Meaning, Definitions, Characteristics, Functions and Importance of Sustainability accounting15th July 2021 0 By indiafreenotes
Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. The concept of sustainability is composed of three pillars: economic, environmental, and social also known informally as profits, planet, and people. Increasingly, companies are making public commitments to sustainability through actions like reducing waste, investing in renewable energy, and supporting organizations that work toward a more sustainable future.
Sustainability accounting (also known as social accounting, social and environmental accounting, corporate social reporting, corporate social responsibility reporting, or non-financial reporting) was originated about 20 years ago and is considered a subcategory of financial accounting that focuses on the disclosure of non-financial information about a firm’s performance to external stakeholders, such as capital holders, creditors, and other authorities. Sustainability accounting represents the activities that have a direct impact on society, environment, and economic performance of an organisation. Sustainability accounting in managerial accounting contrasts with financial accounting in that managerial accounting is used for internal decision making and the creation of new policies that will have an effect on the organisation’s performance at economic, ecological, and social (known as the triple bottom line or Triple-P’s; People, Planet, Profit) level. Sustainability accounting is often used to generate value creation within an organisation.
Sustainability accounting is a tool used by organisations to become more sustainable. The most known widely used measurements are the Corporate Sustainability Reporting (CSR) and triple bottom line accounting. These recognise the role of financial information and shows how traditional accounting is extended by improving transparency and accountability by reporting on the Triple-P’s.
As a result of triple bottom level reporting, and in order to render and guarantee consistency in social and environmental information, the GRI (Global Reporting Initiative) was established with the goal to provide guidelines to organisations reporting on sustainability. In some countries, guidelines were developed to complement the GRI. The GRI states that “reporting on economic, environmental and social performance by all organizations is as routine and comparable as financial reporting”.
Measuring environmental-economic-social interrelationships requires a clear understanding of the relationships that exists between the natural environment and the economy. It is not possible without understanding the physical representation. The physical flow accounts are helpful in showing the characteristics of production and consumption activities. Some of these accounts focus on the physical exchange between the economic system and natural environment.
Wealth-based approaches to sustainability refer to the preservation of stock of wealth. Sustainability is observed as the maintenance of the capital base of a country and therefore potentially measured. A number of environmental changes are also contained in these financial statements that are measured during an accounting period of time.
The GRI offers advanced material to help organisations of all types to create their accountability reports. This published material lead organisations through the reporting process with the main idea of becoming more sustainable in their practices in everyday business.
Specific techniques to measure information in sustainability accounting include:
- Inventory Approach
- Sustainable Cost Approach
- Resource Flow/Input-Output Approach
The Inventory Approach focuses on the different categories of natural capital and their consumption and/or enhancement. This approach identifies, records, monitors, and then reports on these different categories. These categories are analyzed according to specific classifications, including critical, non-renewable/nonsubstitutable, non-renewable/substitutable, and renewable natural capital.
The Sustainable Cost Approach results in a notional amount on the income statement that quantifies the organization’s failure to “leave the biosphere at the end of the accounting period no worse off than it was at the beginning of the accounting period”. In other words, this amount represents how much it would cost an organization to return the biosphere to its natural state at the beginning of the accounting period.
The Resource Flow/Input-Output Approach attempts to report the resource flows of the organization. Rather than explicitly reporting sustainability, it focuses on resources used to provide transparency. This approach catalogues the resources flowing into and out of the organization to pinpoint potential areas of improvement.
- Mimicry and industry pressure
- Legislative pressure
- Stakeholder pressure and ensuring the “license to operate”
- Self-regulation, corporate responsibility and ethical reasons
- Managing the business case for sustainability