Frameworks for Sustainability Accounting

Corporate growth and success are no longer constrained solely by availability of financial capital. Management of social and environmental issues is necessary for sustainable value creation by companies. Consequently, the next step in public disclosure of information is accurate reflection of the risks and opportunities that a business enjoys across all forms of capital, not just limited to financial. Therefore, principles and tools of sustainability accounting are being developed across the globe.

Sustainability Accounting focuses on the disclosure of non-financial information about the ecological and social impact of an organization's activities. Popularly called Social Accounting or Triple Bottom Line Accounting, its focus is on quantifying and assessing business impact on the Triple-P's: People, Planet and Profit.

In light of the statutory requirements relating to mandatory spending on corporate social activities brought about by the Companies Act, 2013, Sustainability Accounting has now become an important subset to Financial Reporting for Indian companies.

The major challenges in accounting of sustainability related data are determination of Key Performance Indicators for environmental, social and governance issues that are material as well as quantifiable. Unlike financial data, non-financial information cannot be identified as “material” based on sweeping principles like a specific percentage of the turnover. Also, as the stakeholders for every sector and industry are more varied with reference to a business’ social impact, the need for sector-wise standards for measuring sustainability is the need of the hour. While many international organizations have been developing such standards for accounting and reporting sustainability information over the years, their penetration into the Indian industries is limited. Some of these widely recognized sustainable accounting and reporting frameworks are introduced below.

1.       Sustainability Accounting Standards

The Sustainability Accountings Standards Board (SASB) is a US based non-profit organization set up in 2011 to develop and disseminate sustainability accounting standards. It aims to integrate its standards into the annual reporting requirements with the Securities and Exchange Commission (SEC) by public companies in the United States of America.

SASB has devised a Sustainability Industry Classification System (SICS) on the basis of which several industry specific standards are being developed to ease comparison and benchmarking. SICS categorizes industries based on resource intensity and sustainability innovation potential. Currently, provisional standards have been issued by the Board for six of these sectors. The remaining standards are projected to be released in a phased manner by March, 2016.

Sector	No. of Standards	Industries Covered
Health Care	6	Biotechnology & Pharmaceuticals, Medical Technology, Health Care Providers
Financials	7	Commercial Banks, Investment Banking & Brokerage, Asset Management & Custodian Services, Consumer Finance, Mortgage Finance, Security & Commodity Exchanges, Insurance
Technology & Communications	6	Electronic Manufacturing Services, Software & IT Services, Hardware, Semi-conductors, Telecommunications, Internet Media & Services
Non Renewable Resources	8	Oil & Gas, Coal, Metals & Mining, Construction Materials
Transportation	8	Automobiles, Air Transportation, Marine Transportation, Railways, Road Transportation
Services	10	Education, Professional Services, Hospitality & Recreation, Media Production & Distribution, Advertising & Marketing
Resource Transformation	5	Chemicals, Aerospace & Defence, Electronic Equipment, Industrial Machinery & Goods, Containers & Packaging
Consumption	15	Food, Beverages, Tobacco, Retailers, Apparel & Textiles, Appliance Manufacturing, Household & Personal Products
Renewable Resources & Alternative Energy	5	Biofuels, Solar Energy, Wind Energy, Fuel Cells & Industrial Batteries, Forestry & Paper
Infrastructure	10	Electricity, Gas, Water, Waste Management, Architecture, Engineering & Construction, Home Builders, Real Estate Developers

Most of these provisional standards are open for public comments and can be accessed for review at http://www.sasb.org/standards/download/

2.       The Global Reporting Initiative

The Global Reporting Initiative (GRI), an international non-profit organization, has developed a comprehensive Sustainability Reporting Framework, which provides metrics and methods for measuring and reporting sustainability related impacts and performance. In May 2013, the GRI released its latest set of Guidelines called G4 that offer Reporting Principles, Standard Disclosures and an Implementation Manual for preparation of Sustainability Reports.

The Guidelines are divided into three major categories viz. Economic, Environmental and Social. Specific tools for measuring various aspects of each of these categories have been specified in the guidelines.

Economic	Environmental	Social
Economic Performance	Materials, Energy and Water	Labor Practices & Decent Work
Market Presence	Emissions, Effluents & Waste	Human Rights
Indirect Economic Impacts	Supplier Transport Assessment	Society
Procurement Practices	Biodiversity	Product Responsibility
	Environmental Grievance Mechanism
	Products & Service
	Compliance

The “Social” category includes guidelines on issues relating to Occupational Health & Safety, Equal Pay for Women and Men, Freedom of Association and Collective Bargaining, Anti-corruption Policies, Anti-competitive Behavior, Customer Privacy, Compliance and Grievance Redressal Mechanisms among many others.

Specific Guidelines have also been issued for sectors like Airport Operators, Food Processing, Construction and Real Estate, Media, Electrical Utilities, Mining and Metals, Event Organizers, NGO, Financial Services and Oil & Gas.

All Guidelines, Implementation Manual and other resources are freely available on GRI’s website at www.globalreporting.org

3.       OECD Guidelines for Multinational Enterprises (OECD-GME)

The GRI Sustainability Reporting Framework provides guidance on how to measure sustainability performance and the OECD-GME provides a benchmark to assess such performance. Last updated in May 2011 when they were adopted by 42 adhering governments, these guidelines provide recommendations on issues relating to Human Rights, Employment and Industrial Relations, Environment, Bribery, Taxation, Competition and Technology.

The OECD offers two different approaches to the sustainability accounting framework: one for measuring environmental-economic-social interrelationships, and a wealth-based approach. The first approach needs a clear understanding of the relationships that exists between the natural environment and the economy. Thus, this method of accounting focuses on the physical exchange between the economic system and natural environment. On the other hand, the wealth-based approach accounts for the preservation of stock of wealth.

As the OECD-GME are more policy based than report oriented, they must be read with the GRI Guidelines for better implementation and presentation. To encourage a more synergistic use of the two frameworks, both OECD and GRI entered into a MoU in December 2010.

These Guidelines are freely available at www.oecd.org/daf/inv/mne/oecdguidelinesformultinationalenterprises.htm

It is unrealistic to expect businesses to voluntarily commit themselves for implementing sustainable accounting systems. For full implementation, governments across the world will have to frame policies for generating revenue through environmental taxes or providing concessions based on environmentally and socially sound operating processes, which will necessitate maintenance of sustainability accounting records. In the absence of such policy decisions, sustainability accounting will just remain a buzzword with little practical use.

In the meanwhile, Cost and Management Accountants must keep themselves updated with the growing knowledge on accounting systems for non-financial information so that they are ready to grab the resulting professional opportunities as soon as they arise.