Arizona State University Holden: Sustainability Accounting: A Review

1. Introduction

Sustainability is a rather complex, multifaceted subject. It is also a newly discovered subject area in the business field, but its’ presence is growing. According to the Task Force on Climate-related Financial Disclosures, “Investments based upon ESG principles have grown 18-fold since 1995, a leap from $639 billion in 1995 to more than $12 trillion in 2018.” J. Robert Brown, Jr. from the PCAOB even highlighted the importance of sustainability disclosures in his 2019 presentation in Shanghai, China. However, concerns are looming about whether these disclosures are complete and consistent, and whether they deliver quality information.

In response to the need for financial reporting standards in this area, The Sustainability Accounting Standards Board (SASB) was developed in 2011. The SASB is currently calling researchers to action to support the standard-making process.

This paper will aim to review sustainability accounting’s important, vast, and necessary addition and growth in the accounting literature.

1.1 Background

To fully understand the subject, we must first define what sustainability means. Sustainability is a broad topic consisting of not only the environmental impacts of a company but also the social and governance aspects as well.

This includes topics from human capital to the future growth possibilities of a company and how sustainable they will be.

1.1.1 History and development. Work in this area started in the 1970s. In the beginning, research was focused on local stakeholders and the immediate organization. Since then, the focus has turned to organizational accounts that impact global, social, and environmental issues and the costs and benefits of analyzing these extensively (INCLUDE SOME PAPERS).

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This, in turn, lead to an increase in disclosure-related studies (Bebbington, Larrinaga, & Moneva, 2008; Buhr & Reiter, 2006; Ferguson, 2007; Laine, 2009; Llewellyn & Milne, 2007; Spence, 2007). In 2013, Harvard Business School (HBS) and the Journal of Accounting and Economics (JAE) held a conference on CSR stating that “Corporate accountability reporting is broadly consistent with at least two hypotheses: (1) such reporting augments shareholders’ demand for information anthe d monitoring; (2) such reporting responds to non-shareholder constituents’ demands, potentially but not necessarily, at the shareholders’ expense.” This alludes to a common question in the literature of whether disclosing further corporate information in disclosures is necessarily good for shareholders. Do the costs outweigh the benefits? Because, at the end of the day, profit trumps all.

Blacconiere and Northcut (1997) study the Superfund Amendments and Reauthorization Act (SARA) of 1986 and find that ‘chemical firms with more extensaboutive environmental disclosures included in their 10-K reports had a less negative reaction to SARA’. This provides support that this information matters to financial markets. In addition, Klassen and McLaughlin (1996) look at environmental performance awards and their association with significant positive returns. With ithe ncreased probability of environmental demands of disclosure with the 2030 Agenda for Sustainable Development summit and increased activity in the changing weather, companies should prepare themselves for the upcoming mandatory disclosures (Terama et al 2016). The need for quantification of the state of ecosystems and ethe conomic importance of each organizational decision made is going to be a large undertaking. This leads to various future projects.

1.1.2 Objectives and rrationale Objectives of social and environmental accounting focus on the impact that companies have on society and ecology. This draws from both science and accounting literature theories and rationales. Gray (2010) phrases the objectives of accounting to contribute to a more sustainable society. As accountants, and stewards of information for the public, we are responsible to hold companies accountablthee for all of their societal impacts.

1.1.3 Initial fears and uncertainties. The complexity of these subjects can lead to various fears and uncertainties about oaboutwhat is being measured. The variability in nature, the social constructs of a local vs global society, and the various regulatory changes occurring simultaneously make it difficult to tease out a significant cause and effect relationship (Bebbington et al. 2014). The empirics on which the literature will base all studies have hhavescientific certainties and uncertainties about the dynamics of the global system which can lead to endogeneity problems.

Another fear, stated in O’Dwyer et al (2016), is that we need to be cognizant of the rigor used in these studies. Passion can drive the research, but they still need to be based ionfact. Theories also need to be grounded in reality. Either way, you slice the pie, and it is evident that sustainability accounting is not a fad but is important for future research.

2. Effects on investor perception

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2.1 Evidence from empirical studies

Dhaliwal et al. (2012) found that a stand-alone CSR report is associated with significantly lower analyst forecast errors. This effect was found to be more prominent in countries with a larger focus on stakeholders, not just shareholders, and in those countries that had less consistent financial disclosures. The findings in this study also showed that TSR activities are not always profit-maximizing. They could only show that the reports provide incremental information to investors.

3. Sustainability and corporate decision making

Within the accounting literature, thus far, there are three main subsections (1) Environmental, Social, and Governance disclosures (ESG) (2) Integrated Reporting (IR) (3) Corporate Social Responsibility (CSR). The main research stream in this area seeks to enhance communal ssustainabilitythrough the investigation of information flow to stakeholders. This can be either voluntary or mandatory, depending on the country in which the study takes place.

3.1 Empirical predictions and evidence

There is conflicting evidence on whether or not disclosures impact markets positively or negatively Dhaliwal et al. (2012) suggested a link between firm reputation and CSR activities, which could, in turn, lead to better financial performance through, not only, increased sales, but also human capital. Kim et al. (2012) find that, on average, ethical managers engage in both more CSR activities and lefewerarnings management, suggesting characteristics of managers choosing to participate in CSR disclosures. Are the voluntary disclosures decided by managers with more moral standards? Are they seeking profit and doing so by lying?

However, Grewal et al (2017), find, on average, a negative market reaction to mandatory disclosures in the EU. This finding, however, is concurrent with a less negative market reaction for those firms who have a higher nononfinancialerformance and those with a higher nonfinancial didisclosureevel pre-mandation. Overall, they found that the increased information leads to net costs for those with weak fifinancialonperformance and benefits for those with strong nonfinancial performance.

Grewal et al (2017) completed another study on voluntary disclosures within the US. InByhe SASB materiality standards, they find that firms voluntarily disclosing more materially identified information have more stock price informativeness.

3.2 Sustainability and other corporate decisions

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3.2.1 Effects on cothe st of capital. In inns.

3.2.2 Effects on forecasting. In inns.

4. Effects of sustainability on corporate governance

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4.1 Effects on executive compensation

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4.2 Limitations and suggestions for future research

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5. Effects of sustainability on audit assurance

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5.1 Empirical predictions on audit assurance

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6. Empirical research design of sustainability studies

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6.1 Sample distributions

Accounting, Organizations, and SoSocietyAOS) has been a leader over the years foinccepting sustainability accounting journal articles.

6.2 Data Sources

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6.3 Multi vs single-country studies

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6.4 Empirical Methodology

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7. Conclusion

Future research can study the newly innovated hybrid organizational forms, such as Benefit Corporations (B-Corps) that are now being introduced in the US and Europe. These structures combine philanthropic societal goals along with the normal profit maximization of businesses (Hiller 2013).