Sustainability Accounting a Brief History and Conceptual Framework 2005 Accounting Forum

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Accounting Forum 29 (2005) 7–26

Sustainability accounting—a brief history and conceptual framework Geoff Lamberton School of Accounting, Southern Cross University, P.O. Box 157, Lismore 2480, Australia

Abstract Research linking accounting to the emerging concept of sustainability surfaced in the early 1990s and has received continuing attention in academic and professional accounting literature. This paper tracks this brief history through to the release of the Sustainability Reporting Guidelines at the World Summit on Sustainable Development in August 2002, consolidating the various approaches into a sustainability accounting framework. The result is a comprehensive reporting model that presents an enormous challenge to business organisations, requiring a significant commitment of resources to achieve widespread implementation. Failure to meet this challenge enables business organisations to continue to avoid accountability for their continuing unsustainability. The paper concludes with a personal view as to how implementation of the sustainability accounting framework could proceed. © 2005 Elsevier Ltd. All rights reserved. Keywords: Global Reporting Initiative; Sustainability Performance Indicators; Sustainability Accounting Framework

1. Introduction Environmental accounting and its most evolved form sustainability accounting (Elkington, 1993), have received continuing attention in the academic accounting literature beginning with the work of Gray in the early 1990s, through to the release of the Sustainability Accounting Guidelines at the World Summit on Sustainable Development in Johannesburg in August, 2002. This paper reviews and consolidates this research into a sustainability accounting framework that captures the breadth and complexity of this new form of accounting. The framework draws on the traditional financial accounting model for its structure, whilst the content of the sustainability accounting framework is derived from E-mail address: [email protected] 0155-9982/$ – see front matter © 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.accfor.2004.11.001

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the various approaches taken by accounting researchers to link accounting to sustainability over the past 10 years.

2. A brief history of sustainability accounting Gray is attributed with much of the conceptual development of sustainability accounting. Gray (1993) identifies three different methods of sustainability accounting 1. Sustainable cost. 2. Natural capital inventory accounting. 3. Input–output analysis. These three methods together with full-cost accounting and triple bottom line (TBL) accounting are discussed in Sections 2.1–2.4, leading to the identification of common themes in Section 2.5 and the specification of a comprehensive sustainability accounting framework in Section 4. 2.1. Sustainable cost and full-cost accounting Sustainable cost is the (hypothetical) cost of restoring the earth to the state it was in prior to an organisation’s impact; that is . . . the amount of money an organisation would have to spend at an end of an accounting period in order to place the biosphere back into the position it was at the start of the accounting period. (Gray, 1994, p. 33) Gray draws on the accounting concept of capital maintenance, and applies it to the biosphere, recognising the need to maintain the stock of natural capital for future generations. A sustainable organisation would be one that maintains natural capital intact for future generations (Gray, 1994). Sustainable cost is deducted from the accounting profit (calculated using generally accepted accounting principles) to arrive at a notional level of sustainable profit or loss. Where the sustainable cost exceeds the accounting profit the degree of unsustainability is measured in monetary terms. The practical problems of valuing external costs such as pollution have been well documented (Mathews, 1993; Pearce & Turner, 1990). Any damage to critical natural capital would, in theory, be valued at infinite cost because it is irreplaceable, leading to the conclusion that the activities of an organisation which damage critical natural capital are unsustainable (Gray, 1994). Unfortunately the science of ecology does not provide clear and unchallenged solutions to environmental problems (Holland & Petersen, 1995); whilst placing costs on a range of possible solutions to environmental problems may prove exhausting (Mathews, 1995). Sustainable cost provides an example of using an established accounting principle, in this case capital maintenance, and applying it to natural rather than financial capital. Gray (1992) acknowledges the inherent dangers of accounting for natural capital within a pricedriven framework, as do critical accounting theorists (Cooper, 1992; Hines, 1991; Lehman, 1996; Maunders & Burritt, 1991).

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Preliminary research projects exploring the practical issues of applying the sustainable cost framework have begun; (see Bebbington & Tan, 1996, 1997 and Howes, 1999). Bebbington and Gray (2001) provide a fascinating account of the difficulties of applying the sustainable cost framework. Difficulties in determining a meaningful estimate of sustainable cost resulted in the recasting of the sustainable cost framework to provide data concerning a range of more sustainable options. This requires the organization to let go of its attachment to the business-as-usual assumption exploring possibly radical alternatives that require costing within the (revised) sustainable cost framework. Another important conclusion drawn by Bebbington and Gray (2001) is that the process of working with an organization and attempting to estimate sustainable cost may prove more valuable than the financial data produced. This is not surprising given that ecological destruction and social inequity have much to do with the (un)ethical underpinnings of our consumer and wealth-obsessed culture (Sivaraksa, 1992), rather than a lack of information. If this is true, the process of disclosing specific aspects of unsustainability, with a detailed exposure of its causes and consideration of alternative paths could prove a significant and cathartic experience. Similar conclusions have been drawn regarding the process of preparing life cycle analyses (Ayres, 1995; Christiansen, 1997) which may indicate we need to spend more energy applying sustainability accounting using field work and case oriented research methods. Sustainable cost and full-cost accounting are not necessarily equivalent forms of accounting (Atkinson, 2002), although both methods attempt to capture environmental costs external to the organization which together with internal costs, provide a more complete picture of total cost. Full cost accounting as with Mathews’ total impact accounting (Mathews, 1993), attempts to capture the total costs resulting from an organisation’s economic activities, including social and environmental costs (CICA, 1994; Deegan & Newson, 1996), attempting to value these impacts in financial terms. This method of accounting is an attempt to counter the misinformation contained within market prices from the omission of social and environmental cost, which leads to a misallocation of resources and widespread social and ecological destruction (Hawken, 1993). 2.2. Natural capital inventory accounting Natural capital inventory accounting involves the recording of stocks of natural capital over time, with changes in stock levels used as an indicator of the (declining) quality of the natural environment. Various types of natural capital stocks are distinguished enabling the recording, monitoring and reporting of depletions or enhancements within distinct categories (Gray, 1994). Gray suggests four categories of natural capital. 1. 2. 3. 4.

Critical, for example, the ozone layer, tropical hardwood, biodiversity. Non-renewable/non-substitutable, for example, oil, petroleum and mineral products. Non-renewable/substitutable, for example, waste disposal, energy usage. Renewable, for example, plantation timber, fisheries.

Natural capital inventory accounting could be predominantly non-financial, tracking resource flows in quantitative, but non-monetary units (Gray, 1992), although Jones (1996) suggests exploring the valuation of natural assets using financial units. Jones (1996, 2003)

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applies the inventory approach to the problem of accounting for biodiversity, adopting a three part process involving the recording, valuing and reporting of natural asset wildlife habitat, flora and fauna, and suggests aggregating records of individual organisations to build national records of natural inventories. The influence of conventional accounting over natural capital inventory accounting is evident in the application of the capital maintenance concept, as well as utilization of the management accounting tool of inventory control. Invoking the axiom of strong sustainability, the capital maintenance concept could be applied to each category of capital (natural and humanmade) recognising that opportunities to substitute humanmade physical or financial capital for natural capital are limited (Costanza & Daly, 1992). Accounting for natural inventories is in its exploratory stage. Both the accuracy and potential usefulness of this information needs to be tested with further theoretical and empirical research. Major challenges involve the identification of the relevant accounting entity to which to apply this method, which may be at the community (Lehman, 1999) or regional level (Gray, 1992), rather than corporate level. Similarly the accounting principle of materiality is critical in identifying the level of detail and the degree of precision required at the data capture stage and reporting stages. Notwithstanding the preceding discussion, whether natural inventory accounts could meaningfully reflect nature’s interconnectedness and enormous diversity is extremely doubtful. 2.3. Input–output analysis Input–output analysis accounts for the physical flow of materials and energy inputs and product and waste outputs in physical units. It aims to measure all materials inputs into the process, and outputs of finished goods, emissions, recycled materials and waste for disposal (Jorgensen, 1993). Resource flows are accounted for using units of volume, although accounting in financial units is considered feasible (Gray, 1994). Input–output analysis uses a balancing technique familiar to accountants, applying the principle what goes in must come out, providing a disciplined approach to the provision of environmental information. Reported advantages of input–output analysis include identification of potential resource and energy savings, it is often the first step in an environmental audit process, and it can facilitate product innovation and pollution prevention strategies, particularly when it forms part of a product and/or process life cycle analysis (Jasch, 1993). Input–output analysis does not measure sustainability or unsustainability; rather it provides a transparent account of the physical flows into and out of a process, enabling further analysis of environmental impact and ultimately sustainability strategies (Gray, 1994; Jasch, 1993). Unlike the previous forms of sustainability accounting discussed, input–output analysis has its origins in materials accounting techniques used in the physical sciences, rather than in financial or management accounting principles or practice. 2.4. Triple bottom line accounting and the Global Reporting Initiative (GRI) Elkington (1999) describes a form of sustainability accounting referred to as triple bottom line (TBL), which aims to report on an organisation’s economic, social and environmental

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impacts. Underpinning TBL accounting is the evolving three dimensional definition of sustainable development (Van den Bergh, 1996; WCED, 1987; Westing, 1996). Some versions of TBL attempt to use monetary units to measure economic, social and environmental performance, whereas others versions such as that used in the GRI Sustainability Accounting Guidelines utilise a wide array of indicators to measure performance toward the goal of sustainability. The use of indicators to estimate variables that cannot be measured precisely has a long history of use in environmental science (Moldan et al., 1997), and is considered appropriate where variables that are inherently complex cannot be directly observed. The latest version of the GRI Sustainability Accounting Guidelines, released at the World Summit on Sustainable Development (WSSD) in Johannesburg in August 2002, provide a rigorous framework for the application of TBL reporting. The Global Reporting Initiative (GRI) is a long-term, multi-stakeholder, international process whose mission is to develop and disseminate globally applicable Sustainable Reporting Guidelines (‘‘Guidelines”). These Guidelines are for voluntary use by organisations for reporting on the economic, environmental, and social dimensions of their activities, products and services. (GRI, 2002) The Guidelines draw on the accepted three-dimensional definition of sustainability using a series of performance indicators to measure each of the economic, environmental and social dimensions, as well as a set of integrated indicators capturing multiple dimensions. The hierarchy of performance indicators included in the GRI framework is provided in Table 1. The economic category of indicators is designed to supplement financial information contained in conventional financial accounting reports, providing information concerning the impact of an organisation’s activities on the 1. economic circumstances of stakeholders; 2. local, national and global economies (GRI, 2002, p. 45). A clear link to sustainability is difficult to observe from these performance indicators (Baker, 2002) particularly given that long term economic impacts are a critical aspect of sustainability. However, the reporting of an organisation’s financial relationships with customers, suppliers, employees and investors discloses the extent of these stakeholders’ reliance on the reporting organization for financial support, and some indication as to potential financial risk if the reporting organization ceases to operate. The environmental indicators specified in the Guidelines are contained within many state-of-the-art environmental reports. Each aspect identified in Table 1 represents criteria relevant to measuring an organisation’s environmental performance. It is recommended in the Guidelines that environmental performance indicators be expressed in absolute and relative (or normalized) terms (GRI, 2002, p. 48), with the latter method enabling comparisons between organizations. A major contribution of the Guidelines is the four categories of social performance indicators covering employee, consumer and human rights, as well as societal issues such as corruption and bribery. Given many of the social performance indicators are difficult to measure in quantitative units, the Guidelines require a range of social policies to be

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Table 1 GRI framework for performance indicators Category

Aspect

Economic

Direct economic impacts

Customers Suppliers Employees Providers of capital Public sector

Environmental

Environmental

Materials Energy Water Biodiversity Emissions, effluents, and waste Suppliers Products and services Compliance Transport Overall

Social

Labour practices and decent work

Employment Labour/management relations Health and safety Training and education Diversity and opportunity

Human rights

Strategy and management Non-discrimination Freedom of association and collective bargaining Child labour Forced and compulsory labour Disciplinary practices Security practices Indigenous rights

Society

Community Bribery and corruption Political contributions Competition and pricing

Product responsibility

Customer health and safety Products and services Advertising Respect for privacy

Source: GRI, 2002, p. 36.

specified, together with a description of the system used to monitor compliance with the policy and results from the monitoring process. Gray (2002) describes social accounting as the universe of possible accountings. This implies that social accounting practice requires careful prioritisation of relevant social information. Sustainability accounting draws its social dimension from the evolving definition of sustainability, which includes the goal of intragenerational equity, usually interpreted as

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the elimination of poverty. The problem of poverty is not directly targeted in the GRI social performance indicators, although some of its causes (human rights violations, health and freedom) are evident, and the financial value of donations is specified as a core economic performance indicator. Limited disclosure could be due to a belief that primarily it is the role of government and not business organisations to eliminate poverty. Nonetheless the business sector does have an obligation to ensure it does not contribute to poverty or its continuance, and activities which do need to be disclosed. In summary, the Guidelines form a noble initiative aimed at increasing the transparency of organisations’ social and environmental impacts, in the belief that if the quality of this information is improved organizational change toward sustainability will occur. However, Broadhead (2002) draws attention to the inherent danger in the incremental management of selected environmental problems at an international level. According to Broadhead regime formation (for example the international regime concerning ozone depletion) and its resulting compromise not only fail to initiate decisive action, but also mask lack of progress toward averting environmental crisis, creating a false impression of material change. Similar to Broadhead’s concerns is the potential misuse by corporate interests of information produced using the Guidelines, reducing sustainability accounting information to environmental propaganda, masking the reality of the environmental crisis and the role of business as a primary cause (Gray, 1992; Lehman, 1995). Critical implementation issues include: voluntary versus statutory compliance; the audit of sustainability reports by qualified and independent third parties; as well as identifying who will bear the cost of producing sustainability accounting information. These issues are discussed in the conclusion to this paper. 2.5. General themes to sustainability accounting In this section five major themes evident in the varied approaches to sustainability accounting discussed in Sections 2.1–2.4 are identified. These themes contribute to the specification of the sustainability accounting framework in Section 3. 2.5.1. Preferred definition of sustainability Applications of TBL are based on contemporary definitions of sustainable development which necessarily include economic, ecological and social dimensions. Absent is any guidance as to how these competing elements are prioritised, although this is more a decision making rather than reporting issue. The three dimensional approach has its roots in the WCED’s definition published in Our Common Future in 1987, where the social evil of poverty was inextricably linked to environmental degradation (WCED, 1987), and economic growth was identified as an essential weapon to fight poverty. However, it is extremely doubtful whether continuing volume measured economic growth is compatible with ecological sustainability (Costanza & Daly, 1992). 2.5.2. Use of indicators Sustainability being a multi dimensional concept is not directly measurable and requires a set of indicators to enable performance toward its multiple objectives to be assessed. Research into the identification of sustainability indicators at the macro level is continuing (see

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for example Azar, Holmberg, & Lindgren, 1996; Moldan et al., 1997; Nilsson & Bergstrom, 1995), and more recent research has focussed on sustainability at the organisational level (Bebbington & Gray, 2001; Lamberton, 1998). Application, for example, of established rules for achieving ecological sustainability at the macro level are inherently difficult to apply at the organisational level (Victor, 1991), and this will continue to hinder the derivation of meaningful micro level sustainability targets. 2.5.3. Multiple units of measurement Although some forms of environmental accounting rely on monetary units to measure environmental and social impacts, an increasing trend, evident in the GRI Guidelines, is the use of multiple units of measurement to assess performance toward the three dimensions of sustainability. Financial units of measurement, the preferred choice for measuring economic performance, are not necessarily suitable for capturing social and ecological impacts, which require an array of measurement tools to capture nature’s multiplicity (Cooper, 1992) and the social equity dimension of sustainability. Qualitative tools, such as narratives to describe an organisation’s social and environmental impacts form a critical part of sustainability accounting (Lehman, 1999). 2.5.4. The interdisciplinary nature of sustainability accounting Given the three dimensional definition of sustainability, it necessarily becomes a concept reaching across and requiring cooperation between the accounting, social and ecological disciplines. This necessitates the construction of a common dialogue to facilitate transdisciplinary discourses, and the formation of interdisciplinary teams to prepare and audit sustainability accounting reports. 2.5.5. Use of traditional accounting principles and practices Most of the various approaches to sustainability accounting draw on traditional accounting principles and/or practice. The capital maintenance concept used in sustainable cost and natural resource inventory accounting, full cost accounting, inventory accounting, and the valuation of environmental assets and liabilities are examples of this reliance. Not surprisingly, the accounting profession’s response to environmental crises draws on the traditions of financial and management accounting, providing familiar principles to navigate through the unfamiliar territory of ecology and sustainability. The five themes listed together with the traditional financial accounting model enable the specification of the sustainability accounting framework in Section 3.1. The components of the traditional financial accounting model are discussed in the next section.

3. Components of the financial accounting model Solomons (1995) describes an accounting model as consisting of the traditional financial statements (profit and loss statement and balance sheet) and the generally accepted accounting principles that underlie their preparation. Elliot and Jacobson (1991) take a similar view of the traditional financial accounting model, including the statement of cash flows in the set of final reports produced.

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Ijiri (1983) identifies accounting records and accounting reports as the major tools of the accountant. Fundamental to the preparation of traditional financial statements are accounting records compiled using tools such as the journal, ledger and trial balance, and most significantly the double entry principle, which increases reliability and influences the form of final reports. According to Ijiri the design of these tools is directly linked to the performance evaluation function of accounting. He states that accounting records and reports are designed to account for . . . performance evaluation relative to the goal assigned to the accountor based on the underlying accountability relationship. (Ijiri, 1983, p. 77) Underlying the provision of financial statements is the assumption that users are primarily interested in the accounting entity’s financial performance, measured by accounting profit and cash flow, and the entity’s financial position measured by the balance sheet. The financial accounting model has evolved to provide information relevant to these assumed primary financial objectives of entrepreneurs. In sustainability accounting the goal assigned to the accountor is the objective of sustainability (or sustainable development). Using a deductive approach (Martin, 1994) a sustainability accounting model can be designed to provide information enabling performance toward this objective to be evaluated. Information provided for general purpose financial reporting should possess the qualitative attributes identified in statement of accounting concept SAC 3 (2002). Similarly, the GRI Guidelines provide a comprehensive set of qualitative attributes of sustainability accounting information, which are included later in this paper as part of the sustainability accounting framework. From the discussions in this section five components are identified as integral to the financial accounting model 1. 2. 3. 4. 5.

The accounting reports (Elliot & Jacobson, 1991). Accounting principles (Solomons, 1995). Accounting records (Ijiri, 1983). The objective of the accounting model (Martin, 1994). Qualitative attributes (SAC 3).

In Section 3.1 a sustainability accounting framework is specified drawing on the general themes identified in Section 2.5 and the five components of the financial accounting model. A justification for sustainability accounting research is that stakeholders, and in particular business decision makers, require a balanced information set, including economic, social and environmental information if decisions are to achieve the multidimensional goal of sustainability. If the accounting profession is to make a constructive contribution to the environmental crisis, it will draw on the accumulated knowledge and experience of accounting tradition. Accountants have significant experience and long established standards for reporting corporate financial performance which should prove useful when preparing sustainability accounting information at the corporate level. What else have accountants to offer? Accounting knowledge may also be used to inform users as to the limitations of and critical assumptions underpinning accounting information (Hines, 1991). Alternatively, as some critical theorists argue, accountants will exacerbate

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the problem and the environment will suffer from attempts by accountants to capture and report its value (Cooper, 1992; Maunders, 1996). The financial accounting model identified in this paper represents a general framework for the capture and reporting of information that has evolved from financial accounting practice. Specifying a sustainability accounting model in the form of the financial accounting model is attempted in this paper to provide structure to sustainability accounting which has developed in a relatively ad hoc manner over the past 15 years. It is difficult to speculate whether this approach will ultimately benefit the environment. Certainly the process of reporting sustainability accounting information is open to manipulation by vested interests. A potentially critical role for accounting is the design of systems to reduce manipulation and increase the qualitative attributes of sustainability accounting information. 3.1. Sustainability accounting framework Fig. 1 displays five components of a sustainability accounting framework drawn from the preceding discussion of the financial accounting model which is expanded into a comprehensive framework later in this paper (refer Fig. 2). An assumption underpinning the specification of this framework is that the issues of: the objective of the reporting model; the principles which underpin application of the model; data capture; reporting frameworks; and the qualitative attributes of the information produced, are critical issues which need to be addressed during the developmental phase to add rigor and structure to the reporting of sustainability accounting information. The five components depicted in Fig. 1 represent the 1. 2. 3. 4. 5.

objective(s) of the sustainability accounting framework; principles which underpin application of the framework; data capture tools, accounting records, and measurement techniques; reports used to present information to stakeholders; qualitative attributes of information reported using the framework.

Fig. 1. Components of the sustainability accounting framework.

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Fig. 2. Comprehensive sustainability accounting framework. 17

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The primary objective of the sustainability accounting framework is to measure organisational performance toward the objective of sustainability. Information measuring performance toward sustainability could serve either the accountability or decision useful objectives evident in the provision of conventional accounting information (Ijiri, 1983). Critical to this objective is the chosen definition of sustainability, which determines the depth and complexity of the accounting framework. If, as is becoming increasingly common, a three dimensional definition of sustainability is adopted, the accounting framework must report on organisational performance from an ecological, social and economic perspective. The primary objective of the sustainability accounting framework together with the chosen definition of sustainability determines the principles which guide the capture and reporting of accounting information. These principles are analogous to the principles and conventions that underpin financial accounting, such as the historical cost, going concern and conservatism principles, and conventions concerning the accounting period and reporting entity. Data management tools used to capture and record sustainability accounting data are analogous to the financial accountant’s journals, ledgers and trial balances used to record financial data. Measurement techniques include the use of performance indicators and valuation methods used to estimate for example, environmental assets and liabilities. Data captured by the sustainability accounting framework would be reported to users in the form of both quantitative and qualitative information and must conform to a series of qualitative attributes. These attributes, listed in Fig. 2, are drawn from the GRI’s Sustainability Reporting Guidelines, and are equivalent to the attributes prescribed for financial accounting data in SAC 3 (2002). In the next section, Fig. 1 is expanded into a comprehensive sustainability accounting framework.

4. Theoretical framework for sustainability accounting Fig. 2 depicts a comprehensive sustainability accounting framework and displays some of the interconnections between the various components within the framework. This framework draws together the five general themes (identified in Section 2.5) evident in environmental accounting research and practice, up to and including the release in 2002 of the GRI Sustainability Accounting Guidelines. Central to the sustainability accounting framework presented in this paper and the Guidelines, is the use of performance indicators to measure the environmental, social and economic dimensions of sustainability. Given the complexity of measurement across the three dimensions of sustainability, multiple units of measurement including narratives of social policy and procedure is envisaged, preferably guided by the supervision of multidisciplinary teams of professionals. The fifth general theme listed in Section 2.5 acknowledges the influence of traditional accounting principles and practice over environmental accounting research. The influence of accounting tradition in this paper is evidenced by the application of the five components of the traditional financial accounting model depicted in Fig. 1, to form the sustainability accounting framework presented in Fig. 2. This structure provides objectives, principles,

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measurement and reporting methods directed at achieving the extensive list of qualitative attributes listed in the Guidelines and discussed in Section 4.5 of this paper. In Sections 4.1–4.5 each of the components of Fig. 2 is discussed in detail. 4.1. Objectives of framework The primary objective of the sustainability accounting framework is to measure performance toward sustainability. Central to this is the debate as to whether sustainability is a relevant goal at the organisational level, and whether it is measurable at this level. The sustainable development concept is widely recognized as a multi-level concept (Starik & Rands, 1995) where levels are highly interdependent. Genuine progress toward global sustainability requires action at every level. Rules have been set for achieving sustainability at the macro level (Daly, 1990) but translation of these rules to the micro level is problematic. As with conventional accounting information, potential internal users of sustainability accounting information can be distinguished from external users. Use by external parties would aim to discharge the accountability of business organisations for their environmental and social impacts to a broad set of external stakeholders. Sustainability accounting information must exhibit the qualitative attributes of transparency and comparability in a relevant sustainability context to enable stakeholders to assess the environmental and social impact of the organization. Society requires information which renders the impact of an organisation’s operations transparent so its contribution to the goal of sustainability can be assessed. An important aspect of sustainability accounts is to establish measurable sustainability targets to enable stakeholders to assess an organisation’s level of unsustainability. The provision of sustainability accounting information to internal users would focus on the provision of relevant and decision useful information to management. For example, an array of performance indicators and life cycle data compared to relevant sustainability targets would assist the internal management of the organization toward the multidimensional sustainability objective. 4.2. Underlying principles Major principles that underpin the application of the sustainability accounting framework are listed in the second column of Fig. 2. The chosen definition of sustainability will shape the scope and content of an organisation’s sustainability accounting framework. The increasingly accepted three dimensional definition expands the sustainability concept to include ecological, social and (specifically longer term) economic objectives. Measuring performance toward a multidimensional conception of sustainability requires an array of social, environmental and economic indicators. The problem of prioritization of the competing dimensions of sustainability leads to differing interpretations of sustainability accounting information by, for example, business management compared to environmentalists. One response to this is to develop integrated performance indicators which attempt to measure two or more dimensions of sustainability, such as eco-efficiency indicators. A contentious issue relates to identifying the appropriate entity for which sustainability accounts are prepared. Applying the sustainability concept at the micro level by construct-

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ing sustainability accounts for individual organisations is based on the (possibly mistaken) assumption that reported information will lead to organizational change toward sustainability (Lehman, 1999). Research exploring sustainability accounting at the household, community, regional and national levels is necessary to exert sufficient pressure to drive the transition to sustainability. Given the systemic nature of human impact on the natural environment the boundaries of a sustainability accounting system need to be clearly defined to limit the scope to a manageable exercise. First-level environmental impacts refer to direct impacts on the environment. Second-level environmental impacts are impacts caused by suppliers of inputs. Third-level impacts are incidental to the provision of inputs. In prior research boundaries have been drawn to include first and second level environmental impacts, but to exclude third level impacts (Bebbington & Tan, 1997). Similarly the period over which organisation performance toward the goal of sustainability is assessed needs to be defined. Alternatives to the financial accounting conventions of (typically) reporting monthly, quarterly and/or annually are reporting continuously by, for example, updating websites (maybe many times per day) with latest information, and/or reporting over the life cycle of an organisation’s products and services. The use of life cycle analysis is considered critical to the sustainability accounting process as it contributes to changing the time horizon of decision makers from the short term accounting period to the longer term product life cycle (Christiansen, 1997). Including social and environmental factors in the sustainability concept necessitates the use of an array of measurement units. Monetary units are relevant for assessing economic performance, but are not appropriate for assessing social or environmental performance. Attempts to monetarise social and ecological impacts risks seriously misrepresenting and understating the significance of these issues relative to economic issues. The accounting principle of capital maintenance is applied to sustainability accounting in Gray’s suggested sustainable cost and natural capital inventory approaches (Gray, 1993). Defining sustainable development in the context of the capital maintenance principle implies maintaining stocks of ecological, social and economic capital, and leads to the contentious issue of substitutability between categories of stock, and the distinction between weak and strong versions of sustainability (Costanza & Daly, 1992). The financial accounting concept of materiality is also relevant to the sustainability accounting framework. Given the interconnectedness inherent in the natural environment, it is not feasible to capture and report all human caused environmental impacts. Impacts need to be prioritised depending on their significance as a potential threat to humankind or the natural environment and their relevance to stakeholders. Lesser threats that would not influence users could be excluded from sustainability reports based on the principle of materiality. The principle of materiality needs to be considered together with the ecologically based precautionary principle, whereby action to alleviate environmental impacts is not delayed due to scientific uncertainty (Chiras, 1992). Impacts that may not be precisely measurable, or where the risk is low still may require reporting to users. An example is highmagnitude-low-probability risks (Rubenstein, 1994) which need to be considered given their potential to influence users given their potential for ecological, social and economic destruction.

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4.3. Data capture and measurement techniques The use of a wide array of indicators to measure performance toward sustainability is recommended in the GRI Guidelines. Performance indicators have a relatively short history of use in management accounting with the development of balanced scorecards which identify critical indicators (Kaplan & Norton, 1996) in recognition of the multidimensional nature of organizational performance. Environmental accounting research has focused considerable attention on the valuation of environmental assets, liabilities and costs, in an attempt to account for the environment using generally accepted accounting principles. Milne (1991) reviews a range of estimation techniques for facilitating the valuation process. Lehman (1996) warns that valuing environmental assets is potentially destructive, and suggests sustainability accounting is more about providing narratives of the social and environmental impact of corporate activities. Life cycle analysis provides an enormous challenge given the complexity and detailed measurement of environmental impacts. As an evaluation technique it is inherently imprecise (Ayres, 1995) and simplified, non-quantitative versions which encourage the transition to life-cycle thinking may be more cost effective. Environmental data can be captured using generalised scientific models to estimate emission levels and resource consumption. In cases where resources are purchased from suppliers, direct measurement by technical instrumentation is possible. For example water meters record consumption by the consumer at the source, as do electricity meters. In many cases sampling method is the only cost effective method of data capture due to the excessive cost of measuring all emissions and natural resources consumed. The poor quality of data required to calculate environmental performance indicators and to perform life cycle analysis is well documented (Lee, O’Callaghan, & Allen, 1995). Methods and sources used to capture data are broad, varied and potentially unreliable, due to the practice of environmental accounting being at an early stage in its evolution. Primary records forming part of the sustainable accounting system could include, for example, a pollution inventory and a resource consumption inventory. As with subsidiary records maintained in conventional accounting systems these inventories are used to record data from which the final reports are extracted. 4.4. Reporting formats The fourth component of the sustainability accounting framework depicted in Fig. 2 concerns the dissemination of information to users and involves two key questions: 1. What is the appropriate format of sustainability accounting reports? 2. How frequently should sustainability accounting information be disseminated to users? Examples of reporting formats used to present sustainability accounting information include

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• Tables of performance indicators which measure actual values of each indicator for a specified accounting period (CICA, 1994). Usefulness of information is increased where actual values are compared to relevant sustainability targets (Lamberton, 2000). • Inventories of stocks of natural capital segregated into various categories (Jones, 1996). • Cost estimates of sustainable alternatives to current business practice (Bebbington & Gray, 2001). • Input–output analysis (Jasch, 1993). • Life cycle analyses. • Lists of non compliance with relevant legislation incidents (for example, see WMC, 2001). • Narratives of environmental and social impacts. These reports could be prepared periodically, or in the case of LCA, as required over the useful life of a product or process, and preferably prior to the design decision being taken. Some types of sustainability accounting information could be disseminated using web sites as it becomes available, rather than conforming to a fixed reporting schedule. This places the onus on users to check web sites regularly for updates. 4.5. Qualitative attributes The fifth component of the sustainability accounting framework identifies qualitative attributes of sustainability accounting information which have been drawn from the GRI Guidelines. The Guidelines provide a comprehensive list of attributes knitted together into a cohesive framework. These attributes are referred to as reporting principles; refer Table 2 which is taken from page 23 of the Guidelines. These attributes, drawn predominantly from financial accounting are designed to inform users as to how reports have been prepared by the reporting organization (GRI, 2002, p. 22). The primary attributes specified in the Guidelines are 1. Transparency which requires (f)ull disclosure of the processes, procedures, and assumptions in report preparation (GRI, 2002, p. 24). 2. Inclusiveness which requires (t)he reporting organization [to] systematically engage its stakeholders to help focus and continually enhance the quality of its reports (GRI, 2002, p. 24). 3. Auditability which requires (r)eported data and information [should] be recorded, compiled, analysed, and disclosed in a way that would enable internal auditors or external assurance providers to attest to its reliability (GRI, 2002, p. 25). The remaining eight qualitative attributes are designed to ensure the quality, reliability and accessibility of information reported which is relevant to the organizational objective of sustainability. As stated in SAC 3 Qualitative Characteristics of Financial Information, sustainability accounting information must possess these qualitative attributes to enable preparers of reports to discharge their accountability to users (SAC 3, 2002, p. 23).

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Table 2 Reporting principles

Source: GRI, 2002, p. 23.

5. Conclusion This paper reviews the relatively short history of sustainability accounting theory and practice, and draws upon the structure of the financial accounting model to develop a sustainability accounting framework. The aim of the framework is to provide direction for future development of sustainability accounting at both conceptual and applied levels. Whether or not it will prove beneficial to apply the structure of the traditional financial accounting model to the sustainability accounting framework is unknown. Ideally sustainability accounting practice should benefit from the history of financial and management accounting, although such an approach may stifle creative development and reinforce existing (environmental) problems and their (accounting) causes. The sustainability accounting framework depicted in Fig. 2 presents an enormous challenge to business. The breadth of reporting to include aspects of environmental, social

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and economic performance which conform to the stringent qualitative standards set in the GRI Guidelines requires a large commitment of resources to achieve widespread application. Given that the desired outcome from the dissemination of sustainability accounting information is radical change to sustainable business practice; it is unrealistic to expect business to voluntarily commit the resources required for full implementation. Furthermore, humankind has too much to lose if this transition does not take place. This paper views the development of sustainability accounting through the lens of the traditional financial accounting model. What this reveals is that sustainability accounting as theorised and practiced exhibits some of the attributes of the traditional financial accounting model but much work is required for sustainability accounting practice to achieve the rigor and integrity defined by the list of qualitative attributes. One option for financing the implementation of sustainability reporting would be to use environmental taxes to both raise revenue and to discourage negative environmental impacts. Once the sustainability accounting system is established tax rates could be linked to (sustainability) performance outcomes to encourage the transition to sustainability at the organizational level. Environmental taxes are a common policy option within green political parties, and have been established as policy during the 1990s in Europe (Ekins, 1999). A critical assumption of this research is that corporate impacts on the environment can be changed by the provision of relevant information to stakeholders. Linking sustainability performance to rates of tax incurred at the corporate level should increase the likelihood of corporate management responding to the information produced. The expectation that business organisations pass environmental taxes on to consumers would partially offset the widespread underpricing of economic goods and services from the failure to include environmental and social costs in market prices. The formation of independent transdisciplinary sustainability teams to prepare and audit sustainability accounts would add credibility to the process. Accountants will need to broaden their knowledge and establish a common dialogue to facilitate discourse with social and ecological professionals. A more cost effective alternative to the regular and continuous preparation of sustainability accounting information could be to prepare sustainability reports (say) every 3 years, using data the company is required to collect annually. The future direction of sustainability accounting research must continue to display the essential quality of diversity. Attempts to increase the coverage, depth and quality of sustainability accounting information need to be complimented by research which draws on knowledge from outside conventional accounting and business. An interesting example is provided by the joint project between GPI Atlantic and the Centre for Bhutan Studies, who report work in progress toward the measurement of human, social and natural capital including environmental quality, health, security, equity, education and free time (Coleman, 2004, p. 5). This project draws on the Buddhist foundation and commitment of the Bhutan Government to achieve genuine progress toward operationalising the objective of Gross National Happiness. Innovative projects drawing, where appropriate on alternative cultural perspective are needed to inform an accounting that is capable of making a genuine contribution to sustainability.

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