (separate report vs. 10-K), and geographic scope (global entities vs. U.S. filers). One area ripe for future research is to better understand the consequences of these potential differences in reporting frameworks. As these, or other, standard setters continue to refine their frameworks, empirical evidence on the consequences of these key policy choices could help inform not only the decisions of standard setters, but also of firms and regulators as well.
CDP Reports and Analyses

28. CDP(Carbon Disclosure Project)
The focus of GRI, IIRC, and SASB are all on entity-level reporting directly to users.
Firms report directly to CDP on certain environmental issues, and CDP then produces a set of reports and also provides access to the database of their survey data.
Using the data from their surveys, CDP produces three sets of primary reports
Greenhouse gas emissions
Water management
Climate change strategies
Objective:
“investors and cities are better able to mitigate risk, capitalize on opportunities and make investment decisions that drive action towards a more sustainable world.”

29. Sustainability Management Accounting – Environment

30. Why Environmental Management Accounting?
Environmental costs are real business costs
Potential Revenue Sources
Improved decisions
Product pricing, responsibility accounting, negotiations
Current accounting systems are not designed for identifying and managing environmental costs
PWC

31. Types of Environmental Costs
Conventional costs of compliance,
Installation and operation of pollution treatment equipment
Other changes to the firm’s production technology
Substitution of raw materials
Changes in type of energy used
Other process changes e.g. operating parameters
General administrative expenses
Changes in productivity growth rate
For example, our follow-up interviews revealed that some steel firms had separate cost pools for waste water treatment, remediation, hazardous waste disposal, pollution abatement capital expenditures, and depreciation on pollution abatement equipment.
- Sinters to pellets
- Coke rate reduction by injecting pulverized coal, NG injection
- Scrap rate increase
-Yield increase
- Byproduct coke ovens- instead of bee-hive coke ovens

32. Environmental Regulations and Firms’ Accounting Systems
Field studies indicate that firms’ costing systems do not sufficiently capture environmental costs (Epstein, WRI Green Ledgers).
Joshi et al. (TAR 2001) found hidden costs 8-10 times the reported costs
Case Studies of specific product-lines in firms indicating that regulatory costs are about 15% - 20% of total cost, of which only about 2% are separately identified (WRI).
Price-Waterhouse survey of 445 companies, 49% responded that they do not identify all costs of compliance.
Epstein: Measuring Corporate Environmental performance
WRI: Ditz, Ranganathan : Green Ledgers: Case studies in Corp Env Accting
Epstein (1996) in an attempt to document best practices for identifying, measuring, monitoring and managing environmental costs, studied more than 100 companies. His field study concludes that most companies lack adequate systems for measuring and managing environmental costs; they do not separately track or accumulate environmental costs and most environmental costs are hidden in various overhead accounts. Hence most companies do not know the total costs of environmental regulation.
The case-study firms included Amoco Oil, Ciba-Geigy, Dow Chemical, E.I. Du Pont de Nemours, and S.C. Johnson Wax. that total environmental cost for the selected product lines range from 2.5 percent of net sales for S.C. Johnson Wax to 22 percent of operating costs for Amoco Oil. The total environmental cost for Ciba-Geigy and Du Pont amounted to 19 percent of manufacturing cost. Each company expressed aggregate environmental costs differently (e.g., as a percentage of either manufacturing costs, operating costs, or net sales), based on what managers thought was appropriate for their companies/industries. As the authors acknowledge, these numbers do not allow meaningful comparisons.

33. Calibration of Hidden Environmental Costs
Steel industry claimed:
“Environmental regulations in the US make it hard to compete with steel from Japan and Korea.”
Steel 10Ks showed:
Reported cost of environmental regulations ~ $5/ton
Difference in margin between US steel and imported steel: $70.
Question: How much of the regulatory overhead costs are hidden?
S. Joshi, R. Krishnan, L. Lave Estimating the Hidden Costs of Environmental Regulation. The Accounting Review (2001) 76 (2):
Center for Economic Studies, U.S. Bureau of Census. Discussion paper CES-WP May 2002

34. Hidden Environmental Costs
Plant-level econometric analysis using data from Census Bureau and other sources.
Result
Accounting systems HUGELY misestimate costs.
High magnitude of hidden costs
A $1 increase in identified overhead cost, increases total cost at the margin by $9.23 for Integrated Steel Plants and $10.68 for Mini Mills.
That is, $ $9.28 costs were hidden for every one dollar of visible costs!

35. Quote from Controller of Fortune 100 Steel Company
There has been so much turnover in our Accounting and Environmental Affairs Departments that the people who would have prepared the cost reports are no longer with the company.  So I can't tell you much about how that information was gathered and compiled.  Often the information is requested in a form different than from what we use to report under GAAP.  This means that we provide  what we think is correct but it may not have the consistency or reliability of other numbers, just because we don't have a system in place to routinely define and gather the data.  Our intent is to report the information at the lowest cost with the least amount of effort.  We would identify direct costs that we believe are environmental but would not spend a lot of time trying to identify overhead costs or opportunity costs or really exploring the economics of the cost.
I can't tell you much about how that information was gathered and compiled.
We provide  what we think is correct but it may not have the consistency or reliability of other numbers
We would not spend a lot of time trying to identify opportunity costs or really exploring the economics.

36. Environmental Management System - ISO 14000

37. Why ISO 14000? Multiplicity of environmental standards
UK - BS 7750, US - Chemical Association Responsible Care ®, EU - Eco-management and Auditing Scheme (EMAS)
How to communicate company’s intent with consumers, regulators, investors, environmental groups in a standardized manner?

38. ISO 14000 System Organization Evaluation Product Evaluation
Environmental Management
Environmental Management
Systems
Life Cycle Assessment
Environmental
Performance
Evaluation
Environmental
Auditing
Environmental
Labeling
Environmental
Aspects in Product
Standards
Organization Evaluation
Product Evaluation

39. ENVIRONMENTAL MANAGEMENT SYSTEM
Environmental policy
Planning
Implementation and operation
Continual Improvement
Management review
Checking and corrective action
PDCA-Plan, Do, Check, Act cycle

40. Management Accounting
Environmental Policy
Planning
Objectives and Targets
Resources
Awareness
Communication
Documentation and Control
Operational Control
Emergency Planning
Monitoring and Measurement
Non Conformance
Records
Auditing and Management Reviews
Plans for Continuous Improvement
Management Accounting

41. What should a firm do for ISO 14K certification?
Design an EMS system (4.1)
Formulate an environmental policy (4.2)
List its environmental impacts (4.3.1)
Be specific to process, equipment, pollutant, dept.
Identify all legal and other requirements (4.3.2)
Establish environmental objectives, targets and plan for achieving them (4.3.3)
Define, document, and communicate roles, responsibilities and authorities (4.4.1)
Structure, resources (human, physical, financial),

42. What should a firm do for ISO 14K certification (contd)?
Identify needs and carry out training (4.4.2)
Establish and maintain procedures for internal and external communication (4.4.3)
Develop and make available documentation applicable to EMS (4.4.4)
Provide for control and maintenance of documentation (4.4.5)
Ensure that procedures associated with significant environmental impacts are carried out under specified conditions (4.4.6)
Establish and test procedures for emergency preparedness (4.4.7)

43. What accredited certification to ISO 14001 does not mean
Important: ISO does not specify performance targets. It is only a process standard.
ISO does not define specific environmental performance criteria.
ISO does not ensure that the organization is currently achieving optimal environmental performance.
The ISO accredited certification process does not include a full regulatory compliance audit and cannot ensure that violations of legal requirements will never occur, though full legal compliance is the organization’s goal.
Accredited certification to ISO does not necessarily indicate that the organization will be able to prevent environmental accidents from occurring

44. Triple Bottom Line Sustainability

45. ISO 26000
Guidance on integrating social responsibility throughout an organization. This includes guidance related to: understanding the social responsibility of an organization, integrating social responsibility throughout an organization, communication related to social responsibility, improving the credibility of an organization regarding social responsibility, reviewing progress and improving performance and evaluating voluntary initiatives for social responsibility. ISO 26K IS NOT CERTIFIABLE (only guidance)

47. PWC

48. PWC-Total Impact Measurement and Management (TIMM)

50. How do all these fit into business strategy
How do all these fit into business strategy? How do we monitor strategic performance?

51. Balanced Scorecard (Kaplan and Norton)
Financial Perspective
Goals
Measures
Customer Perspective
Innovation and
Learning Perspective
Internal Business
Perspective
How do we look
to Shareholders?
What must we
Excel at?
Can we continue to
Improve and create
value?
How do customers
See us?
Vision and
Strategy
20-30 measures for the 4 perspectives, providing a sufficient set of “instruments” to monitor and drive an organization’s competitive strategy

52. Sustainability Score Card (SSC)
Linking and integrating environmental, and social performance with overall business strategy
Identifying value drivers for environmental and social performance
Designing performance measures which are “instruments” to monitor and drive competitive strategy
Testing, validating, and refining SSC

53. Implications for teaching and research

54. Professional Accounting Futures
Practice
Research
Teaching

55. Professional Accounting Futures
Practice
Knowledge demands on accountants are increasing
- Globalization , Governance, Regulation, Technology, Non-Audit Share, Labor Market, Social Media
Research
Teaching
Legal Environment (Companies Act, Contract Law), Macro-economics (National Income Accounting), Labor Economics, Measurement and management of triple bottom line , Strategy, Narrative, Integration
Narrowing of Topics, Theories, Methods
Rigorous study of a narrow issue

56. Research Opportunities in Sustainability accounting
Value relevance of sustainability performance disclosures
Event studies, market studies
Long run relationships between sustainability performance and firm performance
Convergence/divergence of sustainability reporting standards
The Entity vs. beyond the entity
Extended accounting for sustainability
Accounting implications of Extended Producer Responsibility (EPR)
Accounting for stranded carbon assets
Accounting for new emerging environmental goods and commodities
Motivations and drivers of diffusion of sustainability accounting systems
Social Value Added (as opposed to Economic Value Added)

57. Sustainability accounting courses
Sustainability management systems (GRI, IIRC, ISO etc.)
Sustainability risk management
liability, supply chain, regulatory
Sustainability management accounting
legal compliance, compliance cost management, risk management, product pricing, supporting environmental claims

58. Accounting is the Core of Sustainability Management
Sustainability Accounting
Sustainability
Reporting
Sustainability Management
Sustainability Scorecards
Sustainability Governance

59. Disclosure
Accountability
Change