Sustainable Development, Sustainability Reporting and IFRS

 0   580 times read   15 min 12 sec to read
Sustainable Development, Sustainability Reporting and IFRS

The objective of sustainable reporting is to achieve the goal of SD and is expected to cover the financial and non-financial aspects of the changes in society and the environment.
 
--BY BINOD K LAMSAL
 
What is sustainability?
Many authors have provided their opinions on sustainability and ways to achieve it. However, there is no standard definition of sustainability. Awareness about sustainability resulted from the concept of sustainable development (SD) which was the main issue for discussion at the World's first Earth Summit in Rio in 1992. The United Nations World Commission on Economic Development (WCED) has defined sustainable development (SD) as the “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. The definition has been further elaborated as a driver of change including the misuse of resources, the selection of investments, the course of technological development and institutional changes which are interlinked. Addressing these interlinks will help to meet current and future social needs and aspirations. 
 
The notion of sustainable development is being used to articulate through different angles and mainly recognized in economic, environmental and social aspects.
 
Economic: Sustainability is a system to produce goods and services on a continuous basis. It should be within the manageable levels of national administration and external debt to avoid the extreme sectoral imbalance which can damage the agricultural or any other production. This concept further clarifies SD as an economic resource allocation over different periods.
 
Environmental: Economic progress must maintain the natural resources and should avoid the high consumption of non-renewal resources. Renewable resources should be used to the extent possible and investment should be encouraged. The economic progress should maintain the natural resources, biodiversity and other ecosystem functions. 
 
Social: Any social system or business will be sustainable only when it attempts to take care of social issues like health, education, sanitation, gender equality etc. The firm or business will have also responsibility towards society like an individual. As the organisation exists in society, it should contribute to society to promote political accountability and participation. This helps to develop structures and process which support the capability of future generations to maintain a healthy community. 
 
Sustainable Development and Sustainability Reporting
In many countries, reporting on sustainability is voluntary and a large number of business firms do not report on it and it is difficult to compute the damages on the environment and society. The increasing degradation of natural resources which has a negative impact on the environment requires changes in the way businesses are being carried out. The changes are possible only when every business sector reports on sustainability and focuses on sustainable approach of doing business. The awareness through media, education and social media has created some pressure on social and environmental impacts. This has given rise to an increasing demand to enforce sustainability reporting, including in medium and small-scale businesses. 
 
It is still debatable whether such reporting should be made voluntary or mandatory. To meet the needs of the present society without compromising the current needs, sustainability principles can be applied to the business at various levels. The sustainability principles drive intellectual and technological innovation, and demonstrate people's pursuit of excellence. Whether it is a matter of public policy, planning a city or building a home, or setting up a new production unit, sustainable development means to meet the immediate needs of the present generation by incorporating long-term planning. Through SD mainstreaming, an organisation can boost up its profit in the long run. It may be cheaper to choose an inexpensive temporary solution rather than investing in a permanent innovative solution. However, the long-term solutions incorporating the technological innovation will have a long-term benefit which drives the stakeholders to consider a wider perspective. 
 
The objective of sustainable reporting is to achieve the goal of SD and is expected to cover the financial and non-financial aspects of the changes in society and the environment. The publication of reporting supports to enhance the organisation accountability for the impacts and increases trust among the stakeholders. The reporting also helps to manage the social and environmental impacts and provides competitive advantage to enhance the investor confidence and trust.  The dissemination of sustainability information can be utilized by various stakeholders to assess the impact and contribution of businesses to the economy. The reporting practice promotes transparency and it can help the market to operate more efficiently which indicate the health of the economy. Such reporting is used to communicate the risks of the organisation to other stakeholders and develop their strategy to promote the business. The sustainability reporting considered as the driver for innovation through business and product by creating the competitive advantage in the market. This also provides an opportunity to analyze and improve operating efficiency with minimum damage to the environment. Therefore, this has emerged as a common practice and followed by many organisations. 
 
The sustainability reporting results in the following benefits:
 
Better Reputation
Transparency can be achieved through the publication of reports and related data. This helps to maximize the reputation and initiate a dialogue with stakeholders including investors, communities and customers. This is one of the ways of demonstrating the openness and accountability. A survey found that increased transparency and reporting are the most effective ways to increase trust in business. The 2013 Boston College Center for Corporate Citizenship and EY Survey revealed that more than 50 percent of respondents issuing sustainability reports reported that those reports helped improve the reputation of firms.
 
Improved processes, efficiency and innovation
To report on sustainability, an organisation requires collecting and maintaining the data. This will help to analyze the process and impact the society. Such analysis cannot be extracted from basic accounting records. This can further help to identify the existing bottlenecks and provide an opportunity to advance the process. The organization may have pressure to adopt the innovative system, which can result in a competitive advantage in the market. This monitors the issues like energy consumption, material use and waste and allows to promote resource saving and waste reduction and generating bottom-line cost savings that can be used to fund other activities. Internal management and decision-making process can be established through an improved process to minimize the cost and resource usages. 
 
During a global survey of sustainability reporters, 88 percent indicated that reporting helps to make the decision-making process more efficient. This also helps in promoting the innovation and new thinking in the development of sustainable goods and services. It allows the organization to be in a stronger position to attract investment and enter into a new market. Recent research found that the organization with the reporting practice ranked high for sustainability. 
 
Progressing vision and strategy 
Engagement of other players in society can contribute to shape the vision and strategies of the organisation. The engagement can be done through the reporting and engaging in certain process relating to sustainability. The organization will be able to expand its business by making sustainability as an integral part of the organisation strategy.
 
Reducing compliance costs
Sustainability reporting can prepare firms to avoid or mitigate environmental and social risks that might have financial, social and environmental impacts. Through a sustainability performance monitoring system, the organizations can meet regulatory requirements and avoid fines and penalties. The data collected for sustainability reporting can be used for other purposes which can help to explore the innovative way of doing business.
 
Voluntary Codes of Reporting
Voluntary codes of reporting encourage the organisation as self-conduct so that it benefits society as well as the organisation. It also informs stakeholders about the organisation and its products meeting certain standards.  For sustainability reporting, there is set of voluntary codes produced by many organisations which may be called the code of conduct, codes of practices, voluntary initiatives, guidelines etc.  By nature, these sets are non-legislative. This may consist of several documents including its principle, obligation and the technical requirement to be met.  There are series of international initiatives on sustainability reporting including the International Cyanide Code of Practice, Tailings Guidelines, International Diamond Certification System, Global Multi-Stakeholder Initiative on Mining +Biodiversity Conservation and Communities and Small-Scale Mining initiative (CASM). 
 
The UN Global Compact was announced by the United Nations to address the sustainable development goals. This was the world’s largest sustainability initiative with the participation of 13,000 corporate entities from over 170 countries. This has the main objective of “Mainstream the ten principles in business activities around the world" and "Catalyse actions in support of broader UN goals, such as the Millennium Development Goals (MDGs) and Sustainable Development Goals (SDGs)". The UN Global Compact and its signatories agreed to move ahead with these principles on human rights, labour standards, environment and anticorruption. Three principles are developed under the environment theme to support a precautionary approach to environmental challenges; to undertake initiatives to promote environmental responsibility; and to encourage the development and diffusion of environmentally friendly technologies.
 
The above principles are not regulatory instruments but a guide to government, companies and other stakeholders to influence the sustainability reporting.  This may be used as a tool to develop as compliance tools at country level. These principles are flexible and vague so that they can be applied in various contexts. However, there are resources and guidance provided to achieve these principles. For example, Global Reporting Initiative (GRI) has been developed to produce resources and guidance so that the companies can utilize it to achieve the Sustainable Development Goals. 
 
Challenges - Harmonization of Accounting Standards and Sustainability:
Harmonization is not an easy task as there are a number of challenges associated to harmonize and address the sustainability issues. The governments of under-developed and developing countries will have priorities other than accounting standard and sustainability. These countries are going through conflicts and post-conflict stabilization process, and the governments there mainly focus on managing the political situation. The adaptation or conversation of IFRS and environment reporting may not be the immediate need for the government.  Therefore, there is no adequate legal provision to report on environment and sustainability.  This has resulted in the flexibility not to report on environmental and sustainability issues. The stakeholders may not be aware of the damage caused by the company. There are large numbers of companies enjoying such benefits and making significant amount of profits at the cost of damage to the environment and society.  It is vital to bring to the attention of local government sustainability as a political agenda.
 
Local accounting standards have been developed in different countries under different legal, economic, social and cultural environments to meet specific requirements. This has created a gap in harmonization. To achieve harmonization, it is essential that all countries reach an agreement to harmonize the financial reporting including sustainability. In the absence of political will and leadership, it is difficult to adopt a financial reporting philosophy and harmonize the locally developed accounting standards with International Financial Reporting Standards.
 
There is an ongoing debate of rules versus principles approach on harmonization of accounting standards around the world. International Financial Reporting Standards (IFRS) are principle based, however, the Generally Accepted Accounting Principles (GAAP) is rule based. The USA observed the gap between IFRS and GAAP as a significant difference with reluctance to adopt IFRS. The USA is also lobbying to continue with GAAP and appears a major challenge to harmonize the IFRS.  Due to legal requirement and compulsory provisions, the rules-based standards are challenging in harmonization to adopt or converge the accounting standard.
 
There is a strong need to find opportunities to minimize the environmental damage. One of the ways to do that is adopting the innovation to manage the production and supply systems. However, it is not easy to be innovative in all aspects of business. Companies may require spending resources for research and technology. This can result in an additional investment and the investor may not be willing to adopt this approach.  A legal requirement or incentive can motivate the investor to follow this approach. 
 
Countries not having adequate rules and regulations on environment will have less monitoring on the environment reporting which will have difficulties in measuring the damages. A strong leadership and political will can create an interest to introduce rules and regulation relating to the environment. Such rules and regulations shall be discussed at various levels of representatives to ensure acceptance and effective implementation. This will also help ensure the adequate provision relating to monitoring the necessary reporting. The quality of reporting is subject to the effectiveness of the process by which those accounting standards are implemented. It is critical to build the local capacity for the implementation of IFRS and sustainability reporting. The capacity should be built from institutional to individual level including private sector and small business. There are ongoing efforts made by the United Nations and the World Bank to build the institutional level capacity. However, satisfactory achievements are yet to be met. The capacity gaps at national level are assessed through the country’s Public Expenditure and Financial Accountability (PEFA) assessment. Professional accounting bodies made significant improvement to build the capacity at individual level and private sector. Qualified individuals from under developed and developing countries are migrating to the developed countries for better opportunities, and this has created a significant capacity gap in the countries. 
 
Recommendations
There has been a significant progress noted in the process of harmonization towards the convergence of accounting principles and procedure. Convergence initiatives have become more effective across to harmonize the accounting standards.  This is reducing the gap and is expected to contribute to further harmonization in the coming years. IFRS under a new regulatory framework is an effort to achieve harmonization. IFRS shall be expanded to various sectors. There are only a few accounting standards to deal with some of the environmental accounting issues which are symbolic. Therefore, specific accounting standards shall be developed to report on environment and sustainability. This will serve as a guiding tool for disclosure in annual report.
 
The provision relating to sustainability shall be flexible and more options shall be provided to address country-specific issues. IFRS aimed to meet the expectation of stakeholders from various parts of the world and this should be compatible to meet the local statutory requirement. 
 
Sustainability shall be incorporated as a cross cutting issue throughout the accounting standards and mainstreamed during development, harmonization and implementation. The scope of accounting standards shall be expended to environment accounting. The sustainability issues shall be important for the public-sector accounting standards. Some public sectors have their own environmental screening and accounting procedures. However, the IPSAS lacks guidance. IPSAS standards need to incorporate sustainability and the environment. 
 
IFRS shall be further expanded to provide the methodology on calculation of the impact on society and environment. Present IFRS do not provide the methodology to calculate the financial and non-financial impact. In the absence of a specific methodology, various methods are applied by organisations to report on external stakeholders. Therefore, the reports are neither consistent nor comparable. The levels of disclosure of the information relating to sustainability and environment are not clearly defined by the IFRS. This provides the flexibility to the organisations to provide the minimum details in their annual reports. IFRS shall make a requirement to disclose the information on various portal and annual report. This will help to compare the information with-in and across the industry.
 
The author is a Chartered Accountant working at the United Nations HQ in New York and can be reached at binodlamsal@gmail.com
 

No comments yet. Be the first one to comment.
"