Social Accounting: Measuring sustainability

Sustainability – what are the merits and limits of social accounting? What is social accounting? What is sustainable accounting?

Social Accounting: Measuring sustainability. By CoBS Editor Guragam Singh. Related research: Handbook on Ethics in Finance, International Handbooks in Business Ethics,

What the numbers can’t – and don’t – say

Sustainability has become one of the most pressing issues of the day, with the entire world becoming more aware of problems such as environmental degradation, inequality, ethics, and climate change. As such, sustainability involves maintaining ‘a social and environmental balance’ that reduces negative impact in the future.

In light of this, it is important that a form of measurement—or accounting—be developed. This measurement has been given the name ‘social accounting’, and can also be replaced by terms such as ‘sustainable accounting’ and ‘non-financial accounting’, says Prof Zicari. Yet, what it actually measures is not very clear, for there are various parameters that represent the complex nature of social and environmental impact.

The growing volume of information contained in reports on sustainability published by corporate houses is proof of this problem, for there is a distinction between ‘comprehensiveness’ and ‘comprehension’—as the reports become larger, the more difficult it is to understand them. To top it all, social and environmental indicators are not always accounted for using currency units, which are widely understood.

Moreover, conventional accounting dates from around the fifteenth century, and has well established practices and conventions. By contrast, social accounting took its first steps in the 1970s and gained traction in the 1990s, mainly in Europe, with the idea that accounting should encompass more than just economic impact. This means that the field, while more developed today, still has some ground to cover before being as uniform as its financial counterpart.

Report to impress

One issue that needs to be addressed is that of reporting. Until now, social reporting has generally been voluntary, although some regulation does exist, mostly in Europe. Yet, given the freedom to report, many companies choose to report essentially to gain legitimacy, for companies need to address societal expectations.

In addition, a study of corporate reports in the USA reveals that companies with not-so-stellar environmental performance tend to use more optimistic language, which suggests that some environmental disclosure is strategic. Even if one assumes that companies do not provide misleading information, companies can’t be expected to provide open-access to all their social and environmental information.

This brings us to the question of whether regulation will help—for even though CSR actions may be voluntary, and thus out of the scope of a firm’s duties, there is some consensus that some form of compulsory reporting will increase the information available and also comparability among various reports.

Spare the rod

Soft-law deals with existing reporting frameworks—such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Boards (SASB), and Integrated Reporting (IR)—and even though compliance to these frameworks is voluntary, compliant companies have to conform to a certain structure when publishing data. Despite this standardization, ‘comparability among companies using the same reporting standard can still be difficult’, according to Prof Zicari. But it is not a lost cause, for voluntary social reporting can still be used to engage with stakeholders.

Hard-law, on the other hand, requires mandatory social disclosures and while it increases social reporting, as evidenced in some studies in both Spain and Italy, quantity does not mean quality. Further, social reporting is merely a means to an end—sustainability—not an end in itself. Achieving sustainability will perhaps require more—an active civil society that will use social reporting tools to drive the change needed.

To this end, previous research suggests that regulations should foster involvement of civil society, promote easy access to sustainability data, and presentation of the said data in a comparable manner.

An insider’s account

But reporting only takes into account half the story, for it doesn’t really capture what goes on inside the firm. For instance, a case study focused on a small industrial company in New Zealand, with a CEO genuinely committed to CSR, facing no internal resistance, and with initiatives such as inclusive hiring—shows that implementing social accounting is not a piece of cake, no matter how favourable conditions may be.

This is perhaps because of the level of integration between a firm’s internal indicators, also known as the ‘management control system’ (MCS) and the firm’s CSR indicators. The ideal case is one where the firm’s CSR indicators are a part of the MCS, allowing the firm to pursue a developed sustainability strategy.

Given how managers acting in good faith and little internal resistance in their companies can also fail at achieving sustainability, a need for an integrated approach is felt. This integration may come from a clearer definition of CSR together with corporate performance, as opposed to an approach where CSR is the responsibility only of a certain team within the overall organisation.

Intertwined

The next step is to consider how social reporting relates to its traditional counterpart—the financial result. And while one may assume these to be isolated from one another, the reality is a little more nuanced. This is because there is an overlap of audiences—an expense by a company to say, buy a new equipment to reduce pollution has an impact on the bottom line, as well as on the environment.

Similarly, an investor could like to look at the finances to see the where the company is headed and also at the social report to better understand the risks involved.

And while several frameworks have attempted to identify a cause and consequence relation between social and conventional accounting, a clear link is yet to be found. As such, managers may implement sustainability strategies when deemed appropriate, even if a business argument for one cannot be made.

Managers may also want to choose their framework carefully, for each one of them has different indicators. For example, the GRI includes a large set of varied indicators, targeting multiple stakeholders, while the SASB’s indicators differ by industry.

The big picture

One should also not lose sight of the fact that social accounting is not the end goal. Sustainability is. This brings the debate to a crucial argument—whether social accounting will help achieve that objective. And while some research suggests that is indeed the case, the big picture tells a different story.

This is because studies suggest that social accounting can lead to ‘institutional appropriation’—marginal improvements without significant change. This is not to say that the entire exercise has been in vain—large companies across the globe now release social reports and social reporting is now a mainstream academic discipline rather than being a niche field.

One problem is that improvements in large corporations do not compensate for business-as-usual trends in small and medium companies that form the bulk of the production and employment bandwagon.

Furthermore, social accounting increases disclosure that may lead to token improvements without challenging the status quo. This is akin to treating the symptom but not the cause. For example, transportation-related accounting may lead to improvements in numbers such as fuel efficiency and tonnes of emissions. Yet, it does nothing to answer more fundamental questions such as the need to travel so much. The COVID-19 crisis is a good example of how it took a global pandemic, not social accounting, to make real change possible—business meetings only now started to be increasingly held online despite this being possible before.

As such, there is a need to be aware of what social accounting can and cannot do. For it is not a magic wand that when waved will simply replace problems with sustainable solutions. To that end, a concerted effort from an active citizenry and the use of tools from other areas such as design thinking can also go a long way to save us and our future, from ourselves.

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2 responses to “Social Accounting: Measuring sustainability

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