To begin to understand what accounting for sustainable development is, an understanding of sustainability must first be established. Currently sustainability has been difficult to define because it impacts a wide array of issues relevant not only to businesses, but also to a much broader set of external stakeholders including stakeholders at a community, national, and international level. According to Birkin and Woodward, sustainable development is seen by the Brundtland Commission as a "system of development that meets the needs of the present without compromising the ability of future generations to meet their own needs." This definition of sustainable development sets up a key pillar of sustainability that is known as intergenerational equity. Under intergenerational equity, this balancing of current and future generational needs occurs (Herath & Gamini, 2005). According to Birkin and Woodward, intergenerational equity is achieved through the separation of stock resources and flow resources. Stock resources are those resources which are not renewable without human intervention such as fossil fuels and mineral deposits. Flow resources are those resources that are renewable without human intervention such as animal stocks and forests. Through recognition of the separation of stock and flow resources, current and future generations may recognize how to correctly resource usage for the future (Birkin & Woodward, 1997). With business application in mind, this resource separation is also applicable to businesses because their own reduction of ecosystem resources reduces their own survival potential into the future (Birkin & Woodward, 1997). Based on these factors contributing to sustainable development, we may move to defining what accounting for sustainable development is and what has led to accounting for sustainable development.
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According to Birkin & Woodward, sustainable development is a long-term goal that has no immediate end and should be sought after in order to achieve better management models. Understanding the implications that sustainable development has for management directly pours into accounting for sustainable development. In order for management to begin understanding how their management models may be improved by accounting for sustainable development, they must be presented with information provided by the accounting profession that presents the effects of SD models.
Sustainable development supports environmental quality, social justice, and wealth creation. The first two of these factors further contribute to overall wealth creation. For firms that establish a commitment to sustainable development, they may begin reap the benefits that create wealth. Firms pushing for more efficient and effective sustainable development systems experience advances in technology and innovation. These two factors are what underlay much of the wealth that results (O'Dwyer, 2001). In order to achieve successful sustainable development, O'Dwyer presents accounting for the "Triple Bottom-Line," which incorporates measurement of economic, social, and environmental impacts. This essentially is what forms the beginnings of accounting for sustainable development, valuation of the true impacts firms have on outside stakeholders, including the issues related to natural resources. Another accounting principle that drives accounting for sustainable development is the Full Cost Accounting Principle, which incorporates the full cost of production into market prices. The market prices would require the impacts of environmental externalities, including waste production and emission levels (O'Dwyer, 2001). These types of accounting methods and principles that move towards accounting for issues related the environmental, social justice, and intergenerational equity are what form the basis of accounting for sustainable development. With the broad definition of what sustainability is due to the variety of issues it touches, accounting for sustainable development faces this same issue. Therefore, we may summarize accounting for sustainable development by saying that it is accounting for the future and the impacts firms have outside of their business.
Accountant's Role in Sustainable Development
With an established foundation of what accounting for sustainable development is, we must now address the issue of how accountants can fulfill this role. How can accountants account for sustainable development at the firm level? How can they account for sustainable development at the national level? Though steered more toward accounting for the environment, Birkin and Woodward provide some insight into what role accountants can play in accounting for sustainable development through their six part series entitled Management Accounting for Sustainable Development. According to Birkin and Woodward, Management accountants can begin to fill this role by incorporating an analysis of environmental issues for firms including: environmental prices, environmental costs, and environmental consumption rates. A clear example of presenting accounting for these ecological costs is the recognition of natural capital for project analysis. According to Birkin and Woodward, accountants must take into account environmental impacts when performing project analysis. Through taking a role in including environmental impacts may appear to stray from sustainable development accounting, environmental costs not only reflect sustainable development, but significantly contribute in moving toward the establishment of accounting for sustainable development. As stated previously, sustainable development has been very difficult to define, which has led to a very broad definition. The foundation however is still intergenerational needs and related costs. Accounting for environmental issues can tremendously help construct a foundation for accounting for sustainable development by recognizing that with rapid depletion of natural resources, and lingering environmental impacts after present generations, there is a direct relationship between accounting for the environment and accounting for sustainable development.
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At a more general level of analysis, Birkin and Woodward believe that that one of the key elements of establishing accounting for sustainable development is for firms to begin to stop seeing themselves in isolation. Accountants can help push firms to expand their views of stakeholder impacts either through direct influences in discussing such issues with firm management, or from an external level by setting standards through national and international accounting organizations. Though firms in general can be very short-term focused, accountants can continue to fulfill this role by displaying that firms can maximize wealth through recognizing that they are supported by healthy social and ecological systems (Birkin & Woodward, 1997).
With the influence of accounting standards on an international level, accounting standard setters such as the Financial Accounting Standards Board in the United States and the International Accounting Standards board stand to make significant impacts regarding accounting for sustainable development. Whether in the United States, or at the global level, accounting standards significantly influence sustainable development. The influence of these boards flows from the national level to firm level accounting. Changes in their standards can begin to move towards accounting for sustainable development. This is displayed by a simple example presented by Herath and Gamini in accounting for depreciation. Based on standards issued by the IASB and FASB, only manmade objects can be depreciated, natural resources cannot. With rapid depletion and negative externalities affecting a plethora of natural resources from bays to mines, these resources should reflect the damage they are taking. Their value is declining due to environmental degradation, and should be accounted for appropriately. Currently, these impacts are not accounted for under the major standards of IFRS and GAAP. Accountants can play a role in beginning to account for sustainable development by influencing the professional accounting standards board, or by taking more direct action if they stand as directors of these boards.
Establishment of accounting standards spill over into the reporting role that accountants play for firms and even at the national level for governments and their related agencies. The standards established by the IASB and FASB influence how organizations report their activities. Some firms and organizations have taken a step forward in moving towards more transparent, ethical, and sustainable reporting through voluntary reports such as the Global Reporting Initiative (GRI). Most firms however remain to be pushed toward more transparent reporting directly the accounting standards boards. It is based on this fact that reporting should become comprehensive and follow standards that contribute to sustainable development. Sharma presents five focus areas that would influence a move towards standards that promote sustainable development: eco-efficiency, corporate social responsibility, climate and energy, and natural resources. If focus is placed on these key areas, more comprehensive reporting of economic performance will result (Sharma, 2005). Taking Sharma's factors into play, accountants can begin to make a greater movement towards accounting for sustainable development through the reporting function.
At the national level, accountants can better establish accounting for sustainable development by influencing many of the key measurements of wealth and growth. According to Birkin and Woodward, one measurement currently in place that does not take into account sustainable development is GNP or gross national product. GNP is a measure of all of the goods and services produced within a nation in one year. GNP has two significant issues, it does not take into account social welfare, and it cannot measure goods that do not have monetary value (Birkin & Woodward, 1997). As a result of these deficiencies, GNP does not include measurements regarding the value of nature, and in effect nature is ignored when accounting at the national level with this metric. In order to create a more effective GNP measurement, or a completely different measurement of wealth and overall growth, accountants with national influence must take into account more broad national factors such as a measurement of nature. Birkin and Woodward suggest including not only the positive and long-term value of nature, but increase the weight of factors that promote the long-term positive impacts on nature such as wind turbines and solar panel manufacturers.
Herath and Gamini shed more light on national accounting metrics through their work entitled, Sustainable development and environmental accounting: the challenge to the economics and accounting profession. According to Herath and Gamini, GDP has several weaknesses including an overall lack of accounting for damages to environmental resources. In evaluation of GDP, Herath and Gamini also expand their discussion to include the negative impacts of GNP. Both measurements fail to account for environmental degradation, natural resources are given a value of zero in both metrics, and actions taken to fix the damages caused by pollution (exemplified in health care) actually increase GNP (Herath & Gamini, 2005). Herath and Gamini recognize that there is an inherent difficulty in accounting for environmental damage, however it is stated that the challenge can be met through a movement towards greater collaboration for valuation methods among the economics and accounting profession. This presents another unique aspect to how accountants can play a role in accounting for sustainable development. Through inclusion of other professions and professional organizations such as the inclusion of economists, accountants can push for increased collaboration and influence not only at the national level, but also at the firm level. With greater research on valuation methods for natural resources and environmental damage, accountants may present more applicable and understandable accounting methods at the firm and national level. Increasing collaboration alone could put accountants at the forefront of sustainable development. As a result of this position, accountants may increase communication and information regarding sustainable development and its benefits.
Accounting Tools for Sustainable Development and Challenges to Face
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As presented previously, accountants can play a tremendous role in beginning to establish accounting for sustainable development at the firm level, national level, and even international level. In order to progress with this role however, accountants must present and implement a variety of models that can not only create a better understanding of how sustainable development can impact businesses, but also promote wealth creation for firms.
To account for sustainable development at the national level, HDI, or the Human Development Index presents an tremendously useful tool. HDI has been published annually by the UNDP since 1990. According to Accounting for Sustainability-Greening the Human Development Index, by Dr. Mona Ray, HDI uses no monetary values and maintains the following components: Long and Healthy Life which is measured in years lived, Knowledge which is measured in years of schooling, and Decent Standard of Living which is measured as GNI per capita. However, according to Ray, HDI has the following limitations: it has a geometric mean of three indicators where different values can lead to the same HDI, HDI is still related to GDP because GNI is part of the calculation, and HDI does not have an ecological dimension added to its measurement. As a result of these inadequacies, Ray presents SHDI, or the Sustainable Human Development Index, which replaces Longevity with Ecological Footprint in HDI's computation. The benefits of applying SHDI is that it can: be expanded to be calculated at the national and global scale, it covers six types of land to better represent carbon footprints, and it measures how much stress each country is creating on the environment (Accounting for Sustainability-Greening the Human Development Index- Dr. Mona Ray). Through SHDI advances can be made in better representing environmental impacts with its added criteria of ecological footprint and land diversity through unique carbon footprints, SHDI presents a significant tool in accounting for sustainable development at the national level.
Not all models however must rely on exact measurements and standards to begin implementing accounting for sustainable development. Birkin and Woodward present paraphrased guidelines issued by The Business Council for Sustainable Development. Each of these guidelines serves to aid firms in establishing sustainable development and accounting for it. The guidelines are as follows:
Corporations should have environmentally responsive strategies, products, production systems, and policies
Corporations should promote resource and energy conservation and adopt cleaner production technologies
Corporations should minimize and manage waste streams, recycle and reuse materials and reduce pollution
Corporations should engage in customer, employee and public education on environmental issues
Corporations must extend themselves to fulfilling the broader goals of sustainability with respect to patterns of consumption, global food security and ecosystem resources
With these guidelines, any firm can begin to establish movement towards sustainable development, and further management accounting for sustainable development. As displayed with internal control frameworks, the tone must be set at the top of the organization, and the same idea must be established with accounting for sustainable development. Management must follow guidelines such as those presented by The Business Council for Sustainable Development, in order to achieve the benefits of accounting for sustainable development.
Taking a more detailed approach in accounting for sustainable development and information flow within firms, the Cloverleaf model presented by Birkin and Woodward stands as a viable model for further implementation and analysis. Within the Cloverleaf model, the enterprise sits at the center, and it is surrounded by four categories of identified interests. These four interests are: resource flow, resource flow impact, stakeholder analysis, and carrying capacity. The Cloverleaf diagram can be seen in Figure 1 below. Resource flow displays the main flow of resources through the business from right to left within the diagram. Resource flow impact represents the information taken from the business relating to social and ecological impacts of the resource flows inside and outside of the company. This category is represented by the main stream moving from the bottom to the top of the diagram. Stakeholder analysis is presented through information flow lines that form the clover leaves along with the white information pools that reflect the human community. Carrying capacity is represented by a thick black line between the outer ecosystem information pool which is shaded in, and the inner human community information pool. In using the Cloverleaf Model, each of the four categories is evaluated using unique measurements that present their overall progression in relation to sustainable development. The Cloverleaf model however makes three key assumptions: current environmental projects are essential to the mission of the organization and will be continued throughout the year, the projects in development are taken in a cost-efficient and optimal manner, and the projects have been projected to be cost-effective in environmental terms for the current year (Birkin & Woodward, 1997).
The Cloverleaf model presents a very effective tool to begin to fully understand and analyze a firm's impacts outside of its own enterprise. Being aware of carrying capacity, external stakeholders, and how projects related to sustainable development tremendously contribute to accounting for sustainable development through information collection and analysis. This model may even be applied at a national and international level. For instance, understanding waste production and what projects can help reduce the impacts of waste production along with reducing negative impacts on the human community.
Figure 1: Cloverleaf model taken from: Birkin, Frank, and David Woodward. "Part 6: Management Accounting for Sustainable Development (Zero-based Approach for Accounting for Sustainable Development)." ABI/INFORM Global. N.p., Dec. 1997. Web. Apr. 2013.
Impact of Accounting for Sustainable Development
Accounting for sustainable development can have a tremendous impact on business processes, society, environmental issues, technology, innovation, and variety of the other issues. At our present state, we are beginning to face many difficulties regarding overall growth and resource usage. According to Birkin and Woodward, in order to meet long-term objectives regarding sustainable development, the following principles must be followed: resources usage cannot exceed resource renewal rates, soil erosion cannot exceed soil formation, species extinction cannot exceed species evolution, carbon emissions cannot exceed carbon fixation, and human births cannot exceed human deaths. If we cannot meet these sustainable principles, economic activity will be directly impacted (Birkin & Woodward, 1997). Accounting for sustainable development can begin to help firms and nations fulfill these principles through the variety of methods previously introduced.
Bent and Richardson state how sustainable accounting will impact the external environment in their report The SIGMA Guidelines: Sustainability Accounting Guide. Professional accounting bodies are currently encouraging organizations to measure, manage, and report "the impact of environmental risks and liabilities on their organizations' financial position" (Bent & Richardson, 2003). Negative environmental impacts must then be represented as potential liabilities to be accounted for on the company's financials. For example, many areas of Great Britain have begun using the Wessex model to account for these negative impacts. Through this model, companies are fined based on the difference between their present emissions and the national sustainability target. The intention of this model is to encourage companies to reduce their emissions by as much as possible to avoid being fined. The report also mentioned how sustainable accounting will impact the internal environment. Companies will need to account for less tangible costs because the "costs and benefits that may be assessable in financial terms are likely to arise from improved sustainability management" (Bent & Richardson). This may include losses and gains of goodwill from a project, changing environmental attitudes of suppliers, customers, and employees, and advertising issues from sustainability performance. Companies will also need to focus on sustainability focused costs.
Through accountants and the accounting profession working with firms and nations to begin shifting to accounting systems that uphold principles of sustainable development, we can truly begin to address the many issues we currently face regarding the environment, natural resource depletion, and issues with distributive justice. Adhering to the idea of intergenerational equity alone sets a tremendous foundation to begin working toward sustainable development. Accounting for true costs of our economic activity will address our present problems. Moving to management accounting models that incorporate external stakeholders and natural resources such as in the Cloverleaf Model, added-value will also be created for firms by driving innovation and the need for change with stagnant management models.
Accounting for sustainable development can help firms and nations adhere to the principles set by Birkin and Woodward, but management accounting alone cannot address all issues related to sustainable development. Sustainable development is too expansive to be addressed by accounting methods alone, but the profession can still make a significant impact with advanced accounting tools, techniques, and overarching principles into the future (Birkin & Woodward, 1997).