Social, Financial, and Environment Sustainability - Essay Example

SOCIAL AND ENVIRONMENTAL SUSTAINABILITY AND FINANCIAL SUSTAINABILITY by SOCIAL AND ENVIRONMENTAL SUSTAINABILITY, AND FINANCIAL SUSTAINABILITY Introduction Sustainability as a concept involves working in a way that an organization considers and accounts for its impact on the planet, the society and the future (Carroll & Buchholtz 2014, p. 145). This paper will outline the role played by various business models in accounting for sustainability. As it will be discovered, sustainability includes three aspects namely; financial, social and environmental sustainability. This research will recognize various ways thatconcepts of social and environmental sustainability differ from that of financial sustainability, and the accountant’s idea of “going concern”. Many organizations refer to sustainability as corporate social responsibility (CSR). Thus, CSR will be used in the essay to refer to social and environmental sustainability. The terms, sustainability and corporate social responsibility refer to the practical contributions that businesses can make to sustainability. How Concepts of Social and Environmental Sustainability Differ from Those of Financial Sustainability, The Accountant’s Idea of “Going Concern” Many companies in recent times have incorporated social and environmental sustainability in their financial statements. (Gray, 2006, p.81) said that reporting social sustainability is crucial because the sustainability apprehensions of individuals, communities and governments facilitate shaping the world in which organizations operate.Sustainability reporting at the enterprise level also intends to represent an organization’ssocial, environmental and economic performance. Social sustainability reporting is aimed at reflecting the external costs and benefits of an organization that are not otherwise identified. Conventionally, ‘labour hires capital’ with the prominence on individual, environmental and social profit. On the contrary, capital hires labour with the superseding prominence on making a ‘profit’ over and beyond any advantage either to the industry itself or the employees (Epstein and Buhovac, 2014, pg. 29). These two differences provide a major contrast to how the accountant views of business operation. Another difference that arises is that of the conflicts created by professional values and managerial logic. Accountants view the firm in professional term, meaning any notion that does not involve accounting principles is rendered irrelevant. The CSR function, on the other hand, is based on managerial logic whereby the businesses engross in broad activities so long as profits are recognized from the business endeavours. Theoretical work on CSR accounting has created different theories as to the motivation of firms to report or release information on their CSR actions, many of them emanating from the Political Economy Theory. This theory encompasses ‘the social, political and economic framework within which human life takes place (Gray et al., 1996, pg.47). One such theory is the Legal theory that suggests that reporting is used as a communication instrument to inform and manipulate how the firm’s actions are perceived (Friedmann, 1944,p. 25). Legal theory has the responsibility of explaining the conduct of organizations in executing and budding deliberate social and environmental disclosure of information so as to realize their social contracts. Profit maximization used to be the all-inclusive measure of organizational legitimacy (Deegan & Unerman, 2011, pg. 325).The social responsibility actions are those aimed at enabling the recognition of organizational objectives for continued existence and growth in an evolving and competitive environment. Social insights of the organization’s behaviours are reported in agreement to the societal expectations. Another theory that has been derived from theoretical work on CSR accounting is stakeholder theory which extends the legal theory arguments to consider not only society as a whole but particular stakeholder groups (Roberts, 1992, p.21). Therefore, stakeholder and legal theories are overlapping perspectives of reporting behaviour(Grey et al, 1995, p. 52). Consequently, the stakeholders demand different information and organizations will respond to their demands in a variety of ways by considering with large share ownership. Practices of CSR are justified by the fourth theory which is the agency theory.This theory was advanced by (Jensen & Merckling, 1970 p. 190).Agency is the relationship between two parties; i.e. a principal and an agent who represents the principal in the transactions with a third party. Principals mostly delegate decision making authority to the agents. Hill, & Jones (1992, p. 37) argue that agency problems arise as a result of inefficiencies and incomplete delegation. Some of the agency relationships are those between: Stockholders and managers; Stockholders and creditors; Society and the firm, in which CSR conflict falls ((Jensen & Merckling, 1970 p. 87). Accountant practitioners face myriad challenges in accounting for social and environmental sustainability. Accountants mainly concentrate on the financial aspects of the business entities and hence they usually fail to discern the CSR component (Bebbington et al, 2014, p.36). The challenges accountants face result to differences between CSR and financial sustainability. Financial sustainability is strongly based on the going concern principle. The principle affirms that an entity prepares financial statements on a going concern basis when, and the entity is presumed that the business will continue for the foreseeable future. There is an underlying assumption that the business shall not cease operation in the near future. The key conflicts that arise between social and environmental responsibilities are summarized in the figure below, Social and Environmental Sustainability Financial Sustainability 1. Risk based 1. Reward based 2. Specialized 2. Integrated 3. Charitable 3. Collaborative 4. Standardized 4. Diversified 5. Image-driven 5. Performance-driven Table 1: summary of Key differences between social and environmental sustainability The table above depicts some other aspects of the differences between CSR and financial view of the accountant. The CSR activities that a company engages in are risk based. They do not pose a major certainty to the firm of whether there will be a certain gain or loss for the company. On the contrary, financial activities such as investment of shares enable the accountant to ascertain the risks involved (Grey, 2006, pg.780). The accountant can calculate the investment portfolio risks to determine financial viability of the endeavor. Additionally, CSR activities are charitable while financial engagements are shared. The company is not strictly mandated to carry out CSR although it may be a necessity to address social issues. However, financial endeavors are shared among business stakeholders, from shareholders to management. The table also depicts the way in which CSR activities are image driven. They are executed to enhance public relations between the firm and the society. they promote the publicity, while financial sustainability is geared to ensure the performance of the company is enhanced (Adams, 2004, pg.750). Performance of the company includes the share price and profitability index. Other differences are; 1. Financial thinking cannot translate to non-financial measures; Accountants evaluate company performance on financial measures such as share value and profit margins. Therefore, a difference arises when companies engage in CSR where accountants don’t recognise social benefits that the company accrues. 2. In financial Accounting, expenses only relate to resources under the control of the company (entity) and excludes common goods such as air and water; a factor of sustainability. Accountants ignore such expenses 3. The notion of “measurability” emphasises reliability but “externalities” are often uncertain “guesstimates”. Social sustainability are regarded by accountants as measurable only by merely estimating them. Financial accounting does not give room for estimates, rather it requires objectivity and accuracy. 4. The notion of materiality turns on quantifiable measurement – if something cannot be quantified it is ignored;CSR investments and gains can be difficult to quantify and therefore accountants may ignore them due to lack of materiality. The social sustainability of an entity is majorly image-driven. Therefore, augmented clearness and demands for companies to extend the boundaries of responsibility are stressing the significance of clear corporate policies to protect corporate reputation and image. Accountants on the other hand, are principally concerned with the organization’s financial performance. They omit the essence of gaining competitive advantage through positive public relations. CSR activities are charitable whereas financial sustainability focuses on concerted actions. Accountants are concerned with cost effectiveness of business activities. They do not allocate capital spending on regular non-profitable endeavours. Moreover, Social and Environmental Sustainability is risk based. This means that the voluntary activities that a company will chose to partake do not carry the elements of certainty in determining if they are value-adding. On the contrary, accountants’ view of the going concern concept is reward-based (ODwyer & Owen,2005, p.21). An example is Unilever Company which has taken an initiative to reduce poverty in Indonesia. Although Unilever has increased sales in Indonesia through social responsibility, its accountants have conflicting view as funds pumped to these activities are not reflected with an increase in income. CSR measures differ from accounting measures. Firstly, CSR activities are undertaken by External stakeholders. These stakeholders include customers, NGO’s and and local communities. Performance measures of these components include ratings and comments, performance against industry best practices and conformance to voluntary standards. All these measurements are subjective. On the other hand, accountants are usually objective in their measurements. They concentrate on internal “corporate” measures that include measuring Return on Investment (ROI) and valuation of shares. What implications do the differences have for the ways in which businesses operate and the ways in which they report on their activities Public sustainability reporting by various businesses models such as manufactures and franchising is influenced by the differences arising from social/environmental sustainability and financial sustainability. Peeters, (2003, p.35) implies that in many business models, sustainability information is not publicly reported but examined internally, or collected by the government. Companies also profit from internal reporting of environmental and social information, especially if this forms part of a general management information structure.Additionally, sustainability reporting needs to address the contributions of individual firms to sustainable growth. Success at a nationwide and international level needs to be reported. Sustainability reporting can be promoted in the form of corporate reporting policies, deliberate reporting rules and legally supported reporting requirements. One of the impacts of conflict between social financial sustainability to reporting is that of regarding the report as a public relations document. Some organizations might. This hampers objective reporting by accountants whereby they may opt to include subjective opinions in favour of improving their firm’s corporate image. The company might focus entirely on desirable factors such as community support policies rather instead for targets, and positive attainments rather than problems of distress to stakeholders. This would derail objective reporting and users of the information such as customers may not make clear and informed decisions. Users of sustainability reports such as investors and government are looking for responsibility and intelligibility. In particular, the government is interested in finding evidence that the entity complies with the Information and reporting voluntary codes. Corporate policies to which the entity subscribes to should be followed in order for them to justify their license to operate. Another impact of the differences is that advances to sustainability reporting designed to meet the problem of items are sometimes not usually recognized in the accounts. As a result, full cost accounting is not achievable. For instance, full cost accounting engages the inclusion of external and internal costs and benefits. It has been designed chiefly from an environmental perspective as a method of ascertaining that business decisions account for organization’s broader impacts. The differences also results in organizations externalizing certain costs. Accountants recognize cost related to environmental sustainability as external costs of the company. Costa and Menichini (2013, p.36) state that issues related to recycling of waste products, and treating contaminated water are classified as external costs. This depicts a motive by accountants on distancing the company’s performance in case of losses. This is to satisfy shareholders and encourage them to make the company pull out of the exercise of corporate social responsibility. Companies also make contributions to social benefits through employment, training, health education and coaching safety, the costs that are associated with the company rather than the community. They may select just a few to minimize cause and limit their contributions to the society. Another impact of the differences to business activities and reporting is use of benchmarking. Social and environmental sustainability activities are standardized in nature. As such, it is challenging to measure some CSR activities. There is a complexity in directly evaluating stainable development hence organizations looking for methods to handle sustainability performance are applying indicators addressing their social, environmental and economic impacts. Benchmarking is a criterion that has made accountants select performance indicators and compare their activities with those of competitors. The development of environmental and social scenes indicators, mainly social performance evaluation, has received relatively little attention. On the contrary, financial performance can be evaluated and analysed by numerous and generally accepted indicators, from the financial statements. However, a number of industry segments have developed sustainability indicators (Peeters, 2003, p.64). Such initiatives have received positive recognition by government bodies, financial sector and non-governmental organizations. Admittedly, environmental performance evaluation depends on the capture and consistent dispensation of information, with the use of a suitable system. Social and environmental sustainability reporting is voluntary. CSR initiatives are charitable activities. The management of a company therefore is not obligated to reveal its spending or investment in these activities. Nonetheless, there are bodies that have formulated requirements, for example the European Union (EU). In May 2001, the EU published Recommendation on the Recognition, Measurement and Disclosure of Environmental Issues in the Annual Accounts. The publication covers requirements for reporting in the United Kingdom (UK). How, these differences be reconciled and the major obstacles to reconciling the differing views The differences between the view of the society and that of the accountants have major impacts in business activities and financial reporting (Pullman, Maloni&Carter, 2009,p.37). Therefore, accountants will have a major role to play in developing management accounting practices to be used in internal reporting of social and environmental impacts. Accountants also have a mandate to make decisions based on performance measurement and interpretation of the information. Although there has been significant progress that has instigated establishing what needs to be reported, there is room for improvements to further outline clear procedures in reporting. External reporting of sustainability issues should enable the management establish whether development is being made towards more sustainable growth. (Bebbington, Unerman, & ODwyer, 2014, p. 6) propose that accountants ought to know of the pattern towards the use of a multi-stakeholder process in formulating reporting proposals. Regardless of this phenomenon, the accounting profession’s far-reaching experience in reporting issues will almost definitely continue to have a most important control in this area. There are numerous ways or reconciling the conflict between the accountants view and social sustainability. One way of reconciling the differences is internalizing external costs associated with CSR. These are the social costs the firms accrue in observing environmental conservation and costs incurred when giving back to the community. Through a period of time, some external costs and benefits may be internalized through subsidies, taxes, and tradable permits (Regan, 1972, p. 430). This method will incorporate full cost accounting concept by acknowledging the hypothetical nature of differences from the accepted financial statements of an organization. The challenges that the organization may face in interpretation of financial statements and reports will also be identified. IASB has also laid particular conceptual frameworks to underpin accounting standards to help reconcile major differences. Popular national accounting standard formulators such as The International Integrated Reporting Council (IIRC), accentuate that users of financial statements take financial decisions based on an evaluation of the entity’s future cash flows, their timing and certainty. Therefore, in the conflict arising from the fact that going concern is mainly based on future cash flows will be solved. Full cost accounting is fundamentally equal and not concerned with future cash flows. Social sustainability is a day to day mandate of any company. A company that has successfully integrated guidelines to social sustainability in its management functions includes the Coca-Cola (Taylor, 2000, p.278).The company has fully adopted international CSR guidelines such as Global Compact and Ruggie’s Protect, Respect and Remedy Framework (Ruggie’s Framework). The CSR initiatives that Coca-Cola has rolled out are included in other activities of the company. For example, the UN Global Compact principles are cross-checked in the company’s annual Sustainability Reviews and Ruggie’s Framework is partially implemented in the company’s ‘Human Right Statement. Another conflict of the company with its stakeholders is that it was accused of water pollution and over-extraction of ground water. Coca-cola acted swiftly and incorporated GRI guidelines in its CSR policies. The company continues to enjoy brand loyalty and has a competitive advantage over its main rivals. One other way of addressing standardization in social and environmental sustainability as opposed to diversity as viewed by accountants is embracing a code of conduct. This code of conduct should contain the element of specificity to avoid ambiguity. Suppliers of raw materials in a manufacturing entity, for example may have a universal standard that favours only CSR. This will differ to diversification culture of financial sustainability. To curb this negative outcome, companies should revisit their code of conduct of suppliers. Additionally, the company should also form a code of conduct for its all stakeholders including employees and customers. In Bangladesh, Walmart, a supermarket chain store experienced social conflict regarding its employees. It was accused of using child labour to reduce operational costs. Children aged 10-14 years old were found working in the factories for less than $50 a month manufacturing products of the Walmart brand to export to be exported Canada (Cedillo et al, 2012, p.58). This created a bad image for the company. Later, in 1992, it developed its first Code of Conduct (COC) named ‘Standard for Suppliers’ which largely focuses on quality standards for suppliers exclusively. However, in 2006, Walmart’s generated a general report on ethical sourcing that embodied suppliers and customers. This report was convoluted after the filing of the lawsuit by the female employees in 2001 and the damaging campaigns and press publications accusing Walmart’s suppliers in Bangladesh of using child labour. Walmart’s reporting culture was replicate most of the companies in the global market. Currently, Walmart has an edge in formulating CSR policies and is taken as a benchmark for many organizations. What are the implications for the future of business (operational and reporting) be of reconciling these differing views and the implications of not doing so? In modern day business models, reconciling the different views of accountants and the society is of essence. The benefits that a firm accrues when it participates in CSR are tremendous. CSR develops company relationships with the surrounding social perspectives. Since it involves many stakeholders, CSR enables the company to coexist peaceful with the society for mutual benefits. Furthermore, CSR can become one of the centres of company novelty and cohesion. It is unfeasible to develop CSR without linking it to company distinctiveness, to the approaches of conduct and the customs of each organization. The other implication is that businesses would emphasize the need to do more than seeking profits. In general, the rationale of a business is not to concentrate on profit-yield. To make profits the firm will have to do more, in this case engage in CSR. CSR, as a pr tool has been known to enhance business image of the firm which leads to societal positive perception. According to (Costa & Menichini, 2013, p.156) CSR becomes relevant when it is incorporated to the company strategies and policies, integrating with the actual values (and not just hypothesized ones) within the company. CSR also amount to a viewpoint on how to develop relationships with various important players in company activity Therefore, it is particularly significant to associate the development of CSR with the development of the people within the company.If we deal with CSR as if it were a public relations ploy, sooner or later this approach will come to a crisis and fall into disrepute. On the contrary, it is absolutely necessary to prepare a reporting and communication model that is not limited solely to economic aspects, but that also includes social and environmental aspects. In this way, it will compose a dialogue between the company, the surrounding world and the various players (Myers& Majluf, 1984, p. 67). It will be a dialogue for learning, a dialogue for explaining actions better and also a dialogue for socially responsible companies to obtain recognition. Reconciling the differences also presents an opportunity for business models that specialized in supply chain management. Reconciling the differences offer obstacles to businesses. One of such challenge is difficulties operating with indistinct (non-economic) objectives. This challenge will face firms that go ahead to execute their dealings with no profit motive, in trying to please the society in enhancing environmental sustainability. Other difficulties in this category also include problems accounting to numerous stakeholders. Accounting for social, financial and environmental issues can prove to be inconvenient to accountants as the process of accounting for them would prove complex (Pullman, Maloni, and Carter, 2009, pg. 40). The management for social enterprises would also face difficulties such as securing finance, instituting networks and cooperatives and improving the value of goods and services. The financial burden associated with CSR may prove a challenge to the management of social enterprises not forgetting that the goods and services produced by the firms will be compromised in quality. (Orlitzky, Siegel, and Waldman, 2011, pg.12 also added that the management also faces challenges in instituting sufficient governance structures. This poses a great limitation in ensuring financial and CSR obligatory are met. Conclusion Social, environmental and financial sustainability are the three fundamental components of overall business sustainability. Many accountants are concerned with the financial performance of an organization. As such, they tend to omit, either voluntarily or involuntarily the organizational social performance. This creates a conflict between the society and the organization. In this regard, accountants end up having a different view on how to account for social and environmental endeavours. The accountants view of externalizing social functions of a report result in separating social reports from financial reports.Lyon&Maxwell (2008, p.245) recommended that the conflict can be resolved by internalizing social reporting. Internalizing external accounts enables the firm to objectively report its overall performance. Additionally, the benefits of observing social aspects of business by practicing CSR are justified by three main theories. Stockholders theory, MM Theory of Altruistic corporate social responsibility and agency theory provide bases of CSR. Accountants can accept CSR as a crucial function. 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