Sustainability accounting

Peterson K. Ozili

Abstract

This article offers a conceptual contribution to the development of sustainability accounting.

Sustainability accounting is the contribution of accounting to sustainable development.
Sustainability accounting has grown in importance in many countries. The paper uses discourse
analysis to analyse sustainability at the conceptual level. This paper highlights the motivation for
sustainability accounting, the definition of sustainability accounting, the objectives of
sustainability accounting and the tools of sustainability accounting. The findings are significant in
that they show that sustainability accounting can provide a reporting framework that allows
organizations to commit significant resources to promote continuing sustainability in the interest
of society and the environment.

Keywords: Sustainability accounting, sustainability, accounting, sustainability reporting,

sustainable development; society; environment

JEL Code : M41, M42, M48, Q01.

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1. Introduction

This paper discusses sustainability accounting. Sustainability accounting arises from the need to
ensure that accounting contributes to societal and environmental continuity. This concern led to
the early development of sustainability accounting. This article offers a conceptual contribution
to the development of sustainability accounting.

Think of two similar companies – Company A and B. Company A makes a turnover of $13million
a year from extracting mineral resources from the environment. The activities of Company A
degrade the environment and makes it unsustainable for people living in the immediate
community. Company A does nothing about the environment and goes on to plan for next year’s
extraction activities. On the other hand, Company B also makes a turnover of $13million a year
from extracting mineral resources from the environment. The activities of Company B also
degrade the environment. Company B takes action to protect the environment and discloses
information to insiders and outsiders about what it is doing to reduce harm to the environment
and minimize the hardship its activities may bring to members of the immediate community.
From the two scenario above, which of these two companies will be more valuable to investors?
And which of the two companies will have greater legitimacy to operate in the environment and
in the community? The answer is rather obvious – Company B. The behaviour of Company B
demonstrates in part what sustainability accounting is all about.

In simple terms, sustainability accounting is defined as accounting that integrates social,

environmental and economic facets of organization’s activities (Lamberton, 2005; Schaltegger
and Burritt, 2006b; Thomson, 2007). Sustainability accounting is the contribution of accounting
to sustainable development (Schaltegger et al, 2006). Sustainability accounting is considered to
be the branch of accounting that require organizations to pay attention to environmental, social
and governance matters by disclosing non-financial information about the organization.

For example, an organization should disclose information about wage inequality because
employees may want to know whether the CEO earns up to 10times more than the average
employee. Also, an organization should disclose information about its environment protection
activities because members of the community may want to know whether the organization ejects

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harmful waste into the environment, and may want to know what the organization is doing to
reduce harm to the neighborhood. Also, an organization should disclose information on non-
financial performance because investors may want to know the level of customer satisfaction,
the level of employee satisfaction, board gender diversity and corporate reputation. The
examples above demonstrate how sustainability accounting can address the interest of multiple
stakeholders.

Practitioners and academics have used several titles to describe sustainability accounting such as
environmental accounting (Larrinaga-Gonzalez and Bebbington, 2001; Lamberton, 2005; Jones,
2010), environmental reporting (Gray et al, 1995; Sahay, 2004; Clarkson et al, 2011), social
accounting (Dillard, 2014; Retolaza et al, 2016; Perkiss and Tweedie, 2017), social and
environmental accounting (Ball and Craig, 2010; Cormier et al, 2011; Brennan and Merkl-Davies,
2014), corporate social reporting (Sotorrío and Sánchez, 2010; Carnevale et al, 2012), corporate
social responsibility reporting (Bouten et al, 2011, Belal and Cooper, 2011; Dhaliwal et al, 2011);
non-financial reporting (Stolowy and Paugam, 2018; La Torre et al, 2018; Dagilienė and
Nedzinskienė, 2018).

This paper contributes to the literature that examine the role of accounting in assessing the social
and environmental outcomes and impacts that affect organizations and society (see, for example,
Gray et al, 1995; Sahay, 2004; Clarkson et al, 2011; Khan and Ozili, 2021). This paper also
contributes to the literature that offer conceptual insights on how organizations can use
sustainability accounting to address environmental issues.

The rest of this paper is structured as follows. Section 2 discusses the objectives and motivation
of sustainability accounting. Section 3 presents the literature review. Section 4 identifies some
tools of sustainable accounting. Section 5 discusses some future directions, and section 6
concludes.

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2. Objectives and motivations for sustainability accounting

2.1. Objectives of sustainability accounting

There are three objectives of sustainability accounting. The first objective is to prepare accounts
concerning organizations’ interactions with society and the natural environment (Peršić et al,
2017). The second objective of sustainability accounting is to disclose financial and non-financial
information about an organization’s performance in relation to society and the environment. The
third objective is to extend traditional financial accounting to take into account a wide range of
monetized information, covering environmental, social and economic impacts, on which
organizational decisions are made (Elkington, 1999; Bent and Richardson, 2003).1

2.2. Motivation for sustainability accounting

 To avoid greenwashing

Greenwashing is a concept used to describe a situation where an organization spends more time
and money on advertising themselves as environmentally friendly when they are not.
Organizations can use several tactics to mislead or persuade the public that their products,
objectives and policies are designed to promote a sustainable environment and society (Delmas
and Burbano, 2011; Seele and Gatti, 2017). They make people believe that the organization is
doing a lot more to protect the environment than it is actually doing. Sustainable accounting, or
sustainability reporting, has emerged to mitigate greenwashing. Sustainability accounting
ensures that organizations are truly doing what they claim to be doing to protect the
environment. Sustainability accounting provides an opportunity for organizations to report the
exact steps or actions they are taking, or have taken, to protect the environment.

 Mimicry and industry pressure

Another motivation for sustainability accounting is mimicry and industry pressure. There is a
global shift towards sustainability in almost every industry. Several industries have begun to
incorporate sustainability considerations into their practice. For example, the banking industry in

1
https://davidbent.files.wordpress.com/2013/01/sigmasustainabilityaccounting.pdf

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sustainable banking, the marketing industry in sustainable marketing, and the development
sector in sustainable development. Each industry is mimicking the other industry to avoid the
criticism that the industry does not care about protecting the environment and the society at
large. There is increased pressure for the accounting profession, and the accounting discipline,
to incorporate all relevant social and environmental factors into all aspects of accounting, and to
understand how these factors affect the performance of organizations.

 Legislative pressure

Another motivation is legislative pressure. Legislative pressure occurs when legislation is passed
that require organizations to comply with certain sustainability disclosure and reporting
requirements (Guia Arraiano et al, 2017). In some countries, sustainability reporting is backed by
legislation through the securities and exchange commission in the United Kingdom, United
States, China and India. In other countries, sustainability reporting is not backed by legislation
because it is difficult to legislate on which sustainability information is decision-useful to
investors at each point in time since the usefulness of sustainability information is time-
dependent. For example, environmental disclosures may become highly decision-useful during a
climate crisis, and less decision-useful under stable climate conditions. Therefore, imposing
legislation for sustainability reporting may lead to the disclosure of information that investors do
not find useful.

 Stakeholder pressure and gaining legitimacy

Another motivation for sustainability accounting is stakeholder pressure and legitimacy.

Environmentally-conscious stakeholders can pressure organizations to shift from traditional
accounting to sustainability accounting. Making a shift from traditional accounting to
sustainability accounting will help organizations to reaffirm their legitimacy in the environment
and society. Also, the involvement of stakeholders in sustainability accounting can help to align
accounting with sustainable development (Schneider, 2015). It will ensure that sustainability
accounting takes into account both economic, social and environmental considerations.

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3. Literature review

Several studies have examined issues in the sustainable accounting literature. Adams and
Larrinaga‐González (2007) observes that the academic literature in the field of sustainability
accounting has largely ignored sustainability accounting practice within organizations. They
suggest that further research engaging with organizations is needed to identify how accounting
and management systems might reduce their negative sustainability impacts. Passetti et al (2014)
points out that sustainability accounting is in the early phase of development and the lack of
engagement by most organizations is negative for the construction of a more balanced
relationship between business, environmental and social issues.

Schaltegger and Burritt (2006a) state that the development of sustainability accounting can be
achieved by a top-down approach and the stakeholder approach. The top-down approach to
sustainability accounting development starts with the broadest definition of sustainable
development and corporate sustainability. Then, the term ‘sustainable development’ is broken
down into partial indicators and measurements in the most systematic way possible. Meanwhile,
the stakeholder driven approach to sustainability accounting is determined through stakeholder
engagement processes. Gabrusewicz (2013) and Richardson (2013) show that the triple bottom
line (TBL) concept is a common framework used to describe sustainability accounting in
organizations because it recognizes that corporations not only add economic value to society,
they also add social and environmental value to society.

Schaltegger et al (2006) suggest that sustainability accounting is a crucial trigger for management
towards corporate sustainability. They argue that if corporate sustainability is seen as being the
result of management attempts to address sustainability challenges, then it makes sense for
management to use sustainability accounting as a basis to address sustainability challenges.
Burritt and Schaltegger (2010) show that two factors: (i) raising awareness about sustainability,
and (ii) management decision making, through problem solving and scorekeeping, are crucial for
the development of sustainability accounting. They suggest that the development of
sustainability accounting should be orientated more towards improving management decision

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making. Kaur and Lodhia (2018) observe that stakeholder engagement in the sustainability
accounting process of Australian local councils is important, and is achieved through the
development of strategic plans, sustainability indicators, measuring sustainability performance
and the preparation of sustainability reports.

Huchzermeier (2019), in a case study, examines Puma’s decision to create an ‘Environmental

Profit and Loss account’ to increase the sustainability of their business. PUMA is a leading
sportswear and sports lifestyle products manufacturer with three main product categories:
footwear, apparel, and accessories. They measured the activities that harmed nature (loss) and
those that benefited nature (profit). In this way, corporate decisions are founded on impacts on
the environment and profitability. Larrinaga et al (2018) show that, in 2011, the Spanish
government made sustainability accounting a mandatory requirement for public sector
organizations in Spain. The outcome was very disappointing. This adds to the argument that
making sustainability accounting a mandatory requirement for organizations may not be a good
idea.

4. Some tools of sustainability accounting

Sustainability accounting tools are the tools used by organizations to become more sustainable.
The demand for information about the economic effects of environmental and social activities
have led to the development of sustainability accounting tools for use in corporations
(Schaltegger and Burritt, 2010). Some sustainability accounting tools include:

1. Corporate sustainability reporting (CSR)

2. Triple-P reporting, also known as reporting on People, Planet and Profit. This is also known
as the Triple bottom line reporting (Elkington, 1999). Triple bottom line reporting is the disclosure
of information on how business performance affects ‘people’, ‘profit’, and the ‘planet (Slaper and
Hall, 2011).

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3. The Global Reporting Initiative (GRI)2. The objective of the GRI is to ensure that
environmental and social reporting is comparable to financial reporting. It achieves this by
developing reporting principles and information qualities similar to those used in corporate
financial reporting (Roberts and Koeplin, 2007).

5. Future directions for sustainability accounting

5.1. Pay more attention to social and governance matters

The sustainability accounting discourse needs to pay more attention to social and governance
matters not just environmental matters. Currently, much priority is given to environmental
impact. Organizations are placing high importance on carbon neutrality and waste reduction in
their supply chains. Organizations need to also pay much attention to social and governance
matters such as wage inequality, female representation on the Board, employee ethnic diversity
matters, customer satisfaction, human capital quality disclosure, and community acceptance.
Future studies should undertake further research on the social and governance matters
underlying sustainability accounting.

5.2. Exploring the need for new standards of sustainability accounting and reporting

There is a debate about whether we need a separate standalone sustainability reporting standard
or whether existing accounting standards should be expanded to incorporate sustainability
accounting requirements. It is difficult to determine which approach is more appropriate due to
cost, conflict of interest, political economy and country-specific issues. Further research is
needed to explore the possibility of setting a new standard for sustainability accounting and
reporting. Such studies should take into account the benefit of creating a standalone
sustainability accounting standard and the challenges that might be encountered.

5.3. Exploring the limitations of sustainability accounting

2
https://www.globalreporting.org/

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Sustainability accounting, often considered to be the accounting profession’s response to
sustainable development and climate change risk, has its limits. The biggest limitation is that it
focuses only on disclosure and reporting of environmental, social and governance (ESG) matters.
It does not provide organizations with the financial resources they need to make a meaningful
contribution to the environment or society. An organization that is short of cash, or financially
constrained, may be unable to make a significant ESG contribution, and is likely to make
disclosures that analysts consider to be below-the-benchmark ESG performance, thereby making
the organization look bad both in its ESG disclosures. Therefore, it is important for the accounting
profession to recognize this limitation of sustainability accounting and other limitations. Future
research should examine other limitations of sustainability accounting in relation to the
sustainable development agenda.

5.4. Developing relevant sustainability performance indicators for stakeholders

Several efforts are ongoing to develop key performance indicators for sustainability reporting
(Gnanaweera and Kunori, 2018). Some performance indicators will be more relevant to
stakeholders while other performance indicators will be less relevant to stakeholders. Future
studies should determine, based on certain criteria, the key performance indicators that are most
relevant and important to stakeholders.

6. Conclusion

This paper discussed sustainability accounting at the conceptual level. It highlighted the
definition, motivation and tools of sustainability accounting. It showed that sustainability
accounting can help organisations to identify and assess environmental and social challenges.
The findings are significant in that they show that sustainability accounting can provide a
reporting framework that allows organizations to commit significant resources to promote
continuing sustainability in the interest of society and the environment. The first step to develop
sustainability accounting standards is to first understand what sustainability accounting really is
- this is the goal of this short paper. Although significant innovations have emerged in

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sustainability accounting in the last two decades, the concept of sustainability accounting is still
relatively new in some countries, while its development in other countries is still patchy. As more
organisations continue to embed societal and environmental considerations into their business
processes, it will hasten the development of accounting for sustainability in many countries.

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