EG Module-5 2nd-Edn

CPA PROGRAM
ETHICS AND
GOVERNANCE
2ND EDITION
MODULE 5
BE HEARD.
BE RECOGNISED.
Published by Deakin University, Geelong, Victoria 3217, on behalf of CPA Australia Ltd, ABN 64 008 392 452
First published January 2010, reprinted July 2010, revised January 2011, July 2011, reprinted January 2012,
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January 2015, updated January 2016
Second edition published May 2018
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Authors
James Beck Managing Director, Effective Governance Pty Ltd
Courtney Clowes Director, KnowledgEquity
Craig Deegan Professor of Accounting, RMIT University
Patrick Gallagher Director, Governance Tax & Risk Pty Ltd
Alex Martin Manager Financial Policy, Australia and New Zealand Banking Group Ltd
Greg McLeod Senior Investigator, Australian Securities & Investments Commission
Roger Simnett Professor, School of Accounting, University of New South Wales
Jennifer Tunny Senior Research Advisor, Effective Governance Pty Ltd
2016 updates
Jeremy St John Faculty of Business and Economics, Monash University
Thomas Clarke Director, Centre for Corporate Governance, UTS Business School
Roger Simnett Professor, School of Accounting and Centre for Social Impact,
University of New South Wales
Acknowledgments
Steven Delaportas Professor of Accounting, RMIT University
Greg McLeod Senior Investigator, Australian Securities & Investments Commission
Michaela Rankin Associate Professor, Monash University
Tehmina Khan Lecturer, RMIT University
Advisory panel
James Beck Effective Governance Pty Ltd
Prof Thomas Clarke University of Technology Sydney
Dr Mary Dunkley Swinburne University
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Mike Sewell Clean Technology Innovation Centre
Marcia O’Neill Consultant
Eva Tsahuridu CPA Australia
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ETHICS AND GOVERNANCE
Module 5
CORPORATE ACCOUNTABILITY
* CPA Australia gratefully acknowledges the many authors who have contributed to this module.
384 | CORPORATE ACCOUNTABILITY
Contents
Preview 387
Introduction
Objectives
Teaching materials
Overview and introduction to key elements 390
The evolution of corporate accountability
History of CSR reporting
Environmental sustainability
Social sustainability
Economic sustainability
Linking environmental, economic and social sustainability
The board’s responsibility for sustainability of the organisation and
organisational initiatives
Introduction to the key elements
Drivers of increased business accountability 399
The importance of climate change and its relevance to CSR reporting
The Global Financial Crisis (GFC) and the recognition of market and ethical
failures: a case for accountability and transparency
Other incentives tied to maximising the value of the organisation and
shareholder wealth
Corporate identity and accountability
The shareholder primacy perspective
Externalities and potential government intervention
Linking to ethical theories 410
Enlightened self-interest
Stakeholder theory
Organisational legitimacy
Institutional theory
Summary
What can be measured and reported? 416
What is measurable?
Limitations of traditional financial reporting 419
Scope of reporting
Elements of financial reporting
The practice of discounting future cash flows
Reliable measurement and probability
Focus on short-term results
The entity assumption
Reporting and guidelines 423
What is required? (Mandatory reporting)
Guidelines and non-mandatory reporting
Other initiatives
Current reporting practice 449
Surveys of current reporting practice
Examples of best practice and innovative reporting
International initiatives on climate change 452
Climate change accounting techniques
Accounting for the levels of emissions
Current developments 459
Socially responsible investments
Natural capital accounting
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CONTENTS | 385
Review 463
Readings 465
Reading 5.1 465
Reading 5.2 467
Reading 5.3 468
Suggested answers 471
References 483
Websites monitoring progress
MODULE 5
MODULE 5
Study guide | 387
Module 5:
Corporate accountability
STUDY GUIDE
Preview
Introduction
Organisations are entrusted with significant assets and power, and have the ability to have a
significant effect on the economy, community and the environment. As such they need to be
accountable for their actions, and reporting is one method for discharging this accountability.
Traditionally, corporate accountability has been discharged via annual reports. Annual reports
are made up of many components that together demonstrate the organisation’s action
and accountability. But, in most circumstances, the part of the report that receives the most
emphasis is the financial report, especially the accounting profits. However, financial reporting
is not designed to communicate to a broad range of users, and specifically focuses on the
shareholders and debt-holders. As such, these reports are commonly criticised as being narrow
in scope in that they emphasise historical accounting profit, and do not tell the full extent of
the value creation story of the organisation or of the organisation’s broader impacts.
In addition to being accountable for the resources in their care and for their behaviour and
actions, companies are also expected to be sustainable in the way they operate, and also in the
way they consume raw materials and produce finished goods. Dwindling resources, damaged
ecosystems and exploited labour are three reasons to encourage and pursue social and
environmental sustainability.
Organisations are increasingly making additional disclosures to meet information needs that
are not satisfied by the reporting requirements of financial accounting as reflected in financial
statements. This aligns with increasing stakeholder expectations of sustainability (commonly
referred to as corporate environmental, social and governance (ESG)) responsibilities.
MODULE 5
These expectations have been addressed through a significant growth in companies producing
stand-alone or web-based corporate social responsibility or sustainability reports over the last
10 years (KPMG 2013). The disclosure of information about sustainability performance and
processes has become so common that it is now considered mainstream reporting by most major
corporations around the world.
The increase in reporting by businesses about their social and environmental impacts and
performance has been accompanied by a recent increase in associated regulation worldwide.
This means that for some organisations, corporate accountability has changed from being
desirable to being expected, and from being expected to being required.
Some examples of new regulations include the European Parliament announcing the adoption
of a directive on disclosure of non-financial and diversity information for organisations with more
than 500 employees. Such organisations will have to disclose additional information regarding
‘policies, risks and results in respect of environmental matters, social and employee-related
aspects, respect for human rights, anti-corruption and bribery issues, and diversity on boards of
directors’ (EC 2014). In addition, a number of stock exchanges throughout the world, including
Johannesburg, Sao Paulo, Singapore, Kuala Lumpur and Copenhagen, require listed companies
to submit an integrated report (discussed later in this module) or report on their sustainability
issues, or explain why they have omitted this information.
One of the reasons for desiring greater corporate accountability is so we have a sustainable
future, and sustainable development is a central concept in this module. As such, it is useful
to provide a working definition. For the purpose of this module, sustainable development is
defined as:
Ensuring that the needs of today’s world are met while at the same time ensuring that the ability for
future generations to meet their own needs is not compromised. (WCED 1987, p. 16)
This definition is derived from the report Our Common Future (WCED 1987), also known as the
Brundtland Report, and was presented in 1987 by the World Commission on Environment and
Development chaired by Gro Harlem Brundtland, then the Norwegian prime minister.
In this module we introduce you to the key elements of corporate accountability. We then discuss
drivers for greater accountability. These include climate change, the global financial crisis (GFC),
and placing greater emphasis on a concept of value creation for improving shareholder wealth
that is broader than accounting profit. We link this to ethical theories and examine the extent
to which some of these broader concepts are capable of being quantifiably measured.
We also demonstrate that there is a variety of reporting approaches that have recently
evolved to ensure greater corporate accountability. We identify the main mandatory reporting
requirements that have developed, and discuss some of the more widely adopted or higher
profile non‑mandatory reporting initiatives. These include the G4 Sustainability Reporting
Guidelines (G4 Guidelines) of the Global Reporting Initiative (GRI) (2013a) and the International
Integrated Reporting <IR> Framework (IIRC 2013). The module will conclude with a review of
current reporting practices and current developments, including international initiatives on
climate change, social responsibility investing and natural capital accounting.
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Study guide | 389
Objectives
After completing this module, you should be able to:
• explain the concept of social and environmental responsibility and its relevance to
governance;
• describe the obligations of corporations in relation to their social and environmental
behaviours;
• discuss the different theoretical perspectives about what motivates organisations to
present social and environmental information;
• identify the components of corporate social responsibility or sustainability reports;
• identify the limitations of conventional financial accounting in relation to the recognition
of social and environmental costs and benefits;
• describe the mandatory reporting requirements for social and environmental
performance reporting;
• describe the elements and frameworks of non-mandatory reporting for social and
environmental performance reporting;
• discuss the reasons why an entity would use non-mandatory reporting;
• explain the relevance of climate change to corporate accountability, and identify some
related measurement issues; and
• evaluate the role of corporate governance mechanisms in enhancing an organisation’s
social and environmental performance.
Teaching materials
• Readings
Reading 5.1
‘Further views about the social responsibilities of business’
L. de Kretser
Reading 5.2
‘Westpac named world’s most sustainable company at Davos’
G. Liondis
Reading 5.3
‘Social responsibility in eye of beholder’
J. Bhagwati
• Case Study
Case Study 5.1
‘Drilling into disaster: BP in the Gulf of Mexico’
(available on My Online Learning) MODULE 5
Overview and introduction to key elements

In this section, we consider the history and potential boundaries of corporate social responsibility
(CSR) reporting.
The evolution of corporate accountability

There are different perspectives about what the responsibilities (and accountabilities) of business
are, and as such, there is no absolute definition of CSR. As the Australian Corporations and
Markets Advisory Committee noted in its report titled The Social Responsibility of Corporations:
The term ‘corporate social responsibility’ does not have a precise or fixed meaning. Some
descriptions focus on corporate compliance with the spirit as well as the letter of applicable laws
regulating corporate conduct. Other definitions refer to a business approach by which an enterprise
takes into account the impacts of its activities on interest groups (often referred to as stakeholders)
including, but extending beyond, shareholders, and balances longer-term societal impacts against
shorter-term financial gains. These societal effects, going beyond the goods and services provided
by companies and their returns to shareholders, are typically subdivided into environmental,
social and economic impacts (CAMAC 2006, pp. 13–14).
This highlights the fact that definitions of corporate accountabilities typically extend the
responsibilities of corporations beyond their shareholders alone, and incorporate activities
over and above those relating to the usual provision of goods and services. However,
whether corporations, which are owned by shareholders, can realistically be expected to
balance the needs of other stakeholders—many without any financial power or influence—
with the fundamental quest of maximising the wealth of shareholders is a question that will
evoke a different reaction from different people. These tensions are discussed in Adams and
Whelan (2009).
Many people believe that corporations have to earn a social licence to operate and have a
responsibility to make choices that benefit society and the environment. There are others
who continue to believe that the fundamental quest of corporations to maximise profits and
shareholder value can be achieved with little consideration of broader stakeholder interests.
Still others, such as Unilever, firmly believe that social responsibility and minimising environmental
impacts are essential to long-term growth and returns to shareholders. It is unrealistic and
even dangerous to leave social responsibilities in the hands of organisations that are guided
by ‘enlightened self-interest’. As you will see in this module, there is an increased emphasis on
regulation worldwide, and the corporate accountability imperative now extends beyond a few
enlightened organisations.
The underpinning philosophy is that corporations have a social and environmental impact in
addition to their economic impact and these can enhance or diminish the collective good or
wider societal progress. These new accountabilities are being demanded by civil societal groups
with business leaders often responding to, rather than leading, the debate.
Corporate accountability is evidenced by CSR or sustainability reporting. This involves measuring

and reporting on economic, environmental, social and governance aspects and the processes
of an organisation.
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Corporate accountability is closely linked to the other four modules in this subject. This broad
view of corporate accountability demonstrates how the professional accountant can have
a positive impact on society (Module 1). It shows the importance of the accountant having
knowledge of ethics and the tools that can be used to resolve complex ethical dilemmas
(Module 2), as well as the key concepts and principles that underpin corporate governance
approaches (Module 3). It is also a demonstration of the balancing act that the accountant can
be involved in, as different organisations will have a different balance between the objective
of maximising the wealth of shareholders and the responsibility of making choices that benefit
society and the environment (Module 4).
CSR reporting is a process whereby an organisation publicly discloses information about its
interactions with, and impact on, the various societies and environments in which it operates.
As we will see, the nature of this reporting can vary widely between organisations, and across time.
History of CSR reporting

There is a rich history of CSR reporting that, just like financial reporting, has developed differently
according to geographic region. Gray and Adams et al. (2014) summarise these differences and
chart the development of CSR reporting. For example, within the Australian context, Guthrie and
Parker (1989) examined the CSR reporting practices of BHP Ltd (later to become BHP Billiton
Ltd) for the 100 years from 1885 to 1985. They found that throughout the period of their analysis,
BHP disclosed various items of information about its social performance, and from around 1950
also began disclosing information about its environmental impacts.
While there is a history of some organisations making CSR disclosures, within the Australian
context, the practice of CSR reporting became more widespread in the early 1990s. At that time,
many mining companies, some water and energy utility organisations and some organisations
in other industries began releasing stand-alone reports (often referred to as environmental
reports) that documented various aspects of their environmental performance. They did this
on a voluntary basis as there were no laws or regulations in place at that time compelling them
to do so.
In the mid-1990s, various organisations started producing more information about their social
performance. More recently, most leading companies are producing reports—often referred to
as ‘Sustainability reports’ or ‘Corporate social responsibility reports’ (these labels are often used
interchangeably)—that incorporate various aspects of their economic, social and environmental
performance. Again, there are no laws or regulations that compel organisations to release
publicly available CSR or sustainability reports.
This greater emphasis on a broader accountability has been accompanied by an increase in

associated regulation of CSR reporting worldwide, so that for some organisations the broader
corporate accountability imperative has gone from desirable, to expected, to required. Not only
is regulation seen as an increasingly important driver of CSR reporting, but frameworks such as
the GRI and voluntary guidance from regulators and stock exchanges are also increasing the
incidence of reporting. In the next section we discuss the three main pillars of sustainability:
environmental, social and economic sustainability.
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Environmental sustainability
Environmental sustainability involves making responsible decisions and taking action that are in
the interests of protecting the natural world, with particular emphasis on preserving the capability
of the environment to support human life.
There are several compelling arguments for environmental sustainability. From a humanistic
perspective, environmental sustainability is critical because humans rely on the natural
environment for survival and therefore have a responsibility to address the problems they
cause. The intergenerational argument contends that not being sustainable is an unfair
burden to place on future generations, who ultimately will have to live with the consequences
of our current behaviour. The naturalistic argument claims that nature has an intrinsic value,
and deserves preservation for its own sake. While you may find some of these arguments more
convincing than others, they are mutually reinforcing and together make a compelling case for
pursuing environmental sustainability.
The role of business in environmental sustainability has been highlighted by a series of high
profile environmental disasters that have had a vast effect on the environment, ecology and
our society.
Example 5.1: Environmental disasters

Bhopal, India, 1984
Over 500 000 people were exposed to highly toxic chemicals that leaked from a Union Carbide India
Ltd plant; an estimated 22 000 people died.
Chernobyl, Ukraine, 1986

A nuclear power plant accident killed over 4000 people, caused 350 000 people to be permanently
resettled, and is still associated with environmental contamination, illness, deformities and cancers.
Deepwater Horizon, Gulf of Mexico, 2010

An explosion and sinking of a BP deep-water oil rig resulted in oil flowing for 87 days before the well
was capped, discharging an estimated 4.9 million barrels of oil into the ocean with extensive damage
to wildlife, marine ecology, coastlines and tourism across a huge area.
These environmental incidents are shocking, and have received considerable interest from
society, the media and government. However, it is not just disasters that have piqued society’s
interest in environmental sustainability. We are increasingly aware of the resource constraints and
limitations of the world we live in. For example, fresh water is a finite resource that is critical to
life, but also underpins the productivity of industrial, mining, agricultural and urban development.
We are increasingly aware that our water resources are limited; this represents a huge risk to
human life and commercial activity. It is important to note that although businesses contribute
to these problems they may also have tools to address these complex problems.
Some of the key environmental sustainability issues today include:
• Climate change: The change in global and regional climate patterns is associated with more
intensive emission of atmospheric carbon dioxide and other greenhouse gases resulting from
the use of fossil fuels. Climate change represents one of the most challenging market failures
ever known, and the role of business in resolving this problem is critical.
• Waste: Waste is the by-product of production that cannot be reprocessed, recovered or

purified. As global commercial activity escalates, more waste is produced and discarded
or released into the environment in a manner that can cause harmful change.
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• Pollution: Businesses create pollution when production processes lead to the introduction
of substances or contaminants into the natural environment that can cause harmful effects.
• Biodiversity: This refers to ‘the variety of life on Earth. It is the variety within and between
all species of plants, animals and micro-organisms and the ecosystems within which they live
and interact.’ (WWF 2014). Ecosystems are complex and interdependent, so when a business
affects one element of an ecosystem, this can result in profound changes to other parts of
that system.
Social sustainability
Social sustainability can be understood as the ability of a system to continue to function at
a reasonable level of social well-being. Thus an organisation is socially sustainable when its
activities not only meet the needs of its current stakeholders but also support the ability of future
generations to maintain healthy communities.
Traditionally, social sustainability has been considered the role of government; however, there is
a growing acceptance that companies also have an important role to play. Socially sustainable
activities of an organisation may include maintaining mutually beneficial relationships with
employees, customers, the supply chain and the community.
As with environmental sustainability, there are many examples of when companies have not
demonstrated their commitment to social sustainability. One prominent example of this is the
2013 collapse of the Rana Plaza building in Bangladesh, where 1138 people died, many of whom
were poorly paid garment makers who worked extremely long hours in very unsafe conditions.
The disaster caused international outrage, and some responsibility for the conditions of the
workers was placed on the western retailers who sold the garments. The Rana Plaza disaster
showed that as an increasingly globalised and interdependent world, we are becoming more
aware of the linkages between companies, markets and complex global problems such as
poverty and inequity. Some topical issues in social sustainability include the following:
• Child labour: The employment of children in business or industries is illegal in most parts of
the world, yet remains a widespread practice, with an estimated 215 million child labourers
worldwide. It often places children at risk of harm and interrupts their education. World Vision
argues child labour ‘deprives children of their childhood, their potential and their dignity’
(World Vision 2012).
• Ethical trading: This includes operating in markets with integrity and legality. Unethical
trading practices may include corruption, anti-competitive behaviour, bribery, aggressive or
predatory pricing, unethical marketing or unfair uses of power in markets.
• Supply chain management: Many corporations, particularly multinationals have extensive,

complex supply chains for the products they manufacture. There are increasing demands for
corporations to be more accountable, not only for their own activities, but also for those of
the companies that supply them, as was the case in the Rana Plaza disaster.
Social sustainability is not just a global issue. It also relates to local communities, as the following
example illustrates.
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Example 5.2: WACOSS model of social sustainability

The Western Australia Council of Social Services (WACOSS) developed a Social Sustainability
Assessment Framework in September 2008 as a tool specifically for organisations that provide services
to the community. It is intended to be an educational tool that enables organisations to understand
how services and programs contribute to social sustainability by facilitating discussion and enhancing
the understanding and awareness of a project. The Assessment Framework was based on the WACOSS
Model of Social Sustainability (2002).
The WACOSS Social Sustainability Assessment Framework has informed the development of WA State
Budget recommendations and is based on five principles:
• equity
• diversity
• quality of life
• inter-connectedness
• democracy and governance.
Economic sustainability
The economic dimension of sustainability concerns organisations’ impact on the economic
conditions of its stakeholders and on economic systems at local, national and global levels.
In the case of an organisation, it means using available resources to their best advantage
(both efficiently and responsibly) so the organisation can continue to function over a number
of years at a given level of activity. The idea is to promote the use of those resources in a way
that does, and is likely to continue to, provide long-term benefits.
Economic stability is important as we live in a market-based capitalistic society, and it is important

that corporations remain economically viable and vibrant in this system. The GFC of 2007–08
originated in financial markets and led to a global recession from which we are still recovering.
The impacts of the GFC were widespread and extended across financial markets, banking
systems and national economies, and ultimately had huge social consequences. This included
some people losing their savings, houses, and financial security and also led to widespread
lack of faith in our financial system. It showed how complex and interconnected our economic
markets are, and how vulnerable many parts of our society are to economic conditions. It also
pointed to deep flaws in the ways corporations operate. These issues include the following:
• Long-term viability of businesses: Our reporting and financial systems are geared more
towards the short term. Some argue that this leads to myopic decision-making and an
institutionalised failure to manage businesses for the longer term (Bair 2011). This has
generated demands for more attention to be paid to the performance and activities of
businesses in the long term.
• Stability of the economic system: The GFC, like other economic crises before it, showed
how complex and interconnected our economic systems are. Further, economic systems are
an integral part of human communities, and breakdowns can have widespread consequences.
Corporate behaviour can play a large role in creating a stable economic system.
• Transparency: Transparency refers to openness and authenticity about a corporation’s

operations and strategy. Economic sustainability can be affected by many different factors;
transparency allows external stakeholders to appreciate the exposure of corporations to risks.
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Linking environmental, economic and social sustainability

It is important to jointly consider the three aspects of sustainability. A common way to think of
the three aspects—environmental, social and economic—is as three pillars necessary to achieve
sustainable development. This is shown in Figure 5.1.
Figure 5.1: The three pillars of sustainable development
Sustainability
Environmental
Economic
Social
Source: CPA Australia 2015.
Most national and international initiatives, and many advocacy efforts, focus on only one
pillar at a time. For example, the United Nations Environmental Programme (UNEP) and the
environmental protection agencies (EPAs) of many nations focus on the environmental pillar.
The World Trade Organization (WTO) and the Organisation for Economic Cooperation and
Development (OECD) focus mainly on economic sustainability. A company or other reporting
organisation that focuses on one pillar in isolation risks its sustainable future and reputation.
There may of course be different emphases that are appropriate, but an organisation should
consider all three pillars in its sustainable business strategy.
As the GFC demonstrated, weakness in one pillar can have consequences for the other pillars.
As a result of the GFC, many nations and states cut back or postponed stricter environmental laws
or investment, since their budgets were running deficits. Many environmental non governmental
organisations (NGOs) saw their income fall, and income spent on social programs also declined.
These three pillars of sustainable development are often included in CSR reporting. Many
organisations, in their CSR reporting, will discuss their sustainability initiatives in accordance
with these three pillars. As we will see later in this module, the most widely used guidelines
for sustainability reporting, the Global Reporting Initiative (GRI), structure their sustainability
indicators so as to provide insights into an organisation’s significant economic, environmental
and social impacts.
MODULE 5
The board’s responsibility for sustainability of the organisation

and organisational initiatives
There is a growing recognition that boards and those in charge of organisations have an
increased responsibility for taking into consideration broader factors that are beyond financial
profits and performances (Hopwood, Unerman and Fries 2010: OECD 2011, IIRC 2013). It is
argued that leaders of organisations have ethical responsibilities to create a sustainable society,
and that there is a business case for operating in an environmentally and socially sustainable
manner. There is growing demand from a broad range of stakeholders for organisations to better
manage the entity’s consumption of natural resources, and formally incorporate environmental,
social and governance factors in risk assessment processes. Company management faces
the organisational challenge of simultaneously trying to manage environmental and social
performances for the benefit of the community (external stakeholders) while maintaining financial
performance for shareholders.
One important element of the business case, and a reflection of the increased demands from
society, is that specific regulations are asking organisations to report more broadly than financial
performance and position. For example, as discussed later in this module, in March 2014,
the Australian Stock Exchange Corporate Governance Council included a new best practice
requirement that an entity disclose any material exposures to economic, environmental and
social sustainability risks and that if this is the case then the entity needs to provide explanations
for how it manages these risks. Also, across the world we see that climate change initiatives are
becoming a significant driver of the costs and benefits to business. For example, in Australia,
large businesses that exceed relevant thresholds are required to report to the government their
greenhouse gas emissions, greenhouse gas projects, energy use and production under the
National Greenhouse and Energy Reporting Act 2007 (the NGER Act).
In addition to the direct effects of specific regulations, the business case for sustainability
considers other effects on the business, from changing relations with customers, suppliers and
other stakeholders, to the costs and risks of doing business. There is evidence of a positive
relationship between a business’s credibility on sustainability issues and its ability to win and
retain customers, as in Hopwood, Unerman and Fries (2010). Their research also draws links
between a focus on sustainability and increasing competitive advantage through innovation
and new products, and the business’s ability to attract, motivate and retain staff. The business is
also likely to manage risk better if it has a conscious focus on sustainability risks, and to reap the
rewards of direct cost reductions through operational efficiencies and avoiding waste, travel and
regulatory costs. The increase in business profitability and ability to manage risks will benefit
the business’s reputation and brand, including its licence to operate and its ability to raise
external funds.
There is a growing sense that traditional financial reporting is not sufficient. The landscape
for non-financial reporting has changed at different speeds in different countries and regions.
Governments are making policy changes and the consequential procedural changes impose new
reporting requirements on companies. In fact, KPMG in their 2013 survey analysed the reports of
more than 4100 companies globally—including the world’s 250 largest companies—concluding
that ‘The high rates of CR (corporate responsibility) reporting in all regions suggest it is now
standard business practice worldwide’ (KPMG 2013, p. 11). They also identified that much of this
increase was associated with increased regulatory requirements. In addition, some company
managers are voluntarily adopting new reporting practices in response to the desire for better
information for a wider range of stakeholders.
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As we outline later in this module, in response to these concerns, we have seen a significant
development in the evolution of corporate reporting, the integrated reporting initiative.
Integrated reporting provides a broader accountability of an organisation’s resources and
relationships than does financial reporting, by requiring a consideration of all resources and
relationships (including social and environmental) that impact the value creation activities of
the organisation.
The evolution of different organisational forms: social enterprises and B‑Corporations

At the same time we are seeing the development of different organisational forms. Of particular
interest are social enterprises, which are organisations that exist to fulfil a mission consistent with
public or community benefit, trade to fulfil that mission, and reinvest a substantial proportion
of their profit or surplus in the fulfilment of that mission (Barraket et al. 2010). Social enterprises
are argued to represent a form of hybrid organisation, having both business and charitable
characteristics. Traditionally commercial enterprises, public organisations and charities were
distinct entities; however these traditional boundaries are becoming increasingly blurred.
An example of this new organisational form are the companies that are recognised as
B-Corporations. A B-Corporation involves a certification process that recognises ‘a new type
of company that uses the power of business to solve social and environmental problems’
(B-Corp n.d.). In 2015 there were 1307 registered B-Corps from 41 countries. Companies that
have been certified by BCorporation are able to distinguish themselves from other companies
by offering a positive vision of a better way to do business.
In 2014, Natura from Brazil become the first publicly listed B-Corp. Natura is a cosmetics business
based on a direct selling model, which has approximately seven thousand employees in Brazil.
It currently has more than 1.6 million Natura consultants (NCs) in Brazil and internationally.
In explaining why the company wanted a B-Corp certification, they stated:
More than contributing to society with the adoption of sustainable practices, we wish to promote
a growing movement of awareness and search for solutions to a more balanced and fair future
with a social, economic, and environmental perspective. Being part of the B Corp movement
strengthens our belief that we indeed must seek profit, which is the basis of our operation, but this
should not be the sole purpose of our existence. (Natura 2014).
Introduction to the key elements

In this section we provide a brief introduction to some of the key concepts before we consider
the drivers for accountability and discuss issues and practices around their measurement
and reporting.
Accountability
Central to this module and directly tied to the decision to report information (whether it be CSR
or financial information) is the concept of ‘accountability’. We can define accountability as the
duty to provide a report, or an account, of the actions and decisions made about those areas of
activity for which an organisation is deemed to be responsible. These may be financial or non
financial and usually focus on the use of resources that have been entrusted to an organisation’s
care. If we are to accept that an entity has a responsibility (and a duty of accountability) for its
social and environmental performance, then we, as accountants, should provide ‘an account’
(or report) of an organisation’s social and environmental performance—perhaps by releasing a
publicly available CSR report, including additional information in the annual report or disclosing
information online.
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Therefore, a central aspect of corporate accountability and the role of corporate reporting is
to inform relevant stakeholders about the extent to which actions for which an organisation
is deemed to be responsible have been fulfilled. Reporting, whether it be CSR reporting or
otherwise, is a vehicle for an organisation to fulfil its requirement to be accountable.
CSR
For the purposes of this module we base our discussion of CSR on the following definition
by the Commission of European Communities (CEC), which states that CSR is:
A concept whereby companies integrate social and environmental concerns in their business
operations and in their interaction with their stakeholders on a voluntary basis. Being socially
responsible means not only fulfilling legal expectations, but also going beyond compliance
and investing more into human capital, the environment and the relations with stakeholders
(CEC 2001, p. 6).
The above definition is consistent with the definition of CSR provided by the World Business
Council on Sustainable Development (WBCSD n.d.):
‘Corporate social responsibility is the continuing commitment by business to behave ethically and
contribute to economic development while improving the quality of life of the workforce and their
families as well as of the community and society at large.’ (WBCSD, p. 3)
In practice, CSR can refer to a wide range of activities that an organisation can undertake,
from making donations to selected charities to undertaking sustainable activities, including
reducing carbon emissions from their operations. Commonly, the terms ‘CSR reporting’ and
‘sustainability reporting’ are used interchangeably.
Sustainability
There are many and varied definitions of sustainability but the concept addresses the ongoing
capacity of the earth to maintain all life. To be sustainable, the needs of the current generations
must be met without compromising the ability of future generations to meet their needs.
Actions to improve sustainability are both individual and collective endeavours, shared across
local and global communities. They necessitate a renewed and balanced approach to the way
humans interact with each other and the environment (ACARA 2014).
Sustainability reporting
Sustainability reporting is the process of producing a sustainability report (published by an
organisation) about the economic, environmental and social impacts caused by the organisation’s
everyday activities. Other aspects that are commonly expected of an organisation’s sustainability
report include information about the organisation’s values and governance model, and links
between its corporate strategy and its commitment to a sustainable global economy.
Natural capital
Natural capital can be understood as the world’s stocks of natural assets. It includes air, water,
land, soil, geology and biodiversity. It is a finite resource, and the demands of a growing and
increasingly prosperous global population means that escalating demands are being placed on
an already overstretched resource.

The process of calculating the total stocks and flows of natural capital available to and used by
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an organisation, or other possible reporting units, such as an ecosystem or region, is known as

natural capital accounting.
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Integrated reporting
Integrated reporting is a process founded on integrated thinking (see below) that results in
a periodic integrated report by an organisation about aspects of its value-creation process.
Bringing together the main parties involved in corporate reporting, the International Integrated
Reporting Council (IIRC) has produced a conceptual framework for the preparation of a concise,
user oriented corporate report entitled an ‘integrated report’, which captures an organisation’s
resources and relationships using a ‘six capitals concept’ and requires a description of a
company’s business model, allowing a better communication of its value creation proposition
over the short, medium and longer term.
Integrated thinking
An important component of integrated reporting is ‘integrated thinking’, which is ‘the active
consideration by a company of the relationships between its various operating and functional
units and the capitals that the organisation uses and affects’ (IIRC 2013, p. 2). Some of the
expected advantages that an organisation gains from undertaking integrated thinking are that
it advances the alignment of the organisation’s strategic focus with both its financial and non
financial performance. With greater comprehension of how a company creates value and of the
social and environmental impact of its activities, it is more likely that management will recognise
the imperative of integrating sustainability concerns into business strategies.
Drivers of increased business accountability

The importance of climate change and its relevance to
CSR reporting
One area in which many organisations have had a negative impact on society and the environment
is climate change. For many years, companies have treated the atmosphere as a ‘free good’ and
have released emissions into the atmosphere with no direct cost implications. This has allowed
economic activity to develop, generating corporate profits and economic growth at the same time
that climate change has become a reality, thereby raising the potential of serious problems for
future generations (actions which are not in accordance with the goal of sustainable development
as defined earlier).
Had organisations been charged an expense for their emissions in their pursuit of profits in a
market-based economic system, this might have encouraged them to develop ways to reduce
their emissions—and their costs. The introduction of carbon taxes and emission-trading schemes
in some parts of the world has meant that many organisations will now have to internalise aspects
of the environmental impact of their business that would previously have been treated as an
externality and ignored. Motivated by efforts to improve corporate profitability, companies will
focus on reducing emission levels, and therefore, the amount of (carbon) taxes they are required
to pay.
Climate change is obviously an issue attracting much attention globally, and one that we would
expect organisations to address in their CSR reports. Indeed, many organisations consider it to
represent one of their biggest risks.
One or two decades ago, many companies challenged the science associated with climate
change, but now there is a general acceptance that human activity is changing the climate.
We return to the issue of climate change later in this module. At that point we provide a brief
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explanation of the science of climate change as well as insights into how to account for climate
change, and in particular, how to account for carbon-related taxes.
The Global Financial Crisis (GFC) and the recognition of market

and ethical failures: a case for accountability and transparency
It is important that corporations remain economically viable and vibrant. It is now clear that
a confluence of factors, including a lack of accountability and transparency, caused the GFC.
The impact of the GFC extended across financial and national economies and ultimately had
huge social consequences. It showed how complex and interconnected our economic markets
are, and how vulnerable many parts of our society are to economic conditions. It also pointed to
deep flaws in the ways corporations operate.
There appears to be general agreement that the major contributing factors to the GFC included
the following:
(1) High leverage, which was sustainable only under conditions of increasing asset prices and
investor confidence.
(2) Inadequate governance, accountability and remuneration practices within financial institutions.
(3) Uncontrolled (and not well recognized) liquidity creation due in part to global current account
imbalances and the willingness of surplus countries to invest in financial assets being created in
deficit countries.
(4) Growth of a largely unregulated ‘shadow banking’ sector and the construction of complex
financial instruments and techniques which saw risk spread throughout the world and
significant interdependencies created.
(5) A lack of public information about the level and distribution of risk in the financial system
(Davis 2011, p. 4).
The main drivers of improvements in corporate governance requirements and corporate

regulatory change are often large corporate collapses and sovereign debt crises (when
governments struggle to repay their borrowings). During these times the errors and mistakes
of the past are often highlighted and the resulting pain creates strong motivation for change.
The GFC provided an even greater desire for change due to the magnitude of the problems
caused, as well as the many years it has taken for economies to recover. The GFC also had a
multinational effect, with problems in one nation or economic area adversely affecting other
regions. This has had a long-lasting effect on corporations and regulators, who are seeking
to avoid a recurrence of these problems.
The GFC significantly changed how people thought about business, and the wider society’s trust
in business leaders was seriously diminished as a result. As the GFC demonstrated, weakness in
one of the pillars of sustainability can directly weaken the other pillars. This means that society
will increasingly come to expect greater disclosure of environmental and social impact, as well as
governance information. This is often described as becoming part of the social contract. A social
contract is an implied (i.e. not official) agreement between an organisation and society, and the
terms of the social contract are the ways in which society expects the organisation to operate—
this concept is also frequently referred to as the community licence to operate.
There is an expectation that ongoing business decisions will need to incorporate sustainability-
related considerations. Society will expect to be provided with information about how
organisations, governments and other entities have performed in these areas. The accounting
profession will need to continually adapt to these growing expectations.
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Other incentives tied to maximising the value of the organisation

and shareholder wealth
The World Business Council for Sustainable Development (WBCSD) emphasises that a growing
range of environmental issues have an impact on a company’s profitability. For example:
• revenue effects associated with market growth or decline due to changes in customer
preferences for environmentally sustainable products and production methods;
• clean-up costs or fines for non-compliance with environmental regulations;
• insurance cover incorporating environmental risk; and
• research and development programs to stay ahead of environmental regulation.
The statement of financial position can also be affected through, for example:
• impairments in the value of land as a result of contamination;
• plant write-offs as a result of changes to clean production capacity;
• changes in the net realisable value of stock related to consumer preferences for
environmentally harmless products; and
• liabilities (through remediation requirements).
The WBCSD (Williams 1998) pointed out that chief financial officers in many companies have,
for a number of years now, been assessing environmental issues and their effect on operational
costs and shareholder value. For example, Shell experienced a loss of 30 per cent of its market
share in Germany during a period of discontent with its planned disposal of the Brent Spar oil-
storage facility. It is likely that companies that are not perceived to be committed to sustainability
will be at a competitive disadvantage. The potential effects of such changes on global finance
markets illustrate the imperative of developing a sound basis for a broader concept of
accountability reporting.
In 2009, members of WBCSD produced a report entitled Vision 2050, which shows how it
is possible for nine billion people to live well without exhausting the natural capitals of the
world (WBSCD 2009). They discussed a range of market and fiscal incentives and mechanisms,
as well as changes in social values that would be needed to meet the Vision 2050 goals.
An organisation’s reputation can be essential to economic survival, as it affects relationships
with key stakeholders that help an organisation not only survive but also prosper. For example,
in the context of environmental performance, the image of an organisation can affect both its
access to green markets, such as consumers who care about the environmental performance
of companies and products, and its relationships with supply chain and business partners.
Improving corporate reputation, as well as better identifying risks and opportunities in a
resource-constrained world with changing societal expectations, is also one of the key drivers
behind the integrated reporting initiative (discussed later in this module), which emphasises the
benefits of organisations telling their unique value-creation story.
Preferential capital flow

More investors are now seeking to invest on an ethical basis in companies that demonstrate social
and environmental responsibility in their activities. In Australia, socially responsible investing (SRI)
has continued to grow since the late 1990s. In 2014, the Responsible Investment Association
Australasia (RIAA) released its most recent responsible investment annual survey. The survey
found an overall dollar increase of over 50 per cent in responsible investments between 2012 and
2013, to just over $25 billion in assets under management as at 31 December 2013 (RIAA 2014,
p. 4). SRI is discussed in more detail later in this module under ‘Current developments’.
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Brand and reputation

Social and environmental performance can affect an organisation’s future reputation, brands and
its ability to attract talented staff, and maintain consumer and public support. We can consider
what happened to organisations such as Nike, GAP, Reebok, Hennes & Mauritz (H&M) and others
in the late 1990s. News about their suppliers’ use of child labour and poor working conditions in
developing countries attracted increasing negative media attention. It became essential for these
organisations to acknowledge these issues and put in place governance practices to ensure their
suppliers improved their workplace practices. It was also vital for them to provide information
about their remedial actions, thereby rebuilding lost legitimacy (Islam & Deegan 2008).
In 2012, Apple became a high-profile target for non-government organisations concerned

about working conditions in multinational supply chains. The concerns related to the China-
based Foxconn organisation, where the vast majority of its 1.2 million employees are involved in
assembling Apple products (according to Reuter reports). At the request of 250 000 petitioners,
Apple was persuaded to ask the Fair Labor Association to investigate the working conditions at
the Foxconn factory in China.
Walmart in the US has been heavily criticised for its workplace practices in its home market.
In 2012 the National Employment Law Project (NELP) published the ‘Chain of Greed’ report
(Cho et al. 2012) into Walmart’s worker exploitation in the US. Also, some responsibility for
the conditions of the poorly paid garment makers in Bangladesh has been placed on the
western retailers who sold the garments, after the collapse of the Rana Plaza building caused
international outrage.
Since the GFC, and amid a lingering recession that has intensified pressure from shareholders,
companies are devising new CSR models that are more aligned with their core business
goals and services. For example, blue-chip companies such as Visa and Unilever are creating
new markets in the developing world by closely aligning social causes with their overarching
corporate strategies.
Risk management incentives

CSR has a strong role to play in the provision of information for risk management purposes.
Some risks are insurable, while the more intangible ones, such as community outrage,
require management awareness as well as mitigating controls. Such non-financial information
helps management to better understand the nature and likelihood of these risks.
For the more easily quantified risks, social and environmental information by an organisation
helps with the negotiation of lower insurance premiums and lower financing costs. Direct-cost
impositions resulting from legislation include clean-up orders, levies and remediation expenses.
Indirect costs range from loss of business to increased risk, resulting in higher insurance
and financing costs, and the opportunity costs of waste production, treatment and disposal.
Both direct and indirect environmental costs, as well as the risks associated with tarnishing brand
and reputation (as discussed previously), affect profitability. One of the aims of CSR reporting is
to enable information users to assess these costs and predict what their future effect might be.
Reducing risk is an additional economic incentive for transparent reporting. Insurance coverage
of environmental risks can represent a major cost to companies. Thus, reducing information risks,
and showing how these risks are being identified and managed by reporting on non-financial
performance, may result in economic benefit by reducing financing expenses.
As climate change becomes an accepted business reality, the insurance industry is increasingly
interested in the possible exposure that organisations face regarding greenhouse gas (GHG)
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emissions. This could be in the form of understanding emission levels, strategic position, and the
geographic location of operations, given changing weather patterns.
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Various stakeholders, including investors, will increasingly consider risks associated with
climate change when making investment decisions. Stephanie Maier, head of research at
Experts in Responsible Investment Solutions (EIRIS), reported the results of a survey undertaken
of the world’s largest 300 companies. Maier found that some of the highest-risk companies
(in industries such as cement production and coal mining) are not adequately responding to
risks or opportunities. In relation to disclosures, she found that over a quarter of the companies
in the global 300 had either no or limited disclosure on climate change:
Focusing on very high or high impact companies we see that over three quarters (81%) of
companies disclosing either absolute (73%) or normalised (70%) carbon dioxide (CO2 ) or
GHG emissions data. However a closer look at this data reveals that only 36% of it is verified
by an external party—and only 38% of companies disclose any indication of scope of data or
methodology used. The Greenhouse Gas Protocol (GHG Protocol) is an international accounting
tool to quantify GHG gas emissions, developed by the World Resources Institute (WRI) and World
Business Council for Sustainable Development (WBCSD)—only 9% of companies disclose the
scope of their emissions against the GHG Protocol (Maier 2008, p. 4).
There will be a demand for company-specific information on how climate change has affected,
and will affect, the organisation in question. Further, there is a growing trend for investment
funds (including leading international pension funds) to invest in corporations operating outside
their own country. As such, climate change and social issues such as working conditions in
supply chains will affect not only local investment, but conceivably also foreign investment to
a significant extent.
External benefits to companies from communicating through corporate social

responsibility (CSR) reporting: the relationship between CSR and the corporate
cost of capital
The external benefits claimed to be associated with CSR are many, as corporations are enabled
to demonstrate how they create value, consider sustainability matters and coordinate their
non‑financial efficacy in the short, medium and long term.
Cost of capital benefits

Voluntary disclosure theory (Verrecchia 1983; Healy & Palepu 1993) argues that a consequence of
the enhanced disclosures is that investors’ trust and confidence are increased, and an increased
inflow of financial capital will occur, which has the potential to lower the capital cost: the cost that
a company has to pay to its providers of financial capital, both shareholders and debtholders.
CSR reporting can contribute to lowering the cost of capital through at least three channels:
1. Signalling the quality of the company. CSR reporting requires a clear vision and commitment
to social and environmental value creation activities and helps to identify risks and
opportunities within the business;
2. Expanding a company’s relevant disclosures to support stakeholder decision-making; and
3. Reducing the uncertainty in assessing the company’s performance.
This has been examined with respect to CSR reporting by Dhaliwal et al. (2011), who find that
there are cost of capital benefits for companies disclosing CSR reports.
Improved analysts’ forecasts

Dhaliwal et al. (2012) find that reporting CSR information affects the capital market through
a major information intermediary, the financial analysts who make buy or sell recommendations
on individual stocks. They observe that the reporting of such information is associated with an
increase in analyst coverage and improved prediction of a company’s future financial performance.
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Improved general perception of the company

It is important that corporations are well regarded and supported by other parties and the
general community. Reputation risk management is therefore crucial, and the CSR report
provides greater transparency regarding a company’s impact on, and commitment to, the social,
ecological and governance environments. It becomes an effective tool in shaping the public
perception that a company is seriously attempting to account for their sustainability matters
and is committed to delivering positive impacts for society; it also improves the exposure to
shareholders and fundholders who are searching for social and ethical investments.
Corporate identity and accountability

In this section, we explain how corporate managers’ different perceptions of corporate
responsibilities and accountabilities determine to whom they report information, how they
report it, and why they report it.
There are extremes in perspectives about the perceived responsibilities and accountabilities
of business. Organisations need to explicitly consider to whom they believe they owe a
responsibility, and for what aspects of their performance, before they decide what information
they will report, and how and to whom they report. Determining to whom the organisation
owes a responsibility involves considering who has specific rights (e.g. investors) compared
to those who have a more general interest in the organisation (e.g. broader stakeholders).
For example, shareholders are claimants who have specific rights, such as a right to dividends.
The shareholders gain the right to dividends when they invest, and they give up participation in
management in exchange for obtaining limited liability protection. This combination of claimants
having rights and stakeholders with interests has led to the approach described by the famous
economist Milton Friedman.
The views of Friedman are one extreme. He argued that the single role of business is to increase
its profits (within the rules of the game). Specifically, he stated that in a freely operating market:
There is one and only one social responsibility of business and this is to use its resources and
engage in activities designed to increase its profits as long as it stays within the rules of the game,
which is to say, engages in open and free competition, without deception or fraud (Friedman 1962,
p. 133).
In relation to organisations potentially embracing social responsibilities (i.e. CSR), Friedman

further stated:
Few trends could so thoroughly undermine the very foundation of our free society as the acceptance
by corporate officials of a social responsibility other than to make as much money for their
stockholders as possible. This is a fundamentally subversive doctrine (Friedman 1962, p. 133).
Consistent with the views of Friedman and the shareholder school of thought (discussed in the
next section) are those of many corporate managers, who believe that maximising corporate
profits is the main priority. Perhaps this focus on profits is further strengthened by the fact that
many corporate managers are directly remunerated on the basis of profits (e.g. it is very common
for managers to be rewarded by being given a specified percentage of profits as part of their
bonus structure). People who believe that the concentration on profits has not waned in many
organisations—even as the apparent emphasis on CSR has heightened—are often cynical of
corporate claims about being socially responsible.
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An alternative view to that of Friedman is that organisations, public or private, earn their right to
operate within the community. This right is provided by the society in which they exist, and not
solely by those parties with a direct financial interest (such as the shareholders who directly
benefit from increasing profits), or by government. In addition to this right to operate provided
by society, the privilege of incorporation, which may provide limited liability and the ability to
raise capital from the public, is not guaranteed but granted by the state. The state, in turn,
can dictate the terms and controls on operating the business.
This view holds that organisations do not have an inherent right to resources and must not just
focus on maximising the welfare of one stakeholder group (e.g. shareholders) to the possible
detriment of others. Society also determines whether an organisation shall have access to natural
resources, and whether and how it is permitted to hire employees and dispose of waste products.
Therefore, from this perspective, for the community to continue to allow such organisations to
exist, the benefits generated by an organisation must be perceived to exceed their costs to
society as a whole.
Leading modern-day business advisory firms such as McKinsey & Company and the ‘big four’
accounting firms have built a strong business case for the importance of the management of
sustainability to overall business success. For example, McKinsey’s report on sustainability and
resource productivity (2014) presents compelling arguments for business leaders to move with
the times and respond to the critical environment and social issues of the day as part of good
business practice.
➤➤Question 5.1
If corporate managers adopted views consistent with those of Milton Friedman, do you think that
any quest towards sustainable development would be realistic? Give reasons for your answer.
The shareholder primacy perspective

To many people, the notions of a shareholder primacy perspective and corporate social
responsibilities are mutually exclusive. Clearly, focusing only on shareholders’ financial return
is not consistent with the concept of sustainable development. Sustainable development requires
taking into account a business’s environmental and social impact. It does not elevate short-term
profit maximisation (and the maximisation of shareholder value and, therefore, shareholders’
financial interests) to a higher position than considerations of inter-generational and intra-
generational equity. Whether corporations can be expected to place the interests of others
above those of their shareholders or have a moral obligation to take into consideration their
impact on a wider range of stakeholders is still a contested question.
Divergent views on the responsibilities (and accountabilities) of business are nothing new.
The opinions reproduced in Table 5.1 were given during a debate in the 1930s; comments
from this debate were reproduced in a report issued by the Corporations and Markets
Advisory Committee in 2006. They contrast the views of Professor Adolf Berle, who embraced
the shareholder primacy perspective, with those of Professor Merrick Dodd, who embraced
the view that organisations survive to the extent that they comply with the ‘social contract’
negotiated between the organisation and society (Table 5.1).
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Table 5.1: Shareholder primacy versus social contract
Professor Adolf Berle: Professor Merrick Dodd:

Shareholder primacy perspective Social contract perspective
Investors, by way of their investment, are the group Due to the protections and privileges provided
risking their own capital. Therefore, it is only fair that by the act of incorporation (e.g. limited liability
the directors answer to them and to them only. and perpetual succession), the duties owed by the
organisation should not just be to shareholders.
Attempts to broaden responsibilities to a wider There is also a duty to the broader community,
group of stakeholders may lead to reducing and it is fair to say that society should expect
the level of legal responsibilities directors owe the corporation to behave in the general public
to anyone. interest, rather than in a purely self-interested,
profit-focused manner.
Directors should, therefore, be permitted to take

into consideration a wider range of stakeholders
than just the shareholders.
A disparity of views still exists. There are many individuals who support a shareholder primacy
perspective of corporate operations just as there are many who support a more socially
constructed perspective of business operations. An increasing number of corporate leaders
believe that delivering long-term financial returns to shareholders depends on taking into
consideration the concerns of a wider range of stakeholders.
It should be noted that Australian corporations law has only recently required corporations
to consider social and environmental impacts when making particular decisions. There are
environmental reporting requirements in s. 299(1)(f) and, arguably, in s. 299A Corporations
Act 2001 (Cwlth). Also, in March 2014, the ASX Corporate Governance Council included a
new recommendation, 7.4, which requires that an entity disclose any material exposures to
economic, environmental and social sustainability risks and, if it does, how it manages these risks.
These requirements are discussed in a later section of this module, which looks at mandatory
reporting requirements.
The major guiding legal principle pertaining to the responsibility of corporate officers in
terms of the strategies used to run a business is provided by s. 181(1) of the Corporations Act.
This section, often referred to as the ‘good faith requirement’, requires that:
A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose (Corporations Act, s. 181(1)).
Central to this requirement is that the strategies employed by an organisation need to be in the
best interests of the organisation. Is social and environmental responsibility and an associated
consideration of a broad group of stakeholders in the best interests of an organisation? Perhaps
company directors believe there needs to be a clear link between the actions and the likelihood
that corporate profits and value will be positively influenced. Clearly, the good faith requirement
provides some uncertainty for corporate managers in determining the extent to which they
can adopt policies that are perhaps only indirectly in the best interests of the corporation.
This limited approach to recognising broader accountability can be contrasted with the more
positive approach taken in the latest version of directors’ duties stated in UK corporate law.
These laws were updated in 2006 to include specific reference to employees, the community
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and the environment.
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Specifically, s. 172 of the UK Companies Act (2006) states the following:

Duty to promote the success of the company
(1) A director of a company must act in the way he considers, in good faith, would be most likely
to promote the success of the company for the benefit of its members as a whole, and in doing
so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers
and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business
conduct, and
(f) the need to act fairly as between members of the company (UK Companies Act (2006),
s. 172).
There are alternative views about whether corporate managers are legally allowed to use
shareholder funds for non-business social endeavours. (The term ‘non-business’ does not
encompass CSR related initiatives, which are clearly aligned with corporate strategy and
expected to improve efficiency, reputation and contribute to growth.) One view is that the
best interests of the company necessarily require corporations to consider the needs of a
broad group of stakeholders and the environment, otherwise the community will not support
the organisation. This view would suggest that s. 181(1) does not discourage sound social and
environmental behaviour.
The counter view is that s. 181(1) actually discourages companies from considering the needs of
stakeholders (other than shareholders) and of the environment. That is, companies are legally
bound to maximise profits to shareholders. This view would suggest that, by publicly embracing
CSR, companies can publicly promote their social ‘values’, while in reality keeping their value in
focus—this being the company’s share price.
The shareholder primacy approach is increasingly being challenged by corporations’ non-financial

and indirect financial impact on society, including global warming, corporate environmental
catastrophes and human tragedies such as asbestos-related diseases. The 2010 BP oil spill in the
Gulf of Mexico provides an example of the serious consequences that can occur when things go
wrong. That oil spill will have a long-term effect on the environment and coastal communities
around the Gulf. The costs and damage associated with the spill will also affect the company and
therefore its shareholders for the long term. This is a good example of how issues can combine
to create a disaster without any apparent illegal activities taking place, and shows the importance
of organisations being good corporate citizens.
You should now read Case Study 5.1, ‘Drilling into disaster: BP in the Gulf of Mexico’, available on
My Online Learning. Please note: This specific case study is in a booklet called ‘Corporate Governance
Case Studies’. You do not need to read the other case studies. The case study starts on page 162 of
the PDF booklet.
At the end of this case study, there is a set of reflective questions that aim to help you establish your
own opinions about how particular issues should be addressed. There is no single correct answer to
these questions and no solutions are provided.
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Externalities and potential government intervention

Undertaking CSR reporting (or sustainability reporting) requires an organisation to compile
various measures of its social, environmental and economic performance.
However, compiling these measures is not always easy. The activities of organisations
create many social and environmental impacts. Some attributes of an organisation’s social
and environmental performance will be relatively easy to measure, while others will be
relatively difficult.
An externality can be defined as an impact that an entity has on parties that are external to
the organisation where such external parties did not agree or take part in the actions causing,
or the decisions leading to, the cost or benefit.
Externalities can be viewed as positive (benefits) or negative (costs). In most market transactions,
the prices paid for goods or services do not fully reflect all the costs and benefits generated by
their production and consumption (which in itself brings into question measures of performance
such as corporate profits). The implication of this is that the cost of goods or services might be
understated and, as a result, a greater amount of a particular good or service might be produced
and consumed than might be the case if the overall costs to society were considered.
For example, if the air is treated as a ‘free good’ and a heavily polluting organisation does not
pay, or incur liabilities, for the pollution it creates, then its measure of profit—based on generally
accepted accounting principles—may be considered inflated compared to what it would be if
costs were assigned to the pollution. In a freely operating market that does not place a cost on
pollution, there is the obvious implication that production will increase, profits will rise and, at the
same time, the environment will become degraded.
Government intervention can be employed as a means of placing costs on the use of resources
that might otherwise go unrecorded. For example, we can consider the potential introduction
of carbon-related taxes, where organisations are taxed on the basis of the amount of carbon
dioxide released into the atmosphere. Such releases would otherwise be free. By placing a
cost on emissions, a government effectively acts to internalise costs that would otherwise be
externalities. This can in turn motivate profit-seeking organisations to find ways to reduce their
emission levels. The higher the price per tonne of carbon dioxide emissions, the harder we might
expect organisations that are affected by the tax to try to reduce their level of emissions.
➤➤Question 5.2
Explain the nature of an externality. Think about an organisation you know and ask:
(a) What is at least one positive and one negative externality generated by the organisation and
who are the affected stakeholders?
(b) Would these externalities directly affect the income or expenses (and therefore profit) of the
organisation?
(c) In your opinion, is the failure to recognise externalities a fundamental limitation of our current
financial reporting requirements?
(d) In your opinion, what might be the ethical implications of not accounting for business
externalities?
While we might attempt to describe various costs and benefits generated by an entity in
qualitative terms, many costs and benefits will not be recorded in financial terms. Because
corporate profits do not incorporate many externalities, we must treat such financial numbers
with caution when considering the overall performance of an entity.
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Perhaps we can question whether a profitable company is also necessarily a ‘good’ company
or extend our assessment to include both its short-term and long-term profitability prospects
if it is deemed by critical stakeholders to be profiting at the expense of society. For example,
a large financial institution may close many smaller regional branches to reduce financial costs,
which might improve financial performance (e.g. reported profits). This measure of performance
(profits) will not reflect many of the externalities caused by the decision to close regional
branches (e.g. the costs associated with unemployed workers thereafter receiving benefits from
government, or the inconvenience caused to regional communities from no longer having a
local bank).
At this stage, however, we should appreciate that in developing a CSR report, an organisation
should consider the various externalities caused by its operation and how it will disclose
information about these externalities. This will also involve identifying the potential stakeholders
and how they are being affected.
The broad objectives driving any organisation to undertake sustainability reporting are wide
ranging. At one end, there could be an ethically motivated desire to be transparent about various
aspects of its performance as it affects various classes of stakeholders. At the other end is an
economically focused motive to use social and environmental reporting to protect or enhance
shareholder value. The underlying motives will directly shape the style of report that is presented
and the audience it is intending to satisfy.
Once it is determined why an organisation decides to report, this decision will, in turn, inform the
decision as to whom any related information will be directed. Management could determine
that the report is produced to provide information for the interests of its shareholders, or for
the interests of a broader stakeholder community.
Once the target recipients of the report have been determined, management can then consider
the information demands or needs of these particular stakeholders. This will inform what
information will be disclosed and what issues the social and environmental reporting should
address. Identifying what issues an entity is held responsible and accountable for involves
dialogue between the organisation and its identified target stakeholders. Identifying the target
stakeholders requires management to reflect in an open way on the underlying motivations
driving them to report: are they based on an accountability approach, a managerial approach
or somewhere in between?
Therefore, an organisation has to identify the:

• objectives of the reporting process (why report?);
• the stakeholders to be addressed by the reporting process (for whom is the report
intended?); and
• the information requirements of the stakeholders (what issues is the entity held responsible
and accountable for by its stakeholders—or what issues should the report cover?).
➤➤Question 5.3
Explain how any assessment undertaken by management about why they are reporting will have
an effect on the audience for the reports (i.e. to whom they are reporting).
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Linking to ethical theories

Since its emergence, CSR has been associated with a wide range of theories. This section
provides an introduction to some of the most widely accepted theoretical approaches that
explore the nature of and need for CSR. Importantly, most of the differences between these
theories can be linked back to different views about the nature of corporations and society
(Gray & Adams et al. 2014). That is, different theories view the relationship between a business
and the society it which operates differently.
First, the dominant theory of enlightened self-interest is discussed, followed by alternative

stakeholder and legitimacy theories. Finally, institutional theory is introduced as an emerging
approach to understanding behaviour in CSR. These are only introductions to very complex
debates, and the interested reader can refer to the references included in this module to extend
their knowledge of these approaches.
Further, while the theories considered in Module 2 reviewed ethical decision-making for
individuals, the following theories have been developed from a different perspective by looking
at the behaviour of organisations and groups of organisations. There are some links, however,
between individual and organisational ethics, and these are pointed out.
Enlightened self-interest
The theoretical approach of enlightened self-interest is linked to the shareholder primacy
perspective about the role of corporations in society, but explains the circumstances under which
CSR-related activities may be considered. As outlined earlier, this perspective argues that the
best outcomes for society come about when individual firms are allowed the freedom to pursue
their own interests and maximise their utility in free markets. These arguments tend to reflect the
teleological positions of utilitarianism and ethical egoism (see Module 2).
From the perspective of enlightened self-interest, CSR activities are at least considered and will
be undertaken if they result in an overall increase to shareholder value. Therefore, CSR could
and should be undertaken if there is a business case for that activity or if it is in the interests of
the shareholders. A good part of the literature on CSR has been devoted to demonstrating the
ways in which CSR improves shareholder value and therefore makes business sense. Some of
these include:
• improved employee recruitment, motivation and retention;
• greater learning and innovation;
• better customer confidence and reputation;
• improved risk and governance profile and risk management;
• enhanced competitiveness and market positioning;
• avoiding costs and risks of regulation;
• greater operational efficiency;
• increased analyst interest and accuracy, affecting valuation;
• attracting investors and other capital providers, and achieving lower costs of capital; and
• preserving a licence to operate in communities.
Proponents argue that corporations will voluntarily adopt those CSR practices that offer their
business some kind of benefit.
This theory represents a dominant view of the role of corporations in societies. However, in recent
decades, this dominant approach has been questioned on many levels. Some argue that free
markets create many of the social and environmental issues that led to demands for corporate
accountability in the first place, mainly because of externalities associated with the activities of
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the organisation. Others criticise this approach from a teleological perspective—that we cannot
separate values and ethics from economic activities. Some of these criticisms have coalesced
around alternative theories of CSR, which are reviewed in the following sections.
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➤➤Question 5.4
In the introduction to this module we defined sustainable development as:
Ensuring that the needs of today’s world are met while at the same time ensuring that
the ability for future generations to meet their own needs is not compromised.
This definition is derived from the report, Our Common Future (WCED 1987, p. 16), also known
as the Brundtland report. If organisations are guided in their CSR obligations by enlightened
self‑interest, could such organisations also be seen as embracing sustainable development in the
way it has been defined above, based on the Brundtland report? Are the two concepts compatible?
Stakeholder theory
Stakeholder theory offers a different perspective on why organisations should and do practise
CSR. This approach was first articulated in 1984 by Freeman, and since has produced a
diverse literature and a number of approaches. In the following sections we first look at what
a stakeholder is and then at two branches; a normative branch (which embraces broad notions
of accountability) and a managerial branch (which embraces the view that managers act to
maximise shareholder value).
Who are stakeholders?

When going beyond mandated and regulated reporting (such as statutory financial reporting by
public companies), organisations determine to which stakeholders they report. But who or what
is a stakeholder? For the purposes of our discussion, a stakeholder of an organisation can be
broadly defined as ‘a party that is affected by, or has an effect upon, the organisation in question’
(Freeman 1984).
There are many potential groups or agents that could be considered stakeholders for a given
organisation. Stakeholders often include diverse groups such as employees, management,
shareholders, communities, society, government and the state, and even the environment
and future generations. In practice, organisations usually have considerable scope in defining
who their stakeholders are, and further scope in deciding how these stakeholders should
be managed.
➤➤Question 5.5
Three examples of how leading corporations define their stakeholders are included below:
Toyota Australia:
‘Our stakeholders are those groups who are affected by or affect Toyota Australia. Our
stakeholders have been identified as: our shareholder the Toyota Motor Corporation,
employees, customers, dealers, suppliers, community groups and government. Our code
of ethics provides a statement of duty specific to each group outlining the behaviours
expected when engaging with different stakeholders.’ (Toyota 2014).
BHP Billiton:
‘Our stakeholders can be defined as those who are potentially affected by our operations
or who have an interest in, or influence, what we do.’ (BHP Billiton 2014).
Imperial Tobacco:
‘We define our stakeholders as those with whom we have a financial relationship or who
are directly affected by, or have a direct interest in, our business operations. Stakeholders
include investors, employees, customers, consumers, suppliers and governments.
Others include supply chain communities, competitors, non-governmental organisations
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and the media’ (Imperial Tobacco 2014).

How do these definitions vary? Why do you think these companies adopt different positions on
what a stakeholder is?
Normative stakeholder theory

A normative, or ethical, perspective on stakeholder theory is deeply rooted in deontological
ethical theory, which emphasises duties and values (see Module 2). This perspective argues
that all stakeholders for an organisation have inherent worth, and therefore, all stakeholders
have the right to be treated fairly by any organisation (Deegan 1999). Here, the firm is a vehicle
for coordinating stakeholder relationships. Managers have a fiduciary duty to all stakeholders,
rather than just shareholders. When conflicts and competing interests arise between
stakeholders, management should strive to achieve an optimal balance, rather than focus
purely on shareholders.
Accountability is an important part of stakeholder relationships in normative stakeholder

theory. That is, the firm and its managers are accountable not just to shareholders, but also to
stakeholders. All stakeholders have a right to information about how this accountability is being
discharged. CSR, from this perspective, is a responsibility of organisations rather than being
demand-driven.
As this theory is normative in nature, it emphasises what organisations should do and provides
prescriptions about behaviour. This is not how organisations actually act—but rather an ideal of
behaviour. In practice, a more managerial focus may be embraced by researchers to explain the
activities of corporate management. This is also associated with different ethical justifications and
is known as managerial stakeholder theory.
Managerial stakeholder theory

The managerial branch of stakeholder theory focuses on the stakeholders considered to have
power and influence. Under this view, managerial action is based on advancing the interests of
the organisation. Therefore, it does not reject positive interaction with all stakeholders; however,
the underlying purpose of the interaction is self-interest (and in many ways it is similar to
enlightened self-interest discussed previously).
As a result, stakeholders who are regarded as more important or powerful in their ability to
influence shareholder value will attract additional effort and attention from managers. Power in
itself will be specific to the particular stakeholders of an organisation. It may be tied to such
things as the command of limited resources (finance, labour), access to influential media,
ability to legislate against the company (e.g. particular governments or regulatory bodies) or
ability to influence the consumption of the organisation’s goods and services.
Information, including information about social and environmental performance, which is

provided to stakeholders, can represent a powerful tool. This tool is used by the organisation
to control, manage, influence or even manipulate various stakeholders. Corporate social
disclosures are, therefore, viewed as a mechanism to improve reputation and relationships with
shareholders, creditors and other interested parties, as described by Gray and Owen et al. (2010):
Information—including financial accounting and social accounting—is a major element that can be
deployed by the organisation to manage (or manipulate) the stakeholder to gain their support and
approval (or to distract their opposition and disapproval) (Gray & Owen et al. 2010, p. 26).
This theory therefore takes fewer cues from deontological theory, as it tends to see stakeholders
as the means to an end, rather than an end in themselves. In reality, organisations will often show
both types of justification for their reporting.
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➤➤Question 5.6
Following are two excerpts from the annual reports of two of Australia’s largest companies.
Consider the differences in how they view stakeholders:
Rio Tinto:
‘Delivering value for our stakeholders
Rio Tinto’s primary focus is on the delivery of value for our shareholders. We balance
disciplined investment with prudent management of our balance sheet and cash returns
to shareholders. We offer a long-term investment opportunity, and commit to sustainable
growth in cash returns to shareholders through our progressive dividend policy. As we
work, fixed on this core aim, our activities also give us the opportunity to create value
for our other stakeholders, in a variety of ways’ (Rio Tinto 2015, p. 13).
Stockland:
‘Stockland was founded in 1952 with a vision to “not merely achieve growth and profits
but to make a worthwhile contribution to the development of our cities and great
country”. We have a long and proud history of creating places that meet the needs of
our customers and communities’ (Stockland n.d.).
Are these approaches more consistent with the enlightened self-interest theory or the normative
or managerial stakeholder theory?
Organisational legitimacy
Within legitimacy theory, legitimacy itself is seen as a resource on which an organisation depends
for survival. It is something that is conferred on the organisation by society, and it is something
that is desired or sought by the organisation. It is a resource that the organisation is thought to
be able to influence or manipulate through various disclosure-related strategies.
The social contract

Legitimacy theory is based on the notion that there is a social contract between the organisation
and the society in which it operates. The social contract is not easy to define, but the concept is
used to represent the multitude of implicit and explicit expectations that society has about how
the organisation should conduct its operations. It refers to when a community trusts, approves
and accepts the operations of a corporation and its activities.
This means that corporations do not necessarily have a clean slate to do whatever maximises
shareholder value, but must instead keep within the bounds of reasonable or expected behaviour
and activities in a community. For example, minerals and resource companies in particular are
sensitive to their own social contract, particularly in the wake of controversial coal seam gas
developments of the last few years. Origin Energy points to this in the following quote:
The scale of our operations affects neighbouring communities − sometimes positively and
sometimes in ways that create challenges requiring careful management. People living near our
operations can be affected by increases in traffic, noise and dust. They may also be affected
by socio-economic factors resulting from our presence, such as increased housing costs and
competition for labour. Origin must manage these issues sensitively and acknowledge the loss of
control and power people in the community may feel as a result of our large-scale infrastructure
projects (Origin Energy 2015).
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Legitimacy theory
The main premise of legitimacy theory is that an organisation will take action to manage community
perceptions in order to survive. Corporations need to at least appear to be operating within the
established rules of society, that is, within the bounds of the social contract. When there is disparity
between what the organisation appears to be doing and the terms of its social contract, there will
be a threat to its legitimacy, and therefore to its future survival and success.
In this context, CSR is one strategic tool that organisations can use to influence the community’s
perceptions of them. Lindblom (1994) suggests a number of courses of action that organisations
can take to obtain, maintain or repair legitimacy:
• Change and inform—perform activities in a manner that is appropriate, given the
expectations of society, and then inform the relevant stakeholders about these actual
behaviour changes, as well as the performance results;
• Change perceptions without actual change—convince those who are evaluating the
organisation that change has occurred without actually changing performance, activities or
behaviour;
• Deflect attention and manipulate perceptions—switch the focus away from areas of
concern to other issues where the organisation is performing well, and use emotional
symbols and rhetoric to influence expectations; or
• Change criteria for evaluation—try and influence the levels of performance expected, and
attempt to highlight that certain criteria used by society are unreasonable (Lindblom 1994).
It is important to note that what is regarded as acceptable or legitimate behaviour will

change over time, as society changes. Behaviour that was once acceptable may later become
unacceptable. The organisation must continually adapt to maintain its status of legitimacy in
society, and must also adapt to changes in the social contract.
Reading 5.1, ‘Further views about the social responsibilities of business’, provides various views
about the responsibilities of business.
You should read this now.
➤➤Question 5.7
Consider Reading 5.1 and answer the following:
Community expectations are changing and there are growing expectations that organisations
should accept responsibilities beyond those towards their shareholders. With legitimacy theory
in mind, what are the implications of a corporation’s failure to consider a broader group of
stakeholders?
Institutional theory
Institutional theory is an approach that has emerged as a result of dissatisfaction with the
preceding approaches. It adopts a different perspective on corporate accountability that focuses
on explaining why organisations tend to appear more similar over time. Institutional theory looks
not only at individual organisations, but at organisational fields (e.g. industries). Compared with
those theories, institutional theory is less normative and not so grounded in ethical theory,
focusing more on explaining real-world behaviour.
Institutional theory is useful because the practice of CSR has changed considerably over the
last decades. Consider the difference between these two statements from KPMG as it reviews
developments in CSR:
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[In 2002 CSR] is becoming mainstream for big corporations with 45% of Global Fortune Top 250
companies now publishing [a CSR] report (KPMG 2002, p. 6).
Study guide | 415
Compare this with the most recent KPMG report:

Companies should no longer ask whether or not they should publish a CR [corporate responsibility]
report. We believe that debate is over. The high rates of CR reporting in all regions suggest that it is
now standard business practice worldwide (KPMG 2013, p. 11).
Institutionalisation is a process of homogenisation (usually referred to as isomorphism) in

organisational practices over time. Institutionalisation results in the widespread adoption of
innovation or new practices in a field to the point of stability or even inertia. According to
DiMaggio and Powell (1983) there are three main isomorphic processes:
• coercive: when powerful stakeholders pressure a number of organisations in a field to adopt
a practice leading to conformity with that practice;
• mimetic: when organisations imitate the behaviour of their peers and competitors to gain
competitive advantage and reduce uncertainty; and
• normative: when group norms are established that pressure organisations to change
practices (DiMaggio & Powell 1983).
According to institutional theory, organisations conform and homogenise because failing to

do so threatens their legitimacy, access to resources and survival capabilities. According to the
theory, CSR reporting is becoming institutionalised over time and has become an established
norm. Another important element of institutionalisation is decoupling, which explains how gaps
develop between formalised policies and the actual behaviour of organisations.
Summary
In the discussion above we introduced a variety of theories of CSR and how they are linked to
different views on the role of the corporation in society. Table 5.2 provides a summary of some of
the key differences between these theories.
Table 5.2: Corporate social responsibility theories
Theory View of the corporation Why engage in CSR? Key concept
Enlightened self-interest As an instrument to Some CSR activities offer Shareholder

maximise shareholder value benefits to shareholders.
Stakeholder theory As a nexus of relationships CSR can show how a Stakeholder

between stakeholders company interacts with and
values its stakeholders.
Legitimacy theory As contingent on the To prove their worth to Social contract

approval of a community society and maintain their
existence.
Institutional theory As operating within a Companies tend to imitate Peers

context of other firms’ their peers.
behaviours
However, it is important to realise that these theories are often complementary, and many
overlap each other. Indeed, they are frequently invoked together by corporations to explain
their approach to corporate accountability. Finally, it is also important to realise that theories are
always subject to interpretation.
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What can be measured and reported?

Measurement refers to collecting, analysing and assigning quantitative values to an issue.
Measuring sustainability issues is important in corporations as it allows these issues to be
integrated into established business decision-making processes. Think of the common business
adage: ‘You can’t manage what you can’t measure’. With measurement, it is easier to understand
the scale of various issues, to track how they change over time, compare them, and to improve
performance.
However, the reality is that measuring many social, environmental and sustainability issues is very
challenging. Unlike financial reporting, where we have generally accepted ways of measuring and
reporting financial value, our ability to measure social, environmental and sustainability issues
is considerably less developed, and is still very much a work in process. Issues to be resolved
include dealing with indeterminacy (or uncertainty), as well as interdependencies between
pieces of information. One of the difficulties in this area is understanding how all of the different
components interact and the effect they have on each other. Accordingly, it may be helpful to
think of reporting for social, environmental and sustainability issues as comprising:
• quantification: expressing an issue or change in numerical terms (e.g. 75% of staff feel they
have adequate training and development opportunities);
• monetisation: converting a quantified value into currency as a standard unit of measurement
(e.g. ‘we invested $1 million in staff development and training’); and
• narrative reporting: expressing an issue in qualitative form (e.g. what is the management
approach or strategy to staff development?).
You may be familiar with each of these as they reflect similar approaches in financial reporting.
There are also a wide variety of approaches to measuring and reporting social, environmental
and sustainability issues—they vary considerably in the degree to which they adopt these
elements. This provides scope for organisations to report in different ways on their social,
environmental and sustainability activities. Further, it is important to remember that all of these
types of measurement are in a constant state of development and refinement. How companies
measure their social, environmental and sustainability impact in 10 years’ time will undoubtedly
look very different from what is reported in corporate accounts today. In the following sections we
provide a sample and discussion of some key challenges in each of these areas.
There can be quite a range of information available to organisations when they are identifying
their available CSR information. Quite often companies collect data for other mandatory
reporting requirements, such as work health and safety (WHS) obligations, or to comply with
environment regulations, such as greenhouse gas and energy consumption requirements,
and this information, which is usually quantified (and sometimes monetised), is relevant for CSR
reporting. In fact, most information used to report on other mandatory requirements could be
considered in the information set as being potentially relevant to stakeholders. One important
practical consideration is whether the data is in an easily accessible format that can be collated
and reported in a systematic fashion. Organisations often have separate systems located in
different departments that capture all the different types of data that have been mentioned.
Therefore, there are real challenges in being able to collate and integrate this data in one place.
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What is measurable?
Social reporting
In general, there are some areas for which we have better-developed measures for social issues.
This includes areas such as:
• labour practices and workplace—including diversity and equal opportunity, employment
standards and turnover, training and development;
• human rights—including compliance with human rights Acts, policies and management of
issues such as freedom of association, collective bargaining, child labour and forced labour;
• society—including investments in local communities, anti-corruption and anti-competitive
behaviour; and
• product responsibilities—including customer health and safety, product labelling and
ethical marketing.
Further, many corporations often collect much of this information as standard practice anyway,
particularly in the areas of workplace and staff. This may include compliance with international
labour standards such as International Labour Organization (ILO) conventions, and some
components of balanced scorecards.
There are some areas in which social reporting and measurement is much harder:
• Social issues involve quality and subjectivity that can be hard to capture in quantitative
or monetised approaches. For example, a mining company may report that they provide
education to 80 per cent of employees’ children in a mining community. However, this figure
provides no indication of the quality of that education, whether it meets the educational
needs of children, or whether it remains culturally acceptable. Nor does it inform us of why
the remaining 20 per cent have not received an education and what the implications are.
• In CSR reporting, the concept of entity is relaxed. That is, corporations often need to report
on value created outside the organisation rather than just captured within the organisation.
It can be hard to identify what issues can be attributed to a particular organisation and not
to others. For example, consider the supply chain of a large corporation such as Walmart.
How many of the social issues that emerge from this whole supply chain is Walmart
responsible for? What are the implications of this?
• Time is an important measure for social issues. There is often a significant lag between an
activity and when the impact of the activity is felt in a community or society (e.g. the effect
of education). This can be hard to capture when simply measuring indicators and KPIs.
Example 5.3: Social return on investment (SROI)

SROI is an approach to measuring social change that comes about as a result of an organisation’s
activities. Based on a set of principles, SROI tracks the inputs, outputs and social outcomes (e.g. better-
trained staff) and then uses financial proxies (e.g. productivity benefits of better-trained staff) on each of
these items to calculate an SROI that is similar to financial return on investment. It is a popular approach
that is gaining traction, particularly in the not-for-profit or profit for a purpose (social enterprise,
B-Corporation) sector, but it does face considerable criticism.
In particular, the SROI figure is contingent on a large number of judgments, assumptions and financial
proxies and is thus far less reliable than comparable financial figures. It is also relatively time and
resource intensive to undertake, and is most usefully applied to a particular project or activity, rather than
mapping all the many possible issues a large corporation is dealing with. Some, such as Arvidson &
Lyon et al. 2010, also argue that it is not appropriate to place dollar values on social issues.
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Environmental reporting
Environmental reporting accounts for how corporations draw from and affect the natural
environment. In recent years, there have been important advances in developing standardised
methodologies for accounting for certain environmental aspects of business, such as greenhouse
gas emissions. Nonetheless, understanding and measuring environmental impact can be a
very complex process. Further, there are significant differences in the environmental impact of
different industries.
The areas that have seen greater development of measurements and indicators include:
• materials usage and product resource consumption;
• resource usage—including energy and water;
• emissions, effluents and waste;
• transport usage; and
• compliance with and breaches of mandatory and voluntary environmental regulations.
Some of these areas have relatively well established approaches; for example, the
Intergovernmental Panel on Climate Change has produced detailed methodological guidance
for reporting on greenhouse gas emissions.
Many corporations produce environmental measurement information, which is similar to social

reporting, through existing voluntary and mandatory environmental regulations, such as the
National Greenhouse and Energy Reporting (NGER) Act 2007 (Cwlth) and federal and state/
territory Environmental Protection Acts.
Environmental reporting is still a complex and challenging area, and some areas that have been
identified as needing further development include the following.
• Reporting on biodiversity (flora, fauna and ecosystems) is very challenging, particularly as there
is no generally accepted unit of measurement and reporting systems are often exploited.
• Similar to social reporting, environmental reporting includes measures of impact beyond the
control of the organisation. Measuring the environmental effect of supply chains increases
the level of complexity and scope of reporting.
• Many environmental estimates include discount rates for future impact (similar to discounting
for the time value of money). In an environmental context, applying a discount rate to future
environmental impact has ethical implications—that is, it suggests that future generations are
less important than current generations.
• Environmental impact measurement is often confined to and ‘siloed’ in particular areas
(e.g. water use and greenhouse gas emissions) and there is a need to determine how these
different measures fit together to provide an overall assessment of environmental impact.
Example 5.4: Puma

Puma is well known for its leadership in accounting for natural capital. In 2011, Puma released its first
environmental profit and loss account, where it quantified a wide range of environmental effects,
including water use, greenhouse gas emissions, land use, and waste associated with its supply chain,
transport networks, operations and manufacturing, particularly those associated with the leather and
cotton used to manufacture its products. It plans to publish a group environmental profit and loss
statement in 2015.
➤➤Question 5.8
Consider the differences in the environmental impact of a mining firm (e.g. BHP Billiton) compared
with that of a professional services firm (e.g. Ernst & Young).
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Economic reporting
The final element of CSR refers to the sustainability of an organisation’s economic performance.
This includes financial performance measured by generally accepted accounting principles,
but this by itself may be too limited. What is often unreported, but is frequently desired by
users of sustainability reports, is the organisation’s contribution to the sustainability of a larger
economic system. This can include a wide variety of non-financial performance indicators
and narratives, and is usually aimed at economic performance, market presence and indirect
economic impacts—the three categories of economic sustainability used by the GRI in their
G4 sustainability reporting guidelines. A study by Cohen and colleagues (2012) identified the
indicators most commonly reported in large public corporations. These include (in order of their
decreasing frequency):
• market share: referring to the percentage or size of market share for the company, division,
unit or particular products;
• quality rankings: such as prizes or performance against particular benchmarks;
• customer satisfaction: including describing customer service initiatives, loyalty, awards or
campaigns;
• employee satisfaction: comparison of loyalty and awards and comparison to competitors;
• turnover rates: employee turnover compared with competitors and industry averages; and
• innovation: describing innovations introduced across the organisation’s value chain.
Innovation is sometimes measured in monetary terms, such as the amount spent on research
and development, or it can be quantified, such as the number of patents awarded (Cohen &
Wood et al. 2012).
➤➤Question 5.9
Marks & Spencer, a UK-based retail company, produces an annual report based on its sustainability
strategy, known as ‘Plan A’. Review it here: http://planareport.marksandspencer.com.
(a) Identify one issue that Marks & Spencer reports on in the following areas:
(i) economic
(ii) social; and
(iii) environmental.
(b) Identify one of each of the following:
(i) a monetised measure;
(ii) a quantified measure; and
(iii) a narrative on sustainability.
Limitations of traditional financial reporting

There are a number of ways in which the traditional approach to financial reporting is not
appropriate for corporate accountability. We shall explore some of these challenges by reflecting
on the current conceptual framework for financial reporting, the IASB’s Conceptual Framework
for Financial Reporting 2010 (IASB 2010) (Conceptual Framework). The following sections explore
some of these issues in turn—scope of reporting, elements of financial reporting, the practice of
discounting future cash flows, reliable measurement and probability, focus on short-term results
and the entity assumption.
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Scope of reporting
The objective of financial reporting is described by the Conceptual Framework as follows:
The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity. Those decisions involve buying, selling or
holding equity and debt instruments, and providing or settling loans and other forms of credit
(Conceptual Framework OB 2, p. A27).
This demonstrates that inherent in the nature of financial reporting is the focus on the rights
of shareholders, specifically those who are not involved in management, and who have limited
power to obtain information about the organisation. As such, shareholders, along with debt
capital providers, are the main audience for financial reporting, and they are named the primary
users in paragraph OB 5. The Conceptual Framework also states that other users (such as
members of the general public) are not the focus of this reporting (OB 10).
By emphasising the financial information relevant to capital providers, the Conceptual Framework
reflects a shareholder primacy perspective (discussed earlier in this module). This implies a very
narrow interpretation of accountability, restricting reporting only to those aspects associated
with financial performance. However, focusing on financial results alone has its limitations.
For example, financial reporting alone cannot answer important questions about social and
environmental performance that we have discussed previously, including:
• How high is employee morale and turnover?
• Are customers being supplied with appropriate products and services?
• Is the supply chain operating ethically?
• Are the rights of Indigenous people being respected?
• How is the organisation contributing to climate change?
Elements of financial reporting

The Conceptual Framework provides that the five elements of financial reporting are assets,
liabilities, equity, income and expenses. However, the approach that the Conceptual Framework
takes to define these elements often excludes many sustainability factors. For example, the
Conceptual Framework defines an asset as:
A resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity (para. 4.4(a)).
Control is a central attribute of the asset definition. If a resource is not controlled by an

organisation, it cannot be considered as that organisation’s asset (meaning that its consumption
or use will not be considered an expense of the reporting entity). However, many important
social and environmental assets that are of interest to stakeholders are public goods and
are not exchanged in market transactions, including clean air, water, native forests, flora and
fauna, and community wellbeing. Because they are public goods and are not exchanged
in market transactions, it is difficult to account for their use, even if they are integral to
commercial processes.
Some manufacturing processes, for example, use clean air or water and return it to the
environment in a form that is of reduced quality. As these environmental ‘assets’ are not
being recognised by the reporting entity, any reduction in the quality of such assets is not
recognised by the entity (unless fines are imposed).
A second example is expenses. For financial reporting purposes, the Conceptual Framework
defines expenses as:
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decreases in economic benefits during the accounting period in the form of outflows or depletions
of assets or incurrences of liabilities that result in decreases in equity, other than those relating to
distributions to equity participants (para. 4.25(b)).
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This definition of expenses is contingent on the recognition of an asset or liability. Therefore,

the depletion of or contribution to these shared public goods (externalities, as discussed earlier
in this module) by the corporation does not meet this definition. To many people, the framing
of these accounting elements represents a limitation of financial accounting. Deegan (2012) for
example argues that:
Imagine that an entity destroys the quality of water in its local environment, thereby killing all local
sea creatures and coastal vegetation. Under conventional financial accounting, if the entity incurs
no fines or other related cash flows as a result of its actions, no externalities would be recognised.
Reported profits, calculated by applying generally accepted accounting principles, would not be
directly affected, nor would reported assets.
The reason no expenses would be recognised is that resources such as the local waterways are not
controlled by the reporting entity, and therefore they would not be recognised as the entity’s assets.
Thus the use (or abuse) of resources would go unrecognised. If conventional financial reporting
practices were followed, the performance of such an organisation could, depending on the financial
transactions undertaken, be portrayed as very successful (Deegan 2012, p. 1214).
The practice of discounting future cash flows

Another very common practice in financial reporting is the discounting of future cash flows.
Specifically, paragraph 36 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets
requires that ‘the amount recognised as a provision shall be the best estimate of the expenditure
required to settle the present obligation at the end of the reporting period’. Discount rates are
also commonly used in cost−benefit analysis.
When the concept of discounting is applied to social and environmental issues, ethical problems
arise. Many social and environmental issues involve very long time frames (consider climate
change, as one example). Discounting the cost of something that will occur in the future may
be seen as shifting the problems of one generation on to future generations—something that is
arguably not consistent with the sustainability agenda. Secondly, if we discount obligations that
may arise in the distant future in the current period then they may not be considered material
even if, ethically, they are highly material.
Example 5.5: Discounting away the liabilities

Consider an organisation whose current activities are creating a need for future environmental
expenditure of a remedial nature. The work will not be undertaken for many years. As a result of
discounting, the organisation would recognise little or no cost now.
For example, if the organisation was anticipating that the activities would lead to a clean-up bill of
$100 million in 30 years’ time, and with a normal earnings rate of 10 per cent, the current expenses
to be recognised in the financial statements under generally accepted accounting principles would
be $5.73 million.
A reduction in the discount rate to 6 per cent would see this liability increase to $17.4 million. Using a
discount rate of 1.4 per cent (this figure was used in The Stern Review on the Economics of Climate
Change, authored by economist Nicholas Stern, a report released by the British Government in 2006)
would change this amount considerably to $65.9 million in present value terms.
The calculations for these amounts are as follows:

10 per cent discount rate: $100m / (1.10)30 = $5.7 million
6 per cent discount rate: $100m / (1.06)30 = $17.4 million
1.4 per cent discount rate: $100m / (1.014)30 = $65.9 million
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Reliable measurement and probability

Specific recognition criteria must be met before we recognise any element of accounting in
financial statements. The Conceptual Framework provides general recognition criteria for all five
elements of financial statements:
An item that meets the definition of an element should be recognised if:
a) it is probable that any future economic benefit associated with the item will flow to or from the
entity; and
b) the item has a cost or value that can be measured with reliability (para. 43.8).
For all the five elements of financial accounting, both probability and measurability are key
considerations. This has significant ramifications for many similar sustainability issues. As we
saw in the earlier section, measurement of sustainability issues is complex and often difficult,
and questions are raised over the reliability of many of the measures that are currently used
compared with the standards of measurement we use in financial accounting.
Take the example of a potential environmental liability such as clean-up after a chemical spill.
If the corporation argues that it cannot be reliably measured, it may be left off the balance
sheet. If it is not recognised as a liability, then associated expenses will also not be recognised.
The implication is that if it is not easily and reliably measured, then it cannot be important.
Nonetheless, that chemical spill may be very important indeed to many of the organisation’s
stakeholders as it may result in the increased likelihood of a loss of revenue and increased costs
(of capital, staff changes, fines, etc.) due to reputational damage.
Focus on short-term results

Current reporting practices tend to emphasise relatively short-term performance reporting—
often at quarterly or half-yearly intervals. As accountants, we tend to emphasise short-term (annual)
performance through our practices of dividing the life of the asset up into somewhat artificial
periods of time. Managers are also often rewarded in terms of measures of performance such as
annual profits. This can have the effect of discouraging us from making long-term investments in
new technologies, including those that will provide longer-term social and environmental benefits.
This acts to dissuade us from investment expenditure in more sustainable modes of operation
that might not generate positive financial results for many years.
The entity assumption

A central assumption of financial accounting is the entity assumption, which requires an
organisation to be treated as an entity distinct from its owners, other organisations and
other stakeholders. This is closely linked to the idea of externalities that we discussed earlier.
The organisation, the stakeholders of that organisation and the environment are either ignored
or treated as separate accounting entities. Anything the entity does that does not affect its own
financial position or performance (in that period or future periods) is ignored. This is despite any
negative (or positive) impact that might be imposed on others. This means that the externalities
caused by reporting entities will typically be ignored, and that performance measures, such as
profitability, are incomplete from a broader societal (as opposed to a ‘discrete entity’) perspective.
➤➤Question 5.10
Identify some of the limitations of financial reporting practices as they apply to CSR reporting and
provide an opinion about whether you consider that financial reporting practices have contributed
to problems such as climate change.
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Reporting and guidelines

Up until this stage we have discussed issues associated with the management and collection of
CSR information and the increased corporate and social responsibility expected of organisations.
In this section we cover the increased reporting expectations for CSR information. There is of
course a link between managing and reporting, with reporting and the associated accountabilities
often driving better management.
In this section we outline the increased mandatory reporting requirements that organisations
are facing. This is a reflection that regulators are driving change. In Australia, this includes
requirements within and additional to the annual report. This is a worldwide trend. We also see
that organisations are increasingly likely to make additional CSR disclosures, as evidenced by
the significant growth in companies producing stand-alone sustainability reports over the last
10 years (KPMG 2013). In fact, we mentioned earlier that this type of reporting has evolved from
being desired, to being expected, to now being virtually mainstream for most major corporations
around the world. In this section we also cover the major voluntary guidelines and non-
mandatory reporting requirements against which organisations report.
The accounting profession and the professional accounting bodies have played a critical role
in driving the move to increased reporting of CSR information. For such reporting to become
generally accepted, there has to be a generally accepted framework, and the accounting
profession is very heavily involved in developing these frameworks. This helps the actions
and behaviours to become legitimised.
There has also been the recognition that the information is useful not only for external
purposes, but for internal decision-making, to help recognise the risks and opportunities facing
an organisation and make better, more informed decisions. If you pick up most organisations’
corporate reporting information, you will see increased emphasis on CSR information.
CPA Australia is no exception, and in fact is leading the way in its journey to implement
integrated reporting.
From 2013, CPA Australia has published an integrated report that follows the principles and guidelines
of the International Integrated Reporting Council’s framework for integrated reporting. Please refer to
the CPA Australia 2014 Integrated Report to review this approach: cpaaustralia.com.au/annualreport.
What is required? (Mandatory reporting)

As we outlined in the introduction to this module, a greater emphasis on a broader accountability
expected of organisations has been accompanied by a recent increase in associated regulation
worldwide, so that for some organisations the broader corporate accountability imperative has
gone from being desirable, to expected, to now being required. The move towards mandatory
reporting has been caused by a range of factors. These include government regulation due
to community pressure and lobby groups, as well as regulations arising in response to specific
corporate activity that has harmed the environment or community. Reporting is also required to
enable governments to comply with international agreements to reduce emissions and pollution.
A report by KPMG, the United Nations Environment Programme (UNEP), the GRI and the Centre
for Corporate Governance in Africa (KPMG et al. 2013), examining the mandatory and voluntary
CSR reporting practices in 45 countries, found the following:
• There are 134 mandatory policies and a further 53 voluntary policies covering different
aspects of CSR reporting.
• Many of the compulsory policies are on a comply (apply) or explain basis.
• CSR reporting has become a listing requirement on several stock exchanges in non-OECD
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countries, including Brazil, China, Malaysia and South Africa.

In Australia there are additional CSR reporting requirements that have recently been incorporated
into the Corporations Act and accounting standards. In addition, we have heightened imperative
and additional required regulatory disclosures around climate change, as evidenced in Australia
by the NGER Act, and in Europe by the European Union Emission trading scheme (EU ETS).
Earlier, we identified other areas of change, including a number of stock exchanges establishing
requirements to report on sustainability issues, and the European Parliament’s directive on non
financial and diversity disclosures for companies with more than 500 employees.
Requirements embodied within the Corporations Act and accounting standards

In Australia, corporate annual reports are required to comply with the Corporations Act,
relevant accounting standards, and, if the entity is listed, with the listing requirements of the
Australian Securities Exchange (ASX). Consistent with the shareholder primacy approach,
the disclosure requirements as they pertain to annual reports focus on providing information
about financial performance to those parties with an economic interest in the reporting entity.
However, recent requirements have been broadened or clarified, so it could be argued that more
of an enlightened self-interest approach is currently being applied.
Figure 5.2 outlines the sections of an annual report where current mandatory reporting
requirements of a social and environmental nature embodied in the Corporations Act and
accounting standards are normally reflected.
Figure 5.2: Sections of an annual report where mandatory social and environmental
reporting requirements are normally reflected
Major sections of annual reports Mandatory reporting requirements
Chairman and Chief Executive Officer

joint report
Directors’ report Section 299A Corporations Act
Financial statements
Disclosures related to accounting

Notes to the financial statements
standards (s. 296 Corporations Act)
Directors’ declaration and independent

auditor’s report
ASX corporate governance

Corporate governance information
recommendations

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In relation to reporting information about environmental performance, s. 299(1)(f) of the

Corporations Act is relevant. This section requires that in the directors’ report, which must be
included in the annual report, directors must give details of the entity’s performance in relation to
environmental regulations ‘if the entity’s operations are subject to any particular and significant
environmental regulation under a law of the Commonwealth or of a State or Territory’. However,
this section does not require corporations to disclose the financial impact of non-compliance with
environmental regulations.
Section 299A of the Corporations Act is also relevant. Under this provision, listed companies are
required to include in the directors’ report any information that shareholders would reasonably
require to make an informed assessment of the company’s:
• operations;
• financial position; and
• business strategies and prospects for future financial years.
In March 2013, the Australian Securities and Investment Commission (ASIC) released a regulatory
guide on enhancing companies’ consistent conformity with operating and financial review (OFR)
reporting requirements under s. 299A(1) of the Corporations Act. Of specific interest is that
an OFR should include a discussion about environmental and other sustainability risks where
those risks could affect the entity’s financial performance or the outcomes disclosed, taking into
account the nature and business of the entity and its business strategy. For example, it may be
that environmental risks would be more likely to affect a mining company’s financial prospects
than those of a bank.
Corporations in Australia must comply with accounting standards by virtue of s. 296 of the
Corporations Act, which requires company directors to ensure that the company’s financial
statements for a financial year comply with accounting standards. Two accounting standards of
direct relevance to our discussion are IAS 37 and IAS 16.
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, obligations relating
to environmental performance could be included in either ‘provisions’ or ‘contingent liabilities’,
depending on the circumstances. The defining characteristic of a ‘provision’ as opposed to
other ‘liabilities’ is that the timing and amount of the ultimate payment are uncertain. However,
as mentioned earlier, it would appear that many organisations elect not to quantify certain
environmental obligations (such as those relating to remediating contaminated sites) because
they question the probability of the ultimate payment or believe they cannot measure the
obligation reliably.
IAS 16 Property, Plant and Equipment requires that the cost of an item of property, plant and
equipment include the initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located. The entity incurs this obligation either when the item is
acquired or as a consequence of having used the item during a particular period for purposes
other than to produce inventories during that period. Therefore, if the construction of a particular
plant or its use (other than in producing inventory) causes any contamination to land, there is
an expectation that an estimate of this cost would have been made when the asset was put in
place ready for use. This cost is to be included as part of the total cost of the property, plant and
equipment, with an equivalent amount being included in the liability provisions of the entity.
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CSR-related corporate governance disclosures

In March 2014, the ASX Corporate Governance Council published the third edition of its
Corporate Governance Principles and Recommendations. The third edition includes a new
recommendation, 7.4, which states that ‘a listed entity should disclose whether it has any
material exposure to economic, environmental and social sustainability risks and, if it does,
how it manages or intends to manage those risks’ (ASX CGC 2014, p. 30).
This disclosure is on a comply or explain basis (or an ‘if not, why not’ basis) in the directors’
report section of an annual report. The inclusion of this recommendation reflects growing
recognition of the importance of sustainability risks to investors’ medium- to long-term decisions.
While this new disclosure will be easier to achieve for those entities undertaking sustainability
reporting, it will encourage other entities to put into place systems and processes to identify
and measure these risks and consider their implications for the entity.
This increased emphasis on CSR-related corporate governance disclosures is international.

For example, in Singapore, the introduction of the Singapore Stock Exchange Sustainability
Reporting Guide for listed companies and a revised Code of Corporate Governance has seen
a significant increase in the disclosure of governance processes related to the management of
environmental and social risks.
National Greenhouse and Energy Reporting Act

The National Greenhouse and Energy Reporting Act 2007 (Cwlth) (NGER Act) introduced a
national framework for the reporting and dissemination of information about greenhouse gas
emissions, greenhouse gas projects, and energy use and production of corporations. From 2011,
the NGER Act is administered by the Clean Energy Regulator (CER) by virtue of the Clean Energy
Regulator Act 2011 (Cwlth). The aim of the CER is to reduce emissions while encouraging
business competitiveness (CER 2015a).
According to the CER website:

The objectives of the NGER Act are to:
• inform government policy;
• inform the Australian public;
• help meet Australia’s international reporting obligations;
• assist Commonwealth, state and territory government programs and activities; and
• avoid duplication of similar reporting requirements in the states and territories (CER 2015b).
The first annual reporting period began on 1 July 2008. Under the NGER Act, businesses are
required to apply for registration with the CER if they:
• are a constitutional corporation; and
• meet a reporting threshold for greenhouse gases or energy use or production for
a reporting (financial) year.
The NGER Act requires the ultimate Australian holding company of a corporate group to apply
for registration if its corporate group exceeds any one or more of the following thresholds for
a financial year as provided in Table 5.3.
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Table 5.3: National Greenhouse and Energy Reporting Act—reporting thresholds
2010–11 and
subsequent financial
Reporting year 2008–09 2009–10 years
Facility threshold 25 kilotonnes (kt) 25kt of greenhouse 25kt of greenhouse

of greenhouse gas gas emissions (CO2 gas emissions (CO2
emissions (CO2 equivalent) equivalent)
equivalent)
100 terajoules (TJ) of 100TJ of energy 100TJ of energy

energy consumed or consumed or produced consumed or produced
produced
Corporate threshold 125kt of greenhouse 87.5kt of greenhouse 50kt of greenhouse

gas emissions (CO2 gas emissions (CO2 gas emissions (CO2
equivalent) equivalent) equivalent)
500TJ of energy 350TJ of energy 200TJ of energy

consumed or produced consumed or produced consumed or produced
Source: CER 2015c, ‘Reporting thresholds’, accessed September 2015, http://www.cleanenergyregulator.

gov.au/NGER/Reporting-cycle/Assess-your-obligations/Reporting-thresholds.
Corporate groups that meet an NGER threshold must report their:

• greenhouse gas emissions;
• energy production;
• energy consumption; and
• other information specified under NGER legislation.
The data must generally be provided on behalf of the corporate group by its registered holding
company (known as the ‘controlling corporation’).
Aggregated greenhouse gas emissions and energy consumption data for the group will be
published by the CER for each reporting period (financial year) on a website by 28 February in
the following year. In addition, the CER may choose to publish such information for each member
or business unit of the group. Individual companies may also decide to publish this information
on their corporate websites.
While the intention of the requirements is to increase corporate transparency in relation to

emissions, s. 25 of the Act does allow registered corporations providing information under the
NGER Act to request that information about a specific facility, technology or corporate initiative
be withheld from publication, if it would, or could, reveal trade secrets or other confidential
information that has a commercial value that may be destroyed or diminished as a result of its
disclosure. Having said this, even if such a request is accepted, the CER may nonetheless publish
a range within which the relevant data falls.
Reporting under the NGER Act was expected to lead to a carbon tax that was established
under the Clean Energy Act 2011 (Cwlth) (CE Act). However, following the 2013 federal election,
the Australian Government announced that it would implement a Direct Action Plan to ‘efficiently
and effectively source low cost emissions reductions’ (Department of the Environment n.d.).
This plan included the Emissions Reduction Fund to provide incentives for organisations to
reduce their emissions. New legislation was introduced to parliament to repeal the CE Act,
and the carbon pricing mechanism was abolished, effective 1 July 2014.
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Even though the carbon tax was repealed, the reporting of emissions remains. A failure to report
in accordance with the NGER Act exposes the reporting entity to fines of up to $340 000 (2000
penalty units) for failure to apply for registration, and daily fines of up to $17 000 (100 penalty
units) for each day of non-compliance. It also exposes the executive officers of the corporation to
be liable for a civil penalty, at least where the officer knew the failure would occur (or was reckless
or negligent as to whether it would), was in a position to influence the conduct of the corporation
relating to the failure, and failed to take all reasonable steps to prevent the contravention.
This approach, of imposing liability on management for contraventions of environmental-related
legislation (which is also seen in other public good legislation such as health and safety, and
competition legislation), is increasingly common.
Emissions Reduction Fund

In 2015, the Australian Government created the Emissions Reduction Fund to provide incentives
for businesses across the economy to reduce emissions (Australian Government 2015). Its aim is to
reduce emissions at lowest cost and contribute towards Australia’s 2020 emissions reduction target
of 5 per cent below 2000 levels by 2020. All elements will be administered by the Clean Energy
Regulator. The scheme works by the regulator holding auctions to purchase emissions reductions
at the lowest available cost. Participants submit a bid—specifying a price per tonne of emissions
reductions—with the lowest-cost projects being selected. Participants will not be able to see what
other companies are bidding as bids will be ‘sealed’, or secret. Successful participants will be
paid the price that they bid (commonly called a ‘pay-as-bid’ auction). The government will then
enter into contracts with the successful bidders, a process that guarantees payment for the future
delivery of emissions reductions over the life of the contract.
National Pollutant Inventory

The National Pollutant Inventory (NPI) was the first national environment protection measure
to be established by the National Environment Protection Council (NEPC). The NEPC operates
under the National Environment Protection Council Act 1994 (Cwlth) and enables the public
to find out, via the internet, what businesses are discharging into the environment, as well as
showing what actions an organisation may be taking to reduce its emissions.
The NPI requires industrial facilities operating in Australia to estimate emissions of 93 substances
exceeding a specified threshold amount (substances reportable under the NGER Act are not
required to be reported under the NPI). The NPI reporting period is from 1 July to 30 June each
year and most reporting facilities have to lodge their reports with the NPI by 30 September
each year. The relevant state or territory environment protection agency will then assess the
reports and forward them to the federal government for inclusion on the publicly accessible
NPI database.
The NPI reporting requirements are set out at: http://www.npi.gov.au/resource/national-

pollutant-inventory-guide. Industry facilities estimate their emissions annually using a variety of
techniques and report these to the states and territories. The Australian Government aggregates
and publishes the data received from the states and territories. The latest data (2012−13),
marking the fifteenth year of publication of emissions from industry, details the emissions from
over 4300 industry facilities. According to reports released by the government, there is evidence
to suggest that the NPI has been achieving its goal of being ‘an impetus for cleaner production
for industry’ (NPI 1999).
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Issues of disclosure for Australian mandatory reporting requirements

While the disclosures required by the various regulatory regimes other than the Corporations Act
and accounting standards discussed earlier (e.g. NGER Act, NPI) are mandatory for certain
organisations, the organisations are not compelled to disclose the information in their own
annual reports, sustainability reports or on their websites. While the information is publicly
accessible, it would be reasonable to argue that many people would be unaware of the various
databases available. Perhaps more publicity should be given to these databases through
government advertising. The idea behind establishing these sites is that public reporting will
create public pressures on organisations to change if their performance appears to be relatively
poor—but this obviously requires that the public know about these websites in the first place.
While the above Australian requirements have been discussed because of their associated
reporting requirements, it is also worth noting that legislation is increasingly requiring regulators
to make decisions that take into account social and environmental considerations.
For example, in Australia, the New South Wales (NSW) Independent Pricing and Regulatory
Tribunal regulates the prices that suppliers of government monopoly services in NSW (such as
public transport and water or sewerage services) may charge. Under s. 15(1) of the Independent
Pricing and Regulatory Tribunal Act 1992 (NSW), the tribunal, in making a price determination,
is required to take into account (among other things):
• ‘the need to maintain ecologically sustainable development … by appropriate pricing
policies that take account of all the feasible options available to protect the environment’
(s. 15(1)(f)); and
• ‘the social impact of the determinations and recommendations’ (s. 15(1)(k)).
Further examples include the NSW Energy Savings Scheme (established under the Electricity
Supply Act 1995 (NSW), Part 9) which supports the development and installation of electricity-
saving equipment such as ultra-low-flow showerheads, and the Commonwealth Renewable
Energy Target Scheme (established under the Renewable Energy Act 2000 (Cwlth)), which
supports the installation of renewable energy generators (e.g. wind, solar, biomass, tidal).
Similarly, the Australian Energy Regulator, which regulates the prices electricity distributors
may charge, has developed demand management incentive schemes (as contemplated by the
National Electricity Rules) to encourage distributors to take measures to reduce peak demand
on their infrastructure rather than simply build more infrastructure to accommodate increasing
peak demand.
Social procurement is another trend in which social impacts are taken into account in government
decision-making. Social procurement requires public bodies to consider the social value created
in procurement contracts, which may help social enterprises and charities to compete with larger,
established providers. For example, in October 2010, the Victorian Department of Planning and
Community Development launched Social Procurement: A Guide for Victorian Local Government
to assist councils in their efforts to secure procurement contracts with positive social impact.
The above regulatory mechanisms are in place in Australia. One high-profile overseas regulatory
process relates to the European Union emissions trading scheme.
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European Union emissions trading scheme

The European Union (EU) emissions trading system is a key tool for reducing industrial
greenhouse gas emissions cost effectively. The emissions trading scheme (ETS) started in the
then 25 EU member states on 1 January 2005. This cap-and-trade scheme has now entered its
third phase, running from 2013 to 2020. It covers more than 11 000 installations in 31 countries,
as well as airlines, and covers about 45 per cent of the EU greenhouse gas emissions (EC 2013).
Central to the EU ETS cap-and-trade scheme is the creation of emission allowances. One
allowance represents the right to emit one tonne of CO2. The limit or ‘cap’ on the number of
allowances allocated creates the scarcity needed for a trading market to emerge. This means
that companies that generate the highest value from emitting greenhouse gases will be willing
to pay the most for those allowances, whereas companies that generate a lower value from
their emissions-producing activities will seek to reduce their emissions to avoid the need to
buy allowances. This ensures that emissions are reduced in the most cost-effective way.
The EU ETS includes a strong compliance and reporting framework. Article 14 of the EU ETS
Directive (Directive 2003/87/EC) requires the European Commission to adopt guidelines for
the monitoring and reporting of greenhouse gas emissions under the ETS. In relation to the
requirements, it states:
Installations must report their CO2 emissions after each calendar year. The European Commission
has issued a set of monitoring and reporting guidelines to be followed. Installations’ reports have
to be checked by an independent verifier on the basis of criteria set out in the ETS legislation,
and are made public. Operators whose emission reports for the previous year are not verified as
satisfactory will not be allowed to sell allowances until a revised report is approved by a verifier
(EU 2005, p. 13).
As stated by the Commission Regulation (EU) No 601/2012 of 21 June 2012 on the monitoring
and reporting of greenhouse gas emissions pursuant to Directive 2003/87/EC:
The complete, consistent, transparent and accurate monitoring and reporting of greenhouse
gas emissions, in accordance with the harmonised requirements laid down in this Regulation,
are fundamental for the effective operation of the greenhouse gas emission allowance trading
scheme established pursuant to Directive 2003/87/EC.
In the above requirements, reference was made to installations. An example of an installation

would be a factory. Operators may control a number of installations and must report the
greenhouse gas emissions of each installation.
Guidelines and non-mandatory reporting

As indicated earlier, there has been a recent increased emphasis in reporting on CSR information,
associated with increased mandatory reporting regulations to support the specific initiatives.
For those organisations wishing to disclose CSR information, there are a number of guidelines
and frameworks released that suggest how organisations might report. Some organisations
may feel that some of these voluntary requirements are effectively mandatory, as the reporting
is so common that it is becoming the norm, and they will be seen to be lagging behind current
practice if they do not report. Many of the underlying practices that are being performed here
(e.g. WHS or compliance with environmental regulations) are obligatory requirements already,
and so the step forward to providing some level of reporting on this activity should not be
onerous or difficult.
We address some of these guidance documents and further discuss the GRI and the G4
Guidelines. We then consider some industry guidelines that have been produced in Australia
before focusing on a number of other international guidelines that have been developed.
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In Figure 5.3 we outline how these guidelines and schemes relate to economic, environmental
or social sustainability. Although we have separated out the three main pillars, they are slowly
becoming more intertwined, as shown by the GRI and the integrated reporting approaches.
Although this figure provides quite a structured description of how these items are inter-related,
you should consider these concepts as evolving and subject to considerable change.
Figure 5.3: The relationship between non-mandatory corporate social responsibility

reporting guidelines and the three pillars of sustainability
CSR reporting
Economic Environmental Social

sustainability sustainability sustainability
Global reporting initiative
OECD guidelines
CDP
UNGC
AA1000
Equator principles
GHG protocol
Trucost
Sustainability Accounting Standards Board
Dow Jones Sustainability Index
Note: CDP = Carbon Disclosure Project, CSR = corporate social responsibility,

UNGC = United National Global Compact, GHG Protocol = Greenhouse Gas Protocol

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Our discussion, while comprehensive, does not mean that we have referred to all the economic,
environmental and social sustainability reporting frameworks that are available.
The Global Reporting Initiative

Arguably, the most widely accepted CSR or sustainability reporting guidance is produced by the
Global Reporting Initiative (GRI). The GRI is an international, multi stakeholder effort to create
a common but credible framework for voluntary reporting of the economic, environmental and
social impact of organisational-level activity (GRI n.d.).
The GRI comes in several forms of guidance. The first reporting guidelines, released in 2000,
are revised regularly and are used by many organisations globally. The latest version of the
guidelines—the G4 Guidelines—was published in 2013, and is available online at no cost.
The G4 Guidelines, together with other information about the GRI and its role and function,
are available online at: http://www.globalreporting.org.
Protocols are included and provide detailed reporting guidance to help improve reporting
comparability. According to the GRI website, protocols are the ‘recipe’ behind each indicator
in the G4 Guidelines and include definitions for key terms in the indicator, compilation
methodologies, intended scope of the indicator, and other technical references. The guidelines
provide details on report content, quality and scope.
The GRI also provides sector guidance in the form of industry-specific guidance documents.
For example, the guidance for the mining and metals industry includes issues such as site
rehabilitation (GRI 2013b), while for the banking industry the social and environmental impact
of lending practices is examined (GRI 2013c).
A sustainability report should provide insights into an organisation’s significant economic,

environmental and social impact. Reporting for reporting’s sake is not an effective use of
resources. This focus on materiality is important, and this is acknowledged in the G4 Guidelines,
which provide an increased emphasis on addressing material items to ensure reports are more
relevant and have a greater level of credibility. As a practical implication, ‘this new focus on
materiality means that sustainability reports will be centred on matters that are really critical in
order to achieve the organization’s goals and manage its impact on society‘ (GRI 2013a, p. 3).
The GRI lists practical applications and tests to help apply this principle. Some examples are
given below.
External factors
In defining material topics, an organisation should take into account external factors such as:
• main sustainability interests and indicators raised by stakeholders;
• main topics and future challenges for the sector reported by peers and competitors;
• relevant laws, regulations, international agreements or voluntary agreements with strategic
significance to the organisation and its stakeholders; and
• reasonably estimable sustainability risks or opportunities (e.g. global warming, HIV/AIDS,
poverty).
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Internal factors
Internal factors include:
• key organisational values, policies, strategies;
• interests of stakeholders specifically vested in the success of the organisation
(employees, shareholders and suppliers);
• significant risks to the organisation;
• critical facts for enabling organisational success; and
• core competencies of organisations and how they can be applied to contribute to sustainability.
The guidelines show the required standard disclosures (GRI 2013a). The general standard
disclosures are as follows:
• Strategy and analysis—description of the organisation’s strategic relationship and
report context.
• Organisational profile—overview of the reporting organisation’s structure, activities and
countries of operation.
• Identified material aspects and boundaries—details of the reporting period, experience
and scope. This is to include details of GRI usage and assurance processes if used.
• Stakeholder engagement—description of the process for including stakeholders during the
reporting period.
• Report profile—overview of the basic information about the report, the GRI content index,
and the approach to seeking external assistance.
• Governance—description of governance structures and details of accountability for
sustainability matters, and commitments to external initiatives.
• Ethics and integrity—overview of the organisation’s values, principles and norms, and its
policies and process for managing ethical and lawful behaviour (GRI 2013a, p. 12).
The specific standard disclosures are as follows:

• Disclosures on management approach—measures of the effect of the reporting organisation
divided into integrated, economic, environmental and social performance indicators.
• Indicators—50 core indicators for an organisation to report against, with an additional
30 indicators that may be relevant for different organisations (GRI 2013a, p. 12).
Many organisations incrementally increase the number of indicators reported as their information
systems improve. The GRI has established a system of self-assessment from A to C to help report
readers understand the extent to which the guidelines have been adopted. External verification is
identified as a ‘+’. As such, ‘A+’ denotes a fully compliant report that has been externally verified.
While the G4 Guidelines provide the most comprehensive guidance on sustainability reporting,
they by no means cover every situation. The underlying test is linked to the principle of materiality,
so that items that influence the decisions of stakeholders or that have a significant impact are
included in the report. Earlier in this module we discussed externalities created by organisations.
Taking the example of the negative health impact caused by tobacco products, such externalities
could include the illness and death of product consumers, family suffering, use of public resources
to care for smokers and to encourage people to stop smoking, and so forth. The G4 Guidelines
do not provide specific guidance in relation to such health issues, and there is no sector
guidance for the tobacco industry. However, the G4 Guidelines do provide some very general
suggestions under the titles of ‘customer health and safety’ and ‘product labelling’ (part of
the ‘product responsibility indicators’, which in themselves are part of the broader category
of ‘social performance indicators’).
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Many organisations in Australia report in accordance with the GRI reporting guidelines. Apart
from these guidelines, a number of Australian industry bodies have also released their own
CSR reporting guidance (and many of these make specific reference to the GRI Guidelines).
Among the Australian industry bodies that have released reporting guidance are the:
• Australian Minerals Industry, in a document titled Enduring Value: The Australian Minerals
Industry Framework for Sustainable Development (MCA n.d.);
• Energy Supply Association of Australia, in a document titled Sustainable Practice Framework
(ESAA 2009); and
• Property Council of Australia, in a document titled A Guide to Corporate Responsibility
Reporting in the Property Sector (PCA 2009).
We can only speculate as to why industry bodies such as those mentioned would develop
documents or codes requiring public sustainability reporting. One perspective might be
that requiring public reporting and developing guidelines for its members could mean that
mandatory (and perhaps more onerous) reporting would not be imposed on the industry by
government regulation. In a sense, industry might have sought to capture the regulatory process.
Another reason why particular industries introduce codes and associated reporting requirements
could be that industry leaders believe they have a responsibility to disclose information to
the public about how organisations use the environmental resources entrusted to them.
That is, organisations might believe they have an accountability that should be observed.
Another possible (related) perspective is that industries seek to legitimise their practices,
and ensure that they can maintain their social licence to operate and keep within the bounds
of reasonable or expected behaviours in a community.
Having considered the GRI and some Australian industry guidance, we now discuss other
international guidance or initiatives that organisations might choose to voluntarily adopt.
As a result of the recognition of the failings of traditional financial reporting, we have seen
a significant development in the evolution of corporate reporting, the integrated reporting
initiative. The International Integrated Reporting Committee (IIRC) was created in August 2010
as a joint Initiative of the Prince’s Accounting for Sustainability Project and the GRI (IIRC 2010).
According to the International <IR> Framework of the IIRC, ‘An integrated report is a concise
communication about how an organisation’s strategy, governance, performance and prospects,
in the context of its external environment, lead to the creation of value in the short, medium and
long term’ (IIRC 2013).
Many organisations produce an annual report with various items of financial information as
required by accounting standards, corporations law and securities exchange listing requirements
together with a separate CSR report. But there is often little or no connection between the
various reports in order to tell the coherent, concise value-creation story of the organisation.
Integrated reporting is consistent with numerous developments that are taking place in corporate
reporting around the world. It is a response to the limitations of traditional financial reporting
that we discussed earlier in this module. We are seeing greater demands for a broader set of
information relevant to stakeholders, consistent with a move away from the shareholder primacy
perspective. A lot of this is environmental and sustainability information that has been mandated,
as discussed earlier in this information. But integrated reporting is broader than this, and reflects
an organisation’s drawing from and interaction with all the resources and relationships that are
important to that organisation in creating value.
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It is effectively argued by the IIRC that there is a need to transform corporate reporting so that
various types of relevant information for assessing and evaluating a company’s performance
are reported in a comprehensive and integrated way. Corporate reporting should follow
directly from an organisation’s corporate strategies and targets which in themselves need to be
clearly elaborated. Integrated reporting is not simply about combining the annual report with
a CSR report—sustainability will need to be clearly anchored in the overall business strategy
and incorporated within key performance indicators.
The integrated report therefore 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 organisation 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; and
• support integrated thinking, decision-making and actions that focus on the creation of value
over the short, medium and long term (IIRC 2013, p. 3).
Source: Copyright © December 2013 by the International Integrated Reporting Council (‘the IIRC’).
All rights reserved. Used with permission of the IIRC. Contact the IIRC ([email protected]) for
permission to reproduce, store, transmit or make other uses of this document.
The last point made above is the importance of integrated thinking for an organisation,
which was defined earlier in this module. It is believed that a lot of the benefits of the integrated
reporting initiative are due to the improvement to internal decision-making from adopting
integrated thinking. Integrated thinking in an organisation leads to integrated decision-making
and encourages management to undertake actions that affect the ability of an organisation to
create value over time (Adams 2013).
In December 2013, following extensive consultation and testing by businesses and investors in
all regions of the world, the IIRC released its integrated reporting framework. The purpose of the
framework is to establish guiding principles and content elements that govern the overall content
of an integrated report, and to explain the fundamental concepts that underpin them.
The International <IR> Framework is available at: http://www.theiirc.org/wp-content/

uploads/2013/12/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf.
OECD Guidelines for Multinational Enterprises

The OECD Guidelines for Multinational Enterprises (OECD 2011) (OECD Guidelines) are a
comprehensive set of government-backed recommendations on responsible business conduct.
An updated set of the OECD Guidelines was released in 2011, with the changes including a new
human rights chapter based on the concept of ‘protect, respect, and remedy’ (consistent with the
UN Framework for Business and Human Rights).
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The OECD Guidelines aim to promote positive contributions by enterprises to economic,

environmental and social progress worldwide:
The OECD Guidelines for Multinational Enterprises are recommendations addressed by
governments to multinational enterprises operating in or from adhering countries. They provide
non-binding principles and standards for responsible business conduct in a global context
consistent with applicable laws and internationally recognised standards. The guidelines are
the only multilaterally agreed and comprehensive code of responsible business conduct that
governments have committed to promoting
Source: OECD 2011, OECD Guidelines for Multinational Enterprises, 2011 Edition, OECD Publishing,
Paris, accessed October 2015, http://www.oecd.org/corporate/mne/48004323.pdf.
Within the OECD Guidelines, it is stated that enterprises should take into account the established
policies of the countries in which they operate and consider the views of other stakeholders.
Enterprises should contribute to economic, environmental and social progress with a view to
achieving sustainable development. In relation to the environmental obligations, the OECD
Guidelines state:
Enterprises should, within the framework of laws, regulations and administrative practices in
the countries in which they operate, and in consideration of relevant international agreements,
principles, objectives, and standards, take due account of the need to protect the environment,
public health and safety, and generally to conduct their activities in a manner contributing to the
wider goal of sustainable development.
Source: OECD 2011, OECD Guidelines for Multinational Enterprises, 2011 Edition, OECD Publishing,
Paris, accessed October 2015, http://www.oecd.org/corporate/mne/48004323.pdf.
The ‘OECD Guidelines for Multinational Enterprises’ are available online at: http://mneguidelines.
oecd.org. Interested candidates can review the guidelines to see which aspects relate to CSR issues.
Carbon Disclosure Project

The Carbon Disclosure Project (CDP) was formed in 2000. Based in New York and London,
the CDP focuses on the implications of climate change for shareholder value and commercial
operations. The CDP seeks information on the business risks and opportunities presented by
climate change and greenhouse gas emissions from the world’s largest companies. It publishes
emissions data for approximately 4000 of the world’s largest corporations (which are thought
to account for nearly one-third of the world’s emissions that are caused or produced by
humans). According to its website (http://www.cdproject.net), the CDP currently represents
767 institutional investors (up from 534 in 2010), with a combined USD 92 trillion under
management (USD 64 trillion in 2010).
The view of the CDP is that carbon emissions and climate change represent significant business
risks and, therefore, an organisation’s policies and performance in relation to climate change
should be factored into investment decisions. Further, the CDP holds the view that information
about greenhouse gas emissions is useful to investors, corporations and regulators in making
informed decisions that take into account corporate risk from future government legislation,
possible future lawsuits and shifts in consumers’ perceptions towards heavy emitters.
The overall organisational goal of the CDP is promoted as being to reduce the problem of global
warming, and according to the CDP website:
CDP is an international, not-for-profit organisation providing the only global system for companies
and cities to measure, disclose, manage and share vital environmental information. We work with
market forces to motivate companies to disclose their impact on the environment and natural
resources and take action to reduce them (CDP 2014a).
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A special project of CDP is the Climate Disclosure Standards Board. It has developed a climate
change reporting framework that is intended for use by companies making climate change
disclosures in their mainstream financial reports. It is about linking financial and climate-change-
related reporting to give policy makers and investors clear, reliable information for robust
decision-making. The framework has a similar objective to the integrated reporting initiative but
focuses on a specific issue.
For reference, the Climate Disclosure Standards Board climate change reporting framework is
available at: http://www.cdsb.net/sites/cdsbnet/files/cdsbframework_v1-1.pdf.
Organisations wishing to publicly report their greenhouse gas emissions and climate change
strategies can do so through the CDP, and interested parties can conduct searches on the
CDP website by company name. Researchers within the CDP also use the Carbon Disclosure
Leadership Index to score company responses based on the quality of their reporting to CDP.
According to the CDP website, the scores provide a valuable perspective on the range and
quality of companies’ responses.
➤➤Question 5.11
The CDP website features a quote from Douglas Flint, group chairman of HSBC Holdings plc,
in which he states:
For HSBC, climate change is a cornerstone of our ongoing business strategy … The
reporting framework that CDP has pioneered over the past decade has helped us both
as a respondent and a signatory, to improve our understanding of the strategic risks and
opportunities in this area (CDP 2014b).
Evaluate this statement.
United Nations Global Compact

The United Nations Global Compact was designed by the office of the Secretary-General,
then Kofi Annan, with input from the International Chamber of Commerce. The United Nations
Global Compact is a principle-based framework for businesses, with a set of 10 principles. It is
the world’s largest corporate citizenship initiative and, as a voluntary initiative, it exists to assist
the private sector in the management of risks and opportunities in the environmental, social and
governance realms. To make this happen, the United Nations Global Compact supports
companies to:
1. Do business responsibly by aligning their strategies and operations with Ten Principles
on human rights, labour, environment and anti-corruption; and
2. Take strategic actions to advance broader societal goals, such as the forthcoming
UN Sustainable Development Goals, with an emphasis on collaboration and innovation.
(United Nations Global Compact 2015).
Businesses become signatories to the United Nations Global Compact and demonstrate actions
to support the 10 principles by submitting formal ‘Communications on progress’ on an annual
basis. The United Nations Global Compact’s 10 principles are derived from:
• the Universal Declaration of Human Rights;
• the International Labour Organization’s Declaration on Fundamental Principles and
Rights at Work;
• the Rio Declaration on Environment and Development; and
• the United Nations Convention Against Corruption.
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The United Nations Global Compact asks companies to embrace, support and enact, within
their sphere of influence, a set of core values in the areas of human rights, labour standards,
the environment and anti-corruption.
Human rights
Principle 1: Businesses should support and respect the protection of internationally proclaimed
human rights; and
Principle 2: make sure that they are not complicit in human rights abuses.
Labour
Principle 3: Businesses should uphold the freedom of association and the effective recognition
of the right to collective bargaining;
Principle 4: the elimination of all forms of forced and compulsory labour;
Principle 5: the effective abolition of child labour; and
Principle 6: the elimination of discrimination in respect of employment and occupation.
Environment
Principle 7: Businesses should support a precautionary approach to environmental challenges;
Principle 8: undertake initiatives to promote greater environmental responsibility; and
Principle 9: encourage the development and diffusion of environmentally friendly technologies.
Anti-Corruption
Principle 10: Businesses should work against corruption in all its forms, including extortion and
bribery (UNGC 2011, p. 6).
A significant number of Australian organisations have signed up to the principles, including

Telstra, National Australia Bank, ANZ Bank, CPA Australia, Commonwealth Bank, BHP Billiton
and Westpac.
AccountAbility AA1000 series

AccountAbility, founded in 1995, promotes itself as a global organisation that provides solutions
to the major challenges in corporate responsibility and sustainable development. It states as
its vision:
a world where people have a say in the decisions that have an impact on them, and where
organisations act on and are transparent about the issues that matter (AccountAbility n.d.).
At the centre of AccountAbility’s work is the AA1000 Series of Standards, which, according to
its website, is based on the following principles:
• Inclusivity—people should have a say in the decisions that impact on them.
• Materiality—decision-makers should identify and be clear about the issues that matter.
• Responsiveness—organisations should be transparent about their actions
(AccountAbility n.d.).
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The AA1000 series has been designed with the intention of helping ‘organisations become more
accountable, responsible and sustainable’. Currently, the AA1000 series consists of:
• The AA1000 AccountAbility Principles Standard 2008 (AA1000APS), which provides a better
‘framework for an organisation to use in order to better identify, understand, prioritise and
respond to its sustainability challenges’ (AccountAbility 2008).
• The AA1000 Assurance Standard 2008 (AA1000AS), which is a leading international standard,
used to provide assurance on publicly available sustainability information, particularly CSR or
sustainability reports (AccountAbility 2008).
• The AA1000 Stakeholder Engagement Standard 2015 (AA1000SES) (currently under revision
for public comment), which provides the basis for building robust and responsive stakeholder
engagement processes (AccountAbility 2015).
Equator Principles
When an organisation seeks to establish a particular project, it often requires project-specific
financing. As such, there is a view among many people that the organisation providing the
finance (typically a financial institution) should take some responsibility and leadership in how the
funding is being used and the social, environmental and economic impact associated with the
project. With this perspective in mind, the Equator Principles (EPs 2013) were developed.
The Equator Principles are a voluntary set of standards for determining, assessing and managing
social and environmental risk in project financing. Project financing is defined in the Equator
Principles as:
a method of financing in which the lender looks primarily to the revenues generated by a
single Project, both as the source of repayment and as security for the exposure. This type of
financing is usually for large, complex and expensive installations that might include, for example,
power plants, chemical processing plants, mines, transportation infrastructure, environment,
and telecommunications infrastructure. (EPs 2013, p. 19).
Equator Principles Financial Institutions (EPFIs) commit to not providing loans to projects where
the borrower will not or is unable to comply with the respective social and environmental policies
and procedures that are incorporated into the Equator Principles.
The Equator Principles apply to all new project financings globally, with total project capital costs
of USD 10 million or more, across all industry sectors. In addition, while the Equator Principles
are not intended to be applied retrospectively, EPFIs will apply them to all project financings
covering expansion or upgrade of an existing facility where changes in scale or scope may
create significant environmental and/or social impact, or significantly change the nature or
degree of an existing impact.
The intended consequences of adopting the Equator Principles are expressed in the guidance
document accompanying the principles (version III was released in 2013 and titled ‘The Equator
Principles: A financial industry benchmark for determining, assessing and managing environmental
and social risk in projects’) as follows:
We, the Equator Principles Financial Institutions (EPFIs), have adopted the Equator Principles
in order to ensure that the Projects we finance and advise on are developed in a manner that
is socially responsible and reflects sound environmental management practices. We recognise
the importance of climate change, biodiversity, and human rights, and believe negative impact
on project-affected ecosystems, communities, and the climate should be avoided where
possible. If these impacts are unavoidable they should be minimised, mitigated, and/or offset
(EPs 2013, p. 2).
For details of the 10 principles, interested candidates can refer to the Equator Principles website:
http://www.equator-principles.com/resources/equator_principles_III.pdf.
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The Greenhouse Gas Protocol

The Greenhouse Gas Protocol (GHG Protocol) is one of the most widely used international
accounting frameworks for quantifying greenhouse gas emissions. The GHG Protocol
represents a partnership between the World Resources Institute (an environmental ‘think tank’
in Washington DC. that receives funding from a large number of corporate donors) and the
World Business Council for Sustainable Development (a coalition of 200 international companies).
The GHG Protocol is used by many greenhouse gas (GHG) standards and programs throughout
the world. For example, it provides the basis for quantifying GHG emissions under the NGER Act
in Australia, and the European Union Greenhouse Gas Emissions Allowance Trading Scheme
(EU ETS), both of which were discussed earlier under ‘What is required? (Mandatory reporting)’.
The GHG Protocol standards were designed with the following objectives in mind:
• To help companies prepare a GHG inventory that represents a true and fair account of their
emissions, through the use of standardised approaches and principles.
• To simplify and reduce the costs of compiling a GHG inventory.
• To provide business with information that can be used to build an effective strategy to manage
and reduce GHG emissions.
• To increase consistency and transparency in GHG accounting and reporting among various
companies and GHG programs (WRI & WBCSD 2005, p. 3).
The GHG Protocol consists primarily of four separate but linked standards.
The Corporate Accounting and Reporting Standard (Corporate Standard) provides methodologies
for businesses and other organisations to report all of their GHG emissions. It covers the
accounting and reporting of the six greenhouse gases covered by the Kyoto Protocol:
• CO2 (carbon dioxide)
• CH4 (methane)
• N2O (nitrous oxide)
• HFCs (hydrofluorocarbons)
• PFCs (perfluorocarbons)
• SF6 (sulphur hexafluoride).
The Corporate Standard was amended in May 2013 to include a seventh greenhouse gas,
nitrogen trifluoride (NF3 ).
The second, the Project Accounting Protocol and Guidelines (Project Protocol), is designed to
calculate reductions in GHG emissions from specific GHG-reduction projects. According to the
GHG Protocol, the Project Protocol is the most comprehensive, policy-neutral accounting tool
for quantifying the greenhouse gas benefits of climate change mitigation projects.
The third is the Corporate Value Chain (Scope 3) Accounting and Reporting Standard,
which allows companies to assess their entire value-chain emissions impact and identify the
most effective ways to reduce emissions. Scope 3 emissions refer to other indirect emissions
generated in the wider economy as a consequence of an organisation’s activities but which are
physically produced by others. An example would be emissions caused by airline travel for staff
of an organisation. The new standard allows for the accounting for emissions from 15 categories
of scope 3 activities, both upstream and downstream of their operations, and also supports
strategies to partner with suppliers and customers to address climate effects throughout the
value chain.
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The fourth is the Product Life Cycle Accounting and Reporting Standard, which can be used to
evaluate the full life cycle emissions of a product. This is the first step towards more sustainable
products, as organisations can measure the greenhouse gases associated with the full life
cycle of products, including raw materials, manufacturing, transportation, storage, use and
disposal. The standard is also expected to help organisations respond to customer demand
for environmental information and make it easier to communicate the environmental aspects
of products.
For reference, the four separate standards can be accessed from:

http://www.ghgprotocol.org/standards.
Trucost
Another interesting approach to accounting for CSR-related effects is provided by the
organisation known as Trucost. Trucost was established in 2000 with the aim of assisting
organisations, investors and governments to understand the economic consequences of natural
capital dependency. According to its website, a key to its approach is that it not only quantifies
environmental impacts but also puts a price on them. It claims that in this way, Trucost helps
its clients to:
identify natural capital dependency across companies, products, supply chains and investments;
manage risk from volatile commodity prices and increasing environmental costs; and ultimately
build more sustainable business models and brands. (Trucost n.d.)
Trucost has developed a model to calculate quantitative ‘environmental impact across

organisations, supply chains and investment portfolios’ (Trucost n.d.). This model is built on an
analysis of 464 industries worldwide and tracks over 100 environmental impacts. Among other
things, the model analyses emissions and resource usage by companies and then applies
external prices to them so that a comparison can be made against other companies. As an
example, large investors can use the model to identify high-risk sectors for investment and
increase their understanding of how their investments might be affected by increases in the
costs of carbon emissions. According to Trucost (n.d.), a number of large organisations use its
services, including Australian superannuation funds AustralianSuper and VicSuper.
Trucost draws on a range of sources in its analysis, including financial information from sources
such as Dun & Bradstreet, to establish the business activities of an organisation and then
apportion the organisation’s revenues to those activities. It then uses the organisation’s own
external CSR reporting, or proxy information when the CSR information is not available, such
as fuel use or expenditure data. Its analysts then standardise reported figures in an endeavour
to ensure the data covers the total operations of a company and the impacts are categorised
according to acknowledged reporting standards. Each analysed company is then invited to verify
or refine the environmental profile Trucost has created. Trucost analysts validate and authenticate
any amendments or further disclosures made by the company (Trucost n.d.).
Sustainability Accounting Standards Board

The Sustainability Accounting Standards Board is a US not-for-profit organisation whose mission
is to develop and disseminate sustainability accounting standards that help US publicly listed
companies meet their Securities and Exchange Commission (SEC) sustainability disclosure
requirements. US publicly listed companies are required to disclose material sustainability issues
in mandatory SEC filings, including the Forms 10-K and 20-F. The Sustainability Accounting
Standards Board is developing sustainability accounting standards for more than 80 industries in
10 sectors, for completion in 2016. The current status of the standard development can be found
at: http://www.sasb.org/standards/status-standards (SASB n.d.).
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Dow Jones SI
The Dow Jones Sustainability World Index was launched in 1999 and provides a global
sustainability benchmark that tracks the share performance of the world’s leading companies in
terms of economic, environmental and social sustainability. A number of indices (at the global,
regional or country level) serve as benchmarks for investors who wish to integrate sustainability
considerations into their portfolios. The index uses a ‘best in industry’ approach rather than
excluding particular industries, as is the case with techniques such as socially responsible
investments, which will be discussed later in this module.
Each year, the 2500 largest companies in the Standard & Poor’s Global Broad Market Index
are invited to participate in a corporate sustainability assessment, which requires completing a
questionnaire (consisting of approximately 80 to 120 questions on financially relevant economic,
environmental and social factors) and a media and stakeholder analysis. About half the
assessment is about how the organisation deals (in terms of standard management practices
and performance measures) with major global sustainability challenges such as human capital
development, and risk and crisis management. The other half of the questionnaire covers
industry-specific risks and opportunities that focus on economic, environmental and social
issues relevant to that industry (DJSI).
➤➤Question 5.12
This section has discussed a number of major reporting frameworks. Identify which of the
guidelines and non-mandatory initiatives constitute reporting frameworks, and outline the benefit
of such frameworks.
Other initiatives
Social audits
Earlier in this module, we discussed the importance of organisations complying with community
expectations and the necessity for organisations and industries to comply with the social
contract. We noted that failure to comply with community expectations can have significant
implications for the profitability and survival of an organisation.
With the above in mind, many organisations undertake a ‘social audit’ (which should not be
confused with an audit or verification of an organisation’s social and environmental impact or
CSR report). A social audit can be seen as representing the process an organisation undertakes
to investigate whether it is perceived, by particular stakeholder groups, to be complying with
the social contract. This definition of a social audit is consistent with Elkington (1997), who states
that the purpose of social auditing is for an organisation to assess its performance in relation to
society’s requirements and expectations. Any such assessment requires the direct involvement
of stakeholders, which might include employees, capital providers, customers, contractors,
suppliers and local residents interested in the organisation. Social audits provide a basis
for assessing the extent to which an organisation appears to be living up to the values and
objectives to which it has publicly committed.
The results of a social audit often form an important component of an entity’s publicly
released social report, which in itself might form part of a broader CSR or sustainability report.
The outcomes of social audits can be considered an important part of the ongoing dialogue
with various stakeholder groups.
One company that has undertaken social audits in Australia is The Body Shop. Arguably,
because The Body Shop relies relatively heavily on its reputation for superior social and
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environmental performance, it is important to ensure that its stakeholders believe it is

operating ethically. Its Australian website states:
Study guide | 443
2011 saw us complete our 7th Social Audit cycle whereby we surveyed our Employees, At Home
Consultants, Suppliers, Values Partners and Customers. Thank you to everyone who participated
…. We have now commenced preparation for our 2013 Social Audit which will take place later
this year ….
Our social audit process is based on feedback from our key stakeholders about our company
values, social and ethical performance. All stakeholders invited to participate are anonymous.
We are one of the very few companies in Australia to conduct a stakeholder perception social
audit process that is independently audited and publicly disclosed.
Why do we do this?
• It’s the right thing to do—businesses should report on their social and ethical performance.
• For continuous improvement—we want to get better at what we do.
• To lead by example—we want to be a role model to our companies to follow suit
(Body Shop 2012).
Their social audit involved market research questionnaires and focus groups with key stakeholder
groups: staff, customers, suppliers, values partners and The Body Shop at home consultants.
For the 2011/2012 social audit, more than 9000 people were consulted. The results of the
2011/2012 social audit regarding their employees are contained in Figure 5.4.
Figure 5.4: The social statement of The Body Shop regarding employees
EMPLOYEES
Inspiring and developing our people
Ours has always been a business that puts a high value on our People. We are committed to treating
our staff in a fair, considerate and supportive way. As you would expect, this means we have forward
thinking policies on issues like diversity and equality, because we believe passionately that it’s not your
background, race, sexuality, gender, or disability that defines who you are, but the talent you have and
the commitment you’re prepared to give.
In the last few years we’ve formalised most of our People policies. These cover recruitment and on
boarding, learning and development, performance appraisal, reward and engagement and career
development. There are detailed tools and processes supporting all of these and they’re underpinned
by the basic principles we follow in all our dealings with our teams, which are transparency, dialogue,
and mutual commitment.
Good News
(above The Body Shop’s 70% benchmark)
93% of staff believe there’s something special and unique about working for the organisation
89% of staff trust the business to always act ethically in business dealings
86% of staff trust the business to make a difference
83% of people are proud of the achievements of the organisation
80% of staff believe it’s a truly great place to work
Hot Spots
(below The Body Shop’s 70% benchmark)
59% of staff believe workloads are fair & equitable
67% of staff believe there is a strong sense of purpose and direction
63% of staff rate The Body Shop well on the amount of environmental information available
62% of staff are satisfied with opportunities for professional/personal development
Targets
To achieve 80% and more across all indicators related to staff satisfaction with their employment,
in particular across workload, development and environmental responsibility.
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Source: Body Shop 2012, The Body Shop Australia’s Social & Environmental Report 2011/2012,
accessed June 2015, http://www.thebodyshop.com.au/cms/Assets/Images/
The%20Body%20Shop%20Social%20WEB%20public%20Report.pdf.
At this point, we reflect on the question of whether the results reported in The Body Shop report
(2012) represent accounting results. The answer to this returns to the link between accounting
and accountability. If an organisation believes it is accountable to particular stakeholder groups
for certain aspects of its performance, it would seem sensible to engage the stakeholders to
find out whether they are satisfied with the organisation’s performance, and the results of this
engagement would form part of the organisation’s account of its social performance.
Reflecting the interest in social accounting and social auditing, Social Accountability International
released a social accounting standard entitled the Social Accountability 8000 International
Standard (SAI 2014), which focuses on issues associated with human rights, health and safety,
and equal opportunities. SA8000 is a voluntary standard that can be assured against, based on
the principles of the UN Universal Declaration of Human Rights, the International Labour
Organization conventions, international human rights norms and national labour laws.
The above approach can be contrasted with the approach adopted by The Body Shop. The Body
Shop tends to structure its social audit on issues developed in-house, rather than considering
issues specified by an external body such as those responsible for the development of SA8000.
➤➤Question 5.13
(a) What is a social audit and why would an organisation undertake one?
(b) Would the results of a social audit be incorporated in an organisation’s CSR report?
Corporate governance mechanisms aimed at improving social and

environmental performance
We previously highlighted the updated recommendation 7.4 in the ASX Corporate Governance
Principles and Recommendations (ASX CGC 2014). This recommendation states that an ‘entity
should disclose whether it has any material exposure to economic, environmental and social
sustainability risks and, if it does, how it manages or intends to manage those risks’.
Embedding a sustainability focus into an organisation’s corporate governance systems and

processes is a challenge and can be achieved in a number of ways. Sustainability policies,
strategies and performance risk indicators need to be developed as an integral part of the
overall corporate strategy to reflect the requirements of sustainable development as well as
the priorities of stakeholders. Strategies should clarify corporate responsibility positioning
decisions in light of benchmarking information. Business strategy alignment should also be
periodically validated.
Companies can put in place formal structures that have a strong sustainability focus. For example,
many organisations now have formal board committees dedicated to sustainability issues and also
appoint environmental managers who report directly to the board.
A stakeholder engagement process can also be part of a well-functioning corporate governance

system. Companies often do not understand their stakeholders well and, as a result, many do
not even try to encourage their participation in shaping the future of the company. Stakeholder
engagement involves discovering what really matters to the key stakeholders, providing them
with feedback on corporate strategies and performance, and identifying what and how things
can be changed.
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An influential source of guidance on corporate governance as it relates to the environment

is the International Organization for Standardization’s (ISO) 14000 family of standards
(ISO n.d.). Of most relevance to this topic is ISO 14001 Environmental Management Systems—
Requirements with Guidance for Use, which was issued in 2004, and is currently under revision
(as at June 2015) with an expected publication date of October 2015. Many organisations
throughout the world have voluntarily elected to comply with this standard. The standard
recommends that senior management of an organisation devise an environmental policy,
which must include a commitment to both compliance with environmental laws and company
policies, continual improvement and prevention of pollution. Once the policy is put together,
a system is then created and documented that ensures that the environmental policy is carried
out by the organisation. This involves planning, implementation and operations, checking and
corrective action, and management review (ISO 2014).
Another relevant release from the ISO is ISO 26000, Guidance on Social Responsibility,
which provides guidance on social responsibility for all types of organisations. This includes
guidance on:
(a) Concepts, terms and definitions related to social responsibility;
(b) Background, trends and characteristics of social responsibility;
(c) Principles and practices relating to social responsibility;
(d) Core subjects and issues of social responsibility;
(e) Integrating, implementing and promoting socially responsible behaviour throughout the
organisation and, through its policies and practices, within its sphere of influence;
(f) Identifying and engaging with stakeholders; and
(g) Communicating commitments, performance and other information related to social
responsibility (ISO 2010, p. 7).
Arguably, a sound corporate management system should also link executive rewards to key social
and environmental performance indicators. That is, rather than focusing on reward structures
that are tied to measures of financial performance only (paying senior executives a bonus tied
to profit, sales, return on assets, and so forth), management’s bonuses could also be tied to
social and environmental performance indicators, for example, a reduction in emission levels or
workplace injuries. The reporting of a link between employee remuneration and performance
on social and environmental issues is still found to be rare for the largest 250 companies in
the world.
Companies that clearly link employee remuneration to performance on social and environmental
issues send a strong signal to employees, investors and other stakeholders that they are serious
about CR [corporate responsibility] performance and ensuring the long term viability of the
company. Yet only 10% of the world’s largest companies (G250) currently provide a clear explanation
in their reporting of how remuneration is linked with CR performance.
This suggests that in most of these companies CR is still not considered a critical business
performance indicator to factor in to executive remuneration, despite around a quarter of them
stating that the company board has ultimate responsibility for CR.
Source: ‘Linking CSR performance with pay sends clear sustainability signal’, Yvo de Boer,
The Guardian, 13 December 2013, Copyright Guardian News & Media Ltd 2015.
It is eye-opening to learn that worldwide so few companies link CSR performance to executive
remuneration, especially given the potential for social and environmental issues to affect the
supply chain, financial performance, reputation and the ultimate brand value of companies.
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We would perhaps question an organisation’s commitment to a sustainability agenda if we

were to find that bonuses paid to senior executives were only tied to measures of financial
performance. Sustainability opportunities and risks spanning environmental, social or economic
performance should be considered as part of an enterprise-wide risk management framework,
rather than as specific risks that are managed outside the existing risk management strategy
and framework and related policies.
An organisation that commits itself to a broad social responsibility agenda should consider
putting in place a suite of policies and procedures that help it achieve those objectives.
These procedures can relate to a variety of issues such as reporting policies, stakeholder
engagement policies, employee remuneration policies, waste management policies and so
forth—all of which have been discussed.
Corporate governance mechanisms to specifically address climate change

An important area that businesses need to address is climate change. Climate change poses
many risks and opportunities to current and future generations. To reduce the risks associated
with climate change, an entity should put in place corporate governance mechanisms specifically
aimed at reducing their emissions of greenhouse gases.
In a study of the disclosure of climate change-related governance practices, Haque and Deegan
(2010) developed a best practice guide to describe the corporate governance practices a
company might put in place to address climate change. In developing the best practice guide,
the authors referred to various climate change guidance documents released by a number
of NGOs and research bodies. Their synthesised list of best practice corporate governance
practices to address climate change is provided in Table 5.4. This list identifies the types of
board and senior management practices that an organisation could implement.
Table 5.4: Best practice corporate governance practices for addressing

climate change
Board oversight 1. The organisation has a board committee with explicit oversight
responsibility for environmental affairs.
2. The organisation has a specific board committee for climate change and
GHG-related issues.
3. The Board conducts periodic reviews of climate change performance.
Senior management 4. The CEO/chairperson articulates the organisation’s views on the issue
engagement and of climate change through publicly available documents such as annual
responsibility reports, sustainability reports, and websites.
5. The organisation has an executive risk management team, dealing
specifically with GHG issues.
6. Some senior executives have specific responsibility for relationships with
government, the media and the community with a specific focus on climate
change issues.
7. The organisation has a performance assessment tool to identify current
gaps in GHG management.
8. The executive officers’ and/or senior managers’ compensation is linked to
attainment of GHG targets.
Note: GHG = greenhouse gas
Source: Adapted from Haque, S. & Deegan, C. 2010, ‘Corporate climate change related governance
practices and related disclosures: Evidence from Australia’, Australian Accounting Review,
vol. 20, issue 4, p. 324.
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While it would not be expected that a company would implement all of the above processes,
it would be expected that a company serious about addressing climate change would
incorporate a number of the above policies in its corporate governance system.
➤➤Question 5.14
Identify five corporate governance policies that could act to enhance an organisation’s social
and environmental performance and explain how linking such policies to executive remuneration
would generally be in the best interests of the organisation and its key stakeholders.
Environmental management accounting

While a great deal of our discussion relates to the external reporting of CSR information,
there are numerous ways that CSR information can be used internally to increase the efficiency
of an organisation—both from a financial and an environmental perspective (the so-called
win−win scenario). One such way is through the introduction of environmental management
accounting. The International Federation of Accountants defines environmental management
accounting broadly as:
The management of environmental and economic performance via management accounting
systems and practices that focus on both physical information on the flow of energy, water,
materials, and wastes, as well as monetary information on related costs, earnings and savings
(IFAC 2005, p. 16).
To assess costs correctly, it is important to collect both financial and non-financial data
(e.g. materials use, personnel hours and other cost drivers). Environmental management
accounting places a particular emphasis on materials and materials-driven costs because the
use of energy, water and materials, as well as the generation of waste and emissions, is directly
related to many of the effects organisations have on their environments.
Many organisations purchase energy, water and other materials to support their activities.
For example, in a manufacturing organisation, some of the purchased material is converted into
a final product that is delivered to customers. But most manufacturing operations also produce
materials that were intended to go into the final product but became waste instead because
of issues such as operating inefficiencies or product quality issues. Manufacturing operations
also use energy, water and materials that are never intended to go into the final product but
were to manufacture the product (such as water to rinse out chemicals). Many of these materials
eventually become waste streams that must be managed.
One of the first steps required when implementing an environmental management accounting
system is to define which environmental costs will be accounted for (or managed). These costs
can be restricted to those currently recognised by an organisation pursuant to ‘conventional’
accounting practices or they could be extended to include externalities. Where focus is on costs
currently being recognised, it might be that the way they are currently being accounted for is
impeding efforts to improve an organisation’s operations.
It is possible for potentially important environmental costs to be hidden in the accounting

records, where a manager cannot find them easily. One particularly common way to hide
environmental costs is to assign them to overhead accounts rather than directly to the processes
or products that created the costs. The opinion that overhead accounts can conceal or even
distort information relating to environmental costs is not new and is consistent with the views
of the United Nations Division for Sustainable Development:
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Conventional management accounting systems attribute many environmental costs to general

overhead accounts, with the consequence that product and production managers have no incentive
to reduce environmental costs and executives are often unaware of the extent of environmental
costs … A rule of thumb of environmental management is that 20 per cent of production
activities are responsible for 80 per cent of environmental costs. When environmental costs are
allocated to overhead accounts shared by all product lines, products with low environmental costs
subsidize those with high costs. This results in incorrect product pricing which reduces profitability
(UNDSD 2001, p. 1).
The accumulation of various costs (overheads) in overhead accounts is something that many
of us have been taught as part of our accounting education despite the fact that doing so can
impede our ability to manage the consumption of various, all of which may have environmental
consequences. That is, the practice of using overhead accounts can counter other initiatives
implemented to address CSR. Where a variety of costs are being accumulated in overhead
accounts, subsequent allocation of the accumulated costs to particular products are frequently
made in terms of such bases as sales volume, production output, floor space occupied by
particular departments, machine hours or labour hours. This might, however, be an inaccurate
way to allocate some typical environmental costs.
While making the task of cost allocation easier, using such simplistic allocation bases as those
identified above may lead to the misallocation of many costs, including those relating to the
environment. An example would be hazardous waste disposal costs, which could be high
for a product line that uses hazardous materials and low for one that does not. In this case,
the allocation of hazardous waste disposal costs on the basis of production volume would be
inaccurate, as would be product pricing and other decisions based on that information.
Different approaches can be taken to resolve the issue of hidden environmental costs.
One common solution is to set up separate cost categories for the more obvious and discrete
environmental management activities. The less obvious costs that will still appear in other
accounts will need to be more clearly labelled as environmental so they can be traced more
easily. An assessment of the relative importance of environmental costs and cost drivers of
different process and product lines, in line with the general practice of activity-based costing
(ABC), can help an organisation determine whether the cost allocation bases being used are
appropriate for those costs.
From the above discussion, we can see that simply changing the way we accumulate and allocate
costs can provide us with an enhanced ability to control various environmental costs. Apart from
the way we accumulate costs, opportunities relating to reducing such things as waste can also be
enhanced if we classify particular costs differently. What should be understood at this point is that
relatively inexpensive changes to an entity’s accounting system can be made that might lead to
real changes in the ability to control resource usage.
Another potential problem with environmental management accounting is that accounting

records do not usually contain information on future environmental costs, even though they may
be quite significant. As outlined earlier, accounting records also lack many other less tangible
environmental costs. An example is costs incurred when a poor environmental performance
results in lost sales to customers who care about environmental issues. These types of costs
may be difficult to estimate, but they can be both real and significant to an organisation’s
financial health.
Given the current infancy of environmental management accounting, the design of a particular
system is really about incremental progress. The case studies discussed by Deegan (2003)
suggest that a number of benefits can follow from introducing environmental management
accounting. These benefits can span from being direct to indirect and include:
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• More informed decision making: explicit consideration of particular costs that are otherwise
obscured by traditional accounting approaches;
• Uncovering opportunities: an analysis of environmental costs might reveal opportunities,
some of which might lead to revenues through recycling, or use of ‘waste’ in other activities;
• Improved pricing of products: explicit consideration of particular costs will enable more
informed pricing of products;
• Assist with internal and external reporting: identifying environmental costs will help organisations
collect data about their environmental impact for internal and external reporting purposes;
• Increased competitive advantage: given the infancy of environmental management accounting,
explicit consideration and associated publicity, might provide an organisation with a
competitive advantage;
• Improved reputation: efforts to reduce environmental costs and related impact will have
reputation implications;
• Staff retention and attraction: it has also been argued that by showing that an organisation is
trying to manage and account for the environmental implications of its operations, this may in
turn enable it to retain and attract better staff, as well as improve staff morale; and
• Generation of societal benefits: efforts to reduce environmental costs and impact (which will
assist in creating a cleaner environment) will generate human benefit.
Source: Deegan, C. 2003, Environmental Management Accounting: An Introduction and Case Studies

for Australia, Environmental Protection Authority of Victoria, Melbourne. This document was
sponsored by EPA and other organisations and was current at the date of its publication in 2003.
Reproduced with permission.
What should be appreciated is that we, as accountants, can make relatively minor modifications
to our current accounting systems to assist our organisations to act in a more environmentally
responsible manner. Apart from enabling better management within an organisation, such
modifications will also enable us to provide a better account of certain costs (e.g. waste)
to external stakeholders.
Current reporting practice

Surveys of current reporting practice
Producing a stand-alone CSR report has become a widespread practice. One way to understand
the extent of reporting is through various surveys undertaken by different organisations.
In this regard, and for a number of years, KPMG has been undertaking international surveys
of CSR reporting. In the 2013 survey, KPMG analysed the reports of more than 4100 companies
globally—including the world’s 250 largest companies. Its results led KPMG to conclude that
‘the high rates of [CSR] reporting in all regions suggest it is now standard business practice
worldwide’ (KPMG 2013, p. 11). KPMG results showed:
• Ninety-three per cent of the 250 largest companies in the world (G250 companies) reported
on their CR activities (KPMG 2013, p. 22).
• CSR reporting rates in Asia−Pacific over the two years to 2013 dramatically increased
(KPMG 2013, p. 11), with 71 per cent of companies based in Asia−Pacific publishing a CSR
report. This was an increase of 22 percentage points since 2011 when less than half (49%)
did so.
• Australia was one of the 41 countries surveyed that saw the highest growth in CSR reporting
since 2011, with a growth rate of 25 per cent. The other countries that saw significant
growth were India (+53%), Chile (+46%), Singapore (+37%), Taiwan (+19%) and China (+16%)
(KPMG 2013, p. 11). These growth rates emphasised the increase in CSR reporting in the
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Asia−Pacific region.
• More than half of the organisations for all industry sectors reported on CSR, meaning
reporting could be considered standard global practice irrespective of industry. In the 2011
KPMG survey, less than half of the sectors had reporting rates above 50 per cent.
• Worldwide, more than half (51%) of the reporting companies included CSR information in
their annual financial reports (KPMG 2013, p. 11). This was a significant increase over the
previous two surveys. In 2011 only 20 per cent reported this way, while in 2008 only 9 per
cent reported this way. This emphasised the increasing importance given to this information
and, as KPMG stated, this type of reporting could arguably be considered standard
global practice.
• However, including CSR information in the annual report does not imply that companies have
embraced the concept of integrated reporting (discussed earlier in this module). Integrated
reports are published by only one in 10 companies that report on CSR (KPMG 2013, p. 12).
This is because integrated reporting is an evolving practice involving iterative application by
companies that have sought to apply the Framework.
While the survey results were interesting, they fail to reflect that organisations can, and do,
report information selectively. Given the predominantly voluntary nature of CSR reporting in
many countries, some organisations might only elect to report typically favourable information
about their economic, social and environmental performance. Therefore, we must be careful not
to get too excited about claims that of the 250 largest global companies, 93 per cent now report
on their CSR activities.
However, the survey does, unsurprisingly, show that the extent of disclosure in countries with
mandatory disclosure requirements tends to exceed disclosures in other countries:
CR reporting has traditionally been voluntary, however, governments and stock exchanges around
the world are increasingly imposing mandatory reporting requirements. CR reporting regulations
are seen in several countries that have almost 100 per cent reporting rates, including France,
Denmark and South Africa. Regulation is also behind a significant increase in reporting rates
in Taiwan.
Alongside government regulation, new guidelines and standards from stock exchanges and
other organisations are also having an impact. For example, in Singapore, the introduction of the
Singapore Stock Exchange (SGX) Sustainability Reporting Guide for listed companies and a revised
Code of Corporate Governance (which makes consideration of sustainability issues part of the
board’s remit) has influenced the 37 percentage point rise in reporting rates (KPMG 2013, p. 24).
The KPMG report (2013) also raised a number of issues that remain to be addressed adequately,
including the lack of comparability between organisations in respect of the information they
are producing, and uncertainties about the most appropriate mode of reporting. It is important
that appropriate and generally accepted reporting frameworks, as discussed earlier in this
module, be developed. Also, it should be recognised that the financial reporting framework
has the advantages associated with double-entry accounting (debits equals credits), and the
mathematical and systems rigour associated with this.
Most of the issues involved in CSR reporting are not dealt with rigorously. However, it should be
recognised that CSR reporting frameworks are evolving and hopefully maturing. For the sake of
comparability (with prior year CSR information for the same company), this can result in restating
comparative prior year information. High rates of restatement can put the perception of the
quality of the CSR information at risk. As stated by KPMG:
As companies seek to integrate reporting and present relevant CR data to investors alongside
established metrics for financial disclosure, it is more important than ever that CR data is
robust. High levels of restated data year upon year risks eroding confidence in company data,
reporting systems and processes (KPMG 2013, p. 34).
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Examples of best practice and innovative reporting

In this section, we briefly consider some cutting edge CSR reports and provide illustrations
of some reporting that appears to be relatively innovative. As we would expect, given the
predominantly voluntary nature of CSR reporting, there are often variations in the quality of
reporting, although arguably, at least within larger corporations, the difference between the
standards of reporting is decreasing to some extent.
One approach we can adopt to identify cutting edge CSR reporters is to review the results of
annual CSR or sustainability reporting awards. In 2014, Westpac was ranked the world’s most
sustainable company. The bank was handed the prestigious prize at the World Economic Forum
in Davos, Switzerland. This is discussed in Reading 5.2.
Reading 5.2, ‘Westpac named world’s most sustainable company at Davos’, highlights the benefits
of companies undertaking CSR reporting.
You should read this article now.
A leading example of one of these awards is that run by Australasian Reporting Awards Limited
(ARA n.d.), an independent not-for-profit organisation supported by volunteer professionals
from the business community and professional bodies concerned about the quality of financial
and business reporting. The awards provide an opportunity for organisations to benchmark their
reports against the ARA criteria, and are open to all organisations that produce an annual report.
The winners of the 2015 ARA Report of the Year Awards were Woodside Petroleum Limited
and CSIRO.
The ARA judges said that Woodside Petroleum, Australia’s largest independent oil and gas
company, had achieved its stated objectives of both meeting its compliance and governance
obligations, and providing stakeholders with easy-to-read information about the company’s
operations and performance. They said the company had ‘provided a visually attractive report’
that provides stakeholders with easy-to-read information that clearly describes the organisation’s
activities and performance. High quality information is provided throughout’ (ARA n.d.).
The ARA judges said that the CSIRO award-winning report ‘is well-presented and easy-to-read
and to comprehend despite the wide range of topics it covers. The use of relevant pictures
and explanatory captions capture attention and encourage the reader to read the whole story’
(ARA 2015).
These awards might also serve to motivate organisations to improve the quality of information
provided and increase the number of companies making such disclosures. The awards aim to
identify and reward innovative attempts to report CSR-related information. The judging criteria
of such awards can be used as guidance in determining what and how to report.
The integrated reporting initiative also has an Emerging Integrated Reporting Database
(IIRC n.d.) that brings together extracts of reports that illustrate emerging practices in integrated
reporting. This database can be searched by industry, year or component of an integrated
report. It is worthwhile accessing this database and identifying the types of reporting extracts
that are leading to best practice.
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➤➤Question 5.15
The Westpac Sustainability and Community ‘Reporting our performance’ is located at: http://
www.westpac.com.au/about-westpac/sustainability-and-community/reporting-our-performance/
stakeholder-impact-reports.
Review this website, including the latest ‘Annual review and sustainability report’ and evaluate
its ability to communicate Westpac’s economic, social and environmental credentials.
The above discussion shows the variety of reporting approaches being adopted to provide
information about the sustainability-related performance of organisations. Many decisions are
required to be made, which can be contrasted with financial reporting, where the extent of
regulation means that there is relatively limited scope for experimentation or innovation.
International initiatives on climate change

To understand humans’ contribution to climate change, one must understand the greenhouse
effect, through which natural gases in the earth’s atmosphere allow infra-red radiation from the
sun to warm the earth’s surface. These gases prevent heat from escaping the earth’s atmosphere.
Human actions are increasing the concentrations of these gases, which is causing changes in the
earth’s climate—changes that are projected to intensify as greenhouse gas emissions continue
to rise. The Intergovernmental Panel on Climate Change’s (IPCC) Fifth Assessment Report
states that:
Warming of the climate system is unequivocal, and since the 1950s, many of the observed
changes are unprecedented over decades to millennia. The atmosphere and ocean have warmed,
the amounts of snow and ice have diminished, sea level has risen, and the concentrations of
greenhouse gases have increased (IPCC 2013, p. 2).
The authors further note that:

Continued emissions of greenhouse gases will cause further warming and changes in all
components of the climate system. Limiting climate change will require substantial and sustained
reductions of greenhouse gas emissions (IPCC 2013, p. 17).
As the IPCC’s Fifth Assessment Report emphasises, such temperature rises are likely to have
dramatic economic, environmental and social effects.
The international community has become increasingly concerned with the adverse effects of
climate change. In Rio de Janeiro, in June 1992, many countries joined an international treaty,
the United Nations Framework Convention on Climate Change (UNFCCC). As of June 2014,
the UNFCCC has a membership of 195 countries (UNFCCC 2014a).
The UNFCCC established an institutional framework at the international level within which
countries were to begin reducing emissions (known as ‘mitigation’) and adapting to the effects of
climate change (known as ‘adaptation’). It also required, for the first time, countries to measure,
account for and report their aggregate emissions of a range of greenhouse gases (as well as
estimates of greenhouse gases stored in ‘sinks’ such as new forests) across all sectors of their
economies. The overall objective of the treaty was to stabilise greenhouse gas concentrations in
the atmosphere in order to avoid dangerous human interference in the climate system. However,
the treaty did not set any mandatory limits on greenhouse gas emissions for individual countries,
nor did it contain any enforcement mechanisms (UNFCCC 2014a).
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These elements were introduced later, when parties to the convention met in Japan in 1997
and agreed to the Kyoto Protocol. The protocol commits industrialised countries to reduce
their emissions by specific quantities within prescribed timeframes. Thirty-seven industrialised
nations agreed to legally binding reductions in greenhouse gas emissions of an average of below
5 per cent against 1990 levels during the first commitment period, spanning 2008 to 2012.
The protocol left it to those countries to determine the best means by which to achieve
their targets, while allowing their domestic emissions reductions to be ‘supplemented’ by
internationally traded offset credits. Recognising that developed countries are principally
responsible for the current high levels of greenhouse gas emissions as a result of more than
150 years of industrial activity, the protocol places a heavier burden on them compared to the
developing countries.
Subsequent to the Kyoto Protocol, no binding individual or aggregate emissions reduction

targets were agreed upon at the 2009 Copenhagen Accord, the 2010 Cancun agreements or the
Conference of the Parties (COP) to the UNFCCC at Durban in 2011. In Doha, Qatar, in December
2012, the Doha Amendment to the Kyoto Protocol was adopted, launching a second commitment
period, from 2013 to 2020. That amendment has since been ratified by 32 countries committed
to reducing greenhouse gas emissions by at least 18 per cent below 1990 levels. Note that the
composition of countries in the second commitment period is different from that of the first
commitment period. Trust in international agreements to limit future greenhouse gas emissions
will depend on the ability of each nation to make accurate estimates of its own emissions,
monitor their changes over time and verify one another’s estimates with independent information.
Clearly, a strong opportunity exists for accountants to contribute.
In November 2013, at the 19th session of the UNFCCC COP in Warsaw, governments agreed to
negotiate a new international climate treaty for adoption at the 21st COP in Paris in December
2015. This forthcoming agreement is intended to take effect from 2020 and to replace the
Kyoto Protocol by setting new binding national emissions reduction targets to limit the global
temperature rise to no more than 2°C. New pledges will need to be more ambitious in light of
World Bank estimates that the emissions reduction pledges in the Kyoto Protocol are no longer
sufficient to prevent a 2°C temperature rise. Further, any new agreement will need to include key
emerging economies such as China, Brazil, India and Russia and developed countries will need to
provide technology, finance and capacity-building support for developing countries to start on a
clean-growth trajectory.
While various negotiations occur between countries at an international level, at an individual

level—either as individual consumers or as members of an organisation—we can all make
choices that will either increase or decrease our own contribution to climate change. That is,
rather than relying solely on CSR and/or the government, we must also consider personal
social responsibility (PSR). This issue is discussed in Reading 5.3, ‘Social responsibility in eye
of beholder’.
For example, we can embrace a PSR to change the amount of energy we consume (and to
some extent, the amount of energy we use that comes from renewable sources). We can also
consider the necessity for particular travel and the mode of travel being used. Similarly, we can
consider the amount of waste we are generating and how we can reduce that waste. Additionally,
the extent to which we really need to satisfy all our wants, particularly those wants that contribute
highly to climate change, should be reconsidered.
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The emphasis here is that tackling issues such as climate change requires the community to
also embrace the need for change and not simply rely upon (or blame) organisations for the
necessary improvements. Organisations are key contributors to various environmental issues but,
within the capitalist system that dominates world economies, organisations typically respond to
the demands of individuals. As consumers of products and services manufactured or generated
by organisations, individuals must accept some responsibility for the environmental issues that
organisations create.
Reading 5.3, ‘Social responsibility in eye of beholder’ by J. Bhagwati provides certain perspectives
about the social responsibilities of corporations and individuals.
You should read this now and then answer question 5.16.
➤➤Question 5.16
Reading 5.3 provides certain perspectives about the social responsibilities of corporations and
individuals. Consider the following questions:
(a) Should CSR be de-emphasised in favour of personal social responsibility?
(b) Is CSR an effective defence strategy against powerful stakeholders?
(c) Is CSR really only undertaken to generate added revenue?
Climate change accounting techniques

Climate change is an issue that highlights the complexities associated with integrating aspects
of environmental performance with financial decision-making. It also provides an illustration of
the incompleteness of existing accounting methodologies, when we consider issues associated
with social and environmental externalities. Financial reporting practices tend to disregard
externalities due to such issues as the way we define and recognise the elements of accounting
and because of such principles as the entity principle.
The predominant mechanisms to price carbon are taxation, and ‘cap-and-trade’ or emissions
trading schemes (ETSs). Our focus in this section is on ‘cap-and-trade’ systems, which are
designed as a market-based approach to dealing with carbon emissions. This builds on the
discussion in previous sections about specific cap-and-trade schemes, such as the European
Union Emissions Trading Scheme (EU ETS). It is the failure of the market to recognise many social
and environmental externalities which, at least in part, is being blamed for the current challenge
posed by climate change.
The concept of an emissions trading market is based on giving carbon a price per tonne so
that products can be more fully costed and the costs of emissions internalised. As emissions
become an internal cost, they also highlight the need for more specific and consistent reporting,
while providing significant incentives for firms to improve operations. This will mean that,
depending on the individual industry and method of operation, there will be both winners
and losers in the market. Those organisations that produce products generated through
carbon-intensive processes will find that their costs will rise compared to other less carbon-
intensive producers and this would conceivably mean that, through passing on the higher costs,
they would lose customers.
This economic sensitivity is the reason why the establishment of a carbon market can be
contentious. It will mean that certain industries will find their costs rising more than other less
carbon-intensive industries. It might also create an international disadvantage if other countries
do not place a cost on carbon.
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Clearly, requiring the recognition of costs that have not previously been recognised will require
many industries to adapt and change. The intention of placing a price on carbon emissions is
to create change in the way we do things because what we have been doing until now (i.e. not
accounting for carbon) is not sustainable. This will create some economic hardship for some
organisations and individuals. However, this would seem to be a non-issue when the greater
good (which is paramount), is achieved.
Under a cap-and-trade system, ‘allowances’ or ‘credits’ are used to provide incentives for
companies to reduce emissions by assigning a monetary value to pollution. In the EU, each
carbon allowance permits the holder to emit one tonne of carbon dioxide (CO2). The ‘cap’ phase
of the program begins when a government or regulatory body establishes an economy-wide
target for the maximum level of aggregate emissions permitted by companies in a specified time
frame. Then, a specific number of emissions allowances equal to the national target is allocated
(or auctioned) to participating companies based on a formula that generally includes past
emissions levels. Over time, it is expected that the amount of permits (or units) made available
will be reduced by the government in line with the quest to reduce carbon emissions.
The ‘trade’ aspect of the program occurs when a company’s actual emissions are greater or less
than the number of allowances it holds. Companies that emit less than the number of permits
they hold will have excess allowances; those whose emissions exceed the number of permits they
hold must acquire additional allowances. Additional (or excess) allowances can be purchased
(or sold) directly between companies, through a broker or on an exchange. Excess allowances
can be ‘banked’ and used to satisfy compliance requirements in subsequent years. It is argued
that cap-and-trade programs provide companies with added flexibility to choose the most cost
effective way to manage their emissions.
To date, 17 cap and trade programs operate throughout the world at regional, national and
sub‑national (states, provinces, cities) levels. The most active carbon market at the transnational
level is in Europe where the EU ETS began in 2005. In 2013 it moved into Phase III with more
stringent emissions targets to keep on track for a 60−80 per cent reduction by 2050. Despite
its flaws, Phase II of the EU ETS reduced greenhouse gas emissions by an estimated 2.5 to
5 per cent per year. Asia is being described as ‘the new hot spot for emissions trading’ given
that nine new ETSs have been launched in that region in the past three years. Specifically,
China’s national carbon program will start in 2016, based on seven sub-national pilot programs,
which together represent the world’s second largest carbon market after the EU ETS. In the
United States, the most robust legislative attempt to pass a federal carbon price was the
American Clean Energy and Security Act (HR 2454), which passed through the Lower House
in 2009 but was defeated in the Senate the following year. Due to Republican opposition,
there is no national-level price on carbon, despite the Obama Administration’s original pledge
to implement an ETS by 2016; however, cap-and-trade regulation has been enacted at the
sub‑national level (e.g. California). Moreover, there is a national EPA Greenhouse Gas Reporting
Program, which requires certain greenhouse gas-intensive facilities to provide annual emissions
reports to the US EPA.
By region, current ETSs exist as follows (ICAP 2015):

• Europe: EU ETS (2005), UK (2010), Kazakhstan (2013), Switzerland (in force 2008/
mandatory 2013);
• North America: Regional Greenhouse Gas Initiative comprising nine mid-Atlantic and
north‑eastern states (2009), California (2013), Quebec (2013); and
• Asia−Oceania: Tokyo (2010), Saitama (2011), Republic of Korea (2015), Beijing (2013),
Chongqing (2014), Shanghai (2013), Shenzhen (2013), Tianjin (2013), Guangdong Province
(2013), Hubei Province (2014), New Zealand (2008).
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Accounting for the levels of emissions

Various regulatory requirements, discussed earlier in this module, also require organisations to
account for their emissions and any ‘offsets’ they receive (e.g. an organisation might be able
to calculate how much carbon is absorbed by a forest it controls and this amount can be offset
against the emissions from the organisation’s production operations). Earlier in this module we
discussed various initiatives that have been developed to enable an organisation to measure its
emissions (e.g. the Greenhouse Gas Protocol). However, emissions tend to be divided into three
categories—Scope 1, Scope 2 and Scope 3—as described below.
Scope 1—emissions directly occurring from sources that are owned or controlled by an
institution, including:
• combustion of fossil fuels;
• mobile combustion of fossil fuels in vehicles owned or controlled by the organisation; and
• fugitive emissions.
Fugitive emissions result from intentional or unintentional releases of greenhouse gases

(e.g. the leakage of hydro-fluorocarbons from refrigeration and air conditioning equipment).
Scope 2—emissions generated in the production of electricity consumed by the organisation

where that electricity is generated outside the organisation’s measurement boundary (i.e. the
electricity is generated by a different entity, namely an electricity generator).
Scope 3—all other indirect emissions that are a consequence of the activities of the organisation,
but occur from sources not owned or controlled by the organisation, such as:
• commuting;
• air travel for work-related activities;
• waste disposal;
• embodied emissions from extraction, production and transportation of purchased goods;
• outsourced activities;
• contractor-owned vehicles; and
• line loss from electricity transmission and distribution.
In Australia, entities and corporate groups that meet the reporting thresholds (i.e. large emitters)
must report their Scope 1 and Scope 2 emissions under the NGER Act (discussed earlier).
However, companies that do not meet the reporting thresholds under the NGER Act are not
subject to any direct regulation of emissions accounting, reporting or offsetting in Australia,
including in relation to the role of offsets—though companies are prohibited by s. 18 of the
Australian Consumer Law (which is a schedule to the Competition and Consumer Act 2010
(Cwlth)) and its state equivalents from making misleading or deceptive claims, including in
relation to carbon offsetting, carbon neutrality and ‘green marketing’.
Having said this, such companies can choose to account for and report their emissions and offsets
in accordance with any one of a number of existing voluntary standards. The reporting framework
that is the most frequently used and forms the reporting basis of many of the regulatory carbon
reduction schemes is the GHG Protocol (WRI & WBCSD 2005) discussed earlier in this module.
The Carbon Disclosure Standards Board (CDSB 2014), also discussed earlier in this module,
serves as a widespread and authoritative framework for disclosure of GHG emissions by such
companies in an annual report.
Some examples of emissions trading schemes and reporting regulations are provided in Table 5.5.
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Table 5.5: Major emissions trading/reporting schemes
Scheme Reporting Mandatory

(start date) Jurisdiction Emission sources requirements or voluntary
National Australia Large By October each Mandatory

Greenhouse and corporations year, registered
Energy Reporting involved in corporations must
(NGER) Scheme combustion provide annual
(2008) of fuels for reports covering
energy; fugitive greenhouse
emissions from gas emissions,
the extraction energy production
of coal, oil and and energy
gas, industrial consumption from
processes the operation of
and waste facilities during
management that financial year
EU ETS 28 EU Member Large industrial Annual self- Mandatory

(2005; Phase III States plus and energy- reporting to
is 2013−20) Norway, Iceland intensive the competent
and Liechtenstein installations authority in the
in power administering
generation and state
manufacturing
industries
International
aviation
(since 2012)
NZ ETS New Zealand Forestry (2008) Mandatory annual Mandatory

(2008) self-reporting
Liquid fossil fuels,
stationary energy
and industrial
processes (2010)
Waste and
synthetic
greenhouse
gases (2013)
Swiss ETS Switzerland Large industrial Entities must 2008−12:

(2008) and energy- submit an annual Voluntary
intensive monitoring
installations report based on 2013−20:
self-reported Mandatory for
information by large energy-
31 March intensive
industries
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Scheme Reporting Mandatory

(start date) Jurisdiction Emission sources requirements or voluntary
US EPA GHG United States Suppliers of Reports are Mandatory

Reporting certain products submitted
Program that would result annually to
(2010) in greenhouse the EPA
emissions
if released, Reporting is at
combusted or the facility level,
oxidised; direct- except for certain
emitting source suppliers of fossil
categories; and fuels and industrial
facilities that inject greenhouse gases
CO2 underground
for geologic
sequestration or
any purpose other
than geologic
sequestration
Tokyo Tokyo Large offices and Entities must Mandatory

Cap‑and‑Trade factories submit annual
Program (2010) reports (fiscal year)
of their emission
reduction plans
and emissions
reports
KETS Republic of Korea Phase I (2015−17): Annual reporting Mandatory

(2015) heavy emitters in of emissions by
the steel, cement, the end of March
petro-chemistry,
refinery, power,
building, waste
sectors and
aviation industries
Beijing (Pilot) ETS Beijing, China Covers 40% Emissions Mandatory

(2013) of total city reporting is
emissions (direct required annually
and indirect)
from energy and
manufacturing
industries and
major public
buildings
Source: ICAP (International Carbon Action Partnership) 2015, Emissions Trading Worldwide: ICAP Status
Report 2015, accessed June 2015, https://icapcarbonaction.com/status-report-2015.
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Current developments
The field of corporate accountability is developing at a rapid pace, and new developments are
constantly emerging. Two important new initiatives related to corporate accountability include
socially responsible investments and natural capital accounting, which are reviewed below.
Socially responsible investments

The UN Principles for Responsible Investment (2014) define socially responsible investment (SRI) as:
an approach to investment that explicitly acknowledges the relevance to the investor of
environmental, social and governance factors, and of the long-term health and stability of the
market as a whole.
SRI responds to a variety of different investor needs. Some investors look to sustainability factors
to provide information about the long-term health and stability of their investments and the
market as a whole. Others take this further still and regard SRI as ‘an ethos about the way money
is used’—one way for people to combine their personal values with the resources available to
them (Nicholls & Pharoah 2008). This can also mean that investment can be used to direct capital
towards better-governed and better-managed companies that are positioned to contribute
to the goals of sustainable society. It was estimated in 2012 that at least USD 13.6 trillion of
professionally managed assets incorporate sustainability factors (Global Sustainable Investment
Alliance 2013).
In many ways, the initiative has similar aims to the integrated reporting initiative discussed earlier
in this module. It aims to provide the investor (or the financial capital provider) with additional
information about sustainability factors (or resources and relationships), which will provide
information about the long-term stability of their investments, and the value-creation activities
of the organisation.
There are many different approaches to SRI. It is helpful to think of some of these approaches as
a spectrum of capital options (Bridges Ventures 2012).
Figure 5.5: A spectrum of capital options
Level of sustainability concern or integration
Traditional 1. Responsible 2. Sustainable 3. Thematic 4. Impact

investment investment investment investment investment
Source: Adapted from Bridges Ventures 2012, Sustainable & Impact Investment: How We Define
the Market, accessed June 2015, Bridges Ventures: London, p. 3, http://bridgesventures.com/
wp-content/uploads/2014/07/BV004-Bridges-Ventures-report-UPDATE.pdf.
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Responsible investment
Often based on concerns about risk, responsible investment considers a wide range of
sustainability factors. This can involve negative screening—avoiding investment in industries
that have a negative impact on society and the environment.
For example, the AMP Capital responsible investment leaders’ funds demonstrate negative
screening by avoiding any investment in companies within sectors recognised to have high
negative social impact. This includes companies with a material exposure (i.e. 10% of their total
revenue) to:
• tobacco;
• nuclear power (including uranium);
• armaments;
• gambling;
• alcohol;
• pornography; or
• intensive fossil fuel usage (AMP Capital 2014).
Sustainable investment
Sustainable investment involves more of a focus on investment opportunities that create both
social and economic value. This may involve ‘best-in-class investment’ where investments
are selected both for their ability to generate economic returns and to perform better on
sustainability indicators compared with their peers in the same industry. It may also involve
shareholder activism—where investors use an equity stake in a company to change behaviour
and decisions made in a company.
For example, Australian Ethical Super (2013) offers an Advocacy Fund and Advocacy Super
option, and claims that:
We view active shareholder ownership and advocacy as the responsibility of ethical investors and
key to creating positive, sustainable change. The growing collaboration between like-minded
groups on key issues will have a dramatic impact on future corporate behaviour and performance
in Australia and around the world (Australian Ethical Super 2013).
To achieve this, Australian Ethical Super uses tools such as divestment, policy engagement and
purchasing small numbers of shares to actively engage with corporations.
Thematic investment
Thematic investment is investment that focuses on one issue or a cluster of issues where
commercial growth opportunities are created from social or environmental needs.
Leap Frog Investments demonstrates this approach. Leap Frog considers itself a ‘profit with
purpose investor’ that targets investments in financial products for underserved consumers.
This includes microfinance and microinsurance in developing countries. They ‘seek investments
in companies which deliver superior financial and social returns’ (Leap Frog Investments 2014).
Impact investment
Impact investment focuses on placing capital to actively create a social or environmental benefit.
This may require some financial trade-off.
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A recent example of an Australian impact investment comes from the 2013 pilot Social Benefit
Bond in NSW. The Commonwealth Bank of Australia and Westpac Institutional Bank partnered
as investors in an impact investment to establish the Family Preservation Service, delivered by
Australia’s first charity, the Benevolent Society. The service will focus on reducing the number of
family breakdowns and children placed in the foster care system in New South Wales.
As investors seek to integrate information on sustainability factors into their investment decisions,
this has accounting implications, including the need for robust and reliable indicators of these
factors. SRI is also one area of key demand for reporting frameworks that allow organisations
to demonstrate how they deliver economic, social, environmental or other types of value.
Integrated reporting is one approach to meeting this need for investors.
➤➤Question 5.17
Islamic Finance can also be considered a socially responsible investment. You should now explore
the website of Crescent Wealth: http://www.crescentwealth.com.au/index.php/media-resources-
more-about-islamic-investing.
What is its investment approach? What form of socially responsible investment do you think this is?

Natural capital can be understood as the world’s stocks of natural assets, including air, water,
land, soil, geology and biodiversity. It provides us with the resources that make life possible,
and underpins all social, economic and financial activities.
However, our natural capital is a finite resource, and the demands of a growing and increasingly
prosperous global population means that escalating demands are being placed on an already
overstretched resource. A recent study argued that we are already ‘drawing down’ on 50 per cent
more natural capital a year than the earth can replenish (CIMA 2014).
Natural capital and business

Businesses rely on natural capital for their operations and continued existence. Therefore,
the depletion and degradation of natural capital can represent enormous potential costs for
business. It has been estimated that 50 per cent of all existing corporate profits are at risk if
the costs associated with natural capital were to be internalised through market mechanisms,
regulation or taxation (Natural Capital Coalition 2014). A water shortage, for example, would have
a ‘severe’ or ‘catastrophic’ impact on 40 per cent of Fortune 100 companies.
Natural capital therefore represents a risk to companies, but also an opportunity for innovation,
building stakeholder relationships and growing new markets. The Chartered Institute of
Management Accountants (2014) has argued that:
Natural capital will become as prominent a business concern in the 21st Century as the provision of
adequate financial capital was in the 20th Century (CIMA 2014, p. 1).
Despite the importance of natural capital to human well-being and economic prosperity, it rarely
features in corporate decision-making. Instead, our economic and financial systems emphasise
the short term, and are based on the flawed assumption of infinite resources and ecosystem
equilibrium.
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The role of accounting

Accounting has emerged as a critical component of addressing this challenge. As previously
mentioned, it is often argued in business that ‘we can’t manage what we can’t measure’ and
most companies do not understand the complexities of natural capital, nor do they have the
approaches or tools for accounting for the natural capital that their business draws upon. This is
changing, however, and some organisations have developed their own modified techniques
to quantify, price or otherwise account for natural capital externalities and therefore deal with
them strategically.
Initiatives such as the Natural Capital Coalition are also developing standardised methodologies
for quantifying or pricing natural capital in ways that can be easily integrated into existing
organisational practices and decision-making. Our ability to account for different types of capital
remains variable at this stage (refer back to the section ‘What can be measured and reported’),
but thinking is advancing rapidly. Accountants are playing a critical role in the development
of these methods. The Natural Capital Coalition led a consortium of partners in a project to
develop a harmonised evaluation framework (including measurement, management, reporting
and disclosure aspects) for natural capital in business decision-making called the Natural Capital
Protocol, which was released in 2014.
Eventually, the development of these methodologies may allow us to develop aggregated

measures of natural capital (in a similar way to how GDP is used for economic measures),
helping us to honestly answer questions such as, ‘Are we truly sustainable?’
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Review
This module has highlighted the evolving focus on CSR and associated reporting. There is no
doubt that this aspect of an organisation’s reporting, both internally and externally, will become
more important over time. Issues of sustainability and the environment in particular are challenges
that will not dissipate despite the present lack of a binding global agreement to deal with
climate change. CSR reporting is at the heart of enabling us to measure and monitor our CSR
impact, which is why governments and the international community are increasingly expecting
organisations to report this in a reliable and comprehensive manner.
As we have outlined, along with an expanded view of their corporate and social responsibilities,
organisations are increasingly likely to make additional CSR disclosures, as evidenced by the
exponential growth in companies producing stand-alone sustainability reports over the last
10 years (KPMG 2013). In fact, disclosing information about various aspects of their sustainability
performance has become so common that it is now considered virtually mainstream reporting by
most major corporations around the world.
This broader accountability has also been accompanied by a recent increase in associated
regulation worldwide, so that for some organisations the CSR reporting imperative has gone
from being desirable to now being required. We have seen this in Australia with increased
CSR disclosures in directors’ reports and corporate governance disclosures in annual reports,
as well as disclosures outside annual reports, such as the reporting of greenhouse gas emissions
required under the NGER legislation. This trend is also worldwide as evidenced by the European
Commission’s recent announcement of the adoption of a directive on disclosure of non-financial
and diversity information for organisations with more than 500 employees, and a number of
stock exchanges throughout the world now requiring listed companies to either report on
their environmental, social and governance issues or provide an explanation for omitting
this information.
At the same time we have seen initiatives such as the development of the international
integrated reporting <IR> framework, which attempts to make this CSR information more
mainstream. It aims to concisely incorporate the financial and non-financial information in the
one corporate report to more effectively tell an organisation’s value creation story.
The area of CSR reporting provides abundant opportunities for accountants of the present and
future. Accountants combine raw data into meaningful, useful information, and by effectively
communicating information to support decisions, accountants add value. By supporting
that process with analysis and recommendations, the accountant moves from being a pure
information provider to being a strategic support partner.
By assessing and reporting on social and environmental information alongside traditional

financial and management accounting, accountants can aid in promoting sustainable
development and contributing to greater inter-generational equity. This information forms the
foundation for allowing proper and informed engagement and debate between various parties.
However, the information required is increasingly of a non-financial nature, and traditional
financial accounting methods are not capable of providing all the answers. Therefore, a broader
range of knowledge will be required to present this broader base of information. To support
this role, theoretical foundations, valuation methods, reporting approaches and communication
tools will all have to continue to improve.
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Reading 5.1 | 465
Readings
READINGS
Reading 5.1
Further views about the social responsibilities of business
Leela de Kretser
Copping flak over corporate socialism

With the world’s financial markets in freefall, the US economy grinding to a halt and a French
trader forcing his bank to bring out the begging bowls, who would’ve thought a five-minute
speech about corporate socialism could cause an uproar in the press?
But that’s exactly what Microsoft genius Bill Gates faces at home after suggesting to his fellow
billionaires at Davos that the free market is failing the world’s poor—and that it’s time to
introduce a little bit of creative capitalism.
According to the one-time richest man on the planet, it’s possible for a business to make profits
and also improve the lives of others who don’t necessarily benefit from market forces.
But—and with all good speeches the ‘but’ often contains the main point—Gates said profits are
not always possible when business tries to serve the very poor.
In such cases, there needs to be another incentive, and that incentive is recognition.
Many of us may not find the concept of companies being socially responsible all that shocking,
but you wouldn’t have known it reading blogs and newspapers this week.
Gates was basically accused of burning the bible—otherwise known as The Social Responsibility
of Business is to Increase Profits by Milton Friedman—by suggesting that corporations should
consider philanthropy for philanthropy’s sake.
Gates’ desire for companies to dedicate their top people to poverty could prove disastrous for
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the corporate sector, screamed Peter Foster in the Financial Post.

Foster and his band of free-market-worshipping buddies accused Gates of taking the power of
philanthropy out of the hands of the people who deserve it most—shareholders and employees.
Espousing the views of the great Friedman, these commentators argue that the best way for
corporations to contribute to society is to increase their bottom lines, and therefore increase
the amount of money going into shareholders pockets and employees in the form of wages.
Let these individuals—and not a bumbling middle manager or a bureaucratic machine—be the
ones to decide how to donate money to the poorest people, Foster said.
According to this view, a corporation’s only justifiable expense on philanthropy should be to

increase its public relations value.
Many of these columnists used the large amounts of money individual Americans donate
to charities every year.
CNET’s Declan McCullagh points out that while the US Government only gave $900 million for
tsunami relief, individuals donated about $2 billion.
In total, he says, about $260 billion from American pockets goes to 1.4 billion charities every year.
The problem with this argument is that it doesn’t take into account that individual donors in the
US aren’t equipped with the ability to target the money where it’s needed most in the world.
The US contributes only 0.34 per cent of its national income to foreign aid, well behind the
United Nation’s target of 0.7 per cent and leaders such as the Dutch, who give 2.44 per cent of
their national income to the poorest countries in the world.
Those arguing against creative capitalism also fail to see the benefits that people like Gates,
through his charities, have already brought to business.
Perhaps they need to think back to 1999 when major riots marred the WTO meeting in Seattle
and contrast that with the relative peace of Davos.
Source: de Kretser, L. 2008, ‘Copping flak over corporate socialism’, Herald Sun, 29 January, p. 30.
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Reading 5.2 | 467
Reading 5.2
Westpac named world’s most sustainable company at Davos
George Liondis
Westpac has been ranked the world’s most sustainable company in a major global coup for the
Australian bank.
The bank was handed the prestigious prize at the World Economic Forum in Davos, Switzerland,
where Westpac chief Gail Kelly is attending alongside global business and political leaders,
including Prime Minister Tony Abbott.
Speaking from Davos, Mrs Kelly said Westpac had been recognised for its commitment to social,
environmental and economic responsibility.
‘I am delighted that Westpac’s sustainability performance has been rated so highly on the global
stage,’ Mrs Kelly said.
Westpac topped the list ahead of US biotech firm Biogen, Finnish mining technology and capital
goods company Outotec Oyj and Norwegian oil giant Statoil.
ANZ Banking Group, Commonwealth Bank of Australia, Stockland and Wesfarmers were the only
other Australian companies on the list and were ranked at number 19, 25, 32 and 92 respectively.
The list is compiled every year by Corporate Knights, a research company based in Toronto,
Canada.
‘Westpac has a long history of leadership and innovation in corporate sustainability. It was the
first bank to join the Australian government’s Greenhouse Challenge Plus and the first financial
institution in Australia to create a matching donation program,’ Corporate Knights said in
a statement.
As part of its ‘2017 sustainability strategy’, Westpac has committed up to $6 billion for lending
and investment in clean technologies and environmental services.
It will also make up to $2 billion available for lending and investment in social and affordable
housing.
‘It is wonderful recognition of the work of our people to help create a sustainable future and
deliver long-term value for our customers, employees, shareholders and the community,’
Mrs Kelly said.
Corporate Knights chief executive Toby Heaps said the world’s 100 most sustainable companies
had outperformed the broader market by an average of 3.2 per cent over the past year.
‘The results speak for themselves. Topping a well-diversified benchmark is not easy, but the
Global 100 has managed to squeak out marginal outperformance across a turbulent period in
the history of the capital markets,’ he said.
‘We attribute this excess return to the growing investment relevance of core sustainability themes,
including water scarcity, rising energy prices and growing competition for human capital.’
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Source: Liondis, G. 2014, Sydney Morning Herald, 23 January, accessed October 2015,
http://www.smh.com.au/business/banking-and-finance/westpac-named-worlds
-most-sustainable-company-at-davos-20140123-31ab3.html.
Reading 5.3
Social responsibility in eye of beholder
Jagdish Bhagwati
Many companies view corporate social responsibility as an effective defensive strategy against
activist NGOs.
Increasingly, corporations are under pressure, often from activist non-governmental organisations,
to take on specific corporate social responsibility or CSR, obligations. But the fact that CSR is
being demanded, and occasionally conceded, does not ensure clarity about either its rationale
or the ways in which it should be undertaken.
CSR can be divided into two categories: what corporations should do (say, contribute to a
women’s rights non-governmental organisation or build a school) and what they should not
do (say, dump mercury into rivers or bury hazardous materials in landfills). The latter is wholly
conventional and subject to regulation (and recently to questions about how corporations should
behave when there are no host-country regulations).
But are CSR obligations really good practice? Milton Friedman and other critics often asked if it
was the business of businesses to practice corporate altruism. Before the rise of the corporation,
there were mainly family firms, such as the Rothschilds. When they made money, it accrued
principally to the family. Altruism, where it existed, also was undertaken by the family, which
decided how and on what to spend its money. Whether the firm or its shareholders and other
stakeholders spent the money was beside the point. With the rise of the business corporation,
large family firms have generally disappeared. But that does not mean that a corporation is the
right entity to engage in altruism, though its various stakeholders obviously can spend any portion
of the income they earn from the corporation and other sources in altruistic ways. Instead of CSR,
we should have PSR (personal social responsibility).
One can also argue for PSR on the grounds that asking for CSR becomes a way of ‘passing
the buck’—evading personal responsibility for doing good. This is the flip side of blaming
corporations for everything from obesity to scalding from spilled coffee—both the subject of
lawsuits in recent years.
There is also an added advantage in replacing CSR with PSR: there is virtue in diversity of
approaches to altruism. Mao Zedong wanted a hundred flowers to bloom, but only so that
he could cut them all off at their roots. But PSR is more like President George Bush senior’s
metaphor of a ‘thousand points of light.’
Moreover, it is hard to see how a corporation’s stakeholders can always arrive democratically
at a common position on how the corporation should engage in social responsibility on their
behalf. Each will consider his or her CSR view the best.
But there are strong arguments in favour of CSR as well. First, the political reality is that society
treats corporations as if they were persons, which is often also a legal reality for many purposes.
Society increasingly demands that these ‘corporate citizens’ be altruistic, just as people are.
Given this reality, corporations want to give simply because it is expected of them. Such CSR
builds the firm’s image as a ‘good’ corporation, just as giving by Bill Gates and Warren Buffet
builds their image as ‘good’ billionaires.
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Reading 5.3 | 469
Second, many corporations view CSR as an effective defensive strategy against powerful activist
non-governmental organisations such as Greenpeace, that have taken to using online agitation,
boycotts, and other means to ‘blackmail’ targeted corporations into acceding to the activists’
demands. The more CSR a company can point to, the less such efforts will succeed, or even
be mounted.
Consider the contrasting experiences of Coke and Pepsi. Coke has been targeted by
non‑governmental organisations for alleged lapses in labour and environmental standards.
By contrast, Pepsi, which once teamed up with AT&T and the CIA to oust President Salvador
Allende in Chile, smells like a rose nowadays, because it has distributed CSR largesse to several
causes that influential non-governmental organisations embrace.
That is a lesson that Wal-Mart has since learned. In 2005, the Service Employees’ International
Union created Wal-Mart Watch, with an annual budget of $5 million. The purpose was to
make Wal-Mart a ‘better employer, neighbor, and corporate citizen,’ and Wal-Mart eventually
capitulated on some of the union’s specific demands as well.
Finally, CSR can be simply a matter of advertising. In this case, the choice of CSR spending is
focused directly on generating added revenue, much like advertising, and is aimed at sales much
the way advertising is. A benign example is Adidas’s sponsorship of tennis tournaments. A malign
example is Philip Morris’s donation of money to museums, symphony orchestras, and opera
houses, cynically aimed at buying off artists who might otherwise work to ban cigarettes.
All these rationales for CSR suggest that it should be left to each corporation to determine,
just as PSR leaves altruism to each individual’s conscience and sense of what needs supporting.
The attempt by some non-governmental organisations and activists to impose a straitjacket on
CSR, reflecting their priorities, is misguided and must be rejected. Instead, the model should
be former United Nations Secretary General Kofi Annan’s initiative, the Global Compact.
What Annan has done is to embrace ten wide‑ranging guiding principles while leaving
signatory corporations free to choose which they wish to support actively.
Source: Bhagwati, J. 2010, ‘Social responsibility in eye of beholder’,

The Australian Financial Review, 27 October.
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MODULE 5
Suggested answers | 471
Suggested answers
SUGGESTED ANSWERS
Question 5.1
This will be a matter of opinion but, arguably, if corporate managers adopt Milton Friedman’s
view (i.e. that as long as organisations operate within the rules or laws, they should act
only to maximise shareholder wealth), then sustainable development is not a realistic goal.
Sustainable development requires current generations not to concentrate on maximising their
own wealth, but to consider the needs of all people currently on the planet as well as future
generations. It also requires due consideration to be given to the environmental impact of an
organisation’s operations.
However, as will be shown by a number of the corporate accountability initiatives in this module,
maximising shareholder wealth does not have to be inconsistent with a broader sustainability
focus. With a broader community interest in sustainability issues, a broader sustainability focus by
management can identify risks and opportunities that can preserve or increase shareholder value
(especially long-term shareholder value) and/or maintain or enhance corporate reputation.
Question 5.2
(a) An externality is defined as an impact that an entity has on parties that are external to the
organisation where such external parties did not agree or take part in the actions causing,
or the decisions leading to, the cost or benefit. Depending on the organisation in question,
you may have identified a number of positive and negative externalities.
For many organisations, negative externalities might include:

–– emissions into the atmosphere with implications for climate change (this would impact on
many stakeholders, including the environment and future generations);
–– waste emitted into waterways with implications for water life and drinking water quality
(this would impact on local communities, the environment and potentially future
generations);
–– production of goods that create waste that goes to landfill, thereby using land that might
potentially be used for other, more productive purposes (stakeholders affected here
MODULE 5
would include local communities, the environment and future generations); and
–– the retrenchment of staff, thereby causing social costs inclusive of welfare payments
paid by government (stakeholders affected here would include the former employees,
their families, local communities and government).
Positive externalities could include the creation of products or services that have widespread
social benefits. For example, an organisation might breed endangered species and release
these to the environment.
(b) Most externalities would not directly affect an organisation’s profit or loss, although indirectly
they might. From an indirect perspective, poor social and environmental performance could
impact on an organisation’s compliance with its social contract and this in turn might affect
the demand for its products as well as the availability of factors of production—such as
labour (i.e. if an organisation has created a poor reputation for its social or environmental
performance, it might have difficulty attracting employees, capital and so forth).
Increasingly, a number of externalities are being recognised as costs (i.e. internalised).

For example, consider carbon-related taxes (but whether the taxes charged reflect the
‘true cost’ of the damage being done is another issue).
(c) You will have your own opinion about whether the failure to recognise externalities represents
a failure of current financial reporting systems. This module will expose you to current
corporate reporting systems that have broader reporting mandates and will identify and
report on certain externalities in accordance with their objectives.
(d) Possible ethical implications of business not being held accountable for its externalities are
wide ranging and have both short-term and long-term implications such as:
–– When businesses chase the lowest cost manufacturing sites around the world and the
lowest employee costs, they typically destabilise the local society and when they move
on, it leaves large-scale unemployment in the neighbouring communities.
–– Local governments and local communities typically have to pick up the costs of business
externalities such as the clean-up costs associated with abandoned mines, the medical
costs of treating people who suffer from lung cancer as a result of cigarette smoking,
and the costs for asbestos sufferers and sufferers of other workplace-related diseases.
–– Consumers can be physically harmed and die prematurely from toxic industrial wastes
that are not adequately disposed of.
–– The global commons can be polluted and degraded from over-intensive commercial
farming and arable land turned into dustbowls.
–– Developing countries can be deprived of access to water where mining and other
companies overuse local water supplies.
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Question 5.3
The first phase of the reporting process should start with management clearly articulating ‘why’
they are reporting. The answer to the ‘why’ question will then provide important information for
the rest of the reporting process.
Reporting might be undertaken for a range of reasons. For example, an organisation might
decide that it needs to provide (report) particular information because particular (and perhaps
powerful) stakeholders are demanding or expecting such information. This information might be
disclosed because such information might be viewed positively by the powerful stakeholders,
therefore encouraging the stakeholders to further support the organisation by contributing the
resources required by the organisation. This would be referred to as a ‘managerial’ approach
to reporting.
By contrast, an organisation might be motivated to report particular information because

it believes it has an accountability to provide information to those parties affected by the
operations of the entity, regardless of the ability of such parties to impact on these operations.
As indicated, this type of reporting is more commonly being required nowadays, and the
requirement will specify how, and to whom, the report should be addressed.
When the reporting is voluntary, how an organisation reports will depend on how management
defines or prioritises its stakeholders. Managers adopting a managerial focus would restrict
their focus to the demands of those parties (stakeholders) who ‘can affect’ the organisation,
whereas those managers that adopt an ‘ethical, accountability-based’ perspective would
consider those stakeholders ‘who can affect’ the organisation, as well as those ‘who are
affected by’ the operations of the entity.
Once the entity has determined whose information requirements they are addressing,
they will be better placed to determine what they will report and how that information should
be disclosed.
While the above discussion has briefly discussed reporting approaches based on either
managerial or ethical reasoning, it should be stressed that different organisations will operate
along a continuum and operate somewhere between these two positions.
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Question 5.4
If corporate actions are driven by enlightened self-interest, organisations will do the ‘right thing’
if these actions are perceived to lead to benefits that maximise shareholder value. Doing the
right thing will be directly tied to whether stakeholders who can affect the organisation will
penalise it if managers adopt particular strategies. Under this approach, if a particular strategy
negatively affects some members of society or irreversibly damages the environment, but its
financial benefits are deemed by managers to exceed any related financial costs, then that
strategy will be pursued. This assumes that managers have an understanding of the costs and
benefits of doing—and not doing—the right thing. Generally they do not.
By contrast, if managers embrace sustainable development as a guiding principle, they will

evaluate the effects of possible strategies on different stakeholder groups (current and future),
as well as on the environment. At times, this will mean that particular actions will be taken despite
possible short-term harm being inflicted on shareholder value (e.g. paying a fair wage even
though it is higher than the legal minimum).
Question 5.5
The Toyota definition is very similar to the definition suggested by Freeman (1984) as a party
that is affected by, or has an effect upon, the organisation in question. They also refer to a list
of groups, including the broader stakeholders of community groups and government—these
represent organisations that do not have financial stakes in the firm.
While the BHP Billiton definition is fairly similar in including stakeholders that are ‘potentially
affected’ by the organisation, it also includes stakeholders that have an interest in, or influence,
what we do rather than just ‘have an effect upon’, as is the case for Toyota. There is a wide variety
of parties that may ‘have an interest’ in BHP—so this definition could be quite broad.
Imperial Tobacco, however, adopts a more restrictive definition. It appears that it divides
stakeholders into those with more direct influence—those with a financial relationship—who
must be managed more closely. They appear to view ‘others’ differently—and possibly manage
them differently.
The three companies belong to different industries, which may have an impact upon how
they view stakeholders. Toyota has a relatively controlled supply chain and a clear product.
They may find it easier to identify their stakeholders. Compare this with the mining industry for
BHP Billiton—the organisation may adopt a broader interpretation of stakeholder because their
operations extend into communities. Imperial Tobacco is in a very contentious industry that
is under constant threat of regulation and legal implications. Companies may adopt different
positions based on which stakeholder perspective they tend to respond to.
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Question 5.6
Rio Tinto is more closely aligned with an enlightened self-interest approach by arguing that
‘Rio Tinto’s primary focus is on the delivery of value for our shareholders’. Creating value for
stakeholders is only a secondary concern to Rio Tinto. They are primarily interested in financial
returns. If the company did interact with stakeholders, it would be according to managerial
stakeholder theory.
Stockland, on the other hand, seems to adopt a stakeholder perspective. The excerpt shows that
shareholders are seen as only one of a variety of stakeholders that the company is managed for.
Their emphasis on stakeholders for their intrinsic value (rather than their ability to generate profit
for shareholders) is more consistent with normative stakeholder theory.
Question 5.7
Within legitimacy theory, there is a view that the terms of the social contract will change over
time, and organisations will have to adapt to the changing expectations. A successful manager
will be one who keeps abreast of changing community expectations and responds accordingly.
These expectations will be influenced by various sources, including the media, and also by
the disclosures being made by the organisation. Corporate disclosure has been shown to be
responsive to legitimacy threats.
If community expectations have changed, this can cause a ‘legitimacy gap’ (where there appears
to be a lack of correspondence between how society believes an organisation should act and
how it is perceived that the organisation has acted). This might occur for an organisation,
even though it has maintained the same policies and procedures that had previously been
acceptable for decades.
Proponents of legitimacy theory argue that managers must continually assess whether community
demands and expectations are changing and respond accordingly. Therefore, if the community
expects an organisation to embrace responsibilities towards a broad group of stakeholders,
organisations that are seen to be motivated solely by ‘enlightened self-interest’ or who appear to
embrace a ‘shareholder primacy’ approach to operations will struggle to survive in the long run.
Whether communities actually expect corporations to fully consider a variety of stakeholders is

another matter.
MODULE 5
Question 5.8
A mining firm such as BHP has a large and diverse number of environmental impacts. There are
many direct environmental impacts of their activities—consider the environmental impact of
opening a mine, the operation of the mine (often over a very long period of time) and the
remediation required when a mine closes. There are also more indirect effects of the firm’s
activities that may be harder for BHP to map and potentially measure. This includes the supply
chains for the products it uses (such as its trucks and equipment) or the environmental impact
that comes about from the use of all of its products. This is potentially very large, as BHP’s
products are often the input for other production processes.
By comparison, the direct environmental impact of a professional services firm is expected

to be considerably smaller. This does not mean that it should not manage these impacts,
which would include the use of resources in day-to-day activities, energy use and transport.
Managing environmental impact can bring financial benefits and enhance a firm’s reputation
in the eyes of potential clients and employees.
Question 5.9
(a) There are many examples for this question, but some examples include:
(i) Economic
Reporting and transparency, what we sell, how we sell (summarised p. 10).
(ii) Environmental
Climate and GHG emissions, energy, transport, waste, packaging, water efficiency,
sustainable buildings (summarised p. 10).
(iii) Social
Employment and diversity, employability programs, training and development,
health and wellbeing, community (summarised p. 12).
(b) There are many examples for this question, but some examples from the Marks and Spencer
(M&S) report: http://planareport.marksandspencer.com include the following.
(i) A monetised measure
|| [Indicator: Community donations, p. 28] £8.2m cash, £1.6m time, £3.3m in-kind
contributions made in 2014/2015
|| [Indicator: Customer clothes recycling, p. 13] ‘through our Shwopping clothes
recycling initiative, helping us raise an estimated £1.75m for Oxfam (last year £3.2m)’
|| [Indicator: Supporting charities, p. 27] ‘The total amount raised for health and
wellbeing charities totalled £2.45m. That’s £5.35m over two years so far’.
(ii) Quantified measure

|| [Indicator: Youth employment at M&S, p. 24] ‘By 2016 we aim to have offered support
to 5,000 young unemployed people in the UK with 650,000 hours of training and work
experience in order for 50% to find work within three months of their placement’
|| [Indicator: Employee diversity, p. 23] ‘As of April 2015, 38% of our Board and 40% of
employees in senior management roles across our global business were women.’
|| [Indicator: Leather tanning and dyeing, p. 31] ‘To source 25% of the leather used in
M&S General Merchandise products from suppliers who demonstrate continuous
improvement against environmental industry based metrics by 2020’
|| [Indicator: Nitrogen trailer trial, p. 18] ‘By 2017, we will conduct a 20 vehicle pilot to
test nitrogen as a lower carbon refrigerant in our Food transport fleet’.
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(iii) Narrative on sustainability

|| [Indicator: Environmentally efficient food packaging, p. 29] ‘To use the most
environmentally efficient forms of packaging systems throughout the supply chain
to help reduce the overall carbon footprint of packaging and products by 2015’
|| [Indicator: Transparency, p. 12] ‘By 2015, we will consult with our customers and
stakeholders to identify what information they consider to be important about where
and how M&S products are produced and by 2020 we will respond by improving
the information available’.
Source: Marks & Spencer 2015, Plan A Report, accessed October 2015,
http://planareport.marksandspencer.com.
Question 5.10
In the module, we identified a number of limitations of traditional financial reporting practices
as they relate to CSR reporting, due to factors such as the following:
• How we define and recognise the elements of financial reporting acts to restrict the
recognition of externalities. Many environment-related obligations might not be reported
due to considerations associated with the ‘probability’ of the ultimate resource flow and the
‘measurability’ of such resource flows.
• How we measure the elements of financial reporting. For example, the practice of
discounting liabilities tends to make many future obligations—such as those related
to remediating contaminated sites—become immaterial from a financial perspective and,
therefore, not reportable (even though the environmental consequences of the current
actions might be significant).
–– The entity assumption requires the accountant to ignore events that do not directly affect
the financial position and financial performance of the organisation.
–– The practice of dividing the life of the organisation up into short periods—such as
12 months—acts to potentially prioritise short-term performance over and above
long-term performance. The implication is that things such as investments in cleaner
technologies, which might have a pay-back period of many years, might be overlooked in
favour of projects that provide results in the short term.
Whether we believe that generally accepted financial accounting practices have contributed
to problems such as climate change is a matter of opinion. However, because current financial
accounting practices emphasise measures such as profits (which traditionally ignore greenhouse
gas emissions) efforts to maximise profits may conceivably contribute to climate change.
Further, many senior managers will be paid bonuses tied to financial measures such as profits,
and this will further encourage them to undertake actions which will not necessarily be consistent
with reducing their organisation’s impact on climate change.
Question 5.11
The quote shows how important climate change is to the business. HSBC has recognised it as
a business risk and an important part of its strategy. This could also be seen as an attempt to
secure a licence to operate in the face of a legitimation crisis facing banks (i.e. public trust in
banks has been very low, especially since the global financial crisis). It also clearly demonstrates
how important the development of the CDP framework has been, not only as a contributor,
but also because the information produced has improved their internal decision-making.
MODULE 5
Question 5.12
The reporting frameworks that are contained in the ‘Guidelines and non-mandatory reporting’
section of this module include the following:
• GRI G4 Guidelines: the most widely accepted CSR or sustainability reporting guidance.
It gives a reporting framework for the production of a comprehensive CSR report.
• <IR> framework: a newly developed corporate reporting framework that combines both
financial and non-financial information into a concise communication about how an
organisation’s strategy, governance, performance and prospects, in the context of its external
environment, lead to the creation of value in the short, medium and long term.
• Climate Disclosure Standards Board (CDSB): has developed a climate change reporting
framework that is intended for use by companies making climate change disclosures in their
mainstream financial reports.
• AA1000 AccountAbility Principles Standard: provides a framework for an organisation
undertaking CSR/sustainability reporting.
• Equator Principles: provide a framework for assessing and managing social and
environmental risk in project financing.
• Greenhouse Gas Protocol (GHG Protocol): is one of the most widely used international
accounting frameworks for quantifying greenhouse gas emissions.
The benefits of the frameworks are that they provide the criteria against which to report.
As such they give us the basis and measurement of the subject matter, and aid comparability
of information across organisations.
Question 5.13
(a) A social audit can be seen as the process that an organisation undertakes to investigate
whether it is perceived by particular stakeholder groups to be complying with the social
contract negotiated between the organisation and the respective stakeholder groups.
The reason why an organisation might undertake a social audit can be explained in
conjunction with a consideration of legitimacy theory. A breach of the social contract can
create significant costs for an organisation and, therefore, organisations often undertake
social audits to examine whether their operations appear to be conforming with the
expectations of particular societies or particular stakeholders.
(b) The results of a social audit often form an important component of an entity’s CSR/
sustainability report. The module provides the example of The Body Shop Australia,
which has a report that is centred on its social audit.
MODULE 5
Question 5.14
You might have identified any five of the following governance policies that could be employed
to enhance an organisation’s social and environmental performance (the governance policies
are extracted from Haque & Deegan 2010, p. 324).
From the following eight best practices listed in Table 5.4 you may have identified:
1. The organisation has a board committee with explicit oversight responsibility for
environmental affairs.
2. The organisation has a specific board committee for climate change and greenhouse gas
(GHG) related issues.
3. The Board conducts periodic reviews of climate change performance.
4. The Chairman/CEO articulates the organisation’s views on the issue of climate change through
publicly available documents such as annual reports, sustainability reports, and websites.
5. The organisation has an executive risk management team, dealing specifically with GHG issues.
6. Some senior executives have specific responsibility for relationships with government,
the media and the community with a specific focus on climate change issues.
7. The organisation has a performance assessment tool to identify current gaps in greenhouse
gas management.
8. The executive officers’ and/or senior managers’ compensation is linked to attainment of
GHG targets.
You may have also deemed the following from other parts of the module:
• Developing executive remuneration plans that reward managers on the basis of additional
performance indicators such as those tied to social and/or environmental performance.
• Implementing a policy of regular social audits.
• Implementing an environmental management accounting system.
• Implementing a policy of regular CSR reporting.
• Appointing an environmental manager who reports directly to the board.
• Undertaking audits of the supply chain to ensure suppliers comply with certain environmental
performance standards.
Linking such policies to remuneration will have the effect of requiring managers to consider risks
and opportunities to their organisations more broadly than financial profit. As a lot of the risks
and opportunities associated with environmental and sustainability are more long term, it will
help if managers take a longer-term perspective of the organisation, rather than concentrating on
the short term.
MODULE 5
Question 5.15
The Westpac 2014 Annual Review & Sustainability Report (http://www.westpac.com.au/about-
westpac/sustainability-and-community/reporting-our-performance/stakeholder-impact-reports)
is a combined financial review and sustainability report. It thus provides a concise snapshot of the
organisation for a broad range of stakeholders. The report is supported by a website with more
detailed information, including Westpac’s annual report and further sustainability information.
Sections within the website include:

• Communities
• Customers
• Employees
• Environment
• Shareholders
• Suppliers.
The website includes more information under the following sections:

• Embrace societal change
• Environmental solutions
• Better financial futures.
Westpac has also released a 2015 interim sustainability report. You will be able to identify a
number of enhanced reporting features as you peruse the website and the report.
Question 5.16
(a) For society to be able to effectively tackle problems such as climate change, third world
poverty, poor labour conditions and so forth, individuals and business organisations both
have a role to play. Individuals’ investment and consumption decisions will directly affect what
corporations produce and how they produce it. Therefore, it would seem that both personal
social and environmental responsibility and corporate social and environmental responsibility
have a role to play.
(b) Consistent with ethical theories, such as stakeholder theory, it is commonly argued that
corporations undertake particular CSR initiatives to win the support of powerful stakeholders.
Hopefully, this is not the only reason that corporations embrace CSR initiatives.
(c) What motivates corporations to voluntarily undertake CSR-related activities is a matter of
personal opinion, but it would seem somewhat cynical to believe that corporations only
undertake CSR activities to increase revenue. Some managers will do it because it is simply
the right thing to do.
MODULE 5
Question 5.17
Crescent Wealth (http://www.crescentwealth.com.au/index.php/media-resources-more-about-
islamic-investing) calls its approach ‘ultra-ethical’, as it is compliant with Islamic investment
principles. It argues that its ‘investment philosophy is grounded and bound by Islamic finance
principles, which aim to the meet the financial needs of participants with justice, equity
and fairness’.
The website indicates that Crescent Wealth takes an approach to investment based
predominantly on negative screening. It actively screens out:
• conventional financial services;
• weapons or defence orientated companies;
• tobacco;
• pork and pig products;
• alcohol;
• gambling;
• adult materials; and
• morally hazardous media.
It also indicates that it may undertake some thematic screening by selecting investments that
‘mandate social values and good governance’.
This socially responsible investment fund would be a form of responsible investment, involving
‘negative screening’, that is, avoiding investment in industries that have a negative impact on
society and the environment.
MODULE 5
MODULE 5
References | 483
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CPA PROGRAM

Edited and designed by DeakinCo.

ISBN 978 1 9217 4290 3

CPA Program team

Suggested answers 471

Overview and introduction to key elements

The evolution of corporate accountability

Corporate accountability is evidenced by CSR or sustainability reporting. This involves measuring

History of CSR reporting

This greater emphasis on a broader accountability has been accompanied by an increase in

Example 5.1: Environmental disasters

Chernobyl, Ukraine, 1986

Deepwater Horizon, Gulf of Mexico, 2010

Some of the key environmental sustainability issues today include:

• Waste: Waste is the by-product of production that cannot be reprocessed, recovered or

• Supply chain management: Many corporations, particularly multinationals have extensive,

Example 5.2: WACOSS model of social sustainability

Economic stability is important as we live in a market-based capitalistic society, and it is important

• Transparency: Transparency refers to openness and authenticity about a corporation’s

Linking environmental, economic and social sustainability

Figure 5.1: The three pillars of sustainable development

Source: CPA Australia 2015.

The board’s responsibility for sustainability of the organisation

The evolution of different organisational forms: social enterprises and B‑Corporations

Introduction to the key elements

Natural capital accounting

an organisation, or other possible reporting units, such as an ecosystem or region, is known as

Drivers of increased business accountability

The Global Financial Crisis (GFC) and the recognition of market

The main drivers of improvements in corporate governance requirements and corporate

Other incentives tied to maximising the value of the organisation

Preferential capital flow

Brand and reputation

In 2012, Apple became a high-profile target for non-government organisations concerned

Risk management incentives

External benefits to companies from communicating through corporate social

Cost of capital benefits

Improved analysts’ forecasts

Improved general perception of the company

Corporate identity and accountability

In relation to organisations potentially embracing social responsibilities (i.e. CSR), Friedman

The shareholder primacy perspective

Table 5.1: Shareholder primacy versus social contract

Professor Adolf Berle: Professor Merrick Dodd:

Directors should, therefore, be permitted to take

Source: CPA Australia 2015.

Specifically, s. 172 of the UK Companies Act (2006) states the following:

The shareholder primacy approach is increasingly being challenged by corporations’ non-financial

Externalities and potential government intervention

Therefore, an organisation has to identify the:

Linking to ethical theories

First, the dominant theory of enlightened self-interest is discussed, followed by alternative

Who are stakeholders?

and the media’ (Imperial Tobacco 2014).

Normative stakeholder theory

Accountability is an important part of stakeholder relationships in normative stakeholder

Managerial stakeholder theory

Information, including information about social and environmental performance, which is

The social contract

Figure 5.3: The relationship between non-mandatory corporate social responsibility