Module 9: Voluntary disclosures, sustainability and social ......and voluntary disclosures. 2...

Module 9: Voluntary disclosures, sustainability and social responsibilityACCT20080 Ethics and governance

1 Created by Dr G. L. Ilott, CQUniversity Australia

Learning Objectives

After completing this chapter, you should be able to:

1. Identify the important contemporary issues in environmental sustainability

2. Explain likely responses a board would make and disclose based on its orientation, and

3. Explain the role of integrated reporting for business sustainability and voluntary disclosures.


The contemporary issues in sustainability and social responsibilitySustainability, from a strategic business perspective, is the potential for the long-term wellbeing of the natural environment, including all biological entities, as well as the mutually beneficial interactions among nature and individuals, organizations, and business strategies (Ferrell, Fraedrich and Ferrell 2015, p.347).


Sustainability

Sustainability means being able to do what we need to do without diminishing the natural environment in the future.

Sustainability is part of the social expectations of corporate social responsibility.

Boards have to carefully manage the expectations of their shareholders in this regard.


Responsibility for business

Sustainability is an obligation to maximise the benefits while also minimising the negatives of business operations for stakeholders.

This is of interest to companies who follow some kind of stakeholder orientation.


Responsibility of stakeholders

Stakeholders, including shareholders and customers, do have concerns about negative impacts a company could have on the environment.

Most are very happy to see evidence (through voluntary disclosures from the company) that the company is not pillaging the environment on its way to enormous environments.


Corporate social responsibility

Stakeholders' ethical issue awareness feeds into a sustainability and social responsibility awareness for the board.

However, while sustainability is an issue for corporate social responsibility (CSR), CSR is a much broader field than just sustainability.


Global environmental issues

Focusing now on issues of sustainability, there are a range of issues that are constantly being debated in societies around the world, and boards of directors must be aware of them in order to make ethical decisions.


Issues with the atmosphere

• Air pollution• Acid rain• Global warming


Issues with water

• Water pollution• Water quality (not just from pollution

but also from increased salinaty)


Issues with land

• Land pollution & degradation• Waste management• Deforestation• Urban sprawl• Biodiversity• Genetically modified products


Alternative energy sources

Stakeholders are very concerned about alternative, sustainable energy sources.

Some want renewable energy developments given priority.

Others just want them to go away so that the reliance on cheaper but environmentally poisonous reliance on fossil fuels will remain.

Boards of directors must be very careful in how they approach this issue, as they also have a fiduciary duty to shareholders to provide effective stewardship, investment and use of the company's assets (especially capital).


Business responses to sustainability issues

The stakeholders in the corporation (and that includes governments and regulators as well as shareholders and customers) ultimately set the standards for a corporation's ethical behaviour.

It is up to the board, then, to meet those standards. However, all boards would be aware that responses to sustainability issues are about economic performance as much as sustainability performance.


International standards

Most international standards on reporting for sustainability place as much emphasis on economic performance as sustainability and social responsibility performance. Economics can never be ignored.

One such standard is the global framework for Integrated Reporting <IR>.


Sustainability reporting: The example of Integrated Reporting (<IR>)The <IR> framework has a focus that makes its stakeholder orientation clear. The focus is on four key areas:

1. An integration with existing information, not a replacement2. A focus on stakeholder orientation that probably favours the ethical branch

of stakeholder theory3. Sustainability that creates value for the firm, and4. The responsibilities of "those charged with governance" (this refers to the

board and the senior executives of a company) {Purcell, 2014, #31063}.


The IIRC says:

<IR> aims to: • Improve the quality of information available to providers of financial capital to enable a more

efficient and productive allocation of capital• Promote a more cohesive and efficient approach to corporate reporting that draws on different

reporting strands and communicates the full range of factors that materially affect the ability of an organization to

• create value over time• Enhance accountability and stewardship for the broad base of capitals (financial, manufactured,

intellectual, human, social and relationship, and natural) and promote understanding of their interdependencies

• Support integrated thinking, decision-making and actions that focus on the creation of value over the short, medium and long term (IIRC 2013, p.2).


An integrated report is:

The primary purpose of an integrated report is to explain to providers of financial capital how an organization creates value over time. An integrated report** benefits all stakeholders interested in an organization’s ability to create value over time**, including employees, customers, suppliers, business partners, local communities, legislators, regulators and policy-makers (IIRC 2013, p.4).


Principles-based approach:

The International <IR> Framework (the Framework) takes a principles-based approach. The intent is to strike an appropriate balance between flexibility and prescription that recognizes the wide variation in individual circumstances of different organizations while enabling a sufficient degree of comparability across organizations to meet relevant information needs. It does not prescribe specific key performance indicators, measurement methods, or the disclosure of individual matters, but does include a small number of requirements that are to be applied before an integrated report can be said to be in accordance with the Framework (IIRC 2013, p.4).


Preparation:

An integrated report may be prepared in response to existing compliance requirements, and may be either a standalone report or be included as a distinguishable, prominent and accessible part of another report or communication. It should include, transitionally on a comply or explain basis, a statement by those charged with governance accepting responsibility for the report (IIRC 2013, p.4).


The contents of an Integrated Report

The <IR> will contain the following elements:

• An overview of the organisation and its external environment• Governance (explaining how the governance structure adds value to the firm)• Business model• Risks and opportunities• Strategy and resource allocation• Performance (the extent to which strategic objectives have been met)• Outlook• Basis of presentation {IIRC, 2013, #58526}


To conclude about <IR>:

<IR> is about much more than sustainability reporting; it is in fact a beefed up annual report with added emphasis on sustainability while also creating value for the firm.

This is a deliberate approach. The IIRC, as the title suggests, believes that sustainability and social responsibility is not more or less important than standard corporate reporting: it is all important and should therefore be integrated.


Module 9: Voluntary disclosures, sustainability and social ......and voluntary disclosures. 2...

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