When Sustainability means Accountability

PREMISE: with this post we aim at raising attention around the relationship between Sustainability and Accountability.  According to literature (e.g., Sharma and Henriques, 2005), the development of sustainability-oriented strategies and practices is greatly driven/influenced by stakeholders’ demand.  Stakeholder groups (Governments, NGOs, Local communities, shareholders, customers, etc.), however, have different and contrasting goals, which results in a disparate number of sustainability requirements (Hall and Vredenburg, 2005).  Therefore, in practice, sustainability-oriented strategies and practices vary extensively in terms of focus (CO2, Water, Energy, Waste, Health and safety, Child labor and Workers Rights, etc.) and  extension (e.g., be developed inside a firm’s boundaries or, instead, cover several tiers of a supply chain).  The question, thus, becomes: What should companies account for? and, Why? Here, we approach the sustainability-accountability issue, concluding that future research should be developed to provide some more insights.

Few months ago we provided initial evidence of the growing trend characterizing  sustainability-oriented programs  in businesses.  Nowadays, this trend does not seem to slow down:  a recent  KPMG International CSR Survey found that 95% of the world’s 250 largest companies are strongly committed towards sustainability and are actually disclosing information around their environmental and social impacts.

By carefully observing the phenomenon of sustainability, one may also recognize an enlargement in the scale of sustainability-related strategies and practices: from a focus on the focal organization and on environmental issues, towards a more supply chain oriented perspective that covers both environmental and social dimensions of the triple bottom line. For instance, corporate initiatives are moving from Scope 1 (i.e., emissions I own and emit – direct emissions) required by regulation, towards Scope 2 (i.e., indirect emissions reporting due to electricity and district heating and cooling) and even Scope 3 (i.e., indirect emissions along the entire value chain, from sourcing to utilization of products and even recycling them). The Greenhouse Gas Protocol (GHCP) initiative is a SCOPE 3 remarkable example. On the social side, a recent important initiative is the “conflict minerals’’ provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act

Given this trend,  the question becomes: what should companies account for? and why? Trying to address this question, we looked at existing initiatives around this topic. The existing G3 guidelines (i.e., third version of the Global Reporting Initiative), for instance, state that:

The Sustainability Report Boundary should include the entities over which the reporting organization exercises control or significant influence both in and through its relationships with various entities upstream (e.g., supply chain) and downstream (e.g., distribution and customers).

The emphasis here is on what a firm can directly control for.

Conversely, the current G4 draft (e.g., last version of the GRI guidelines) includes substantially more indicators for supply chain performance than G3, and suggests that companies should account for all the material aspects of their business. Materiality, however, is something very broad: the G4 principle suggests that a firm’s report “should covers topics and indicators that substantively influence the assessments and decisions of stakeholders”. This recalls a general definition of materiality as what would be useful to stakeholders considering a “total mix” of information in their decision making (for further details, see a recent study by the Harvard University on “materiality and sustainability“).

The issue of materiality leads to the concept of accountability. Broadly speaking, accountability refers to the necessity for businesses (pertaining to any industry) to take cognizance of stakeholders’ perspectives  and manage any issue that may be salient to them, although out of their control. Stakeholders may indeed affect a firm’s performance by varying the provision of resources that are necessary to its survival and success. Nowadays, even stakeholders that find it hard to directly exert power on a firm (e.g., citizens) may take advantage from several initiatives managed by other stakeholders groups (e.g., NGOs) and indirectly influence the way companies conduct their business. An example is provided by the recent “End Ecocide” initiative or the “change.org” organization.

The broad definition of materiality used by G4 raises several concerns. For instance, a recent post by the UCLA university says:

e.g., for a bank, does “focus on materiality” mean that social aspects of lending practices should now be reported? For an auditor, how can they truly assure that a firm’s sustainability report is accurate, if that report now has to include many disclosures that fall well outside the firm’s boundaries? The process behind this more extended reporting can be valuable: firms have reported that mapping their value chain as part of their sustainability reporting efforts led to a better understanding of the structure of their supply chain. But it is a stretch from current practice to ask CEOs to sign statements that certain aspects are simultaneously material and effectively outside the firm’s control.

Concluding, two questions need to be addressed by academics and practitioners: (1a) What does accountability mean in the context of sustainability? (1b) How does the definition of materiality influence the behavior of companies and the way they address sustainability issues? (2a) What about the mismatch between control and accountability? (2b) How does this impact a firm’s triple bottom line?

What’s your opinion concerning this issue???

References:

Hall, J., Vredenburg, H., 2005. Managing stakeholder ambiguity. MIT Sloan Management Review 47, 11-13.

Sharma, S., Henriques, I., 2005. Stakeholder influences on sustainability practices in the Canadian forest products industry. Strategic management journal 26, 159-180.