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Is It Time for Companies to Capitalize on Sustainability? [CPA Journal, The](CPA Journal, The Via Acquire Media NewsEdge) Considering the Opportunities and Challenges S Sustainability has become a common business buzzword, akin to "going green," "saving the planet," "reducing our carbon footprint," "the three Ps" (people, plants, and profit), "triple bottom line," and "environmentally friendly" products and services. This requires corporations to pay increased attention to sustainability initiatives. Growing public awareness and social, economic, and governmental forces have driven companies to alter their product designs and rebrand their image, among other changes. Many companies are enacting measures to become more environmentally and socially responsible, although some might just be jumping on the sustainability bandwagon. Other companies are establishing sustainability measures in an effort to receive economic benefits or to comply with federal, state, or local regulations. As the spotlight on environmental protection increases, companies might be compelled to increase their sustainability initiatives and demonstrate increased corporate social responsibility (CSR). As a result, corporate managers-and the public-must evaluate whether these sustainability initiatives are worth the investment by the company and its stakeholders. Is it time for businesses to capitalize on sustainability? Before deciding, companies should become more informed about the benefits and challenges of sustainability initiatives. This can help improve planning, control, and decision making, both internally by managers and employees, as well as externally by investors, creditors, potential stakeholders, suppliers, environmental groups, and regulators. Historical Development An examination of the current state of sustainability suggests a lack of a harmonious definition, clear focus, consistent measurement, and reporting of sustainability initiatives. Furthermore, the creation of special markets and industries results in vastly conflicting opinions and definitions of green measures. An often-cited definition for sustainability was articulated in 1987 by the United Nations: "Development that meets the needs of the present without compromising the ability of future generations to meet their own needs" (Our Common Future, World Commission on Environment and Development). This broad definition encompasses both environmental issues and human rights (i.e., social) issues. This increased awareness of the need to protect the environment and human rights has permeated society for many decades; in the 1960s, some groups argued that humans were harming both themselves and the environment with the continual development of technology. A string of environmental catastrophes-the Three Mile Island accident in 1979, the Bhopal Gas tragedy in 1984, the Chernobyl accident in 1986, the Exxon Valdez oil spill in 1989, and the British Petroleum oil spill in 2010-heightened this environmental focus by calling into question the responsibility of management to its stakeholders, as well as to the general public, and highlighted how many companies treated the environment. The demand for high-quality financial information, assurance services, and management accountability regarding sustainability issues has intensified and increased in importance as a result of corporate irregularities, as well as the volatility of the U.S. stock market and the subsequent need to restore investor confidence in financial reporting. The rapid growth of the Internet and social networks (e.g., Facebook and Twitter) vastly enhanced the dissemination of sustainability information, thus increasing public awareness of these issues. This awareness has led to reductions in energy consumption and the use of fossil fuels around the world, and it has contributed to the goals of cleaner air and water. Sustainability Initiatives Today Companies in almost every industry have jumped on the sustainability bandwagon. The food industry and supermarkets have introduced recycled and ecofriendly shopping bags, food, and other products. The hotel industry offers green rooms and other similar programs. The auto industry has introduced hybrid automobiles and programs to reduce emissions. In the construction industry, there has been an increase in eco-friendly homes and in the proliferation of energy-saving appliances. In the petroleum industry, there is an emphasis on clean fuels. Even the ski industry has gotten in on the act, using bio-diesel (i.e., fuels from renewable sources, such as vegetable oils and animal fats) to power shuttles and hybrid vehicles. Sustainability initiatives can also be seen in numerous other merchandising, manufacturing, and service industries, all aimed at decreasing the environmental damage to the air, water, earth, and its inhabitants. These companies are placing the spotlight on recycling, the increased use of biodegradable products, alternative energy, and a proliferation of other programs to protect the biosphere and ensure the sustainable use of natural resources, reduction and disposal of waste, energy conservation, the creation of environmentally safe products and services, and restoration of the environment. Many corporations have claimed that these initiatives resulted from their commitment to increased CSR; however, the authors believe that many companies' sustainable measures might have been intended primarily to enhance the bottom line. Benefits of Sustainability Initiatives There are several positive effects that could result from enacting sustainable initiatives, including increased revenue, improved branding, improved reputation, and reduced costs. The following sections discuss some of these benefits. Increased revenue. Sustainable production provides opportunities for increasing revenue by giving companies access to new markets, producing differentiating products, and selling pollution-control technologies. In addition, companies can charge higher prices or a premium for their sustainable products. Adding green initiatives to the supply chain can lead to a wider range of integrated supply-chain services, which can ultimately contribute to increased competitiveness and economic performance [Agatha E. Jeffers and Laurence A. DeGaetano, "Is There a Relationship between Sustainability (Green) Initiatives and a Company's Value?," International Journal of Data Analysis and Information Systems, vol. 5, no. 2, 2013]. Improved branding. Sustainability initiatives can be used as a marketing strategy to build strong brands toward their triple bottom line objectives. In 2013, a study conducted by Interbrand (a global brand consultancy) found that brands that are committed to transparency and communicating with consumers continue to outperform; this commitment was positively correlated with the consumer's perception of a company's green practices ("Interbrand Releases the 3rd Annual Best Global Green Brands Report," Interbrand press release, 2013). Improved reputation. Sustainability and green initiatives can help companies gain admiration and a better reputation in the marketplace. Socially responsible behavior results from internal and external pressures on companies, and it is linked to corporate image and reputation. In addition, the authors believe that sustainable behavior attracts the right employees-and highly satisfied employees are often more engaged with their work, which translates into more innovation and better service to customers (Robert G. Eccles, Ioannis Ioannou, and George Serafeim, "The Impact of Corporate Sustainability on Organizational Processes and Performance," working paper, Harvard Business School, 2013; Daniel W. Greening and Daniel B. Turban, "Corporate Social Performance as a Competitive Advantage in Attracting a Quality Workforce," Business & Society, vol. 39, no. 3, 2000, pp. 254-280). This equates to increased product demand from customers, greater customer loyalty, and higher revenues. It also contributes to a reduction in staff turnover and the associated retraining costs. Reduced costs. Another benefit of adapting energy-efficient processes is cost savings and overall cost-effectiveness resulting from resource efficiency, fuel savings, reduced waste, increased tax credits, and other incentives. This is particularly effective in operations costs and environmental savings across industries (e.g., construction, foods, hotels, forest products). This cost reduction goes straight to the bottom line of a company and directly contributes to increased net income. Furthermore, in the authors' opinion, companies that initiate disclosure of sustainability activities enjoy a subsequent reduction in the cost of equity capital (Dan S. Dhaliwal, Oliver Zhen Li, Albert Tsang, and Yong George Yang, "Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting," Accounting Review, vol. 86, no. 1, 2011, pp. 59-100). Challenges of Sustainability Initiatives Despite some perceived benefits, sustainability initiatives are also associated with negative effects, such as compliance costs and initial capital investments. Compliance costs. In a 2011 article, "The Relationship between Sustainability Initiatives and the Corporation's Bottom line," the authors pointed out that corporations are currently being encouraged or pushed to comply with environmental laws and regulations (Jeffers and DeGaetano, Journal of International Management Studies, vol. 11, no. 2, pp. 12-21). A company that does not comply and gets caught will incur huge penalties, fines, and intense pressure on the organization. The corresponding deleterious effects on the company's bottom line, reputation, and potential future earnings could be significant. But how does a company calculate the cost of compliance or noncompliance? In 2007, Jeffers proposed that these costs should be based on their economic impact, environmental impact, and social impact; however, these three impacts are extremely difficult to measure ("Towards a Framework for the Measurement of the Financial and Managerial Implications of Green Accounting in Corporations," Review of Business Research, vol. 7, no. 2, pp. 55-65). Substantial initial capital investments. Invariably, the sustainability measures enacted by large corporations require considerable amounts of capital for new equipment, new processes, or other infrastructure. They also require education of the public and training of the company's employees. These initial costs can be significant and it can take companies a considerable amount of time to recoup them. Once these costs are recouped, however, the investment could translate into substantial benefits. Additional Implications In addition to the potential effects noted above, many other tangible and intangible implications-including managerial, corporate governance, performance, and behaviormodifying factors-accrue to a company that enacts sustainability initiatives. Managerial implications. Measuring and accounting for environmental initiatives can be useful as a management tool; thus, it is important that managers consider environmental revenues and costs in the planning, control, evaluation, and decision making in corporate organizations. Information generated in measuring and accounting for sustainability initiatives could be used for a variety of purposes. This includes improving environmental performance; controlling costs; investing in "cleaner" technologies; developing "greener" processes and products; and making more informed decisions related to product mix, product retention, and product pricing. Furthermore, in management accounting, data about environmental costs and performance are useful in analyzing the costs of production, inventory, and waste management. Performance data in the accounting system can be used to evaluate various aspects of a company and make other business decisions. Corporate governance. Another implication of sustainability initiatives is its impact on a company's corporate governance-that is, the structure and the relationships that direct and control corporate affairs in order to ensure that companies are fair, responsible, and ethical to all stakeholders. The board of directors, as representatives of shareholders, is central to corporate governance; other primary participants include management, employees, customers, suppliers, creditors, and environmental groups. The corporate governance framework depends-to a large extent-on the legal, regulatory, institutional, and ethical environment of the community in which the company operates. As the public's attention continues to focus on companies operating as responsible corporate citizens, the environmental and social issues associated with managerial decision making have increased in importance. Furthermore, in an effort to prevent additional corporate scandals and restore investor confidence in financial reporting, many companies and organizations have issued numerous reports focusing on corporate governance (available from the World Bank, http://www. worldbank.org/ifa/rosc_cg.html). The common thread within these corporate governance reports is the quality of published information, internal controls, independent directors, auditor independence, audit committees, transparency and disclosure, ethical conduct, environmental protection measures, and treatment of financial statement fraud. Thus, corporate governance measures regarding environmental protection are essential in financial reporting. In addition, the authors believe that companies that exhibit better CSR are associated with higher-quality financial reporting (e.g., less earnings management, fewer SEC investigations). Management performance evaluation. Sustainability initiatives also impact performance measurement. In most organizations, effective performance evaluation requires multiple financial and nonfinancial performance measures. Because sustainability accounting is part of the process for recognizing performance in the total operations of an organization, it should utilize a total company-wide systems approach in order to evaluate the impact on a company's bottom line. Before evaluating or measuring sustainability accounting, it is important to first determine the purposes for which the information is being gathered; these will determine the choice of scale and scope of the environmental accounting to be generated. In addition, because the effects of environmental measures cannot always be seen in the short term, consideration should be given to evaluating performance in both the short and long term. Behavior-modifying incentives. Sustainability initiatives can modify the behavior of companies. A company's actions with regard to sustainability initiatives depend upon several factors, including awareness, culture, incentives, resources, willingness, and ability to execute change. Furthermore, the enactment of sustainability initiatives also depends upon a company's ability to understand the results of its actions (or inaction). Failure to enact sustainability measures (inaction) could result in fines, penalties, and other negative consequences, whereas enacting sustainability initiatives (action) might be costly but could result in positive benefits. The authors have found that public awareness of sustainability initiatives has indeed modified corporate behavior, and thus highlights the negative effect of inaction when consumers expect active sustainable behavior from a company (Jeffers and DeGaetano 2011; Jeffers and DeGaetano, "Impact of Sustainability Issues on Corporate Financial Reporting and Ethical Behavior," Journal of Applied Financial Research, vol. 1, 2012, pp. 83-96). Companies are required to comply with relevant legislation to protect the environment or they could face fines and penalties. But anecdotal evidence shows that some companies find the current financial costs of compliance to be greater than the fines associated with noncompliance (for example, see Dave Fehling, "Polluter and Penalties: Will Higher Fines Make a Difference in Texas?," Statelmpact, http://stateimpact.npr.org/texas/2013/02/11/p olluters-and-penalties-will-higher-finesmake-a-difference-in-texas/). This is seen in many countries, where a company may be fined if it pollutes the environment, but the pollution-control device or remediation measure required to comply is more expensive than the fines; thus, many companies might prefer to be fined than remediate. Furthermore, the degree of sustainable and socially responsible practices might be correlated with a country's socioeconomic conditions; therefore, the main barriers to implementing sustainable initiatives in emerging economies include a lack of financial incentives, government incentives, and policies; a lack of integrated design; and a lack of affordability. The authors are convinced, however, that as the fines and penalties for noncompliance become more excessive, and as public awareness of environmental and sustainability issues grow, individuals and corporations will be forced to comply with regulatory requirements. Accountability and Sustainability Reporting It is the authors' opinion that pressures from different stakeholders, such as shareholders, customers, clients, employees, and environmental and other social groups, have resulted in increasing demand for accountability and sustainability activities; however, the evolution of sustainability and CSR reporting differs around the world. CSR is a process in which companies make an effort to engage in activities that create a positive impact on the environment, society, communities, and a broad base of stakeholders. The European Union adopted an active role in requiring countries to develop legislation to enhance CSR. As a result, Europe has been perceived as a leader in this respect. To aid in sustainability reporting on a global basis, the International Integrated Reporting Council (ERC), formed in 2010, brings together representatives from a cross-section of interest groups. Its aim is to create a globally accepted framework for communication by organizations about the increase in value that they provide based on economic, environmental, and social performance measures. In addition, the Global Reporting Initiative (GRI), a nonprofit organization that promotes economic sustainability, seeks to harmonize reporting standards for all organizations and make sustainability reporting routine and comparable to financial reporting. In 2013, Belen Femandez-Feijoo, Silvia Romero, and Silvia Ruiz studied the evolution of CSR reporting following the standards developed by the GRI by utilizing a sample of countries from all over the world ("Effect of Stakeholders' Pressure on Transparency of Sustainability Reports within the GRI Framework," Journal of Business Ethics, 2013). They found that Spain has experienced the highest increase in the number and quality of reports since the first set of standards was released. In addition, they noted that Japanese companies are at the beginners' level, and that CSR reporting in the United States has picked up steam in recent years, particularly after the GRI opened an office on Wall Street in 2010 with the objective of promoting CSR reporting in the United States. Moreover, the 2011 founding of the Sustainability Accounting Standards Board (SASB), a nonprofit organization developing a framework and standards for use by U.S. public companies in disclosing sustainability issues for the benefit of investors and the general public, has contributed to sustainability reporting in the United States. Future Trends The population of the Earth is estimated to exceed 9 billion by 2050 (http:// www.un.org/esa/population/publications/ wpp2008/pressrelease.pdf). These people will all demand food, energy, medical care, technology-related products, and other resources from society. Companies will be forced to balance their obligations to society and to their shareholders. Thus, the authors believe that the focus on sustainability will become even more important as managers become more concerned with the costs associated with providing sustainable products and services. Managers might try to ensure that the pursuit of sustainability does not erode the margins and the bottom lines of their companies. In the authors' opinion, these pressures could lead to increased emphasis on costs and other accounting factors associated with enacting sustainability initiatives. In addition, as users of financial statements demand more transparent reporting, corporations will be compelled to provide more detailed information regarding their sustainability measures and initiatives. Sustainability initiatives are a necessary ingredient in a company's decision-making process, and they can have both positive and negative effects. In the authors' opinion, the positive effects outweigh the negative impacts; thus, companies in every industry should consider instituting sustainability initiatives in order to improve their competitiveness. The enactment of sustainability initiatives could represent a win-win situation for corporations and their stakeholders. Companies in almost every industry have jumped on the sustainability bandwagon. The environmental and social issues associated with managerial decision making have increased in importance. Agatha E. Jeffers, PhD, CPA, is a professor, Beixin (Betsy) Un, PhD, is an associate professor, Silvia Romero, PhD, is an assistant professor, and Laurence A. DeGaetano, CPA, is an instructional specialist, all at Montclair State University, Montclair, NJ. (c) 2014 New York State Society of Certified Public Accountants |