How businesses can balance profit with environmental and social good is an urgent question for boardrooms globally, with accounting and reporting playing a crucial role in managing positive and negative impacts, risks and opportunities. Jeffrey Unerman explains how the evolution of sustainability accounting should help more organisations reach the best answers for themselves, society and the planet.

It might not have been given the name of 'sustainability reporting but companies like Shell and BHP' were reporting on issues relating to their broader social impacts from the late nineteenth century. Non-financial reporting became more systematic among several large corporations in the 1970s, particularly those in the oil and chemical industries. The practice of non-financial reporting declined in the 1980s, to be resurrected in the 1990s with a focus on environmental reporting. Since then, growing concern and awareness around the social and environmental impacts of business activities has led to an age when a range of business stakeholders need to be reassured that organisations and their leaders are a force for building a sustainable future. Organisations therefore need to systematically identify and embed their sustainability risks and opportunities into strategic decision-making.

At first glance, sustainability and accountancy might appear to be different worlds with different languages. But it's critical they work together. A key role of accounting is communicating information to aid decision-making, whether by managers within the business or shareholders thinking about investment. Conventionally, accounting has focused on communicating the economic impacts of actions and how to optimise related economic decisions.

Sustainability accounting broadens the range of information provided to include impacts of decisions and actions that affect the natural environment and societies. It thereby helps leaders make better-informed decisions that aren't narrowly focused on short-term financial outcomes, and take into account greater complexities around social and environmental risks and opportunities; including longer­term threats from reputation al damage linked to issues like climate change.

To take advantage of this broader perspective, businesses need the right tools to manage non-financial accounting, and reach the optimal balance between economic, social and environmental concerns. Recent years have seen a flurry of initiatives and guidelines on corporate sustainability accounting and reporting, leading to a, fragmented landscape of sustainability accounting and reporting practices.Indeed, in May 2019 the World Business Council for Sustainable Development's Reporting Exchange indexed over 2,000 Environmental, Social and Governance reporting requirements across 60 countries (and 70 sectors). This level of fragmentation hinders consistency and comparability in reporting, making it more difficult for information to be evaluated and for the wider world to be able to see the progress being made.

Keep it Common

The most popular sustainability reporting guidelines have been developed and progressively refined by the Global Reporting Initiative (GRI) since the late 1990s. They were used by over 6,700 organisations for 2017 reporting. A more recent catalyst, though, has been the launch of the United Nations' Sustainable Development Goals (SDGs) in 2015, covering the period 2016 to 2030. While being goals for governments and policy-makers internationally, the SDGs were developed through extensive consultation; including with big business, acknowledging the vital role businesses need to play in their delivery. They are also communicated in an engaging manner, making their relevance to the commercial world and its interests readily apparent. The SDGs, underpinned by 169 targets and 232 indicators, have thereby provided a common and comprehensive framework motivating more widespread business commitments to action on sustainability and related reporting.

Among the 1,000 responses from global CEOs to an Accenture survey in 2016, shortly after the SDGs were launched, 89% indicated that "commitment to sustainability is translating into real impact in their industry" and 87% said that they "believe the SDGs provide an opportunity to rethink approaches to sustainable value creation". PwC's 2018 SDG Reporting Challenge found there had been a repid development of corporate-level SDG reporting after SDGs were launched. It analysed SDG reporting practices of 729 large corporations (with collective revenues of $12.4 trillion) across 21 countries and six sectors and found that 72% referred to SDGs in their reporting, compared to 62% the previous year. Half of the corporations had identified a sub-set of the SDGs they considered the most relevant for their business. However only 23% disclosed SDG-related KPIs or targets; a core focus for accounting. The PwC report explains (p.21) that: "Using SDG relevant KPIs provides the all-important bridge between prioritising the Goals, embedding them into business strategy and action planning, and in turn, producing better reporting."

Many organisations are developing guidance to help implement high quality SDG-related accounting and reporting. The institute of Chartered Accountants in England and Wales (ICAEW) are among the professional accounting bodies that have embraced the value of the SDGs as an important way forward in framing accountancy to address wider public interests.

Improving Sustainability Reporting

PwC's report highlights the sharp rise of interest in and reporting on the SDGs. But it also suggests a gap between rhetoric and reality in SDG reporting. This gap reflects findings from academic research into sustainability reporting over many years before the SDGs were developed.

Attitudes to sustainability reporting among shareholders are mixed. Longer-term investors like pension funds, with liabilities stretching several decades ahead, need to ensure their investments are going to provide financial returns over the long term; they're more sharply aware of how social and environmental risks will turn into economic risks over time. But there is also evidence that fund manager performance is still being assessed via measures of short-term financial gains.

The landscape is likely to change due to public awareness and activism, as demonstrated by the recent swell of support for action on plastic waste, prompted by the BBC's Blue Planet series, and the rallying behind popular protest groups like Extinction Rebellion. Digital communications mean the activities of companies are more visible and the mobilisation of opposition via social media can be fast and on a high scale. Corporate reputations are fragile. At the same time, investors themselves are looking for businesses to manage the kinds of risks and opportunities that are presented by climate change and other areas of sustainable development. For examples, they want action that acknowledges not only the impact the company has on climate change but also the financial dependencies of the company on increasing climate risks (such as consequences for an individual business's supply chain from increasing storms, droughts and floods). This latter area is the focus of new reporting proposed in 2017 by the Taskforce on Climate-related Financial Disclosures, which was established by the Governor of the Bank of England (through the central bankers' Financial Stability Board) - and chaired by Michael Bloomberg - to address the importance of effective management and disclosure of climate-related risks and opportunities for the prudential regulation of banks and the resilience of companies in other sectors.

Universities have an important role to play in helping improve the effectiveness of sustainability accounting and reporting. We are in an ideal position to provide robust evidence and insights in shaping accounting tools that enable organisations to more systematically identify and embed sustainability-related risks and opportunities in their strategic and operational decision-making. Given the complexities of sustainable development, this has to be a interdisciplinary endeavour. For example, Lancaster University's Pentland Centre for Sustainability in Business brings together climate scientists, management scholars and accounting academics in a way that embeds robust insights from climate science that are relevant to specific business in their sustainability accounting and reporting practices. This enables the translation of evidence into form that are pointedly relevant and a basis for action among business leaders; bringing science into the boardroom.

There's great scope for sustainability accounting to develop in ways that both ensure maximum impact on environmental and social issues and act as a platform for building trust in businesses.

Jeffrey Unerman, Professor of Sustainability Accounting and Associate Director of Lancaster University's Pentland Centre for Sustainability in Business. Jeffrey is a co-opted member of the ICAEW Council and vice-chair of the ICAEW Research Advisory Board. He is also a member of the Expert Panel of the Prince of Wales's Accounting for Sustainability Project.