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CHAPTER 1
Introduction to Business Sustainability Gatekeepers
Executive Summary
There have been considerable efforts to encourage business organizations to pursue profit-with-purpose goals in the past decade by focusing on long-term investment and integrating environmental, ethical, social, and governance (EESG) sustainability into their strategic and investment decisions. The concept of impact investing, which focuses on the importance and relevance of corporate investment strategies in creating returns on investment and providing positive social and environment impacts is gaining acceptance by retail and institutional investors. The investment managers are trying to maximize financial performance as well as to have positive and measurable effects on the environment and society. Positive effects on the environment and society cannot be achieved without allocating scarce resources that could otherwise be used to maximize firmsā financial economic performance. Business sustainability can be promoted and sustained when corporate gatekeepers set a tone at the top and make commitments to create shared value for all stakeholders. The board of directors and senior executives and investors play an important role in promoting business sustainability as presented in this chapter.
Introduction
Business sustainability is advancing from the greenwashing and branding to, very recently, business imperative as shareholders demand, regulators require, and companies report their sustainability performance. Sustainability has become economic and strategic imperative with potential to create opportunities and risks for businesses. Business sustainability is defined in this book as a process of generating financial economic sustainability performance (ESP) in ensuring desired rate of returns for shareholders while achieving nonfinancial EESG sustainability performance in protecting the interests of other stakeholders such as creditors, employees, customers, suppliers, communities, regulators, society, and the environment. The business sustainability process is affected by policy makers, regulators, investors, corporations, and their board of directors and executives, and the process affects the decisions and actions of these participants. The five chapters of this book offer guidance to business sustainability gatekeepers including investors, boards of directors, executives, and management accountants for proper measurement, recognition, and reporting of all five economic, governance, social, ethical, and environmental (EGSEE) dimensions of sustainability performance. This book also highlights how people, business, and resources collaborate in a business sustainability and accountability model. The five chapters of this book are intended to cover a variety of issues relevant to business sustainability and their implications for sustainability gatekeepers including investors, the board of directors, executives, and management accountants.
Business Sustainability Definition and Book Objectives
As mentioned previously, this book defines business sustainability as a process of generating financial ESP to create shareholder value, while achieving nonfinancial EESG sustainability performance in protecting the interests of other stakeholders.1 The primary purpose of sustainability is to create shared value for all stakeholders and as such management accountants play an important role in continuously improving financial ESP and nonfinancial EESG sustainability performance toward achieving the main goal of creating shared value. Given the global growing attention to corporate sustainability, this book examines the emergence of business sustainability from investors, directors, and management perspectives. The role of business corporations in our society has evolved from profit maximization to creating shareholder value and in recent years to create shared value for all stakeholders. Firm performance is measured not only by financial income but also by the mechanisms in which business success and sustainability is measured in terms of nonfinancial sustainability key performance indicators (KPIs) pertaining to environmental, social, governance, and ethical activities.
This book consists of five chapters covering all aspects of business sustainability with a keen focus on its implications for sustainability gatekeepers including investors, boards of directors, and management. Anyone who is involved with business sustainability and corporate governance, the financial reporting process, investment decisions, legal and financial advising, audit functions, and corporate governance education will be interested in this book. Specifically, corporations, their executives, the boards of directors, board committees, internal and external auditors, accountants, lawmakers, regulators, standard-setters, users of financial statements (investors, creditors, and pensioners), investor activists, business schools, and other professionals (attorneys, financial analysts, and bankers) will benefit from this book. Business sustainability structure including principles, theories, risks, performance, mechanisms, and functions presented in this book are applicable to organizations of all types and size. Profit-oriented, not-for-profit, and governmental entities can benefit from this book. This introductory chapter defines business sustainability and provides a synopsis of what sustainability means for business sustainability gatekeepers including investors, the board of directors, and management. Other chapters present more detail of business sustainability for business organizations, their investors, directors, and executives.
Sustainability Performance
Sustainability performance is broadly referred to as financial ESP and non-financial EESG sustainability performance.2 This section examines each of the ESP and EESG sustainability performance dimensions. The World Economic Forum (WEF) provide guiding principles and metrics for focusing on the ESG sustainability performance relevant to governance, people, planet, and prosperity as discussed in the following subsection.3 The International Business Council (IBC) of the WEF, in collaboration with the big 4 accounting firms, has released its final recommendations for a set of financial ESP and nonfinancial EESG sustainability performance metrics and disclosures that can be globally accepted and implemented.4 These metrics are relevant to both financial and nonfinancial sustainability performance and also determine a companyās adoption of the Sustainable Development Goals (SDGs) that have been promoted by the United Nations. The recommendations encourage companies to disclose their core ESP and EESG metrics using a ādisclose or explainā approach by focusing on a āmateriality testā of reporting sustainability performance information as discussed in the following.
Financial Economic Sustainability Performance
The most important and commonly accepted dimension of sustainability performance is financial ESP, which is the cornerstone of business sustainability. The main objective function for any business organization is to achieve economic performance in creating financial returns and value for shareholders. Economic sustainability disclosure is any financial information related to the profitability and growth of business organizations. Traditionally, business organizations have focused on maximizing profit without much consideration of the social and environmental impacts of their operations and whether they are producing goods and services that the society needs. Some of the KPIs of financial ESP are reported earnings, cash flows, return on assets, return on investment, growth, research and development, total amount of spending on R&D, total amount of spending on Information Technology, and net investment (capital expenditure less depreciation). These KPIs should be used as benchmarks against which ESP is evaluated, and directors and executives are held accountable.
Environmental Sustainability Performance
Environmental sustainability is based on the simple concept of leaving a better environment for future generations. Stakeholders are expecting business organizations to provide clearer and more complementary information beyond what is legislated by law. Interest in the environmental sustainability performance is increasing as investors are becoming more concerned about climate change and global warming and current Democrat administration is more in favor of focus on environmental issues than the previous administration. The United Nations Climate Change Conferences are typically conducted annually to address climate change and global warming. President Biden has already issued an executive order I January 2021 to rejoin the Paris Agreement to address climate change and global warming. For example, greenhouse gas (GHG) emissions in tons of carbon dioxide equivalent (tCO2e), estimate of upstream and downstream GHG emissions are important environmental KPIs.
The environmental sustainability performance dimension includes reducing an organizationās carbon footprint, creating a better work environment, addressing climate change, and improving the air and water quality of the property and the surrounding community. Examples of environmental sustainability performance indicators are: (1) proper air and water policies; (2) beneficial products and services; (3) pollution policies and ozone depleting chemicals; (4) recycling; (5) clean energy; (6) hazardous waste; and (7) climate changes.
Energy efficiency and climate change strategies, policies, and procedures should consist of the following:
ā¢ Identify and select relevant factors related to energy efficiency and climate change risks and opportunities based on an assessment of company performance.
ā¢ Create a methodology for developing KPIs energy efficiency and climate change.
ā¢ Implement energy efficiency and climate change strategy.
ā¢ Periodically review and revise the climate change and energy efficiency policies and procedures.
Climate performance indicators are:
ā¢ GHG emissions. An emissions assessment should evaluate the companyās emissions compared to peers, industry, or regulatory requirements.
ā¢ Industry climate risk. Some companies are more vulnerable to the future implications of climate change, given the nature of their businesses, industry, or the location of their operations. Thus, be aware of your industry best practices.
ā¢ Climate risk outlook. Forward-looking KPIs of climate risk performance and disclosure include the companyās corporate policies and strategy on climate change and climate change resilience in general.
ā¢ Energy efficiency and climate change strategies, policies, and procedures should consist of the following:
ā¢ Identify and select relevant factors related to energy efficiency and climate change risks and opportunities based on an assessment of company performance.
ā¢ Create a methodology for developing KPIs energy efficiency and climate change.
ā¢ Implement energy efficiency and climate change strategy.
ā¢ Periodically review and revise the climate change and energy efficiency policies and procedures.
ā¢ Communicate with all stakeholders the assessment and management of climate change and global warming risks and actions taken to control and minimize such risks.
ā¢ Conduct climate risk scenario assessment and planning, and design and implement policies and procedures to manage climate-related risks.
Ethical Sustainability Performance
Ethical sustainability performance is often integrated to the other dimensions of sustainability performance and it relates to how ethically an organization is conducting its business. Ethical sustainability performance is a function of business culture of integrity and competency, employeeās integrity, and begins with the tone management sets at the top and workplace ethics. Attributes of an ethical corporate culture are driven from the existence of codes of conduct, appropriate tone at the top, sense of employee responsibility, accountability, honesty, fairness, mutual respect, and freedom to raise concerns.
The ethical dimension of sustainability performance reflects a companyās policies and procedures relevant to integrity and competency of all individuals within the company, as well as workforce diversity activities and other equity and inclusion-related issues. Corporations should evaluate and properly manage their progress on diversity, equity, and inclusion issues by: (1) ensuring oversight of diversity commitment; (2) evaluating diversity-related risks and effectively managing such risks of pay inequity among diverse groups; and (3) disclosing of workplace diversity, inclusion, and equity to all stakeholders. On December 17, 2020, the Institute of Business Ethics (IBE) released its report entitled The Ethics of Diversity, which provides guiding principles and a practical guide as to why diversity matters business organizations and their boards, executive, and stakeholders.5 The IBE report underscores the importance of the ethical dimension of business sustainability in the context of diversity and provides business organizations and their boards and executives. Proper ethical policies and procedures in the workplace can affect the integrity and quality of operations and performance. Some of the examples of ethical sustainability perf...
