Question

1) Why have so many 500 fortune companies implemented sustainability accounting?  How do they present it? What do they believe is the value in their participation? What about the companies that have not yet participated, why?

2) Draw a distinction between GRI and SASB. What are their specific goals and how do they interact? Given today's environment, do they compliment each other? What do suggest should take place to improve their performance/outcomes?

Answer 1

1.

Mike works for Medical Innovations in the research and development area. He recently has had two new medical device inventions that have resulted in $10 million in sales so far. He is a very valued employee. Medical Innovations has several employees like Mike, and management knows the company is very fortunate. What is the value of Mike and his associates to Medical Innovations? What happens if Mike decides to leave the company, or if he gets ill and has to take time off? What happens to future sales? What is the value of human capital? Do the shareholders of Medical Innovations know the value of its employees or the sustainability of future earnings if good employees were hard to find?

Sustainability Accounting may be the next emerging issue for accountants. How do we measure corporate activities that enhance the company or create value over time? Activities, such as the impact on the environment, customer relations, highly trained employees, or product innovation, are not always reflected in the numbers, but are valuable assets for the organization and that information should be provided to the shareholders and decision makers.

The dictionary defines sustainability as “the ability to be supported, upheld or confirmed” and “supporting long-term balance” (dictionary.com). The latter sums it well in that organizations are trying to balance the production of goods and services with human and social capital, impact on the environment, as well as governance.

The Sustainability Accounting Standards Board (SASB) states that “sustainability accounting reflects the management of a corporation’s environmental and social impacts arising from production of goods and services, as well as the management of the environmental and social capitals necessary to create long-term value.” (SASB.org) It is their goal to develop sustainability accounting standards to help guide corporations in disclosing information to their stakeholders. The Sustainability Accounting Standards Board, created in 2011, is an independent 501(c)(3) nonprofit. It is not associated with the Financial Accounting Standards Board or the Government Accounting Standards Board. It was created to increase transparency and encourage companies to do the same (Rogers, 2016). The risks vary by industry, so the SASB organized sustainability topics under five broad scopes: Environment, Social Capital, Human Capital, Business Model and Innovation, and Leadership and Governance. However, for example, hazardous waste management is very different in the manufacturing industry versus the health care field.

Financial accounting is intended to reflect a company’s current position, recording transactions based on book value. A transaction must be probable (likely to happen) and estimable (cost known). Sustainability issues are difficult to price and will often look to the future, where there is uncertainty. The sustainability standards were developed to help identify topics that are likely to have a material impact for the organization’s future operations or finances.

While sustainability issues are vast, the goal of SASB is to hone in on those issues that are likely to affect the financial condition or the operations of the company (Rogers, 2016). Accountants must be prepared to deal with these issues and report them to stakeholders, not only for better decision making, but also for comparability to other companies and for possible new innovation.

Sustainability accounting (also known as social accounting, social and environmental accounting, corporate social reporting, corporate social responsibility reporting, or non-financial reporting) was originated about 20 years ago and is considered a subcategory of financial accounting that focuses on the disclosure of non-financial information about a firm's performance to external stakeholders, such as capital holders, creditors, and other authorities. Sustainability accounting represents the activities that have a direct impact on society, environment, and economic performance of an organisation. Sustainability accounting in managerial accounting contrasts with financial accounting in that managerial accounting is used for internal decision making and the creation of new policies that will have an effect on the organisation's performance at economic, ecological, and social (known as the triple bottom line or Triple-P's; People, Planet, Profit) level. Sustainability accounting is often used to generate value creation within an organisation.

Sustainability accounting is a tool used by organisations to become more sustainable. The most known widely used measurements are the Corporate Sustainability Reporting (CSR) and triple bottom line accounting. These recognise the role of financial information and shows how traditional accounting is extended by improving transparency and accountability by reporting on the Triple-P's.

As a result of triple bottom level reporting, and in order to render and guarantee consistency in social and environmental information, the GRI (Global Reporting Initiative) was established with the goal to provide guidelines to organisations reporting on sustainability. In some countries, guidelines were developed to complement the GRI. The GRI states that "reporting on economic, environmental and social performance by all organizations is as routine and comparable as financial reporting".

In order to help finance teams and accountants embed sustainability into their accounting, The Prince of Wales set up The Prince's Accounting for Sustainability Project (A4S) in 2004.

Accounting for sustainability involves linking sustainability initiatives to company strategy, evaluating risks and opportunities, and providing measurement, accounting and performance management skills to ensure that sustainability is embedded into the day-to-day operations of the company.  

2.

The two global leading sustainability reporting standards GRI (Global Reporting Initiative) and SASB (Sustainability Accounting Standards Board) are planning to align their frameworks in order to bring sustainability reporting one step closer to the financial mainstream and, in prior, to investors. The two initiatives announced that ahead of the Global Climate Action Summit (GCAS) which took place in mid-September 2018 in San Francisco. The intention is to simplify the standards in alignment with the TCFD (Task Force on Climate-related Financial Disclosures) recommendations.

Founded in 1997, GRI established its first sustainability reporting framework in the same year. Since then, the standard has been developed continuously by an ongoing stakeholder process for many years. The latest version, the GRI Sustainability Accounting Standards (GRI Standards), have been established two years ago (autumn 2016). Companies that report their sustainability efforts in alignment with GRI identify its key stakeholders and dig with them into a dialogue in order to identify its material sustainability topics which have the most significant impact on the environment and the society. This is a key aspect and also mandatory if a company would like to publish its sustainability report in alignment with the GRI Standards.

The SASB was founded in 2011. The current SASB standards are still provisional but will be finalized in October (see GreenBiz from the 20^th Sep. 2018). The key aim of the framework is to meet the needs of investors by fostering high-quality disclosure of material sustainability information. The SASB standards are designed to improve the effectiveness and comparability of corporate disclosure on ESG factors (see SASB).

Firstly, one difference between the two considered standards is that GRI is trying to frame what is the impact that organizations are having on the world whereas the SASB looks at the world’s impacts on the company. Furthermore, the key difference is the stakeholder perspective. A company reporting in alignment with the SASB is providing sustainability information to investors. So, the investors are able to assess the influence of these factors on their portfolio (see GreenBiz from 2^nd Jan. 2018).

Reasons for harmonizing GRI and SASB

Besides above-named aspects, there are still areas where contents of both standards overlap. So, a special implemented two-year project will help to harmonize the frameworks, to identify areas where they are already similar and areas where they do not overlap.

One reason of harmonizing the two sustainability reporting frameworks is to bring substantial sustainability information for all stakeholders and investors together. It is possible, that investors are not reviewing a companies’ sustainability report and therefore, missing important information for their own assessment. That’s also, why TCFD recommends including climate-related disclosures into public financial fillings each year. Main obstacles in this context are auditing and data collection. Whereas financial disclosures have to follow strict requirements sustainability reports, for example, have not to follow strict rules compared with financial reports (see GreenBiz from 20^th Sep. 2018).

Firstly, the alignment of GRI and SASB should result in a more holistic sustainability reporting approach. Furthermore, it should provide substantial sustainability information to investors that they can assess their own portfolio better. The TCFD can help to integrate non-financial information, especially climate-related data, into a mainstream financial report.

DFGE’s opinion

The merger between the two standards would potentially lead to several advantages:

• Companies can address and understand linkages and interdependences between financial and sustainability disclosures
• Sustainability reporting gets more holistic
• Companies have to disclose more detailed information as the SASB asks to go deeper regarding specific aspects which is very helpful for the company
• More stakeholders are involved more intense as investors play a key role within this frame
• Risks could be avoided or at least mitigated more efficient

Companies should take these opportunities. However, achieving the potential benefits caused by above-named aspects depends on how a company follows the guidelines provided by the sustainability reporting framework. Therefore, companies should think of integrating sustainability factors into mainstream reporting to show linkages between these two areas. In this context, it is not enough including non-financial information into the financial report where the sustainability issues are separated from the financial aspects. In other words, integration is desirable, and inclusion should be avoided.