Sustainability

What Do We Mean by Sustainability?

Many definitions of sustainability and sustainable development exist, but arguably the foremost, and most widely accepted, is from the Report of the Brundtland Commission: Towards Sustainable Development, which states: “Sustainable development is not a fixed state of harmony, but rather a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are made consistent with future as well as present needs.”

Public recognition of the importance of sustainability and sustainable development is changing business culture and society. Two critical global challenges include dealing with national accounting systems that do not comprehensively reflect this progress, and ensuring that organizations embrace their performance on three levels:

• Economic: goes beyond financial performance to reflect an organization’s wider impact on the economy, and recognize that profitability, growth, and job creation lead to compensation and benefits for families and to tax generation for governments;
• Environmental: relates to the natural resources consumed in delivering products and services, and the environmental impact of the organization’s operations; and
• Social: reflects an organization’s impact on people and social issues, which include (a) health, skills, and motivation on the people side, (b) human relationships and partnerships on the social side, and (c) business conduct and ethics.

From a business perspective, achieving sustainable value for investors and stakeholders means that organizations must do more than only complying with external laws and regulations. Taking a sustainable path requires organizations to give back more than they take in relation to critical economic, environmental, and social factors that their business models depend upon.

Two useful resources on the breadth of issues included in sustainability are The Sigma Guidelines—Toolkit: Guide to Sustainability Issues and the Global Reporting Initiative’s Sustainability Reporting Guidelines.

Why is Sustainability Important?

The world population will grow from seven billion people in 2012 to nine billion in 2050. This growth will increase demand for scarce natural resources that cannot be met if production and consumption remain as they are today—creating major challenges in environmental sustainability and social welfare and barriers to sustainable growth in society and business.

The importance of sustainability and corporate responsibility are gaining wide recognition and are increasingly embraced by international institutions, governments, regulators, and growing numbers of investors, stock exchanges, and organizations.

Organizations that embrace sustainability can enhance both their reputation with stakeholders and their value over the longer term. In The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance, published by the Harvard Business School, “high sustainability” companies dramatically outperformed the “low sustainability” companies in both stock market and accounting measures, over an 18-year period.

How organizations manage sustainability factors will increasingly determine how well they perform financially and whether they can deliver sustainable business value to shareholders and other stakeholders.

Global Perspectives on Sustainability

Numerous international frameworks, standards, and benchmarks cover the various elements of sustainability. At least ten global treaties to protect the environment have been negotiated in the past three decades, and the number of regional and bilateral agreements is even higher.

For the past 20 years, corporate sustainability has been largely defined by people and institutions in the west, particularly Europe. But with the current global shift in economic balance, countries like India and China are redefining the landscape. Multinational corporations have a significant role to play in incentivizing sustainable development in many economies.

For developing and emerging economies, which account for 85% of the world’s population, sustainability can be very different than it is for developed economies, leading to different priorities. Many developing and emerging economies are attempting to balance green growth with inclusive growth; while green business initiatives can inhibit inclusion of the poor, these two elements of sustainable development should be linked to address the multiple challenges in low-income markets.

In some jurisdictions, corporate governance requirements are being expanded to require directors to take a longer-term perspective and to incorporate a wider range of stakeholders and issues in their decision making and accountability. For example, the premise of the King III Corporate Governance Framework in South Africa is that business strategy, corporate governance, and sustainability are inextricably linked.

The Role of Accountants and the Accountancy Profession

Sustainability is on many organizations’ agendas; however, environmental and social responsibility issues are typically disconnected from core business strategy, and too few organizations include it on the agenda of the chief executive officer and chief financial officer (CFO).

Accountants have a leadership role to play in embedding sustainability factors into an organization’s strategy and decision-making processes to achieve sustainable value creation, and being more transparent and informative on how value is created for stakeholders.

Accounting for sustainability is fundamentally about improving business decision making in:

• Responding to uncertainty and risk, and seizing growth opportunities through developing existing and new markets;
• Innovating processes, products, and services that can provide societal benefits;
• Driving operational efficiency and lowering costs by way of lean operations; and
• Inspiring people including employees, customers, and suppliers.

Accountants’ and finance professionals’ roles in this area are increasing, primarily among larger organizations and at senior levels. For example, in a 2012 Deloitte Touche Tomatsu global survey, 26% of CFOs said that they are accountable to the board for their company’s sustainability strategy—a 9% increase over 2011. A majority of CFOs (53%) said their involvement in sustainability increased in the previous year; even more (61%) expect greater involvement in sustainability over the next two years. 

According to various surveys, including the IFAC SMP Quick Poll, accounting practices are increasingly providing sustainability services to their clients. These services include advisory, accounting, and assurance, with the former the most common.

In response to this need, the accountancy profession is raising awareness of the importance of accounting for sustainability, helping to prepare accountants and the organizations they serve, and supporting developments in thinking as well as practical tools and guidance. In conjunction with others, the profession is leading multiple initiatives to help accountants, clients, and organizations embrace management practices and processes that help integrate sustainability into decision making.

IFAC works closely with the Prince of Wales’ Accounting for Sustainability Project (A4S), which emphasizes the importance of the connection between accounting and sustainability, and The Economics of Ecosystems and Biodiversity (TEEB) for Business Coalition, which is developing guidance to successfully incorporate natural capital into strategy and decision-making processes. In addition, IFAC is significantly involved with the International Integrated Reporting Council (IIRC), which is developing an international framework to help organizations report how strategy, governance, performance, and prospects lead to the creation of value over the short, medium, and long term. IFAC also supports the Climate Disclosure Project's Climate Disclosure Standards Board, which issued the Climate Change Reporting Framework, and the Global Reporting Initiative.