20 Social and Environmental Accounting

Question 1

What is the stakeholder theory of a firm

Answer 1

• Sustainability links to stakeholder theory as need to consider all the different stakeholders that are involved with the business
  o Who impacts the organisation and who does the organisation have an impact on
• Theory developed by Edward Freeman (1984)
  o A stakeholder in an organization is…”any group or individual who can affect, or is affected by, the achievement of the organization’s” objectives” (Freeman 1984:46)

Question 2

What is the principle of corporate rights

Answer 2

Corporation has the obligation not to violate the rights of others

Question 3

What is the principle of corporate effect

Answer 3

Companies are responsible for the effects of their actions on others

Question 4

What are stakeholder maps

Answer 4

Almost like mind maps setting out the stakeholder groups and all the stakeholders in each group with their interrelationships

Question 5

How does social and environmental accounting link to strategic management accounting

Answer 5

• Strategic Management Accounting is ‘The provision of information to support strategic decisions in organisations’.
• SMA can help to inform strategies to gain competitive advantage through exploiting linkages in the value chain.
• In a strategic role, MA helps to formulate and support the overall strategy of an organisation by developing an appropriate framework of performance measurement.
• SMA moves away from the traditional, internal focus of management accounting to include external information about competitors, society and the environment

Question 6

Why do organisations exist

Answer 6

• As we have given them a social license to exist
• They must coexist peacefully with the people around the organisation
• As they provide goods and services and receive labour

Question 7

Why does social accounting exist

Answer 7

• As profit was the driving force of what was occurring and no consideration was given to the surrounding environment
  o Cannot just consume resources
• The dominant – and rarely questioned – objective of organising economies so as to maximise economic growth

Question 8

What are the characteristics of economic growth

Answer 8

• Corporate pursuit of profit
• Increasingly demanding capital markets
• Energy and material intensive production
• Overconsumption of finite resources
• Exploitative social relations
• Environmental degradation, extinction and destruction of ecosystems

Question 9

How does social and environmental accounting link to accounting

Answer 9

• Accounting is all about accountability
• Need to capture costs of social and environmental activities
• Accounting is a powerful tool which traditionally seeks to optimise the economic performance of organisations
• Accounting techniques have allowed managers to:
  o Focus on the financial or economic outcomes of business activities
  o Plan and control their activities so that they maximise profits
  o Discharge duties of accountability to shareholders who are not involved in the day-to-day running of the business
  o Treat social and environmental issues as mere externalities (and not core to day-to-day strategic decision-making)

Question 10

How does social and environmental accounting shape the future of accountants

Answer 10

• New legislation that will require these social disclosures
• Accounting has the ability to change behaviour, prioritise interests and make things ‘visible’
• Accountants impact the way in which accounts are created, how they are used and how ‘performance’ within them is understood
• Accounting can identify and link the economic, social and environmental costs and benefits of organisational strategy
• Accounting can make sustainability a key strategic issue that poses significant challenges to business and society as a whole
• Accounting can embed a sustainability focus within day-to-day language
• Accounting can expose the conflict between economic objectives and social and environmental ambitions

Question 11

How must the firms exposure to its environmental impacts change

Answer 11

• Improving the management of environmental impacts requires more accurate measurement of these impacts
• Accounting practices have the ability to expose a firm’s environmental impacts, costs and their cause
• Management accountants “are well placed to take a pivotal role in moving the environmental sustainability agenda forward”
• Management accountants are involved in activities that can give a prominence to environmental sustainability
  o Strategy development, capture of data, costing, investment appraisal, performance management, reporting

Question 12

What is social accounting

Answer 12

Accounting for different things
* Environmental and social impacts and benefits
* Not just things that have an economic impact
Accounting in different ways
* Provide forward-looking information with longer reporting timeframes
* Not just in strictly historical and budgeted/forecasted financial terms
Accounting to different individuals and groups
* Not just to the providers of finance
* Allow alternative voices to be heard, listened to and accounted for
Accounting for different purposes
* Not just to enable strategic decision making whose success would be judged in financial terms
* Allow strategic decision making that relates to other definitions of ‘value’

Question 13

Outline the business case for sustainability accounting

Answer 13

• Winning and retaining customers
• Competitive advantage, innovation and new products
• Attracting, motivating and retaining staff
• Managing risk
• Driving operational efficiencies and cost reduction
• Maintaining licence to operate
• Accessing capital
• Reputation and brand

Question 14

What is the Prince’s Accounting for Sustainability Project

Answer 14

• Accounting for Sustainability (A4S) was established by Prince of Wales in 2004
• Aim of A4S is to “Transform financial decision making to enable an integrated approach, reflective of the opportunities and risks posed by environmental and social issues”.
• “Financial and accounting systems focus on short term financial outcomes and do not adequately reflect the dependency of our economic success on the health and stability of our communities and natural environment”.
• CIMA is a member of the Accounting Bodies Network formed to support the Prince’s A4S project

Question 15

What are the UN SDGs

Answer 15

17 goals set out by the United Nations for Sustainable Development

Question 16

How does sustainability related to management accounting

Answer 16

• Defining, tracking and recording new types of costs
• Defining and measuring environmental and social performance measures
• Incorporating these performance measures into a range of decision contexts, for example supply chain management or capital investment

Question 17

What is environmental performance

Answer 17

The impact of an organisation’s activities on the environment, including natural systems such as land, air and water, as well as on people and living organisms

Question 18

What is social performance

Answer 18

Refers to the impact of an organisation’s activities on society, including the broader community, employees, customers and suppliers

Question 19

What are forgotten costs

Answer 19

These are the ones we fail to measure. For instance we measure the cost of recycling and properly disposing of waste but not the long term costs of dumping that waste

Question 20

What are the challenges in recognising social and environmental impacts

Answer 20

Future ecological and social issues are not always known
* What will the consequences of current economic activity be in the future?
* What aspects of the environment and society will be valued by future generations?
* …so what are appropriate measures to monitor between now and then, and how would we measure them (for example, the impact on the future health of employees and the local community)?
Many costs and benefits are external to the organisation
* Traditionally, management accountants have recorded only the costs and benefits that occur inside the organisation
* Difficult to assess the environmental and social impacts outside the organisation
Many costs and benefits are difficult to measure in financial terms
* For example, the impact on family life for an employee who contracted a terminal illness
* As many environmental and social impacts cannot be measured in quantitative ways, qualitative information is needed
Lack of benchmarks or comparable data for social and environmental impacts

Question 21

What is greenwashing

Answer 21

• Organizations simply using sustainability accounting as a public relations tool
• To win the approval of stakeholders whose continued support is crucial for the perceived legitimacy of their activities
• Who gets left behind? The most marginalised and less powerful stakeholders?
• Selective reporting of environmental and social impact
• Short-term restrictive ‘bottom-line’ perspective
• Is a mere ‘extension’ of current accounting practices and a simple ‘balancing’ of economic interests with social and environment priorities enough

Question 22

What are some sustainable accounting practices

Answer 22

• Sustainability reporting
• Environmental management accounting
• Sustainability performance measurement (Week 4)
• Sustainability assessment models

Question 23

What are sustainability reports

Answer 23

• Measure and communicate the economic, environmental and social (EES) impacts of an organisation’s activities
• Select performance measures, set performance targets and design systems to monitor and improve sustainability performance.
• Many names: triple bottom line reports, corporate social responsibility (CSR) reports, corporate responsibility reports, social audits, or social and environmental reports.
• Some organisations report their sustainability performance in their annual reports, while others produce stand-alone sustainability reports

Question 24

What are sustainability frameworks

Answer 24

• The production of sustainability reports is mostly voluntary
• Many organisations use recognised sustainability frameworks to monitor and report sustainability, for example the Global Reporting Initiative (GRI)
  o Can lead to a consistent approach to reporting and quality across reports
• The GRI’s Framework is a reporting system that provides performance measures (metrics) and methods for measuring and reporting sustainability-related impacts and performance, to enable greater organisational transparency and accountability
• Goes beyond data gathering and reporting by encouraging organisations to set goals, measure their performance against those goals and implement and manage change

Question 25

What is environmental management accounting

Answer 25

Increasingly important because:
* Environmental costs can represent a large proportion of operating costs in some companies.
* Demands from society for companies to adopt environmentally friendly products and production systems
Consists of:
* Management accounting systems and practices that provide information about the environmental impact of an organisation’s activities
* An extension or adaptation of existing management accounting tools and techniques, such as costing, performance measurement and capital expenditure investment appraisal, to include broader sustainability perspectives.
* Financial information on environmental costs and savings as well as physical information about the use, flows and outcomes of energy, water and materials, including waste
* Techniques such as life cycle costing, environmental cost accounting, environmental performance measures, assessment of environmental benefits, and strategic planning for the environment

Question 26

How can accounting be used to expose environmental costs

Answer 26

• Activity Based Costing (ABC) and life cycle costing (LCC) allow companies to identify the activities, processes and products that have environmental costs and to provide a comprehensive assessment of these costs beyond the present
• This can then allow companies to manage better manage environmental and social impacts, such as change product design
• LCC provides the means for firms to take a longer term strategic view by accounting for costs and benefits of possible actions of the life of a product
• LCC expanded beyond economic impacts to include environmental and social factors
• Traditionally investment appraisals did not include indirect, intangible and external (social) costs
• Total Cost Assessment a method used to evaluate total life cycle costs- considers a broader range of costs than has been the focus of management accounting and management decision making

Question 27

What are environmental costs

Answer 27

• Costs that an organisation incurs to prevent, monitor and report environmental impacts.
  o Can also include the costs an organisation incurs when it does not comply with environmental regulations, some of which may extend well into the future
• In conventional accounting systems these costs tend to be ‘hidden’ within general overheads (and allocated arbitrarily to products) or not reported at all
  o Therefore, relationships between these costs and underlying products, processes and activities are not identified
• Environmental cost accounting can make these costs ‘visible’
  o Accumulates environmental costs to separate cost pools and analyses them on this basis
  o Encourages managers to manage there costs separately and strategically think about more sustainable product and process design