Lecture 10 Environmental Performance Reporting

The financial reporting decision u Involves disclosures about the impact of companies on the surrounding environment and society u The type of financial reporting decision involved is ‘disclosure’ u Essentially unregulated/voluntary

Lecture Overview u Review - Positive and normative theories u Accountability for the environment (9.1) u Sustainability (9.2) u Limitations of the financial accounting system (9.3) u Environmental performance reports (9.4)

Review - Positive and Normative Theories u Positive theories help us to understand what we see happening u PAT u Legitimacy theory u Managerial branch of stakeholder theory u Normative theories prescribe what we should do u Ethical branch of stakeholder theory u Conceptual Framework projects

Accountability for the Environment

Accounting for Environmental and Social Performance u Triple bottom line reporting u reporting that provides information about the economic, environmental and social performance of an entity u departure from sole economic focus u tied to the concept and goal of sustainable development

Sustainable Development u Defined as “development that meets the needs of the present world without compromising the ability of future generations to meet their own needs”. u Sustainable organisations: u are financially secure u have minimum negative environmental impacts u act in conformity with societal expectations

What are the responsibilities of business? u To generate profits for the benefit of shareholders/maximise firm value; OR u Sustainable development? u Incorporates environmental and social responsibilities in addition to financial security

How does an entity determine its responsibilities? u What do its relevant stakeholders consider business responsibilities to be? u determined by the personal judgement of the management involved u has implications for the information disclosed u perceived responsibility and accountability go hand in hand

Accountability u The duty to provide an account (not necessarily financial) or reckoning of those action for which one is held responsible u two responsibilities or duties u responsibility to undertake certain actions u responsibility to provide an account of those actions

To whom is business responsible? u Many organisations making public statements that responsibilities extend beyond shareholders to encompass communities in which they operate and society as a whole u if sustainability embraced then responsibility also owed to future generations

Theories to explain social and environmental disclosure u Legitimacy Theory u depending on expectations of society u Stakeholder Theory u positive - depends on expectations of powerful stakeholders u normative - should be accountable to all stakeholders u Positive Accounting Theory u depends on positive wealth implications

Sustainability

Sustainability u sustainable development defined as …development that meets the needs of the present world without compromising the ability of future generations to meet their own needs u an ‘ideal’ or an achievable goal? u contrast with ‘ideals’ espoused in SAC2 u focus on financial performance u to provide information to enable financial statement users to make decisions about the allocation of scarce resources

Sustainability (continued) u Many governments, associations and organisations have released documents addressing the need for a shift towards sustainable development u inter-generational and intra- generational equity central to the agenda u implies something other than short- term self-interest should drive decision making

Incorporating sustainability in financial reporting u By regulation u a revised conceptual framework u new accounting standards u disclosure laws u Voluntarily u evidence that this has started to happen u can be explained using legitimacy theory

Review – Legitimacy Theory u Organisations seek to ensure they operate within the bounds and norms of their respective societies u relies upon the notion of a ‘social contract’ u Represents the implicit and explicit expectations that society has about how the organisation should conduct its operations

Review – Legitimacy Theory u Legitimacy Theory proposes a relationship between corporate disclosure and community expectations u Consider implications of not meeting social contract when making financial reporting decisions u may lead to sanctions such as legal restrictions on operations, limited resources provided, or reduced demand for products

Legitimacy theory and sustainability u If sustainability becomes part of the expectations held by society, providing information about social and environmental performance will enhance the perception society has of the organisation u the view that corporate survival and prosperity is tied to community perceptions is being promoted publicly by a number of companies

Limitations of the Financial Accounting System IF the goal is sustainable development AND accountability helps to achieve sustainable development

Limitations of traditional financial accounting u (a) financial accounting focuses on information needs of those involved in resource allocation decisions u (b) the notion of ‘materiality’ tends to preclude the reporting of social and environmental information, given the difficulty in quantifying costs u (c) reporting entities frequently discount liabilities to present value, which tends to make future clean-up expenditures appear trivial (at odds with sustainability concept)

Limitations of traditional financial accounting - continued u (d) adopts an entity assumption where the entity is treated as distinct from its owners and other stakeholders u transactions not directly impacting the entity are ignored (even though they impact society or the environment) u externalities are ‘impacts that an entity has on external parties that typically have no direct relationship with the organisation

Limitations of traditional financial accounting - continued u (e) expenses are defined to exclude the recognition of any impacts on resources not controlled by the entity u eg pollution of waterways u (f) externalities caused by the entity cannot be reliably measured, so are not recognised (SAC4 recognition criteria)

Characteristics of the traditional accounting model u Reporting in monetary terms u Accounting for economic events u Accounting for defined entities u Providing information primarily for shareholders and other finance providers

Characteristics of the social accounting model u Accounting for more than just economic events u Accounting in different media (not just financial terms u Accounting for different individuals or groups u Accounting for different purposes (not just decisions that are based on financial information)

Environmental Performance Reports

Eco-justice and Eco-efficiency reporting u When considering environmental and social implications eco-efficiency and eco-justice issues are considered u true sustainability implies both should be considered u current environmental reporting practices consider only eco-efficiency and not eco- justice

Eco-efficiency and Eco-justice reporting (continued) u Eco-efficiency reporting is concerned with maximising the use of a given quantity of resources and minimising the environmental implications of using the resources u Eco-justice reporting indicates how the entity is using its limited resources to ensure that disadvantaged groups are not forgotten

Environmental reporting guidelines u Currently eco-efficiency focus u led by mining industry in Australia u Early stages of regulatory capture? u Legitimacy considerations? u Environmental Protection Authority (NSW) also produced reporting guidelines u numerous international bodies have also released guidelines

Voluntary environmental reporting u Can be explained using legitimacy theory and the concept of accountability (related to the ethical branch of stakeholder theory) u Communities are increasingly expecting companies to be accountable for their environmental performance

For Tutorials u Required reading u Text chapter 9 u Self assessment questions u Questions from module 9 u Answers in tutorials