Metrics for Sustainable Business

Measures and Standards for the Assessment of Organizations

Scott R. Herriott

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317450641
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Contabilidad financiera

Metrics for Sustainable Business is the first book to give students a comprehensive understanding of sustainability in organizations from an accounting perspective. The book walks student through the steps for doing a sustainability assessment, and aims to develop them into financial analysts who understand sustainability reports, and are able to create or audit them.

While most books focus on environmental issues, Herriott trains his gaze on the corporate and institutional perspective, covering measurement systems, how to evaluate and improve a standard, and conducting a life cycle assessment. Walking students through the programs of disclosure, the varying standards for corporate ratings, and organizational certification, allows them to grasp the tools for conducting a sustainability assessment and auditing reports. Chapters on accounting for greenhouse gas emissions, water use, and waste introduce students to the technical details in sustainability accounting, while a chapter on the philosophies of sustainability offers an answer to the question, "Why are they asking us to report that?"

Richly demonstrated with practical examples and informative visuals, this book will serve students of sustainability, accounting, and integrated reporting.

1
Systems for Disclosure

In this chapter, we will look in depth at two programs for reporting on sustainability, the “guidelines” of the Global Reporting Initiative and the “standard” published by the Sustainability Accounting Standards Board. We refer to guidelines and standards generically as systemsor programs .

Guidelines and standards have some features in common but also an important difference. At their basis, both guidelines and standards for disclosure identify the variables, called indicators,which users of the program may find relevant to an evaluation of sustainability, and they prescribe the procedures for measuring and reporting those indicators. In that way, both guidelines and standards promote consistency in reporting, which permits users to make comparisons within a firm over time and across firms.

Around that basic function, programs for disclosure also convey principles by which reporters should decide which items of information are useful to an evaluation of sustainability and which are not. Borrowing a term from financial accounting, we say that the useful disclosures are materialto the users and that these principles characterize the materialityof the indicators.

Guidelines and standards differ in that standards are designed to be auditable, but guidelines are not. As an example, the ISO 14001:2004 Environmental Management Systems—Requirements with guidance for useis a standard against which a firm can be audited and certified, but the ISO 26000:2010 Guidance on Social Responsibilityis not a program for certification. The Sustainability Accounting Standards Board encourages its users to have their SASB Standard Disclosures audited the using the American Institute of Certified Public Accountants’ Statements on Standards for Attestation Engagements, which are also used by the Public Company Accounting Oversight Board as an interim standard for attestation engagements with publicly traded companies. As a point of comparison, the Global Reporting Initiative’s G4 Sustainability Reporting Guidelinesis not designed to be auditable, but it offers sufficient detail in its presentation of principles for disclosure and requirements for reporting individual indicators of sustainability that the GRI guidelines recommend that organizations have their reports externally assured in whole or in part, meaning assured by a third party such as an accounting firm.

Programs for disclosure address the fundamental question of what should be reported and how. The standards for sustainability, to be discussed in Chapters 2 and 3, begin with the “what” and “how” of individual indicators and then consolidate that information into subcategory scores, category scores (environmental, social, and economic), and finally summative metrics for the overall sustainability of an organization, which we will discuss in Chapter 5. Thus, the study of standards for disclosure is a good starting point for understanding metrics for sustainable business.

We begin this chapter with a discussion of the concept of materiality. We continue with an examination of programs for disclosure that have been developed by two organizations, the Global Reporting Initiative and the Sustainability Accounting Standards Board. There are many standards for disclosure, most of which have been mandated by government for specific purposes.¹Our focus in this book is on guidance and standards for the voluntary disclosure of information related to the full scope of sustainability issues—environmental, social, and economic. Notable among these, but not discussed in detail here, is the standard for the disclosure of information related to corporate social responsibility of the Chinese Academy of Social Sciences since 2009 as Guidelines on Corporate Social Responsibility Reporting for Chinese Enterprises, published in its third edition in 2014 as CASS-CSR3.0. We will use the GRI as our primary example of voluntary disclosure, but persons interested in CASS-CSR may find a crosswalk of the CASS-CSR3.0 onto the GRI at the GRI website.²

The Concept of Materiality

Materiality is the central concept in the analysis of metrics for sustainable business, but its application to sustainability is more complex than its use in accounting. To the Financial Accounting Standards Board (FASB), which governs the practice of financial accounting for nongovernmental organizations in the United States, a fact is material if its omission makes it “probable that the judgment of a reasonable person [emphasis added] relying on the [fact] would have been changed or influenced by the inclusion or correction of the item.”³Facts are material to users of information,not to the reporting firm. The user, the person relying on that information, might be taken to be an existing or prospective owner of the shares or debt of the firm, a transactional party (buyer from or seller to) the firm, or a governmental regulator of the firm. In the context of accounting, any of these parties may be interested in the current and future financial status of the reporter, so the information is judged as material to financialdecisions. The definition of materiality taken from U.S. securities laws and case law is more specific about who the “person” is: information is material if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor [emphasis added] as having significantly altered the ‘total mix’ of the information made available.”⁴

In contrast, sustainable business is characterized by an attention to the stakeholders of a firm, not merely to its shareholders. Stakeholders include individuals or companies that have an interest in the firm, where “interest” is not meant only in the financial sense but more broadly as having a relationship to the firm. Yet more broadly, even the natural environment is viewed as a stakeholder. The environment may have a direct impact on organizations, but it is also represented in the social domain by citizens and organizations that have a concern about the effect of business on the environment.

As we consider materiality in the sustainability arena, the user of information may be any stakeholder who has any type of relationship to or interest in the firm. This takes the concept of materiality well beyond its original domain in financial accounting, where the “judgments” in the FASB definition focus in practice on the value of the firm (for investors), its financial stability (for creditors), or the firm’s compliance with laws and regulation (for the government). The extension of materiality into accounting for sustainability extends the domain of the interests that persons may have in the business. However, sustainability as a concept is not so well defined that it will always be clear what interests are relevant and what judgments about a firm should reasonably support those interests.

Indeed, in the sustainability domain, materiality may be defined not merely in terms of judgments but by interested parties having expectationsabout the firm. In the Global Reporting Initiative’s G4 guidelines on disclosure, which we will examine in detail in this chapter, item G4-2 states that a firm must report on its key impacts, risks, and opportunities. As part of that, reporters are instructed to discuss their

… effects on stakeholders, including rights as defined by national laws and relevant internationally recognized standards. This should take into account the range of reasonable expectationsand interests of the organization’s stakeholders.⁵

(Emphasis added.)

That is a qualitative extension of the definition of materiality from the context of financial accounting, because parties may have expectations without having the legal or even ethical grounds for enforcing those expectations. If “reasonable” is meant to mean legal or ethical, then the scope of those interests is constrained somewhat, but as we shall see in Chapter 4, there are many ethical perspectives that may be taken on questions that pertain to sustainability.

As materiality is defined by the FASB (and, as we shall see below, the SASB), the concept pertains to facts . Only facts can be material. In the broader use to which the term is put in sustainability accounting and reporting, we will see reference to material issuesor to material aspectsof sustainability. We generalize the term by defining issues or aspects to be material if information about the issue or aspect would be material.

The Global Reporting Initiative (GRI)

The Global Reporting Initiative is a not-for-profit organization that promotes guidelines for organizations on how to report their economic and environmental impacts and their policies and practices in relation to social justice and organizational governance. Covering environmental, social, and governance (ESG) elements, the GRI is comprehensive, not targeted to a specific organizational function or process, so we treat it here as an organizational system for disclosure. However, the GRI does not evaluateorganizations. The GRI promotes a system for disclosure, called the Sustainability Reporting Guidelines, but it does not offer a summative evaluation of any aspect of sustainability.

In May 2013, the GRI published its fourth-generation program, the G4, which was optional during a transition period of 2013–2015. This section of the chapter reflects on the GRI by comparing the last of the third-generation guidelines, GRI G3.1, with the new G4 guidelines.

History and Organization

The Global Reporting Initiative was formed by the Coalition for Environmentally Responsible Economies (CERES) and the United Nations Environment Programme (UNEP) in 1997, a year after the International Organization for Standardization published its ISO 14001 standard for environmental management systems. The first 20 GRI reports were released in 1999. In 2001, the CERES board separated GRI to form an independent institution, following a recommendation of the GRI Steering Committee. In 2000, the second version of the GRI (G2) was released at the World Summit for Sustainable Development in Johannesburg, South Africa. Over 150 organizations released reports. The third generation (G3) was launched in 2006. I...