By BERNARD BEMPONG
In today’s corporate world, there has been clarion call on businesses to be more responsible for the impacts of their operations on the environment, communities and society. This brings to the fore what is known as sustainability accounting.
Sustainability accounting involves the process of measuring and reporting on the impacts of a company’s business activities on the environment and society. It is also called Social Capital Accounting or True Cost Accounting (TCA) and goes beyond the usual traditional financial reporting.
Sustainability accounting provides a thorough picture of an organization’s impact on the environment and society. By incorporating non-financial indicators, sustainability accounting helps businesses to identify areas where they can improve their sustainability practices and contribute positively to the well-being of the communities in which they operate. In general, sustainability accounting aims at achieving certain goals.
Why Sustainable Accounting
- To identify and manage sustainability-related risks and develop strategies to mitigate those risks and enhance resilience.
- To provide relevant information and insights to support decision-making. Thus, a business enterprise can make responsible decisions that balance financial, environmental and social considerations by integrating sustainability factors into its financial reporting and analysis.
- To measure and monitor the environmental, social and governance (ESG) impacts and dependencies of a business. By enumerating these factors, businesses can evaluate their sustainability performance and track progress over time.
- To help organizations to align their strategies and actions with the global sustainability development goals. This alignment is to ensures that businesses contribute to a more sustainable and equitable future.
- To promote transparency by providing stakeholders with accurate and reliable information on the company’s sustainability performance. Transparency in tend fosters accountability through which stakeholders hold a company effectively responsible for their environmental and social impacts.
- To improve stakeholder-engagement by seeking input from them, collaborate to develop sustainable solutions to their environmental issues.
- To attract investors and stakeholders, secure partnerships and build strong relationships with stakeholders by demonstrating a commitment to sustainability and providing transparent reporting.
Sustainability accounting bridges the gap between corporate social responsibility and environmental compliance by verifying companies’ environmental friendliness and ethical conduct thereby creating value for all stakeholders. Indeed, there is growing evidence that a business entity that commits enough resources to their environmental and social responsibilities improve in financial performance as well.
Companies need to have their performance with respect to Environmental, Social and Governance (ESG) issues reviewed continuously because external environmental factors change and can unexpectedly affect their operations. Sustainability accounting normally requires an independent audit and assurance of a company’s Environmental, Social and Governance (ESG) practices to guarantee the integrity of sustainability disclosures.
The need for independent sustainability accounting has increased in recent years to satisfy the stake of all interested parties. Nonetheless, there has been conflicting or different standards on sustainability disclosures.
Sustainability Accounting Standards
It is worth noting that there is no one-size-fits-all approach to measuring the impacts of Environmental, Social and Governance (ESG) practices but an established framework can serve as a guide. Even so, the dilemma an independent auditor or an assessor faces relates to which standard it should adopt in order to meet a stakeholder’s expectations. To note, the choice of a standard premised on the fact that there are many Environmental, Social and Governance (ESG) accounting reporting standards.
These standards include the SASB (Sustainability Accounting Standards Board), ESRS (EU Sustainability Reporting Standards), EU Taxonomy, the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), the Carbon Disclosure Project (CDP) and the Greenhouse Gas (GHG) Protocol. Apart from all these standards, ISO (the International Organization for Standards) also has its guidelines (ISO14016:2020) on sustainability (environmental) reporting.
Despite the array of standards and the conflicting interests, sustainability accounting must make the necessary disclosures regarding a company’s sustainability impacts. Indeed, the following factors largely influence which of the standards an independent auditor or assessor can use for a sustainability accounting exercise and reporting.
- a) Regulatory Provisions
For compliance purposes, it may be necessary to use standards stipulated in enabling legislations on the environment in the country. However, those legislations should not preclude the use of other standards to assess the effects of a company’s operations on the environment, impacts of its social responsibility programs and governance related issues. To solicit relevant information, independent auditors must have their checklist (aide memoire) so designed that it can tick the box of detailed disclosure.
Where necessary, independent auditors can harmonize their checklists with guidelines from state institutions, agencies or commissions that have oversight responsibilities over clients’ regulatory requirements.
- b) Related Risks & Industry Best Practices
Every industry faces its own unique risks and opportunities. Hence, it will also be worthwhile to use industry-specific standards that consider key Environmental, Social and Governance (ESG) issues pertaining to the industry. This can ensure relevant disclosure of the company’s sustainability projects or impacts.
For instance, sustainability accounting for companies in the oil and gas fields will need to adapt templates of international best practices so required by the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP). Relevant provisions and standards of other regulatory agencies like the Environmental Protection Agency also come in handy in same operations in Ghana.
- c) Investors’ Interests & Corporate Values
Investors are often inclined towards their interests when it comes to assessing their companies’ Environmental, Social and Governance (ESG) performance. Depending on the industry and their orientation towards the environment, investors require sustainability information specific to their business interest.
Indeed, we should not lose sight of the fact that investors have trade secrets that can influence data collection during the assessment and the amount of disclosure during reporting. In that regard, sustainability accounting should consider all these factors- regulatory requirements, industry practices and investors’ interests exclusively to obtain relevant disclosures for comprehensive reports. This way, sustainability accounting will protect the interests of all stakeholders by upholding the fundamental principles of environmental sustainability.
To communicate sustainability efforts effectively, an organization can also adopt an integrated reporting approach that combines a financial and non-financial information in a single report. An integrated report provides a holistic view of an organization’s performance, strategy and its impacts on society and the environment.
Businesses that integrate environmental sustainability practices in their operations and undertake regular sustainability accounting exercises invariably gain support, and win the trust and confidence of its stakeholders.
Despite the gains associated with sustainability reporting, some companies are yet to make it count or do the necessary disclosures aside from the traditional financial reporting. This is some married to the fact that entities have limited knowledge and awareness of how to document their sustainability impacts.
Here again, some companies are worried about the cost implications and limited resources to coordinate their environmental sustainability programs. In all considerations, it is a question of whether investors are really committed to upholding Environmental, Social and Governance (ESG) standard practices. How can consumers, communities or the public have a clear assurance and an understanding that they are not being shortchanged by investors whose primary motive is to make profit?
BERNARD BEMPONG
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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