The economic benefits of Sustainability Reports - Dissertation Example

? The economic benefits of sustainability reporting Contents Contents 2 Introduction 3 Sustainability reporting – application within organizations 3 Sustainability theories 6 Developmental sustainability reporting 7 Economics of Climate change 9 Corporate Social Reporting 11 Benefits and implications of sustainability reporting practices 12 Improved financial performance 13 Improved investor relationships 13 Finding new markets and business opportunities 14 Improved risk management 14 Creation of a sustainability roadmap 15 Barriers to effective sustainability reporting practices 15 Recommendations 16 Conclusion 18 Introduction Until recent past years, organizations and market were dependent on the financial report or the dataset to evaluate and gauge their achievement. In today’s world, the concept is changed and extended to take in to account its social, environmental and economic effect as well to measure an overall organizational performance. The procedure is termed as sustainability report. This feature is developed and used extensively in order for companies to strike a balance between them, the society and the environment (GRI, 2012). The people, planet, and profit are the three elements which are considered while studying the elements of sustainability report. Emphasis is given to the stakeholders rather than the shareholders as they are the ones who are mostly directly or indirectly influenced by the activities or the action of any company. The sustainability reporting provides a platform for communication between the company and the stakeholders. This paper presents a detailed analysis of the use, importance, barriers and the economic benefits of using the sustainability report by a company in the daily practice. This allows the society to understand and judge how well an organization or a company is performing. The need of the hour is to make sustainability report a mandate and common practice to benchmark performance. Sustainability reporting – application within organizations Sustainability refers to the ability of maintaining an outcome over time without causing an ecological imbalance or exhausting the resources on which the result would depend. There are various theories and models of sustainability which are studied and considered. Some of them are the economic, ecological, political models etc (Jenkins, 2009). Sustainability reporting enables a company to communicate openly, positively and effectively with its stakeholders. This is crucial for maintaining and meeting the financial goal or the profitability of the company. The stakeholders, on the basis of the reports, can compare and analyze the performance of the company with others and to check on their own performance. Those organizations, which succeed in tailoring their communication with the stakeholders, to present a detailed analysis can convince them as to the fact that their company is working in tandem with the social, economic and environmental practices for long term growth. The success lies in a clear understanding of the true values of reporting and the issues associated with the making and execution of the sustainability reporting (KPMG, 2008). The management and the senior officers want to get the green label for their company, which is self explanatory by itself, that is it would prove that there is perfect alignment in the company’s sustainability strategy, the environmental impacts and the social implications, as well. Sustainability reporting has now made its place in almost all sectors of business. Three out of Australia’s four largest banks publish annual sustainability reports (KPMG, 2008). Here, the reporting is considered as TBL (triple-bottom-line) business accountability. People, planet, and profit are taken into consideration while evaluating the reporting practices (vivodepot, 2008). Sustainability reporting involves a series of guidelines or a set of rules and regulations to be followed by the companies. As the aim is to deliver in accordance with the social, economic and environmental performance, the negative feedback of any stakeholder is also taken care of (KPMG, 2008). A sustainability report contains information as to the ways in which a company would work beyond the set regulations to ensure minimum of negative effects on the environment that helps in strengthening the brand name, and differentiating in the market place. Global standards and frameworks provide a platform for measuring and analyzing sustainable reporting practices across different companies. GRI or Global Reporting Initiative is a globally accepted framework. GRI has guidelines which helps the reporting companies as well as the stakeholders to understand the working of the vice versa towards a sustainable environment (KPC, 2012). The Global Reporting Initiative Sustainability Reporting Guidelines (GRI guidelines) defines Sustainability reporting as “…the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development” (KPMG, 2008). The real value of a company is not a reflection of its financial report. There are some non human resources like the responsibility and the role of the company towards the social well being, the reputation, and the capability of the company to invent new things that contribute to the value adding of the company. The guidelines laid down by the GRI takes into account all of these measures. Organizations across diverse industrial sectors such as telecommunication, transport, energy, and chemical products have already incorporated the GRI guidelines as the reporting procedure (KPC, 2012). The management, directors have become more conscious in their efforts to study and understand the issues of sustainability. This includes reviews and implications in context of biodiversity, green house gas emission, water use etc. Many organizations focus on sustainable structures that help in studying, analyzing and transforming existing procedures and operations for increased efficiency. Such objectives are met with the help of a working group, task force or a civil society that works towards the defined goals (Deloitte, 2012). Some reporting program like IIRC (International Integrated Reporting Council, United Nations Environment Program Finance Initiative (UNEPFI), Professional Accounts In Business Committee (PAIB), International Corporate Sustainability Report etc. IIRC works to form a structure for accounting sustainability, where the financial, environmental, social system is integrated upon. Their aim is to raise awareness on the issue, rule out those areas where some extra work needs to be done, promotion of the reporting method through the regulators and appropriate reporting. UNEPFI works with banks, insurers to evaluate the impact of environmental and social framework on financial sector. They also venture into the role of climate change in the financial sector. PAIB works with the investor sector and environmental, social and governance (ESG) information. Deloitte works for the climate change resources and sustainability (Deloitte, 2000). The International Corporate Sustainability Reporting deals with corporate sustainability (CSR) and environmental reporting. The sustainability report program comprises of new methods of reporting by business and industry. They study on the basis of the reports obtained by 20 companies whose effect is studied on environment, health and safety (Sustainable reporting program, 2000). Sustainability theories There are many theories and concepts related to sustainability reporting. Some of these are developmental sustainability, economic and financial sustainability, social and employee reporting, economics of climate change, environmental reporting, sustainable energy, management of human consumption, and corporate sustainability reporting. Broadly, the theoretical perspectives on sustainability reporting focus on stakeholders, social and environmental perspectives that form the basic tenets for reporting and accountability in this context. The subsequent sections highlight the significance and application of these perspectives in corporate culture. Developmental sustainability reporting “Ability to make development sustainable- to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs” (Kates, Parris & Leiserowitz, 2005). This is the Bruthland Commission’s definition of sustainable development. Everything in today’s world can be sustained for the purpose of further use by the next generation. Sustainable development is thus, defined as the ways through which the human activities impact the economic development, social welfare and the ecological balance (Kates et al., 2005). Many companies are working in tandem with the government to promote business growth and development which is sustainable in all the three perspectives. The significance of such initiatives is enhanced focus on human beings and communities in which business enterprises thrive. Much emphasis is given to sustain cultural diversity, collaboration among groups, and social and economic consequences of business growth objectives. The human development perspective involves increased emphasis on human skills development, education, and employment and improved standards of living. However, the key challenge lies in measuring or evaluating the impacts of such reporting practices. Many efforts have been made to clearly define and rule out the facts and the appropriate indicators that can help in measuring the impacts. There are some groups working in the regions of Costa Rica that are trying to maintain and study the effect of sustainable developmental parameters (Kates et al., 2005). In the measurement of the developmental sustainability, many stakeholders are trying to put their own initiative measures. For example, in the UN commission, the stakeholders are working to picture the ways to measure progress and to measure the reasons for the lack of progress as well, towards the sustainable development. In the GRI (Global Reporting Initiative), the stakeholders are the corporations, investors, etc. Their sole aim is to rule out the actions performed by the corporate which are negatively impacting the sustainable development objectives (Kates et al., 2005). The case study of Coal Industry Advisory Board (CIAB) presents interesting insights in this context. The CIAB consists of many executives from different coal companies which were established by the International Energy Agency (IEA) in July 1979. The Board caters to the needs of the coal companies. The coal production process, consequent electricity production and the safety conditions of the workers in the industry are some of the vital aspects looked into by the Board. The scope of CIAB also include monitoring resource utilization and undue exploitation of existing resources to prevent complete depletion of natural reserves for future generations (CIAB, 2006). The Board works within the framework of the Organization for Economic Cooperation and development (OECD). They work to improve the energy supply and demand by producing alternative sources of energy. The CIAB has installed a permanent information system on the international oil market to monitor resource utilization. They use the GRI reporting system, both for the corporate and the government reporting. The Dragline at Hail Creek mine of Australia has already adopted the same. They work on a much broader prospective rather than working only on the financial part of the coal company. They have already employed the top class technical and operational standards and highly skilled workforce. The main emphasis lays in the development of the work force, which works towards sustainable development, safety of the team members and the enhanced productivity but not at the cost of the welfare of the people (CIAB, 2006). Economics of Climate change The economics of climate change has come up as an important issue as the sustainability factor. This is because of the fact that owing to the carbon dioxide released from the burning of fossils and other green house gas emissions the surface of the earth has reported increase in temperatures. The result is that the sea level is rising, and the sea waves are also behaving abnormally. It has become more difficult to predict and ascertain as to how the waves would turn up, the intensity of the storms and related weather changes. This has certainly taken a toll on the human life as the ecological balance is disturbed, the wild life is affected to the extent that many of the dairy and other animal products on which human life is dependent has also suffered. The climate change economics emphasizes the positive and the constructive analysis of the economic effects of the climate change on the various commodities and the long term effect of climate on the environment (Goulder & Pizer, 2006). The cost incurred to combat such negative impacts and damages is high. The market damages can be termed as the quantity, quality of the product, and the rise in price of commodities. This can be further extended to the other industries like the forestry, energy services, and water resources. It results in the coastal flooding because of which the sea level also rises. There are some non market damages too that can have serious social implications. These can be identified as imbalances in the ecosystem and the damages felt in social and community welfare (Goulder & Pizer, 2006). The cost of the machineries which would be required to get rid or minimize the harmful effects of the emissions of the carbon dioxide calls for large investment. Thus, climate change is an inherent problem and communities can benefit immensely from prompt action and awareness of such issues within the corporate world. The case study of British Petroleum (BP) illustrates the significance of such accountability and reporting practices. BP has adopted the reporting practice to enhance the significance and value of the company operations in the eyes of the shareholders. Such reporting practices have helped the company prove the fact that their operations are sustainable and contribute to social, economic and environmental development objectives (BP, 2010). In the year 2010, the Gulf of Mexico and the explosion of the Deepwater Horizon are the two incidents which have caused much devastation of human life and consequent loss of the marine life. Future BP operations have focused on safety, understanding and evaluating the risk management to prevent and minimize such catastrophes. Such accountability practices have helped the company in promoting their capabilities and improving their relationship with the stakeholders. Two other two incidents like the Texas City explosion and the pipeline leakage in Alaska caused much harm to the company’s reputation and its implications were felt on trust and confidence of the stakeholder. BP currently focuses on some measures like the evaluation and eradication of oil spills, the number of hours the workers are required to stay, the level of carbon dioxide emitted in the atmosphere, the number of women working, and the benefits provided to employees. All these measures have resulted in improved quality in performance which in turn has helped the company in achieving its business goals and reducing the number of accidents (BP, 2010). They are providing long term support to the environmental conservation for the welfare of the people residing in the Gulf. They are bringing in more advanced technology that contributes to business value creation and thus influences the constructive and other management decisions. For deep water management, they are taking help of the contractors both onshore as well offshore. They are making sure that the accidents, which have already taken place in the past, are not repeated (BP, 2010). Corporate Social Reporting The term corporate is now considered as the institutions rather than the companies per se as they reflect the economic parameters of success. They are the centres for the providing the products, services and are the one stop solution for imparting knowledge, job opportunities and wealth creation (KPMG, 2008). They were earlier considered being the reflector of the financial performance, now the definition is changed to bear the responsibility of the society and the stakeholders. They are required to act and behave in a much ethical and socially responsible manner. The term CRS itself stands for corporate, social and responsibility. Some consider it as the corporate responsibility while some regard it as the social action. The CSR reporting demands that the company’s performance is measured against the parameters of the economic, social and environmental parameters (KPMG, 2008). Apple is one of the leading companies that have adopted the virtues of practicing the culture and the values of the CSR. They are also working to be one of the most environmental friendly and technology advanced Company. They have used the CSR both for the long term and the short term use. They are using the methods of recycling, online reports, employee communication, engaging in some social performance etc (Mitchell, 2010). Benefits and implications of sustainability reporting practices Sustainability reporting is gaining importance and thus interest among the shareholders, the management and the company per se. The economic benefit of a company or the profit is of little consequence if the stakeholders are not certain of their activities and it fails to integrate its economic goals with social and environmental objectives. Sustainability reporting is also required to understand and to enhance the scope of the final report. This facilitates an easy and transparent communication and interaction with the stakeholders, when it comes to gauging the company’s performance. It also provides an easy and fast access to information (CII, 2011). A stakeholder can be the government agencies, investors, and other financial institutions, who demand that the company should be recognized as a socially responsible company. The sustainability reporting helps companies to identify and take care of the business risk and explore other opportunities. This is possible as it helps in thinking out of the box, influences the policy makers and improves the data management techniques. The economic benefit is also linked to the core business processes like regulating cost incurred, increasing the options available to the employees, the clients and other stakeholders. Needless to mention that it helps in the decision making process, and all these measures leads to increase in talents, advanced technology, and last but not the least enhanced profitability (CII, 2011). The World Business Council for Sustainable Development (WBCSB) defines sustainability report as “Public reports by companies to provide internal and external stakeholders with a picture of corporate position on activities on economic, environmental and social dimensions” (Katun, 2010). Increasingly more companies are starting to publish sustainability reports, which as a management tool for businesses can have significant benefits (Katun, 2010). There is an increasing interest and demand by the company’s customers, partners, and other stakeholders for environmental and social reporting to understand and measure the company’s impact on the surrounding environment. More and more companies have started publishing sustainability reports. The key benefits of sustainability reporting are listed in the sections below - Improved financial performance The stakeholders want a clear and a transparent picture of how the company is performing in terms of profit and revenues. For sustainability reports to be effective, it should reflect an understanding of ethical practices, reporting, measures and analysis of the social and the environmental performance as in the financial report. Improved investor relationships The usage of the sustainability reporting lies in its ability to identify the weak areas or the sections that call for improvement and which can help the organization adopt proactive changes for improved results in terms of profits and reputation. The dataset obtained after measuring resources used by the company through analysis of energy, water, waste and other purchases can in the long run help the company make and take appropriate decision in regards to the capital expenses and other programs. Such measures help in sustaining company operations and economic benefit of the organization. Owing to these aids the investor’s confidence increases as it improves the image of the company in the investor’s eyes and enhances the social acceptance of the company. It offers better management of resources in all areas of company operations that play an important role in leveraging economic goals and objectives. All these measure lead to improved business performance, cost savings and success of the organization. Finding new markets and business opportunities The economic importance of the sustainability reporting can also be understood by the fact that it provides a platform to the stakeholders to get critical information from the business perspective. Such benefits are usually absent in the traditional financial reporting. It has the financial reports and other measuring units which are crucial for the stakeholders and the other business units to understand and analyze the areas that are significant for the development and growth of the company. The reports are also useful for understanding and the formation of the human resources information, management of the risks involved in areas such as environmental, social and economic aspects of the business. It helps in interpreting the capability of the company to innovate and adopt a creative work culture to explore new dimensions in the industry. Improved risk management Sustainability reporting also enhances the chances to address and study the risk involved in the business. It helps in saving time, money and maintaining the reputation of the company intact. It explores the negative aspects of the business; identify challenges and market risks that can be overcome to gain competitive advantage in the industry. It also contributes to the sustenance of prolonged financial value of the organizations. According to Snyder (2011) sustainability reporting is not only a “report” and apart from its usage, for commercial purposes, it shows that society and business entities are interdependent and both can benefit from each other. The other benefit would include the making or the creation of the sustainability pathways, creating a platform to be able to compare the result and achievements. Chances for strong bonding with the stakeholders and the regulators and innovation at workplace is also encouraged (Schema, 2011). Creation of a sustainability roadmap Any company needs a sustainability report to get a clear picture of the business performance and efficiency in existing operations. Such measures are useful in defining new strategies and future goals for market leadership. It also emphasizes the future path of the organization which would bring improvement and can provide an action plan to work towards the same. Helps in improving the image of the organization As the organization gets help in evaluating and creating a long term plan and strategy, the structured sustainability reporting digs out the inherent challenges and solutions to the short term goals. All these measures help in building a strong relation with investors and thus aids in improving the image of the company. Barriers to effective sustainability reporting practices The sustainability reporting provides a smooth platform for the companies to have communication with the stakeholders and the shareholders as well. Problem arises when there remains gap in the knowledge transfer between the two. Either both are not on the same page or some serious disagreement arises among them, in terms of the priority, roadmap and the structural framework to be used and followed. This can happen owing to the lack of time, commitment, interest and the understanding of the seriousness of the issue. The management at times in order to look after their self interest fails to adhere to rules or regulations pertaining to the adaptation of the safety measures and the well being of the people. Many accidents have taken place because of this. The risk management team who is in charge for measuring and gauging the risk involved in the operation are not able to anticipate the time and money involved thus resulting in the loss of reputation of the company. The stakeholders comprises of the employees, the investors, credit agencies and the business partners. There should be an element of trust among them; this is required for the smooth functioning of the company and to meet the financial and social goals. Often because of personal ego and negative attitude among employees the transparency at workplace decreases. Last but the least the framework, for e.g. GRI should be used precisely and with adept understanding of its implications for effective results. Most managers lack this knowledge and fail to understand the impacts and benefits of such practices. Recommendations The significance of sustainability reporting can be well understood by the disaster originating with the Deepwater Horizon Oil Spill which began on April 20, 2010. This continued until June 13, 2010. The spill caused a tremendous damage to the ecosystem. This resulted in massive loss to the surrounding ecology and the impact was also very severe. Before the accident Louisiana exported over 30% of the domestic sea food to the United States (IEM, 2010). Likewise it contributed much to the revenue earned by the government, providing job opportunities and contributing in the economic growth of the country. As most of the commercial fish species and the marine life were disturbed and damaged, it took a toll on the fishery revenue earned. The impact was evident in a decrease in the sea food prices, loss of exports, land loss and deforestation. All the related industries also suffered. In order for the company to start all over again, they have to not only rebuilt the fishing process but had to clean up the oil from the sea level as well. This needed more capital investment as there was a huge cost involved in the oil cleaning process, new equipment suppliers, and distributors. This also involved more time, employees and compensation for the losses incurred. The oil and gas industry or any company must realize and understand the important role played by them in the global environment. Their actions should be responsible towards sustaining the ecological balance and the welfare of mankind .This helps the stakeholders to understand the viability of existing operations and company incentives to assume corporate social responsibility. This contributes to positive image of the company and its reputation as a ethical corporate entity. The non- financial reports or sustainability reports are needed for an improved understanding of company operations and complements the financial reports required by the investors. Reporting not only helps in facilitating communication with stakeholders but also presents the image of the company as a socially responsible one (IPIECA, 2010). BP in their sustainability review aims to reflect the exact definition of responsibility in their true sense. With the help of the sustainability reporting systems they can be a safer, environmental friendly, non accident prone and more risk aware business enterprise. This is an effective means to gain and rebuild the trust of the shareholders. This can be achieved only if they can adopt some safety measures, can take care of the demand of the energy and change the framework of the company to be a low-carbon company (BP, 2010). They focus on the utilizing deepwater gas, hydrocarbon basins and building strong relationship with the stakeholders. This is based on the knowledge of the technology used, the understanding of the importance of maintaining the ecological balance and analyzing the severity of the accidents on the well being of the people and the country per se. The focus on the low-carbon business model for their company can ensure safe and reliable operations. All these efforts and measures which are part of the sustainability reporting are dedicated to ensure that BP meets the promise to fulfill its responsibilities and to restore the Gulf cost. They continue to face the challenge of climate change. They are also working to limit the green house gas emissions. All these measures will bring them a positive image in the eyes of the stakeholders and will definitely help them in enhancing their business. With the usage of the sustainability reporting by the companies or the organizations, they can surely grow make a suitable place for themselves in the global economy and global market. The problems persisting with the implementation of the sustainability reporting is educating, teaching and analyzing the importance of the reporting requirements and its application. It is recommended that companies should adopt an easy structure of the reporting system in terms of its operations and procedures that align with social, economic, and environmental goals. Organizations should appoint a group of people to audit and see if the organization is following the rules of sustainability reporting. Much of the problem comes when the companies fail to understand the responsibility they have towards the society, the environment and the country as a whole. The sustainability reporting also enables a company to have clear, transparent understanding of the need of the stakeholders and the financial aspects of the company that play a vital role in strategic planning and decision making process. The unit of the company which is in charge for the transfer of knowledge should also have a clear understanding of the work and should be able to narrate the same to the stakeholders. Conclusion The sustainability reporting which is also called a non financial reporting has come a long way. This is widely used and recommended in all the companies and organizations today. It not only enables the company to meet the profit objectives but also helps in promoting social and ethical responsibilities of the business enterprise. It helps in building the reputation of the company in the eyes of the stakeholders. Organizations can improve their performance by measuring, monitoring and reporting the various elements of the sustainability elements to be used by them. It helps the companies to work in tandem with the society and both grow and flourish as a whole. The need of the hour is to take care of the challenges of the climate, the environmental hazards and the various loop holes in the working of any organization. The financial report presents only the various dataset of the organization but there are many factors over and above the financial report which contributes to the growth and the future of the company. The steps should be taken in a much thoughtful way so as to work on the company objectives but not at the cost of the society. The approaches and the tools which are used to make the company or the organization a more fruitful one, sustainability reporting is one of them. References 1. BP 2010, Sustainability review, available from http://www.bp.com/assets/bp_internet/globalbp/STAGING/global_assets/e_s_assets/e_s_assets_2010/downloads_pdfs/bp_sustainability_review_2010.pdf 2. CIAB 2006, Case studies in sustainable development in the coal industry, OECD and International Energy Agency (IEA) report, available from http://www.iea.org/papers/2006/CIAB_Case_Studies_2006.pdf 3. CII 2011, Sustainability reporting, available from http://www.sustainabledevelopment.in/services/corporate_substainability_management/activities/sustainability_reporting.htm 4. Deloitte 2012, Sustainability reporting, available from http://www.iasplus.com/sustain/sustainability.htm 5. GRI 2012, About sustainability reporting, available from https://www.globalreporting.org/information/sustainability-reporting/Pages/default.aspx 6. IEM 2010, A study of the impact of the deepwater horizon oil spill, IEM, available from http://www.uflib.ufl.edu/docs/Economic%20Impact%20Study,%20Part%20I%20-%20Full%20Report.pdf 7. IPIECA 2010, Oil and gas industry guidance on voluntary sustainable reporting, International Association of Oil and Gas Producers report. 8. Jenkins, W. 2009, Sustainability theory, Berkshire Encyclopaedia of sustainability: the spirit of sustainability, pp 380-384. 9. Kates, R.W., Parris, T.M. & Leiserowitz, A.A. 2005, What is sustainable development? Goals, indicators, values and practice, Environment: Science and Policy for sustainable development, vol 47, no.3, pp 8-21. 10. Katun, A. 2010, How sustainability reporting can help to improve your bottomline, available from http://greeneconomypost.com/how-sustainability-reporting-can-help-to-improve-your-bottomline-9983.htm 11. KPC 2012, Sustainability reporting (under GRI), available from http://www.kpcindia.com/Pdf/Business/Sustainability%20Reporting%20(Under%20GRI).pdf 12. KPMG 2008, Sustainability report – a guide, KPMG Australia report. 13. KPMG 2008, Corporate social responsibility – towards a sustainable future, White paper KPMG and Assocham. 14. Mitchell, J. 2010, Apple Inc – Corporate social responsibility case study, available from http://jmitch150.files.wordpress.com/2010/04/apple-inc-final-csr-case-study.pdf 15. Schema 2011, Sustainability, available from http://www.schematt.com/public/English.aspx?Site_ID=1&Lang=0&Page_Id=500&Menu_ID=45 16. Snyder 2011, Sustainability reporting fact sheet, available from http://www.snyderleadership.com/images/media/Sustainability-Reporting.pdf 17. Vivodepot 2008, Triple bottom line accountability, available from http://www.vivodepot.com/green-building-philosophies-and-methodologies/index.php Read More