Detailed in-depth notes for the first year 'Financial Management' paper on 'Sustainability Accounting'. Mainly based on lectures, with summaries of readings (where applicable), learnings from pre-work problems, and personal explanatory notes included where relevant.
Prepared by a student scoring 8...
Sustainability Accounting
Why care about non-financial measurement and management?
Stakeholders care about it
For corporate decision-making
It impacts long-term financial performance
System-level challenges: risks that cannot be diversified away (eg. Climate change and property
destruction, income inequality and social unrest, corruption regulatory risk)
The Problem
Academic lens:
o Embeddedness of markets (Karl Polanyi, 1944): all companies are embedded in the
larger social, environmental context etc.
o Economic activity is constrained by and embedded in noneconomic institutions and pre-
existing social ties
Ecological lens: climate change disproportionately affects developing countries
Why should companies care
Trust is at an all-time low. Trust matters to stakeholders. Companies with trust from
stakeholders can weather through crises better
Stakeholder voices become louder through social media and more heard
Why care (in the context of accounting)
Intangible value mostly not considered in accounting but is critical for long term sustainable
success
Regulators increasingly care: increased mandatory and voluntary non-financial disclosures and
reports (provisions)
Investors and markets care: capital inflows into ESG. ESG is seen as useful to indicate long term
sustainable success
Economic lens:
o Stocks with better ESG performance shown to have long term share price
outperformance (Eccles et al., 2014)
Intangible value is becoming more important in business
We are increasingly dealing with problems with two problematic characteristics:
o Long-term, intergenerational challenges
o Systematic challenges that cannot be diversified away
o Stakeholder-related challenges that require partnerships to be addressed
Leads to new risks and opportunities, information and notions of performance that needs to be
measured
Corporate Purpose & boundaries of the firm
Dodge v Ford (lawsuit where shareholder primacy wins)
Shareholder primacy: Friedman
Prosperity: better business makes the greater good (Colin Mayer)
Principles: purpose/ values
Provenance: evolutions/ ownership
Practice: governance/ performance
, Policy: law/ regulation
Partnership: finance/ investment
Purpose of organisations: “To produce profitable solutions for problems of people and planet
and not to profit from producing problems for either.” Find commercially viable solutions that
do not produce harm
Examples
Exxon Mobil: socially and financially unsustainable
o Exxon Mobil not doing well financially in recent years.
o Engine No.1 activist investor in Exxon Mobil pushing ESG issues, arguing that emissions
and climate change are a long-term financial risk for Exxon
Danone (F&B products): high social sustainability, but financially unsustainable
o B Corp certification, MSCI AAA ESG ratings
o Poor share price performance. Unable to produce commercially viable solutions
Activist investor Bluebell capital partners' campaign that led Danone's CEO Emmanuel Faber to
step down
Unilever, Philips: socially sustainable and profitable
Boundaries of the firm
Moving beyond the economic and operational entity to the wider ecosystem
Purposeful business: no separate financial and sustainability report. Single report showing links
between financial and social/ environmental issues
Where we are: enlightened shareholder primacy
Different boundary definitions have:
o Different reporting frameworks: IFRS, Sustainability accounting standards board (SASB),
global reporting initiative (GRI) etc.
o Different measurements
o Different assurance mechanisms (financial audit, sustainability assurance)
o Different disclosure content
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