Business Sustainability

Performance, Compliance, Accountability and Integrated Reporting

Zabihollah Rezaee

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351284264
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Business sustainability has advanced from greenwashing and branding to being a business imperative. Stakeholders, including shareholders, demand, regulators require, and companies now need to report their sustainability performance. No longer is this a choice for businesses. A decade ago, fewer than 50 companies released sustainability reports, and now more 8, 000 global public companies disclose sustainability performance information on some or all five economic, governance, social, ethical, and environmental (EGSEE) dimensions of sustainability performance, and this trend is expected to continue. Indeed, more than 6, 000 European public companies would be required to disclose their environmental, social, governance and diversity information for their 2017 reporting year. However, the proper determination of sustainability performance, accurate and reliable reporting and independent assurance of sustainability information remain major challenges for organizations of all types and sizes.

Through reading this book, you will:

Identify sustainability strategies to create innovation in new products, services, energy-efficiency, environmental facilities and green initiatives.

Understand the role and responsibilities of all participants in the corporate reporting process, including directors, officers, internal auditors, external auditors, legal counsel, and investors.

See ways to improve public trust, investor confidence, business reputation, employee satisfaction, corporate culture, social responsibility and environmental performance.

Learn all five economic, governance, social, ethical and environmental (EGSEE) dimensions of sustainability performance separately and their integrated and interactive effects on achieving the goal of creating sustainable value for all stakeholders, including shareholders.

Learn how to adopt best practices in sustainability development and performance, and deliver effective integrated sustainability reporting and assurance.

1
Introduction to business sustainability performance, reporting, and assurance

In today’s business environment, global businesses face close scrutiny and profound pressure from lawmakers, regulators, the investment community, and their various stakeholders to focus on sustainability measures and accept accountability and responsibility for their multiple bottom lines (MBL) of economic, governance, social, ethical, and environmental (EGSEE) performance. Organizations worldwide recognize the importance of sustainability performance in creating stakeholder value. Over 6,000 public companies worldwide issue sustainability reports on some or all five EGSEE dimensions of sustainability performance, and this trend is expected to continue well into the future. More than 6,000 European companies will be required to disclose their environmental, social and governance sustainability as well as diversity information for their 2017 financial reporting and onward. However, proper measurement of sustainability performance, as well as accurate and reliable reporting of sustainability performance, remains a major challenge for organizations of all types and sizes. This chapter offers guidance to organizations to properly integrate sustainability into their business models and strategic plans and practices. It also provides guidelines for complete and accurate measurement, recognition, and disclosure of all five EGSEE dimensions of sustainability performance in an integrated reporting model.

1.1 Introduction

Sustainability or sustainable development was first defined in the 1987 Brundtland Report as “… development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”¹ This definition has been criticized for not being adequately specific about whose or which needs should be considered, and it appears to primarily focus on environmental sustainability whereas other dimensions of sustainability performance such as economic and social should be also considered.² Business sustainability, however, is a relatively new concept which has been defined as a process of focusing on the achievement of all five (economic, governance, social, ethical, and environmental (EGSEE)) dimensions of sustainability performance.³ In this context, sustainability focuses on activities that generate financial (long-term earnings, growth, and return on investment) and nonfinancial sustainability performance (environmental, social, ethical, and governance) that concern all stakeholders. The terms business sustainability, corporate social responsibility (CSR), and triple bottom line (focusing on environmental, social and governance (ESG)) have been used interchangeably in the literature and authoritative reports. However, business sustainability is regarded as much broader than CSR and even ESG and has recently gained more acceptance.⁴ Business sustainability has advanced from a main focus on CSR to integration into corporate culture, mission, strategy, business model, and management processes.⁵ A recent research study conducted by MIT Sloan Management Review, the Boston Consulting Group, and the United Nations Global Compact (UNGC) suggests that business sustainability is moving away from isolated and opportunistic efforts with the main focus on CSR and toward a more integrated, holistic, and strategic approach of embracing all dimensions of sustainability performance and engaging diverse stakeholders.⁶ Business sustainability for organizations means not only providing products and services that satisfy the customer without jeopardizing the environment, but also operating in a socially responsible manner and presenting reliable and transparent sustainability reports.

In this chapter, business sustainability refers to the ongoing process of promoting, measuring, recognizing, enforcing, reporting, and auditing sustainability performance in the five areas of economic, governance, social, ethical, and environmental (EGSEE).⁷ Traditionally, organizations have reported their performance on economic affairs. Their sole focus on financial results has become complicated and irrelevant. In recent years, stakeholders, investors, regulators, global organizations, and the public at large have increasingly demanded information on both financial and nonfinancial key performance indicators (KPIs) in this platform of MBL accountability and sustainability reporting. Sustainability performance and accountability reporting have gained a new interest during the recent financial crises and resulting global economic meltdown which has sparked widening concerns about whether or not big businesses (e.g., banks and car-makers) are sustainable in the long-term in contributing to the economic growth and prosperity of the nation. The ever-increasing erosion of public trust and investor confidence in the sustainability of large businesses, the widening concern about social responsibility and environmental matters, the overconsumption of natural resources, the global government bailout of big businesses, and the perception that the government cannot solve all problems in the business world underscore the importance of having a keen focus on sustainability performance and accountability reporting. The United Nations Global Compact, in its 2013 Global Corporate Sustainability Report, while underscoring the importance of business sustainability, calls on corporations worldwide to integrate ten principles of sustainability pertaining to environment, human rights, fair labor, and anticorruption into their strategies and operations.⁸

There are four primary themes in this book that present a framework for the five dimensions of business sustainability performance (EGSEE) and ten sustainability principles as discussed in this chapter. First, the business sustainability framework is driven by and built on the stakeholder theory, which is the process of protecting the interests of all stakeholders, with a keen focus on achieving long-term and enduring financial and non-financial performance for all corporate constituencies from shareholders to creditors, employees, customers, suppliers, society, and the environment. The stakeholder theory implies that business organizations have obligations to a number of constituencies and thus should add value for all stakeholders, as listed above.⁹ This stakeholder view of business organizations and business sustainability is supported by researchers, regulators, and the business and investment community. For example, ISO 26000 takes into account all aspects of the triple bottom line (TBL) key financial and nonfinancial performance relevant to the planet, people, and profit.¹⁰ In the past several years, more than 21 U.S. states, including Delaware, New York, New Jersey, and California, have enacted laws creating a new hybrid type of corporation designated as a “Benefit Corporation” for businesses that want to simultaneously pursue profit and benefit society.¹¹ The justification for B-corporations is that existing laws prevent boards of directors from considering the impact of corporate decisions on other stakeholders, the environment, or society at large. Boards of directors of B-corporations are required to consider the impact of their decisions on specific corporate constituencies, including shareholders, employees, suppliers, the community, and on the local and global environment.

Second, the main goal and objective function for business organizations is to maximize firm value. The goal of firm value maximization under business sustainability can be achieved when the interests of all stakeholders are considered. The main focus is on long-term shareholder value creation and maximization while considering trade-offs among other apparently competing and often conflicting interests of society, creditors, employees, and the environment. Business sustainability focuses on the achievement of long-term firm value maximization by creating value for shareholders and meeting the claims and interests of other stakeholders.

The third theme is the time-horizon of balancing short-term and long-term performance, with a keen focus on long-term performance. Business sustainability focuses on the achievement of long-term and enduring performance and enables corporations to focus on maximizing long-term performance instead of meeting quarterly financial targets. Businesses can no longer focus on short-term earnings performance. Achievement of this level of sustainable performance can take ten or more years.

The final theme is the multi-dimensional nature of sustainability performance in all EGSEE areas. The multi-dimensional EGSEE sustainability performance is interrelated. The relative importance of the dimensions with respect to each other and their contribution to the firm’s overall long-term value maximization is affected by whether these EGSEE dimensions are viewed as competing, conflicting, or complementing. One view is that these EGSEE dimensions are complementary because a firm that is governed effectively adheres to ethical principles and commits to corporate social responsibility (CSR) and environmental obligations, enabling sustainable generation of long-term financial performance. Another view is that corporations must do well financially in the long term to be able to do well in terms of CSR and environmental activities. On one hand, corporations that are managed ethically, governed effectively, and are socially and environmentally responsible are expected to produce sustainable performance, create shareholder value, and gain public trust and investor confidence. On the other hand, more economically profitable and viable corporations are in better positions and have more resources to create jobs and wealth and better fulfill their social and environmental responsibilities.

1.2 Definition of business sustainability and multiple bottom line (MBL)

Business sustainability is the practice of creating stakeholder value by focusing on the achievement of financial performance that nurtures both long-term growth and profitability and nonfinancial performance that promotes corporate governance effectiveness, ethical conduct, and social and environmental respo...