Lecture 10 Environmental Performance Reporting

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Lecture 10 Environmental Performance Reporting

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The financial reporting decision

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

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Lecture Overview

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

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Review - Positive and Normative Theories

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

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Accountability for the Environment
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Accounting for Environmental and Social
Performance

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

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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.
• Sustainable organisations
• are financially secure
• have minimum negative environmental impacts
• act in conformity with societal expectations

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What are the responsibilities of business?

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

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How does an entity determine its
responsibilities?

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

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Accountability

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

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To whom is business responsible?

• Many organisations making public statements that
  responsibilities extend beyond shareholders to
  encompass communities in which they operate and
  society as a whole
• if sustainability embraced then responsibility
  also owed to future generations

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Theories to explain social and environmental
disclosure

• Legitimacy Theory
• depending on expectations of society
• Stakeholder Theory
• positive - depends on expectations of powerful
  stakeholders
• normative - should be accountable to all
  stakeholders
• Positive Accounting Theory
• depends on positive wealth implications

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Sustainability
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Sustainability

• 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
• an ideal or an achievable goal?
• contrast with ideals espoused in SAC2
• focus on financial performance
• to provide information to enable financial
  statement users to make decisions about the
  allocation of scarce resources

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Sustainability (continued)

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

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Incorporating sustainability in financial
reporting

• By regulation
• a revised conceptual framework
• new accounting standards
• disclosure laws
• Voluntarily
• evidence that this has started to happen
• can be explained using legitimacy theory

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Review Legitimacy Theory

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

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Review Legitimacy Theory

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

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Legitimacy theory and sustainability

• 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
• the view that corporate survival and prosperity
  is tied to community perceptions is being
  promoted publicly by a number of companies

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Limitations of the Financial Accounting System

• IF the goal is sustainable development
• AND accountability helps to achieve sustainable
  development

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Limitations of traditional financial accounting

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

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Limitations of traditional financial accounting -
continued

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

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Limitations of traditional financial accounting -
continued

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

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Characteristics of the traditional accounting
model

• Reporting in monetary terms
• Accounting for economic events
• Accounting for defined entities
• Providing information primarily for shareholders
  and other finance providers

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Characteristics of the social accounting model

• Accounting for more than just economic events
• Accounting in different media (not just financial
  terms
• Accounting for different individuals or groups
• Accounting for different purposes (not just
  decisions that are based on financial information)

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Environmental Performance Reports
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Eco-justice and Eco-efficiency reporting

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

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Eco-efficiency and Eco-justice reporting
(continued)

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

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Environmental reporting guidelines

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

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Voluntary environmental reporting

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

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For Tutorials

• Required reading
• Text chapter 9
• Self assessment questions
• Questions 1 - 11 from module 9
• Answers in tutorials