INSTRUCTIONAL MATERIAL

FOR

MAC 301 –

SUSTAINABILITY AND STRATEGIC AUDIT

COMPILED BY:

RENZY Q. DELA CRUZ, MBA

Week 2

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 Introduction to Sustainability
Overview:

‘Sustainability revolves around the idea that, as the human population and demand for food and finite
natural resources grow, in order to ensure our own survival and that of future generations, we need to
recognize and adapt our behaviors so their impact on our natural environment is minimized,’ says Elaine
Conway, senior lecturer in accounting and finance at the University of Derby.

In a business context, sustainability is about better business. ‘Better for society, better for the planet
and better for companies’ own long-term growth,’ says Charlie Ashford, senior researcher at global
sustainability consultancy Corporate Citizenship.

‘By working to understand and improve their wider economic, social and environmental impacts,
businesses around the world can create more resilient growth for the economy and help to find solutions to
global issues.’

Learning Objective:

After studying this lesson, the student should:

1. Understand the nature of sustainability reporting.

2. Learn the background and trend of sustainability reporting.
3. Appreciate the need and benefits of sustainability reporting.
4. Grasp the Securities and Exchange Commission’s (SEC) vision and action plan on sustainability
reporting in the Philippines.
5. Know the role of accountants in sustainability reporting.

Course Materials:

Nature of Sustainability and Sustainability Reporting

Sustainability is defined as “development that meets the needs of the present without
compromising the ability of future generations to meet their own needs”. It focuses on how a company
manages its economic environmental and social impacts, risks and opportunities. Disclosure on these non-
financial matters is done through sustainability reporting (also known as EESG (economic, environmental,
social and governance) reporting, non-financial reporting, or triple bottom line accounting), which is a
central element of modern corporate reporting that includes strategy, governance and performance.

Sustainability reporting is an organization’s practice of reporting publicly on its significant economic

environmental and/or social impacts, in accordance with globally accepted standards. Such disclosures
enable organizations to measure, understand and communicate their EESG performance and then set goals
and manage change more effectively. Often, they go hand in hand with the setting of performance targets
related to EESG impacts.

Sustainability reporting also benefits stakeholders interested in an organization’s ability to create

value over time, including employees, customers, suppliers, investors, business partners, local communities’
legislators, regulators, and policy makers. This promotes transparency and accountability, empowering
stakeholders to make informed decisions and helps the company manage its EESG impacts.

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Conceptual Background of Sustainability Reporting

Sustainable development as a concept was launched in the late 1980s. The UN’s Brundtland report
defined it as “development that meets the needs of the present without compromising the ability of future
generations to meet their own needs. Sustainability recognizes the interdependence of economic, social
and environmental factors. With reference to future generations, it is also forward-looking. On the
macroeconomic level, sustainability has been linked to arguments about national accounting and limitations
of using Gross Domestic Product (GDP) as an indicator of economic performance and social progress. For
example, traffic jams may increase GDP as a result of the increased use of gasoline, but obviously not the
quality of life or the state of the environment. As a consequence, there is increasing interest in developing
new welfare indexes, such as the creation of gross happiness indexes, originally invented in Bhutan.

There is also the development of environmental accounting. Environmental accounts have been
created to complement national financial accounts, by detailing the full economic costs of natural resources
used and environmental effects caused. Sustainability concerns have been introduced to the debate about
organization-level annual reporting as well. In most countries, private and public organizations are required
by law to publish an annual report on their financial performance. It contains all the relevant financial
information and is presented in a structured manner. Usually, a financial report or financial statement is
audited by an external auditor in order to provide the user of the accounts with reasonable assurance about
its completeness and accuracy and, in the public sector, to attest the proper financial accountability of the
audited entity.

Corporate decision-making is often heavily reliant on financial information, although this

information may not give a complete picture about an organization and the environment in which it
operates. The success of an organization might not only depend on its financial results, but also on issues
such as its capacity to reduce greenhouse gases or its efficient use of resources. Environmental and
sustainability issues are not only a moral concern, but are increasingly important because of their financial
significance. Another example is how an organization can act in order to maintain employee and customer
satisfaction. These examples are related to the growing importance of corporate governance in the private
sector and good governance in the public sector. These kinds of issues cannot be reported solely through
the use of traditional financial reporting. In order to provide such a broader perspective on their
performance, some organizations have started to report their performance on environmental issues, social
responsibility or sustainable development, alongside financial issues.

Sustainability reporting is a systematic tool to gather and present sustainability information for the
management process, and to stakeholders such as employees, shareholders, customers, local communities,
NGOs, investors or financial analysts. Whether organizations choose to report or not, information that
affects the environment and communities has become more easily available with globalization and social
media platforms.

In the late 1980s, the first voluntary environmental reports were published. Companies with
environmentally sensitive operations, especially large polluters, started to develop sustainability reporting.
This was done partly as a response to pressure from non-governmental organizations that criticized the
power of multinational companies. This indicates the importance of sustainability reporting as a tool in
communicating with stakeholders and managing business reputation. At the same time, the development
of voluntary codes of environmental conduct and eco-auditing led to the development of environmental
management systems (EMS) and the creation of standards, such as the ISO14000 standard series. The ISO
14001 standard, which provides requirements for environmental management systems, was first launched
in 1996. The European Union soon launched its own Eco-Management and Audit Scheme, EMAS.

Since the mid-1990s, sustainability reporting has developed in various directions.

Companies with socially sensitive operations started to develop corporate social responsibility (CSR)
reporting, which had some roots in earlier philanthropic movements. The European Union, for instance,
currently defines CSR simply as “the responsibility of enterprises for their impacts on society”. One of the
drivers of CSR reporting was concerns about labor conditions in supply chains that were becoming more

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 complex at the same time that human rights and particularly the use of child labor had become concerns
for consumers.

Sustainability reporting developments have taken different forms, one of them being triple bottom
line (TBL) reporting, where the three dimensions are social, economic and environmental, or people, planet
and profit. At the same time, global organizations supporting sustainability reporting were founded. One of
them is the Global Reporting Initiative (GRI), which has developed a voluntary sustainability reporting
framework. In addition, there are country-specific initiatives, such as Connected Reporting, developed in
the United Kingdom,17 which aims to provide a new approach to corporate reporting and improve annual
reports and accounts.

The social emphasis of sustainability is visible in the UN’s Global Compact, which was launched at
the turn of the millennium. It encourages businesses worldwide to adopt sustainable and socially
responsible policies and to report on their implementation. It concentrates on the areas of human rights,
labor, environment and anti-corruption. The OECD also has Guidelines for Multinational Enterprises that are
recommendations by to governments, aimed at providing voluntary principles for responsible business
conduct. One example of changing concerns is that the 2000 update of these Guidelines added
recommendations on the elimination of child labor and forced labor, and new chapters on combating
corruption and consumer protection, whereas the 2011 update contained a new chapter on human
rights.20 Also, the attention paid to climate change issues is now more pronounced.

Another development was the launch of the ISO 26000 guidance for social responsibility in 2004. It
is voluntary guidance and is not used as a certification standard unlike other ISO standards. According to the
ISO 26000 guidance, the objective of social responsibility is to contribute to sustainable development. Social
responsibility has the organization as its focus and concerns its responsibilities to society and the
environment. According to ISO 26000, the core subjects of social responsibility are issues related to
organizational governance, human rights, labor practices, the environment, fair operating practices,
consumer issues, and community involvement and development. ISO 26000, however, notes that as
society’s concerns change, its expectations of organizations also change, and therefore the elements of
social responsibility are liable to change.

In addition to wider social and environmental reporting, the growing concern about climate change
has made carbon reporting more popular. One example is the Carbon Disclosure Project, which has
encouraged companies and cities around the world to measure and disclose their greenhouse gas emissions,
climate change risks and water strategies.

Sustainability Reporting in the Philippines

Consequently, Sustainability Reporting has emerged as a common practice for companies globally.
In fact, 93% of the world’s largest 250 companies and 75% of the top 100 companies in 49 countries report
on sustainability. However, for the Philippines, less than 22% of publicly-listed companies have published a
report on sustainability impacts and performances.

The need to promote sustainability reporting to Philippine companies served as the impetus for the
SEC to include Principle 10 in the Code of Corporate Governance for Publicly Listed Companies (PLCs) stating
that companies should ensure that material and reportable nonfinancial and sustainability issues are
disclosed. Recommendation 10.1 of the same Code further provides as follow:
“The board should have a clear and focused policy on the disclosure of non-financial information,
with emphasis on the management of economic, environmental, social and governance (EESG) issues of its
business, which underpin sustainability. Companies should adopt a globally recognized standard/framework
in reporting sustainability and non-financial issues.”

The Securities and Exchange Commission (SEC) encouraged the corporate sector to integrate
sustainability in their business practices, as it formally launched the Sustainability Reporting Guidelines for
Publicly Listed Companies (PLCs) during the SEC-PSE Conference on Building a Sustainable Business

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Community. The Commission presented the business case for sustainability reporting, in particular, during
the conference it held together with the Philippine Stock Exchange (PSE) and in partnership with the Global
Reporting Initiative (GRI) and Australia’s Department of Foreign Affairs and Trade (DFAT) on April 12, 2019.

"With the issuance of the Sustainability Reporting Guidelines, your SEC has high hopes that PLCs
would not only be made aware of sustainability but would make it a part of their priorities," SEC Chairperson
Emilio B. Aquino said. "We hope we would all be reminded that the responsibility of creating a sustainable
environment is an obligation so basic and imperative that it precedes any kind of law. It is a call for the
preservation of humankind, of our generation and of the generations to come."

The PSE also underscored the role of businesses in sustainable development and acknowledged the
Commission’s support for sustainability initiatives in the Philippine capital market. "Companies have the
inherent responsibility to take care of human, social and environmental capitals,” PSE President Ramon S.
Monzon said.

SEC’s Vision on Sustainability Reporting

SEC’s Action Plan on Sustainability Reporting

1. Creation of a Technical Working Group

Commission En Banc Resolution dated 16 July 2020: Approval of the Proposed Formation of a Technical
Working Group (TWG) for the Drafting of the SEC Sustainability Reports (SR)

2. Strict Monitoring of SR Submissions

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 The SEC’s Corporate Governance Division shall strictly monitor SR submissions and study the trends for
purposes of policy formulation.

3. Strict Imposition of Penalty for Non-Submission of SR

The SEC’s Corporate Governance Division shall strictly monitor SR submissions impose penalty for non-
submission. Non-attachment of the SR to the Annual Report shall be subject to the penalty for
Incomplete Annual Report provided SEC Memorandum Circular No. 6, Series 2005 (Consolidated Scale
of Fines).

4. SR Workshops Conducted by the SEC 5. Issuance of SEC Memorandum Circulars

• Evaluate the SRs submitted.
• Issue Memorandum Circulars to adjust approach (from “comply or explain mandatory) and
coverage of compliance with the SR guidelines (expanded coverage to include all types of
corporations).
5. Coordination with Different Market Groups on Sustainability Reporting
• HS MARKIT
• S&P GLOBAL
• PHILIPPINE BUSINESS COALITION FOR WOMEN EMPOWERMENT (PBCWE)

• ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD)

• ASIAN INSTITUTE OF MANAGEMENT (AIM)
• OTHER ENTITIES
• COORDINATING WITH DIFFERENT ORGANIZATIONS (e.g.ASEAN CAPITAL
MARKETS FORUM)

Benefits of Sustainability Reporting

Internal Benefits

1. Identification Effective management of sustainability risks and opportunities

The process involved in sustainability reporting allows companies to know and better understand
their sustainability risks and opportunities. This would in turn result to a more effective assessment and
management of said risks and opportunities.

2. Sustainable Vision, Strategy and Business Plans

Sustainability reporting encourages companies to assess, and if necessary, to update, their visions,
strategies and business plans to ensure that sustainability is embedded in their organizations. It gives
companies the opportunity to determine the necessary changes in their vision strategies and performance
goals/targets for more sustainable operations.

3. Improved management systems

Sustainability reporting involves tracking and gathering data which when evaluated can identify the
areas that need improvement. In addition, public reporting on performance motivates companies to

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improve in succeeding reporting periods, thus, resulting to improvement in management systems, such as
streamlining of processes, reduction of costs and over-all improvement in efficiency and productivity.

4. Motivated workforce

Creating a sustainability report requires a concerted effort from companies’ employees, exposing
them to the companies’ commitment to sustainability. Knowing that the company is environmentally and
socially conscious increases morale and motivates the workforce to work hard for the company.

External Benefits

1. Investor attractiveness

Institutional investors are now looking at the ESG practices of companies and makes this a key
element in their investment analysis and decisions. In CFA Institute Survey done in 2017, 73% of the survey
respondents answered that they take into account ESG issues in their investment analysis and decisions.
Sustainability reporting, thus, provides institutional investors easy access to ESG information of companies.
At the same time, it allows companies to discuss their sustainability performance in a clear and concise
manner.

2. Improved company reputation and brand value Having a sustainability report indicates the companies’
commitment to full transparency and accurate and complete reporting on both positive and negative
news. Moreover, it shows the companies’ efforts towards sustainability. This improves the company’s
image and builds trust and respect for the company. Thereby, improving company reputation and brand
value.

3. Stakeholder Engagement

The process of sustainability reporting provides companies with opportunities for stronger
engagement with their stakeholders, which in turn can result in better relationships with them. Stakeholders
would feel empowered while the companies can gain valuable insights beneficial to their sustainability
journey.

4. Competitive Advantage

Awareness on sustainability reporting is still quite low for most Philippine companies. As such,
having a sustainability report may provide companies with a competitive advantage.

Role of Professional Accountants in Sustainability Reporting

Professional accountants working in commerce, industry, financial services, education, and the
public and not-for-profit sectors undertake diverse roles in leadership and management (e.g., chief executive
officer, chief financial officer, chief operating officer), operations (e.g., management accountant or
performance analyst), management control (e.g., risk manager, compliance manager, internal auditor) and
in stakeholder communications (e.g., head of reporting, financial controller, investor relations). IFAC refers
to these accountants collectively as professional accountants in business.
In all these roles, professional accountants in business are involved in activities and decisions that
influence their organization’s ability to create and preserve value over time. Delivering continuing value to
providers of financial capital and other stakeholders is the key to business resilience and requires longer-
term thinking on a broader range of matters. Professional accountants need to consider how, through their

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work and positions of influence, they can contribute to business resilience and influence organizations to
integrate sustainability matters into organizational strategy, finance, operations, and communications.
Accountants have historically provided stewardship of an organization’s assets and been responsible
for sound financial management and reporting. However, their professionalism and professional skills enable
them to effectively exercise stewardship of a broader range of assets and capitals upon which an
organization depends. Evidence suggests they are increasingly taking on this broader stewardship role. In a
business partnering capacity, accountants are expected to increase their support of strategic and
operational decision making in addition to fulfilling traditional stewardship responsibilities. This can involve
helping organizations respond to uncertainty, improve decision making, and identify new business
opportunities, and innovative processes, products, and services. Professional accountants are poised to help
their organizations develop more sustainable business practices.

Sustainability needs to be measured, reported and assured and all these areas fall under
accountants’ remit. ‘Accountants have an important role to play in helping companies embed sustainability
into their corporate strategies, and are very well placed to do so,’ confirms Gordon Hewitt, sustainability
adviser at Association of Certified Charted Accountants (ACCA). ‘A company’s finance function is responsible
for producing much of the management information that forms the basis for internal strategy as well as
reports for external stakeholders.’

A business can only modify its behavior if they have good quality, trusted information.
‘When looking to address sustainability issues, companies can only manage what they can measure so it’s
important that accurate, complete and reliable information gets collected,’ says Hewitt. In organizations
where sustainability reporting is yet to be adopted, accountants have just the right knowledge and skills to
help develop a credible standard of reporting. ‘They recognize the need to be accountable to external
stakeholders and the need to operate to good governance and ethical standards; they can develop
performance metrics and monitoring/auditing systems, they can set budgets, produce strategic plans and
manage risk,’ says Conway.
Many accountants are also good team-players and able to work with colleagues in the areas of the
business beyond the finance function, which is important as sustainability reporting requires inputs from
across the organization and incorporates a lot of non-financial data. ‘However, they must also be prepared
to acquire new skills in developing verifiable non-financial measures for issues that cannot be easily
monetized, and in enhancing estimation techniques and forward planning, especially in areas that are more
subjective than many traditional accounting measures such as environmental or health impacts,’ points out
Conway.
Practice clients also now expect their accountants to be ‘trusted business advisers’, including on the
issues of corporate sustainability, rather than just ‘number-crunchers’. ‘The accountant’s role has shifted
over the past 20 years from a reporter of historical performance to being much more the forecaster and the
business planner,’ says Russell. ‘This trend will almost certainly continue as the financial services industry is
now increasingly pointing out that historic performance is no indication of future performance.

-End of Week I-

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