In the past, companies ignore their consumption of natural resources such as air and water because they assumed that supplies of these items were both limitless and free.
This is no longer the case. It can now be argued that whereas companies are increasing economic wealth through growth and the search for profit maximisation, society may well be getting poorer because of the damage that economic activity is having on the environment and society.
The capitalist ‘economic model’ of the society is based on maximising wealth through economic activities, in spite of concerns for the environment, and recognition that the continual growth in its current form cannot be sustained.
In recent times, company have become increasingly aware of environmental issues, and begin to accept that economic growth might not be sustainable, they become more interested in measuring sustainability and environmental impact.
Traditional accounting methods do not provide for this type of measurement to the extent that companies and the society want environmental impact to be measured. This inadequacy has given way to the current alternative measurement and reporting systems that recognise the need for economic activity to be sustainable.
Sustainable Development
A generally accepted definition of sustainable development provided by the Brundtland Report (for the World Commission on Environment and Development, 1987) is: development that meets the needs of the present without compromising the ability of future generations to meet their own need.
Another definition of sustainable development is: a dynamic process which enables all people to realise their potential and improve their quality of life in ways which simultaneously protect and enhance the earth’s life support system.
The assumptions of these definitions have underlining practical difficulties that we need to look into:
- What are the needs of the present? Presumably, these are more than simply survival needs, because current levels of consumption are, in many parts of the world, are well above survival level.
- What are the needs of future generations? Are these just survival needs? If so, there is presumably an assumption that economic wealth will decline.
- Over what time period the needs of future generations should be measured? In theory, future needs should be measured into the long-term future. However, companies and governments plan for the future over much shorter time frames.
- Do we mean the needs of all people in all societies, or its sustainability measured in terms of individual countries or regions of the world?
- Since companies plan for future and report their performance to shareholders within a fairly short time frame, reporting for sustainable development is likely to focus on relatively short-term measures of sustainability.
Reporting by Companies on Sustainable Development
We suggested earlier that environmental footprint can be measured for countries in terms of geographical area per head of the population, but other than this are other techniques used by companies to plan and report the impact of their activities on the society and the environment. These include:
- Measuring environmental footprint for individual companies
- Triple-bottom line reporting
- The balanced scorecard and sustainability balanced scorecard
- The sustainability assessment model (SAM) and full-cost accounting (FCA).
Environmental Footprint for Individual Companies
The measurements of individual company environmental footprint vary according to the nature of their different operations. A company can measure its environmental footprints through the following series of measurements:
- The company’s consumption of materials subject to depletion such as timber or non-farmed fish stocks, land or aquatic reclamation and non-renewable energy resources including oils, natural gas and coal.
- The pollution created by company’s activities, measured for example in terms of emissions of carbon dioxide, chemical waste or oil spillage
- An assessment, in either qualitative or quantitative terms, of the broader effect of the company’s resource consumption and pollution on the environment.
Triple Bottom Line Reporting
Eikintron in 1994 came up with triple bottom line reporting with the aim of encouraging companies to recognise social and environmental issues in their business models and reporting systems. Eikington named it ‘three-bottom-line’ because they provide key measurements for three aspects of performance:
- Economic Indicators
- Environmental Indicators
- Social Indicators
Economic indicators will include measurements relating to: sales revenue, profits, earnings and earnings per share, dividends per share, global market share and in some companies such as car production, unit of sales worldwide.
Environmental indicators might include measurement relating to: reducing the intensity of materials in products and services, reducing energy intensity, minimising the release of toxic materials/pollutants, improving ability to recycle material, maximising the use of renewable resources, extending the life of a product etc.
Social Indicators is informed on demonstration of concern for stakeholders’ interests in various capacities such as labour rights, environmental management, donations to communities and sponsorships, gender equality for employees, employee satisfaction, climate change mitigation and adaptation.
Balanced Scorecard and Sustainable Balanced Scorecard
Balanced scorecard as discussed earlier in chapter 17 is a method of setting targets and measuring performance for both individual managers within a company and the entire company. The balanced scorecard is viewed in four different perspectives:
- Financial perspective
- Customer perspective
- Internal business perspective
- Innovation and learning perspective.
The four perspectives give suitable importance to short-term profitability, non-financial considerations and long-term strategic issues.
A sustainable BSC adds a ‘non-market’ perspective to the balanced scorecard, for the environmental and social impacts of the company’s operations or the manager’s activities. This type of scorecard therefore includes an element of accounting for
sustainability.
Sustainability Assessment Model (Sam) and Full-Cost Accounting (FCA)
The sustainability assessment model (SAM) measures the impacts on sustainability of a product over its full life cycle, from raw material extraction through the production process to its final consumption. This impacts the economic cost of the product, the company’s operations on society and the environment, and also the broader social costs and benefits.
The full cost and the measurement system supporting the sustainability assessment is called full-cost accounting (FCA), because it includes environmental and social costs as well as economic costs.
Conclusively, sustainable development does not have a universal agreement about its meaning, but the reasons that seem to persuade companies to report on sustainability include competition, risk management, emerging markets, corporate reputation and in some countries, mandatory minimum reporting requirements.
Environmental Management Systems
An environmental management system is a broad general term for any system used by an entity to monitor and manage the impact that its products and operations have on the environment. The aims of a management system might be to:
- Minimise the negative impact of operations such as damage to air, water or land on the environment.
- Mitigate the effects of operations on the climatic conditions.
- Comply with environmental laws and regulations.
- Make continual improvements in either of the above areas.
An environmental management system includes an environment information system to:
- Monitor compliance with environmental laws and regulations
- Monitor implementation of the company’s own environmental policies.
An information system may provide, for example, information about physical quantities of emissions of waste or toxic materials, resources in the environment, the environmental characteristics of the company’s products or services, information about environmental ‘incidents’ such as spillages of waste or toxic materials.
The International Standards Organisation (ISO) issued a series of standards that specify a process for managing, controlling and improving an entity’s environmental performance. This series of standards is known as ISO 14000 standards.
The ISO does not specify targets for achievement or standards of environmental performance. It however provides guidance on a management system for the management of environmental issues. One of the series of ISO 14000 standards which is universally applicable to any company include:
1. The general requirement for environmental management system
2. Companies environmental policy that must meet ISO 14000 requirements
3. Companies should declare their main environmental objectives plans
4. A standard implementation and operation procedures that will ensure environmental policy is implemented to achieve target objectives
5. Checking and corrective/control actions
6. Regular review of the environmental management system to ensure that it is suitable for the entity and effective operation.