Sustainability is a hot topic today due to increasing awareness of climate change and inequality, among other pressing issues.
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The Earth just recorded a seven-year hot streak and we’re approaching the Covid-19 pandemic’s first anniversary. The crisis has had enormous implications on our mental health, the economy and income inequality. Post-pandemic, we need to build back better, and sustainability will be the key to success.
What is sustainability?
There is no universal definition of sustainability, but many point to the United Nations’ 1987 Brundtland Report that calls for sustainable development that meets our needs today without compromising the needs of those in the future.
This idea of meeting our needs without sacrificing the needs of our children, or our children’s children, tends to form the basis of most sustainability definitions.
We all have a role to play in achieving sustainability, and these roles are interconnected. As consumers, we can make changes to our lifestyles to reduce our waste and use cleaner energy sources, but that’s not enough.
We buy products and services produced by companies, so they need to be responsible too. It’s estimated that 71% of all greenhouse gas emissions come from just 100 companies, including ExxonMobil and Shell. If these companies produced sustainable goods and services while consumers also took individual responsibility, it could have a powerful impact.
Governments play an important role too, creating and enforcing regulations such as putting a price on carbon to disincentivise its use.
Regulators like the Securities and Exchange Commission in the United States and the Canadian Securities Administrators in Canada also set rules around what information publicly traded companies are required to disclose. These regulators require audited, financial information from public firms, but the same cannot be said for sustainability information that’s mostly voluntary and typically not audited.
Communities may be interested in how much pollution or greenhouse gases a firm is producing so that their neighbourhoods remain clean and safe. Investors are usually interested in a firm’s financial performance, including ESG.
ESG investors are attracted to companies that meet certain ESG criteria while they avoid investing in companies they believe are unethical, like tobacco or gun manufacturers (known as sin stocks). They also pressure firms to improve their ESG performance, or they divest from some companies completely.
How do we measure sustainability?
Measuring sustainability is where it gets tricky. Much of the information used to gauge a firm’s sustainability is provided by the company itself, and it’s not always audited. This makes it very different than financial information, which is subject to detailed audits.
Third-party organisations use this company-provided information as the basis to create different ratings and assessments, meaning there are serious issues with their analyses. While many firms provide this information voluntarily, many say one thing but do another, burnishing their reputation, for example, while continuing to pollute.
This means that a company’s true sustainability performance is difficult to accurately gauge. Because their ESG disclosures are voluntary, businesses don’t have to divulge anything they don’t want to, and there are few consequences for grand, baseless claims or non-disclosure.
The need for sustainability accounting
There is huge potential here, however, for sustainability accounting to play a key role.
There are currently a number of different ways to report ESG information. Among the most popular is the Global Reporting Initiative, which takes a multi-stakeholder perspective. That means that information on how a company’s actions affect many different parties — not just shareholders — is reported.
This can include local communities and employees. This approach captures many different elements of a company’s business operations. That’s more in line with a long-term view of sustainability itself and is one of the features that differentiates the Global Reporting Initiative from other measures.
So while ESG has piqued their interest in making more money, that won’t necessarily lead to the broader, enduring societal sustainability that’s urgently needed in the midst of the climate crisis.
Right now, the current measurement systems are inconsistent and incomparable. Unlike the financial information for public companies that we can compare and rely upon, we do not have the same reliability for sustainability accounting information.
Why does it matter?
Sustainability accounting, ESG investing and SRI are not going away any time soon as pressure grows on companies to measure and report their sustainability information.
The Conversation Africa The Conversation Africa is an independent source of news and views from the academic and research community. Its aim is to promote better understanding of current affairs and complex issues, and allow for a better quality of public discourse and conversation. Go to: https://theconversation.com/africa
About the author
Leanne Keddie, assistant professor, Sprott School of Business, Carleton University
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