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  • 1. reporting sustainability briefing paper 1 in partnersHip WitH 1
  • 2. AccountAnts And reporting the importance of the role of the accounting profession should not be under-stated. accountants in both private and public there already exists a number of practice, sMes, multinational corporations mainstream financial accounting issues and the public sector have qualifications, that touch on sustainability matters. skills and experience which have long been these include how to measure and used to provide legitimacy and coherence record environmental liabilities and to financial and business reporting. provisions (ias 37) and how to account it is the accountant’s involvement in the for the grant of, and using up of emissions twin issues of organisational decision- trading permits (withdrawn ifriC 3). in making and external reporting that addition to these agreed standards and imposes on the accounting profession the legislative requirements there are a growing responsibility for understanding, absorbing number of material sustainability matters and articulating performance on a range of infiltrating financial reports and accounts material issues. increasingly, sustainability which necessitate the assistance of the issues are among those material professional accountant. considerations. the importance of the role of the accounting profession, therefore, accountants have always needed to adapt should not be under-stated. Company in their evolving professional landscape. management, capital markets, consumers in recent times, important developments and employees are heavily dependent on in accounting and legislative practice the unique role accountants occupy through have included the harmonisation of their provision of relevant and credible accounting standards by the adoption information. of ifrs and the implementation of sarbanes-Oxley requirements. the next significant development is the emergence of sustainability issues within core business practice. this briefing paper on reporting will help accountants understand the implications for them. 2
  • 3. the chAnging LAndscApe it is how businesses deal with diverse non-financials such as customer service or climate change that drive reputation, innovation and, ultimately, profitability. for many years financial reporting provided Current financial reporting covers only Corporate accounting and reporting much of the information used to assess part of the picture of overall business models are being increasingly influenced an organisation’s performance. However, performance. there is a built-in bias from outside the financial world. information needs of businesses and towards short-term, financial results that ‘Disruptive innovations’ taking place in the their stakeholders are evolving and those sheds too little light on the impact of non- sustainability reporting field are challenging involved in the reporting process need to financial issues on value creation. it is how the status quo. in addition to reporting on understand this changing landscape. businesses deal with diverse non-financials non-financial issues, sustainability reporting such as customer service or climate change does a number of things differently. it that drive reputation, innovation and, weaves stakeholder engagement into ultimately, profitability. financial reporting the fabric of reporting and engages is failing to capture these parameters, and stakeholders who want to understand as a result there is a pressing need for the role and contribution of organisations greater reporting on non-financial issues. to society. it looks at how performance “ on non-financial issues contributes to Market capitalisation is rarely, if value creation but also strives to measure ever, totally explained by traditional and report on social value. sustainability accounting methods, which largely reporting challenges organisations to lack information on non-financial move beyond the focus on historical assets that are playing an increasingly performance, as reporting on sustainability significant role in value creation. must necessarily address future risks, Therefore additional information opportunities and strategy. sustainability ” is needed to complement and reporting often requires accountants to supplement that contained in the collaborate in multi-disciplinary teams and financial statements. learn new skills, to develop the quantitative international Corporate governance network and qualitative metrics required by mandatory and voluntary reporting. 3
  • 4. MAndAtory reporting Mandatory reporting requirements for listing requirements are being adjusted an area that has seen increasing attention non-financial reporting are increasing in a number of countries to reflect these is mandatory reporting requirements globally. Many countries have had reporting developments. a prominent example of relating to carbon emissions. this is a clear requirements for several years; others are this is that all companies listed on the Jse trend that will expand heavily in the near just beginning to legislate. in sweden, in south africa must report on corporate future. in australia the national greenhouse including certain environmental data in governance issues, based on the King ii and energy reporting act 2007 establishes annual reports has been mandatory since report into corporate governance which lists a national system for reporting which will 1999, and state-owned enterprises must seven characteristics of good governance. affect 700 companies, of which around now prepare sustainability reports. france these organisations are also expected 300 will be reporting for the first time, has the nouvelle régulations economiques to disclose social and environmental highlighting the degree of learning required. which requires social and environmental performance with reference to the global in the usa, state-level legislation is now in reporting by listed companies. the eu reporting initiative (gri). in China place in a number of regions and is placing Modernisation Directive has led to a environmental disclosures have been made pressure on federal legislators. number of new regulations on reporting in mandatory for certain listed companies and various european countries, which have environmental requirements relating to ipO demanded more narrative comment on applications have also been introduced. non-financial issues. elsewhere, legislation is more recent. the city of buenos aires announced in early 2008 that all companies with more than 300 employees must produce a sustainability report. VoLuntAry reporting alongside increases in mandatory stakeholder engagement and materiality reporting, the last decade has witnessed a are essential concepts in understanding significant increase in voluntary reporting the benefit of sustainability reporting and on sustainability issues, with the number assurance, in particular in relation to core of reports published globally growing at business strategy. Only through stakeholder almost 20% p.a. in recent years according engagement can an organisation to data from Corporateregister.com. the understand what stakeholders’ information predicted global output for 2008 is 2,850 needs are and how to address them voluntary reports. europe still accounts for adequately. Only by identifying the most the majority of reports (ca.1,400 annually), material, i.e. most relevant and significant, but voluntary reporting has recently seen sustainability issues can an organisation strong growth elsewhere, most notably in understand the links between sustainability asia and north america (ca.400 each, and strategic interests, and therefore annually). ensure reporting is relevant to both the business and its stakeholders. Voluntary reporting is increasingly seen as a value-adding strategic activity because Voluntary reporting tools and standards are the process can help identify, measure becoming increasingly recognised globally and communicate on non-financial and accepted by the mainstream. the issues that can have a major effect on an gri g3 provides a framework to guide organisation’s performance, its stakeholders reporting in this area, and includes the and society. nike has used voluntary most widely recognised set of reporting reporting to ensure performance standards indicators to improve comparability. are upheld throughout its supply chain and the increasing importance of voluntary reported its list of suppliers to increase reporting to accountants is demonstrated stakeholders’ confidence in an area that by the growing interest and participation has provided the company with problems in of accounting standards bodies in this the past. Vodafone has used sustainability area. ifaC has recently issued several reporting to build a ‘we said, we have, we papers for professional accountants in will’ strategy to address key sustainability business and sustainability reporting and challenges and communicate progress (or now have a sustainability experts advisory lack of) and future aims to stakeholders. panel that advises its leadership, boards and committees on matters relating to sustainability and environmental reporting. 4
  • 5. the Future oF reporting convergence may eventually require radical changes to the reporting system as has been suggested by the ceos of the six largest international accounting firms. increases in mandatory reporting the CeOs also highlight the emerging requirements as well as improvements trend away from the annual one-size-fits- in, and the expansion of, voluntary all sustainability report and towards more sustainability reporting are beyond doubt. concise, and possibly more frequent, beyond this, the future challenges for disclosures targeted to the intended sustainability reporting include: audience. this requires organisations to • convergence with financial reporting better understand the information needs • comparability and consistency of of their various stakeholders but also information necessitates a switch from a reporting • credibility mindset to a disclosure mindset, in various formats and through various media. Convergence relates to the integration of financial and non-financial reporting. While much work has been done to as a few pioneers have already shown, develop common non-financial reporting if sustainability issues are at the heart of frameworks and performance indicators, strategy, they need to be reported alongside there is still a lack of mainstream the financials which reinforces the centrality comparability. if the reports are going to of determining materiality. novo nordisk is be meaningful to decision-makers they a good example of a company which has must provide comparable information that already embraced this integrated approach. shows trends, both within sectors and over Convergence may eventually require radical time. this information must also clearly changes to the reporting system as has be credible if it is to be useful. Quality been suggested by the CeOs of the six and consistent independent sustainability largest international accounting firms. assurance, based on recognised “ international standards, is becoming The current systems of reporting increasingly important for many reporters and auditing company information as they strive to give decision-makers the will need to change – toward the confidence they require. assurance is now public release of more non-financial an essential element of credible disclosure, ” information…customized to the user, after all who would now have confidence in and accessed far more frequently an unaudited financial statement? than is currently done. a Vision from the CeOs of the international audit networks 5
  • 6. roLe oF the AccountAnt thus within sustainability reporting the role Information provision: to provide clear, of the accountant is increasingly to apply reliable information and, where required, skills in the following key areas: assurance of it, build the evidence base for a business case, and establish the Reporting: to understand the regulatory necessary supporting processes and and voluntary reporting environment in procedures. furthermore, through the which businesses (regardless of size) and assurance process there is a requirement governments operate, and respond to new to report directly to the board of Directors demands resulting from changes in the or top management, requiring the auditor level and nature of business activity and to know the business as well as responding new legal requirements on the scope of the audit. Risk: to advise on risk management and accountants are well placed to link the implications of entering into voluntary sustainability Kpis with the financial reporting mechanisms performance of the organisation. they can Frameworks: to develop frameworks which also advise organisations on the limitations allow for the efficient measurement of of corporate decisions based on economic financial and non-financial information and grounds, and suggest how externalities can either maintain or assure the collection of be internalised; thus better reflecting the information. potentially in an environment needs of stakeholders and current ways of where there is a lack of specific reporting corporate thinking. guidance from government, or where there are difficulties in capturing and for accountants to effectively fulfill this collating social and environmental data role they need to look to the availability and integrating them into mainstream of social, environmental and sustainable information functions development issues in the educational curriculum. furthermore, accountants need Policy: to advise on the development to explore the increasingly wide variety of of policies for determining ‘necessity to environmental finance opportunities that report’ decisions (where they exist) and to are being developed and the implications contribute to the materiality process to help these have for sustainability reporting. identify what to include in the report 6
  • 7. AdditionAL resources ACCA (accounting, reporting and assurance) www.accaglobal.com AccountAbility (assurance, stakeholder engagement, materiality) www.accountability21.net KPMG (audit, assurance, reporting) www.kpmg.nl/site.asp?id=40378&process_mode=mode_d Global Reporting Initiative (voluntary reporting) www.globalreporting.org UN Global Compact (guidelines, reporting) www.unglobalcompact.org Accounting for Sustainability (accounting, reporting) www.sustainabilityatwork.org.uk SustainAbility (global reporting trends) www.sustainability.com International Corporate Governance Network (corporate governance, reporting) www.icgn.org IFAC (accounting, assurance, reporting) www.ifac.org IAASB (accounting, assurance, reporting) www.ifac.org/iaasb The Carbon Disclosure Project (climate change reporting) www.cdproject.net Corporate register (voluntary reporting database, copies of reports mentioned in this article) www.corporateregister.com 6 Audit CEOs (future of reporting) www.globalpublicpolicysymposium.com/documents.htm 7