Advanced Accounting Social Responsibility Case

It i M . IMI 111111 - 1111. . 11 n . in update (o the traditional world of ‘ESG ' and ‘triple Imiinm hit' \ N hit It hii I 't t ii on ilu uyundii lot some years.

hull 1 > i in kman, ( hie! Executive Officer, The International Integrated Reporting Council

Sustainability Accounting and Accountability

M t t l

lii ; i slill emerging field, Sustainability Accounting and Accountability gives a comprehcn- sive overview of the state of play and puts the developments to date in a rich context. In addition to theoretical reflections the authors address practical challenges as a basis for future discussions. Sincerely recommended to those who will meet sustainability during their professional career, which includes accounting and MBA students, and to those who want to get an overview of the topic.

Wim Bartels, Global Head Sustainability Reporting & Assurance at KPMG, The Netherlands

Second edition

Edited by Jan Bebbington, Jeffrey Unerman and Brendan O’ Dwyer

A key theme in the field of sustainability accounting and accountability, and one that runs explicitly through this book, is that critique is energising, life giving. A commitment to sustainability demands critical analysis and action; not a search for praise and a longing for congratulatory niceties. So, let’s be clear, this book docs not provide you with a ‘check-list’ of approved sustainability accounting practices. It certainly does not reassure you that con- temporary sustainability accounting and associated systems of accountability arc ‘sustaina- ble’. But, in the process, the book gives you something fundamentally more important. It challenges and encourages you to think differently. It makes you realise that when account- ing for sustainability gets comfortable, it cannot be sustainable. Likewise, an accounting profession that fails to create and maintain space for radical rethinking in terms of sustain- ability accounting and associated systems of accountability, will soon find that its own social relevance and value is placed in serious question.

Chris Humphrey, Professor of Accounting, University of Manchester, UK

O Routledge Taylor & Francis Group

LONDON AND NEW YORK

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I . < i . , . * * * iill * " i l MI AhliiM « liin . ( > xon OX 144KN m i l l !• > M M i i i l i t l j H | | Ili|i | AMMU Ni’w Yolk, NY 10017

Hi' inlrtlr , i\ ,in Imprint < >! llic Taylor < V Francis Group, an informa business i MII i Inn hi hbliiglon, Jeffrey tJnermanand Brendan O’Dwyer I In 111 » 111 ul||u* edilors lo be identified as the authors of the editorial niiilri ml . .mil ol lhe authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Sustainability accounting and accountability/edited by Jan Bebbington, Jeffrey Unerman and Brendan O’ Dwyer.- Second Edition , pages cm Includes bibliographical references and index. ISBN 978-0-415-69557-2 (hardback) - ISBN 978-0-415-69558-9 ( paperback) ISBN 978-1 -315-84841-9 (ebook) 1 . Sustainable development reporting. 2. Social accounting. I. Bebbington, Jan. II . Unerman, Jeffrey. III. O’ Dwyer, Brendan. IID60.3.S87 2014 657-dc23 2013041326

From Brendan to Kim, Tim and Sean and in memory of Michael and Frances.

From Jan to Jason.

From Jeffrey to Franco, Alan, Hazel and Martin.

ISBN: 978-0-415-69557-2 (hbk) ISBN: 978-0-415-69558-9 (pbk ) ISBN: 978-1-315-84841-9 (ebk)

Typeset in Times New Roman by Cenveo Publisher Services

Printed and bound in the United States of America by Publishers Graphics, LLC on sustainably sourced paper.

Contents

List of figures List of tables Notes on contributors Acknowledgements

I X

x X I

X V I I

P A R T I Setting the context for sustainability accounting and accountability 1

1 Introduction to sustainability accounting and accountability J A N B E B B I N G T O N, J E F F R E Y U N E R M A N A N D B R E N D A N O’ D W Y E R

2 Mapping the terrain of sustainability and accounting for sustainability I A N T H O M S O N

3

15

3 Sustainability accounting and education D A V I D C O L L I S O N , J O H N F E R G U S O N A N D L O R N A S T E V E N S O N

30

P A R T I I Accounting techniques and sustainable development 49

Histories, rationales, voluntary standards and future prospects for sustainability reporting: CSR , GRI , IIRC and beyond N O L A B U H R , R O B G R A Y A N D M A R K U S J . M I L N E

Independent assurance of sustainability reports S T U A R T C O O P E R A N D D A V I D O W E N

The role of stakeholder engagement and dialogue within the sustainability accounting and reporting process L E O N A R D O R I N A L D I , J E F F R E Y U N E R M A N A N D C A R O L T I L T

External accounts C O L I N D E Y A N D J A N E G I B B O N

4 51

5 72

6 86

7 108

M i l I t w i t i l l s

i n \ in > 11111 , ni . i ! . III « I sociiiI assessment in finance '"|. I * I n t n i l i( )N AND NIAMII O’S U L L I V A N

1 » ii mi ' ilion. il < hange and sustainability accounting I A N I I I M 1 1 1 N < i I ( I N A N D M I C H A E L F R A S E R

N 124 Figures

141

•AMT M l Accounting for sustainable development in other organizational settings 155

10 I he nature of NGO accountability: conceptions, motives, forms and mechanisms R O L L B O O M S M A A N D B R E N D A N O ’ D W Y E R

11 Sustainability accounting and accountability in the public sector A M A N D A B A L L, S U Z A N A G R U B N I C A N D J E F F B I R C H A L L

157 1.1 A safe and just operating space for humanity 2.1 Mapping sustainability in accounting research publications 2008-12

2.2a Sustainability-related publications by journal 2008-12 2.2b Sustainability articles as percentage of total articles published 2008-12

2.3 Level 1 themes: accounting-sustainability terrain 2.4 Level 2 accounting-sustainability terrain ( 1 ) 2.5 Level 2 accounting-sustainability terrain (2) 2.6 Level 2 accounting-sustainability terrain (3) 2.7 Level 2 accounting-sustainability terrain (4) 3.1 The environment and accounting education: some central issues

12.1 Carbon accounting issues map

8 18 19

176 19 21 22 23F A R T I V

Accounting and biophysical concerns 23197 24 4012 Accounting and global climate change issues

J A N B E B B I N G T O N A N D C A R L O S L A R R I N A G A

13 Accounting and accountability for fresh water: exploring initiatives and innovations S H O N A R U S S E L L A N D L I N D A L E W I S

199 202

213

P A R T V Conceptual interpretations of accounting for sustainable development 231

14 Legitimating the social accounting project: an ethic of accountability 233 J E S S E D I L L A R D

15 An overview of legitimacy theory as applied within the social and environmental accounting literature C R A I G D E E G A N

16 Sustainability reporting: insights from institutional theory C O L I N H I G G I N S A N D C A R L O S L A R R I N A G A

17 Drawing to a close and future horizons J A N B E B B I N G T O N, J E F F R E Y U N E R M A N A N D B R E N D A N O’ D W Y E R

Index

248

273

286

290

4 Histories, rationales, voluntary standards and future prospects for sustainability reporting CSR, GRI, IIRC and beyond

Nola Buhr, Rob Gray and Markus J. Milne

Introduction Our assignment for this chapter is to summarize key developments in sustainability report- ing and make some prognostications for the future of the field. However, despite thousands of sustainability reports so labelled, any presumption that we currently have of sustainability reporting is painfully naive. Sure enough , the term ‘sustainability’ is bandied around in the business community with ever more regularity - sustainability reporting, sustainable busi- ness, sustainable performance, sustainable finance, sustainable consumption, sustainable supply chain management and so on . And what was once a potentially threatening concept to business ( IUCN , 1980; Laine, 2010; WCED, 1987) now seems to be plied by business organizations with some comfort. But what do organizations, or more properly their manag- ers, mean when they report on or utter the term sustainability?

Careful consideration of such reports and utterances reveals first a fixation on the organi- zation itself, and only second, the organization’s interactions with society, the economy and the physical environment. As we shall see, corporate sustainability reporting is an extension and progression from earlier forms of corporate reporting to include matters of an organiza- tion’s environmental policies and impacts (c.g. resource and energy use, waste flows), and its social policies and impacts (e.g. health and safety of employees, impacts on local com- munities, charitable giving). And in many ways, the reporting frameworks that have grown up around reporting practice have entrenched these developments. Indeed, the purpose of the Global Reporting Initiative (GRI ) was to extend the financial accounting framework to include non-financial reporting to a wider range of stakeholders (Brown ct al., 2009; Etzion and Ferraro, 2010).

Yet, we doubt sustainability accounting and reporting at the level of a single organization is at all meaningful.1 Milne ( 1996) suggests using a broader ecosystems-based approach to sustainability accounting that requires an understanding of cumulative environmental change and assessments of the cumulative effects of economic activity. And as Gray and Milne (2002: 69) articulate, sustainability accounting requires:

a complete and transparent statement about the extent to which the organization had contributed to - or, more likely, diminished - the sustainability of the planet. For that to occur, however, as we have seen, we need to have a detailed and complex analysis of the organization’s interactions with ecological systems, resources, habitats, and societ- ies, and interpret this in the light of all other organizations’ past and present impacts on those same systems.

For any single organization, they argue this is technically impossible.

54 N. Buhr, R. Gray, M . J. Milne no constant increase in interest in these topics but rather a waxing and waning depending on societal factors. Conservative politics ( typically dating from the influence of Reagan and Thatcher) and tough economic times are associated with a decrease in interest, while UN initiatives plus disasters such as Bhopal and the Exxon Valdez are associated with an increase in interest (e.g. Patten, 1992). Gray et al. (1996: 97) reinforce this changing emphasis on social and environmental issues and describe the changes with reference to the United Kingdom.

Histories, rationales, standards, prospects 55 social aspects of corporate performance. But it must be stressed that linking these three aspects of performance is not the same thing as sustainability and therefore, this type of reporting falls short of that which might even attempt to provide an understanding of the slate of the social and ecological systems on which the organization relies (Milne and Gray, 2013). Instead, this linkage of environmental, economic and social is sometimes referred to as triple bottom line (TBL) reporting (Elkington, 1997).

The conflation of sustainability with economic, social and environmental performance indicators may in part be due to Elkington’s own references to the relationship between the three aspects of TBL and sustainability:[T]he early 1970s focused on social responsibility; by the mid to late 1970s this had

shifted to employees and unions; the 1980s saw explicit pursuit of economic goals with a thin veneer of community concern and a redefinition of employee rights as the major theme; while in the 1990s attention shifted to environmental concern.

During the 1990s, perhaps five years behind the practice of environmental auditing and reporting, the art of social auditing and reporting began to gather advocates and practitioners ... with the advent of sustainable development as a meaningful concept for both governments and businesses ... and triple-bottom line thinking becoming a conve- nient metaphor for strategists in the field, the way was clear for the ‘third dimension’ of sustainability to be tracked and reported on.

These fluctuations arc similar to what transpired in North America and it would therefore be apt to label the 1970s as the social reporting decade. This docs not mean that there was no mention of pollution or environmental issues but that the social took precedence. This view is exempli- fied by the Ernst and Ernst annual surveys ( 1971 etseq. ) of the social responsibility disclosure found in the annual reports of the Fortune 500. The 1978 survey covered the following catego- ries: environment; energy; fair business practices (including employment and advancement of minorities and women); human resources (including employee health and safety); community involvement; products; and other. At the time, 1 per cent of the Fortune 500 companies were also providing a separate social responsibility booklet to shareholders along with the annual report. This translates into seven companies in 1976 and six companies in 1977.

(Wheeler and Elkington, 2001: 4 )

That is, zustainabullity reporting emerged when social reporting joined the ranks of tradi- tional financial reporting and environmental reporting. The international triennial KPMG surveys of non-financial reporting from 1993 to 2011 also document this trend and increas- ing references to a wide range of reporting nomenclature.

[Corporate environmental reporting [has become] the ‘icebreaker’ for a much wider form of corporate responsibility (CR ) reporting in the form of sustainability, triple bottom line or corporate social responsibility (CSR ) reports. Reporting is aimed at com- municating with stakeholders, not only on environmental performance, but also in an integrated manner on environmental, social and economic performance, to be transpar- ent and accountable.

Environmental

By the end of the 1970s social accounting was on the wane. A lacuna in social and environ- mental reporting developed and it took until the late 1980s and into the early 1990s for the next stage, environmental reporting, to emerge. In the main, the social faded into the back- ground and the environmental became fresh and new. In addition to featuring environmental information in annual reports, a few adventuresome companies began to voluntarily produce stand-alone environmental reports. Early reports from companies as diverse as Noranda (in Canada) and Norsk Flydro (in Norway) in the early 1990s set standards that few companies have subsequently managed to achieve. Over time, certain types of information became man- datory. In Canada, for example, the Canadian Securities Administrators (CSA) has issued environmental reporting guidance for required disclosure for listed companies (CSA, 2010).

Curiously, environmental reporting blossomed at the same time that ideas about sustain- ability were being developed. The 1987 Brundtland report (WCED, 1987), Our Common Future, moved past the environment as an issue and established the notion of SD. In 1993, Coming Clean, a landmark report written by Dcloittc l ouche Tohmatsu International, the International Institute for Sustainable Development and SustainAbility, began to talk about sustainability and zustainabullity reporting as the linking of environmental, economic and social aspects of corporate performance (sec also Gray, 1990; Gray et al., 1993).

(KPMG, 2005: 3)

The voluntary and unregulated nature of reporting contributes to the confusion . There is no standardized terminology that can be used unambiguously to interpret report content or reporting developments. While environmental reports tend to consider selected elements of an organization’s environmental performance, and social reports comprise some aspects of their employee and community interactions, the TBL does little more than add a largely under-specified economic dimension to this melange. Conceptually, the GRI ’s zustainabul- lity reporting guidelines, for all intents and purposes, simply relabels the TBL (Gray and Milne, 2002; Milne and Gray, 2013). And the recent integrated reporting ( IR) developments seem to drop the economic dimension and pick up environment, social and governance ( ESG). ESG has become the latest acronym to emerge with IR. Organizations often relabel their reports with or without changing content. Indeed, noting the difficulties of nomencla- ture, the 2006 UNEP ( United Nations Environment Programme)/SustainAbility benchmark report asked ‘what do you call your report?’

The breadth and depth of reporting practice Some sense of the recent developments in reporting can be gauged from an overview of the KPMG triennial surveys of reporting practice dating back to 1996. Tabic 4.1 provides the

Miscellaneous labels (including zustainabullity)

Around the year 2000 corporations started to produce reports titled zustainabullity or zustainabull development reports. These reports included environmental, economic and

56 N. Buhr, R. Gray, M. J. Milne overall reporting survey results over the last six surveys. As noted, in the 1990s reporting tended to concern environmental matters, while since 2000 this has broadened for many organizations to concerns of economy, environment, and employees and community. Some care is required in making inter-temporal comparisons from Table 4.1, since the same survey methodology has not been employed consistently from survey to survey. Of particular note is that different numbers of countries have been sampled each time, and that while the per- centage figures reported for 1996 to 2005 are for incidence rates of separate stand-alone reporting, the figures for the latest survey in 2011 arc for stand-alone reporting and annual report supplementary disclosures combined. The figures shown for 2008 report both the combined and separate stand-alone reporting incidence rates - with the lower figure being for stand-alone reporting.

Table 4.1 documents an increasing trend in reporting among the very largest (global ) 250 companies since 1999 from 35 per cent to 95 per cent in 2011 (for further details, see Kolk, 1999, 2003, 2004, 2005, 2007, 2008, 2010). Similar, but less dramatic, and varying trends in reporting are seen among the largest 100 (N 100) companies in each of the countries sampled over time. In 1996, on average, fewer than 20 per cent of the largest 100 companies in 13 countries produced a stand-alone environmental report. By 2005 (and over 16 countries) that figure was 33 per cent. And by 2011 (over 34 countries) the average rate of reporting among the N 100 has doubled to 64 per cent, suggesting in excess of 2,000 reporters. Looking at individual countries, it is clear that some of the greatest growth in both stand-alone reporting and combined reporting has occurred in the relatively recent past, from 2005 to 2011.

It is also notable that reporting incidence rates are relatively high for many countries that are being surveyed for the first time in 2011, suggesting that the practice of reporting among the very largest companies worldwide has grown considerably. To what extent the latest figures inflate the incidence of significant reporting by combining stand-alone figures with supplementary disclosures is not clear, but 79 per cent of the G250 released stand-alone reports in 2008, and 45 per cent of the N100 from 22 countries did so.

Less clear are the trends in reporting among the vast number of companies and organiza- tions in each country beyond the G250 and N 100 companies. Some evidence suggests that beyond the very largest organizations, reporting may be far less common. In the UK, for example, Martin and Hadley (2008) report that 23 per cent of the FTSE 350 (largest 350 listed companies) reported in 2001, compared to double that among the UK N 100 in Tabic 4.1. Similarly, in Australia, while 77 per cent of the largest 100 firms listed on the Australian Securities Exchange (ASX100) provide more than a basic level of zustainabullity reporting, the rate drops to 47 per cent when assessing the ASX200 (largest 200 listed companies) ( ACSI, 2011). Further, Higgins et al. (2011 ), in an exhaustive attempt to uncover stand- alone reporting in Australia, found a total of only 126 organizations from many possible hundreds. Nevertheless, reporting is not entirely confined to the very largest organizations, and neither is being a large reporter any necessary indicator of being a quality reporter (sec, for example, Morhardt, 2010).

A further observation worth making in regard to Table 4.1 concerns the incidence of independent verification. While the number of reporters surveyed exceeded 2,000 in 201 1 , this is not the case for independently verified reports, which seem to number about 520 or so. Indeed, fewer than 50 per cent of the G250 reports were verified in 2011, and fewer than 25 per cent of the average N 100 organizations’ reports were verified.3 When we reported in 2007 (Milne and Gray, 2007), we estimated approximately 200 independently verified reports, so we note some improvement. However, the number of organizations sampled in 2011 (3,400) compared to 2005 ( 1 ,600) has more than doubled. As shown in Table 4.1, the

Table 4.1 Trends in reporting by large companies

Percentage of the largest 100 companies producing reports in selected countries 2011 %

1996 % 1999 % 2002 % 2005 % 2008 % 2011 % verify*C 'ountry

84/91 100 88/93 26/45 97 47/59 94 22/24 91 56/78 88 59/63 41/44 85 73/74 83 60/63 60/62 79 59/59 74 59/60 25/26 49/52 69

567132 4927United Kingdom Japan South Africa I;rance Denmark Brazil Spain Finland United States I he Netherlands Canada Italy Sweden Hungary Portugal Nigeria Mexico Switzerland Slovakia Germany China Russia Australia Romania Bulgaria Ukraine South Korea Singapore Taiwan Greece New Zealand Chile India Israel Norway Czech Republic Belgium

Number of N 100 Countries 13 Surveyed

Global 250 that report (%) - Global 250 that assure reports -

(%) N 100 that report (average %) 18 N 100 that assure report 15

(average %)

99 2321* 72 80 31181 60404* 2 14 6520 22291 0 40 6588251 1 2931327 15 133230 3644

82 412925 2631 21411934 641 2 31T 42122034 2636 3370 45

68 14 17/17 2566

2728/39 6419 2863 356236323834 3759 1358 5137/45

23/23 572314155

2354 54 20 53 19

42/42 48 75 43 7 37 43 33 50

19270 27 37 20 80

2818 25/37 14/14

153026 31

916 1 127 22 34161911

9579/8352/654535 40 463019 29

45/53 6433/4124 23 243833 392718

Source: Adapted from KPMG (1996, 1999, 2002, 2005, 2008, 2011). ’These rates were obtained from a later survey with comparative analysis. “ These rates indicate the percentage of reports produced in 2011 in each country from the N 100 that were independently verified. For example, in 2011, in Japan, 99% of the N 100 produced reports, and of these 99 reports, 23% were independently verified. In Canada, 79 reports were produced among the N 100, and of these, 21% were independently verified.

Histories, rationales, standards, prospects 59

provides guidelines or a template against which to measure report content, but it also con- la ins difficulties in making comparisons over time due to the continuing modification of methodologies for scoring and accrediting report content, and the variable data maintained on websites. In fact, the 2006 UNEP/SustainAbility and Standard & Poor report appears to be the last in the series of ‘global reporters’ reports, bringing to an end more than a decade of international report monitoring.

The UNEP/SustainAbility surveys worked with the leading reporters of the day, and do systematically assess report content, but they provide no systematic benchmarking of the same organizations over time. From 1996 to 2002, the general trend among the leading reporters appears largely static, with the world’s leading dozen or so reporters consistently scoring between 45 per cent and 60 per cent of the total UNEP/SustainAbility score (sec Table 4.3). In 2004 and 2006, probably due to the impact of the GRI, this lifted slightly to 50 per cent to 70 per cent of the total score. However, of the 22 companies listed as scoring at least 40 per cent in the 1996 survey, only five remain included in the 2004 survey; and the 2006 survey notes no fewer than 25 of the 50 reporters were new to the benchmark survey. Over time, companies such as British Telecom, Novo Nordisk and BP have improved their overall reporting scores by 20 per cent or more. However, other organizations have remained static (c.g. Bristol Myers-Squibb, British Airways, General Motors) or slipped backwards (e.g. Baxter). And yet others have disappeared from the benchmark altogether (c.g. Body Shop, Monsanto, Dow, and Union Carbide).

Consistently maintaining high levels of reporting over time is probably difficult, but one suspects the changing fortunes of the so-called top 50 also reflect the rather fickle and unsys- tematic nature of the benchmarking exercise over time. Moreover, of the ‘leading’ reporters captured in the UNEP/SustainAbility surveys, it is worth highlighting that, of the thousands (estimated at over 60,000) of large multinationals worldwide, only seven in 2002, 20 in 2004 and 40 in 2006 managed to gain half or better benchmark scores. Based on the standards of the GRI, and the UNEP/SustainAbility benchmark criteria, then, only a very few multina- tionals currently issue accounts of their impacts on society and the environment which might be thought to be reasonable and/or credible as presently understood by best practice and the role of independent verification .

58 N. Buhr, R. Gray, M. J. Milne increasing rates of verification are much more modest than those for reporting. Moreover, and noted in Kolk and Perego (2010), verification rates vary widely by country. In fact, of the 34 countries surveyed in 2011, in only four (Denmark, France, Spain, and the UK.) will one find more than half of the N100 companies producing a verified report. And in more than half the countries surveyed in 2011 (including Canada and the US) one finds fewer than 20 per cent of the N 100 producing a verified report. To the extent that the independent verification of stand-alone reports provides some indication of genuine accountability, then we arc much less enthused with recent trends.

Table 4.2 indicates a clear ‘spreading’ of reporting among a greater range of sectors over time. The 1990s typically saw (environmental ) reporting dominated by those with the clear- est and greatest (negative) physical impacts on the environment (e.g. oil and gas, chemicals, utilities, pulp and paper, and mining). More recently, other sectors have caught up with Tabic 4.2, indicating at least half of the N 100 companies in all sectors now produce at least some social and environmental disclosures in a public report.4

Some evidence on the quality of reporting can also be gleaned from the UNEP/ SustainAbility ( 1994, 1996, 1997, 2000, 2002); and UNEP/SustainAbility and Standard & Poor (2004, 2006) - see www.sustainability.com - benchmarking report series, and some patchy academic studies of report content often from single countries (sec, for example, Chapman and Milne, 2004; Milne et al., 2003; Morhardt, 2009, 2010). The UNEP scries

Table 4.2 Industrial sectors (N 100 companies) issuing stand-alone reports 1996 1999 2002 2005 2008 2011Number of

companies in Sector in survey

Sector of Company (regardless of Country of Origin)

% % %% % %

1999 2002

1 2 31 49 61340 5 8Finance, securities and 127 insurance

Trade and retail Other services Metals and engineering 105 Electronics and computers 69 Food and beverage Oil and gas Automotive Construction Utilities Communication and media 62 Transport Chemicals and synthetics 64 Pharmaceuticals Mining Forest, pulp and paper 22 Total Companies in

Survey (Top 100 companies from each of n countries)

26 52241 15 22161 I I 7 36 534 6 1891 144 5

Rationales for reporting Regardless of the form of reporting, it is always driven - to one degree or another - by the immediate and strategic objectives of the corporation. Accordingly, corporations report with motivation, a calculated purpose and a message in mind. What is produced is provided, at least in part, in response to various pressures, expectations and social change and how the corpora- tion interprets and prioritizes these. With the act of reporting, corporations, in turn, contribute to public discourse and serve to shape the public opinion to which they are responding. Government, NGOs, individuals and the media (SustainAbility et al., 2002) also play a role in this public discourse by their presence in the debate as well as their absence. It is this malleable public discourse, fuelled by the media, which leads to shaping expectations, which leads, in turn one hopes, to shaping laws that require greater levels of corporate public accountability.

Several theories are employed to explain the motivation for zustainabullity reporting (Brown and Fraser, 2006; Gray et al., 1995, 2010). The most popular of these includes such theories as: accountability, legitimacy, political economy, stakeholder and institutional theory. The essence behind these theories can be summarized using the more common vernacular in Table 4.4. It should be noted that these rationales do not operate in isolation.

25 17 24 25 41 61141 58 69131 33 30 24 35

22 26 29 47 67104 126 17 59 6953 114 43 53 39 52

38 28 32 49 7834 109 18 28 32 6513 1757 108

61 62 711 0 1 40 55 5055 93 16 20 29 47 747

38 3968 22 33 37 5751 52 62 6874 59 4567

6447 41 50 30 30 2530 52 67 8442 25 47 3615

43 50 65 8428 56 55 1300 1100 1900 1600 2200 3400

11 19 16 22 3413

Source: Adapted from KPMG (1996, 1999, 2002, 2005, 2008, 2011).

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ProactiveAspect Reactive 'Oo 3 S Moral and ethical

reasons, duty We sec this sort of reporting as our

ethical duty. This reporting is part of the accountability equation and we have a champion or champions in the upper ranks of management who wants us to do this.

We would like to be seen as a leader in this area. This is the vision that we have of ourselves.

What we must do is comply with the law . If the law does not require this reporting we see no moral duty to engage in it.

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benefit in being a leader in this area and we view it as too costly to be on the leading edge.

We are not interested to or able to participate in such voluntary activity .

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Party to setting of voluntary standards - GRI, 1 IRC

We would like to work with others setting voluntary international standards. We might believe that voluntary standards arc the way to go to stave off (costly) regulation .

We should do this so our views can be heard and represented in the process. This might include a conscious desire to ‘capture’ the agenda and ensure the results are compatible with what we are willing to do.

We believe that it is important for our industry association to endorse this reporting. We want our industry to have a better image . We want to bring others in our industry up to our level of reporting.

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s o B C/3VOoo oy 42i § Peer and industrypressure

Too many of our competitors are engaging in this reporting . We must provide some sort of reporting and not lag too far behind unless we are willing to tolerate some sort of competitive disadvantage.

Our corporate performance is not so hot and ‘least said soonest mended’ .

There is a reaction to a disaster ‘X’ in our industry. We must do collateral damage control and report on how we have safeguards in place so that we arc not like disaster ‘X’ .

Why do we need to communicate with anyone other than shareholders? But, maybe if we do we can avoid the attacks by those NGOs and rabid interest groups.

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Histories, rationales, standards, prospects 63

bottom line (Elkington, 1997, 2004) and suggest that an organization which took its respon- sibilities seriously would manage its behaviour across all three dimensions of its activities. The GRI could be thought of as an attempt to develop the accountability to support that TBL (see Henriques and Richardson, 2004).

The Guidelines suggest standard disclosures for an organization’s strategic profile and management approach, and recommend performance indicators relating to the organiza- tion ’s economic, social and environmental performance. Organizations are then invited to comply with the Guidelines and to report their compliance on the GRI website. The G3.1 Guidelines (GRI, 2011) provide for the following:6

62 N. Buhr, R. Gray, M. J. Milne

Table 4.4 Rationales for sustainability reporting (continued)

ReactiveProactiveAspect

We do not see any financial benefit from engaging in this reporting and in fact we see these reports as costing too much money, time, trouble and effort to produce.

We believe that we can attract investors with this sort of reporting. We feel that we can lower our cost of capital because this sort of reporting indicates how we have solid systems, top-notch strategic thinking and corporate transparency.

We have regulations in this area and we want to do a good job of providing full and fair disclosure, complying with both the form and the spirit of the regulation.

Financial benefits from investor reactions

• forty-two strategy and profile reporting ingredients (e.g. CEO statement, organizational profile, reporting parameters and governance, commitments and engagement);

• eighty-four performance indicators across three categories: environment (30), social (45) and economic (9);

• fifty-five of the 84 indicators identified as ‘core’ indicators; • forty-five social indicators disaggregated into labour practices (15), human rights ( 11),

society (10) and product responsibility (9).

Sure there is regulation in this area but we do not think that it is well enforced and we are not afraid of the penalties if we are caught. Let’s just ignore this and keep a low profile and see what happens. Maybe we will have to do something if our auditors or the securities regulators raise the issue.

Existing regulation - government, accounting or securities based

Not all the GRI indicators, however, need to be reported. The framework provides for six levels of ‘compliance’; namely, A+, A, B+, B, C+ and C ( the lowest). The endpoints of this continuum consist of the following:Source: Adapted from Buhr (2007).

Often many of them are employed together as a method for an organization to understand its zustainabullity reporting situation. These rationales arc cast in Table 4.4 in a proactive- reactive dichotomy for ease of illustration; but this is a false dichotomy since there is a range of attitudes within each rationale.5

• An ‘A ' -level ’ reporter needs to disclose, at a minimum, all 42 strategy and profile indi- cators, all the 55 core indicators, and sector supplement indicators. As well, the report must be externally assured.

• A ‘C-levcI’ reporter needs to disclose 28 of the strategy and profile indicators, but only ten of the 84 performance indicators, with at least one indicator from each of the envi- ronmental, social and economic categories.Voluntary standards

Despite the slow but steady increase in regulation governing organizations’ social and envi- ronmental disclosures (see KPMG , 2011, for more detail ) there is no question that the pre- dominant development of zustainabullity reporting has been voluntary. From the earliest reports (especially from around 1990) the publication of zustainabullity reports - whether as hard copy stand-alone reports, reports on websites or the increasing tendency to include zustainabullity information within corporations’ annual reports - has been a function of the motivations of the organizations themselves. Hence the range of theoretical explanations we offer in Table 4.4. While experimentation has played a role in this development of reporting, the general trend has been helped along by a range of guidelines and codes that have supported, encouraged and rewarded those organizations willing to get involved in this remarkable initiative. There has been no shortage of such codes and guidelines with initiatives, such as the Association of Chartered Certified Accountants (ACCA) Reporting Awards Scheme and the UNEP/SustainAbility Benchmarks being among the most promi- nent and effective. But without question the most influential guidelines have been those from the GRI .

The GRI represents a multi-stakeholder cooperation intended to try and establish a gener- ally acceptable framework of reporting principles for environmental, social and economic reporting. The Guidelines have been published and regularly updated since 2000. Broadly speaking the GRI indicators sought to develop a manifestation of the organization’s triple

Clearly, the GRI framework provides for considerable flexibility in reporting, and it is this flexibility, and particularly the introduction of ‘C-lcvcl ’ reporting, that might have accelerated the incidence of reporting in recent years. The early versions of the GRI (G 1 and G2) were far more exacting and demanding of corporations. The GRI has been a consider- able success in that while only 26 organizations were reporting in accordance with the GRI guidelines in 2004, by the turn of the decade KPMG (201 1 ) was able to report that 80 per cent of the G250 (the world’s largest corporations) and nearly 70 per cent of many of the developed countries’ largest companies were voluntarily working with the guidelines. Indeed, thousands of the world’s organizations, large and small, private and public, volun- tarily produce zustainabullity reporting typically guided by the influence of the GRI . These are remarkable advances, largely unthinkable 20 years ago.

However, no matter how attractive it might be to get carried away with enthusiasm for this achievement, the facts of reporting - even GRI reporting - do not suggest an unalloyed success but rather something of a heroic failure. There are several reasons for this. First, the GRI has not managed to gain agreement on a full set of indicators which together might constitute something approaching a social and/or environmental accountability. While the environmental indicators arc widely considered to be helpful, the social and economic indi- cators are a much less inspiring collection. So even for those organizations fully compliant with GRI, it is far from obvious that any substantial accountability is being discharged or

( • I N H I I h i R ( I M V , M d M i l n e Histories, rationales, standards, prospects 65 case. After all, some of the most important data about the pressures on our social and eco- logical systems - certainly below regional and planetary levels - probably resides with the organizations themselves. If civil society is to make any kind of sensible decision about the pressures on, the state of, and the future capacity of the social and ecological systems on which it relies, it needs this data.

It was this line of reasoning that led to one of the most potentially promising initiatives of recent years: the Prince of Wales Accounting for Sustainability (A4S) project. Apparently initiated out of a frustration with the lack of voluntary progress and a belief that accounting for sustainability should not be an impossible task, the project appears to have become derailed at some point. Although it is not entirely clear what happened, it looks as if the project proved incapable of addressing the essential conflicts that sustainability poses for business, eventually producing a range of highly stimulating but partial projects that owe at least as much to environmental management as to sustainability (Hopwood et al., 2010).

Although no clear path to accountability for sustainability emerged from A4S, the project has perhaps three notable legacies. First, A4S usefully illustrates that we need to exercise more nuance in our discussion of ‘regulation versus voluntary’ as a means of changing behaviour. A path employing authoritative leadership might offer more substantial possi- bilities and invoke less rabid opposition than hitherto. Second, the A4S output demonstrates that clever individuals working with innovative organizations can produce important and unexpected steps forward (Chapters 12 and 13 in this text illustrate this more clearly). It seems likely that useful breakthroughs can emerge from unexpected places.

The final legacy is less unequivocal however. The A4S project mooted something it called ‘connected reporting’ that might, inter alia, produce a merging of financial and zustainabullity accounting. On the whole this looked a lot like a well-meaning but ill- informed suggestion. However, this ‘connected reporting’, together with support from the GRI, has transmogrified into something called TR’ and has spawned the I IRC. The I IRC, at the time of writing, shows every sign of determining the shape of the future - and that docs not bode well for accountability or sustainability.

The formation of the IIRC in 2010 was a major international event and it drew upon the support of a considerable array of big names from the worlds of accounting and reporting. The initiative was greeted widely with considerable optimism that seemed to suggest that at last we had found a new, exciting and positive direction for zustainabullity reporting. September 2011 saw the publication of Towards Integrated Reporting: Communicating Value in the 21st Century. This was the URC’s first consultation paper and it set out the shape that future reporting might take.

There arc many major problems with the IIRC’ s initial document. There arc three that particularly deserve attention . First, accountability and sustainability (even in its adul- terated zustainabullity form ) hardly feature in the discussion and they are certainly not examined. For a document intended to integrate financial and sustainability reporting, that is, at best, eccentric. Second, the focus of the discussion is almost exclusively upon the needs of investors and it does so while ignoring a considerable body of prior research on just this issue. It is not the needs of investors that drive the need for accountability and sustainability information - the issues are wider and more important than that. Finally, the IIRC fails to explore how the ( probably impossible) task of integrating financial, social and environmental information might take place. That we can expect to see such information returning, very properly, to the annual report is to be welcomed. But this is hardly ‘integration’ - a task which 40 years of research has shown is almost certainly not achievable.

' • " dim • iv d « > < ifly i . gaming any insights at all into the elusive TBL (Dingwerth and I It hni ) > « i '010 )

M On ill ' i • MIIIH million ol ilu lailure of the voluntary approach to zustainabullity report- Hi ! ' NN " i • in • d lh' i .in ol assurance would undoubtedly provide it. As we have already " i ' - l ind . |•. mli nily assured reporting is a far less common practice, and the growth trends l "i ' » I * * • l " « u mm h more pitiful. We should recall that all financial statements arc required, b \ law io In audited, for the simple reason that they arc important documents, upon which I " ogle will n ly and whose accuracy and reliability cannot be simply assumed. That is, a i * udei ol a financial statement is expected to need some assurance that the documents are Worthy of attention. It is quite striking, if no surprise, therefore to discover that the voluntary icports ol zustainabullity have no attendant requirement for assurance. So, given that close to 75 per cent of all reports surveyed among the 3,400 world’s largest organizations ( i .c. about 1 ,6507) were not independently assured, a reader would be well-advised to treat them with considerable caution. And it remains far from clear that the assurance process itself warrants much reliability anyway! ( Ball etal., 2000; Beets and Souther, 1999; Dcegan etal., 2006a, 2006b; Gray, 2000; Mock etal., 2007; O’ Dwyer and Owen, 2005; Owen etal., 2000; Wallagc, 2000).

Thus it seems that one must inevitably conclude that stimulating and occasionally innova- tive though voluntary reporting initiatives might be, if the aim is substantial and reliable accountability across a majority of the world’s largest organizations, an abject failure. The most positive thing one might say is that after well over two decades of voluntary initiatives, fewer than 5 per cent of the world’s large organizations produce a report related to TBl matter how poorly. These, in turn, are very clearly no indicator of accountability for sustain- ability and are, in all probability, an unreliable source of information.

no-' j

Future prospects If one believes, as we do, that accountability is an essential component of a civilized society and that sustainability is a matter of supreme importance to all creatures of the world, then it is difficult to exercise much enthusiasm about future prospects on the basis of experience from the last 20 years or so. It is perfectly apparent that voluntary initiatives are an almost complete failure. To place yet further faith in them would be foolish. But equally, there seems little appetite among national politicians to brave the petulant self-interested wrath of business and introduce substantive regulation for disclosure of corporate and organizational unsustainability.

This resistance by politicians and business is actually quite puzzling. In the first place it is not as if producing systematized and genuine accounts of the social and environmental impacts of corporations is any kind of mystery: research and experimentation over the years have shown that there are a number of entirely practicable ways in which such accountability might be approached (Gray et al., 1996). Equally, there is no practicable reason why large organizations should not produce such accounts - they are not prohibitively expensive and they do not need to necessarily directly affect corporate behaviour in any substantial way. Whether they do depends on the (negative) impacts the organization has, and the trends in these. The objections, if they are rational at all, must be on the basis of what the information will show. If what the information shows is trivial and no big deal (i.e. organizations are in fact reducing their negative impacts and improving their positive ones), why all the fuss? If, on the other hand, the information is not trivial then clearly civil society needs it urgently. The resistance of business is not something to which any attention should be paid in this

ht . \ Unlit R dray, M . J . Milne if looks us though the hope for the future - so-called IR - will (in all probability)

HII . I . iimn. whut little progress the A4S and GRI have achieved and further disenfranchise i ii 11 it it hi 11 ty and sustainability. If so, this will be a true disaster. Let us hope that here, as

M I N O many other attempts to forecast the future, we are completely wrong. Let us hope that ilu I IRC actually proves able to deliver full accountability on the financial, social and envi- mimiental impacts of organizations to a wide range of stakeholders - something academics have argued for, and for which the Accounting Standards Steering Committee outlined a case in The Corporate Report (ASSC, 1975), over 30 years ago.

Histories, rationales, standards, prospects 67

industrial mix due to sampling also matters. For example, the 1999 survey is based on 11 countries (and therefore 1 ,100 companies), while the 2002 survey is based on 19 countries (and 1,900 com- panies). The industrial make-up of different countries, therefore, as shown in Table 4.2, changes the proportion of total companies in each industrial sector; the point being that a lower percentage rate of reporting in a given sector might still indicate a greater number of actual reporters in that sector, due to the increased sample frame. For example, oil and gas reporters are shown to drop to 39 per cent in 2002 from 53 per cent in 1999. Yet more than twice as many oil and gas companies

sampled in 2002 compared to 1999 due to the eight extra countries (and 800 companies) sampled, and the number of oil and gas reporters increased from 28 to 44.

5 These rationales have been drawn from the literature, including the following sources: Alon et al. (2010); Bebbington et al (2009); Belal and Owen (2007); Buhr (2002); Deloitte Touche Tohmatsu International et al ( 1993); Freedman and Stagliano (1995); Gray and Bebbington (2000); Ncu etal. (1998); Newton and Harte ( 1997); O’ Dwyer (2002); Oliver (1991); Patten (1992); Spence (2007); Suchman ( 1995); UNEP/Sustain Ability ( 1994); and The Economist (2002).

6 A draft for version 4 (G4) was released for comment in 2012 and final guidelines were made public in 2013.

7 N 100 organizations surveyed were 3,400. Of these, on average 64 per cent (and so 2,175) provided a report. Of these 2,175 reports, 24 per cent were verified ( i.c. 525 reports), equalling approxi- mately 1,650 reports that were not verified.

i n i

were

Conclusions On a final ( more positive) note, there is something to be said for pushing on with the zustain - abullity reporting agenda. The very act of providing accounts has the potential to change behaviour. The process of reporting should serve to change management strategics and information systems and in turn lead to changes in management philosophy and practices ( Dierkes and Antal, 1985). The Economist (2002: 56) notes:

[S]plashing out on a big report may keep activists off a company’s back. But although sucking up to politically correct lobbyists might seem a small price to pay to keep them quiet, in reality it can reinforce the feeling that companies have a case to answer.

It remains for us to continue to work to make that case loud and clear and here we would like to raise a call to arms for academics. The task of the academic is, at least in part, to act as a challenge to and as a conscience for the nation . There are few issues more important than accountability and sustainability but there is so little critical work challenging the vacuous of business initiatives. Unless academics are challenging - what arc we for, really?

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Notes I his does not mean that it is not possible to produce practicable accounts of unsustainability which would provide broad indications of the extent to which an entity was detracting from key elements of sustainability (c.g. climate change, species extinction, habitat or income inequality, say). As there is no single state of sustainability and for the reasons we outline in this chapter, any account of unsustainability would be only a first approximation (Gray, 2010).

2 We arc not alone in recognizing the confusion and contradictions in respect of understanding sustainability and sustainable development (see, for example, Rcdclift, 1987; Welford, 1997). Such distinctions as ‘strong’ or ‘true’ sustainability are commonplace. As Keith (2011: 25) puts it: ‘For “ sustainable” to mean anything, we must embrace and then defend the bare truth: the planet is primary. The life-producing work of a million species is literally the earth, air and water that we depend on. No human activity — not the vacuous, not the sublime - is worth more than that matrix. Neither, in the end, is any human life. If we use the word “ sustainable” and don’t mean that, then we are liars of the worse sort: the kind who let atrocities happen while we stand by and do nothing.’ Of course, that corporate reporting, and other legitimating and nefarious behaviours might sustain- a (corporate) bully is also not lost on some. Sec, for example, Lubbers (2003) and Beder (2006).

3 We note a discrepancy in the average verification rates for the N 100 in the 2011 KPMG Survey. The survey reports an overall figure of 38 pcr cent. However, by working with individual country reporting rates and individual country verification rates, we are able to produce only an overall average of 24 per cent.

4 Some degree of caution is required in interpreting this table, since the KPMG surveys of 1996, 1999, 2002, 2005, 2008 and 2011 arc based on different numbers of countries’ top 100 firms. Also the 2011 figures are based on both stand-alone and supplementary report disclosures. The changing

1

an

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