Environmental Reporting - Shodhgangashodhganga.inflibnet.ac.in/bitstream/10603/28706/10/10_chapter5.pdf · Environmental reporting is the term now commonly used to describe the disclosure

111

Chapter Chapter Chapter Chapter 5555

Environmental

Reporting

112

IN THIS CHAPTER

5.1 INTRODUCTION

5.1.1 WHAT IS ENVIRONMENTAL REPORTING? 5.1.2 CORPORATE GOVERNANCE, ACCOUNTABILITY AND

ENVIRONMENTAL REPORTING 5.1.3 HISTORICAL DEVELOPMENT OF ENVIRONMENTAL

REPORTING 5.1.4 KEY MEASUREMENT AND ENVIRONMENTAL REPORTING

DRIVERS 5.1.5 THE COSTS AND BENEFITS OF ENVIRONMENTAL

REPORTING 5.2 DIFFERENT APPROACHES TO ENVIRONMENTAL

REPORTING

5.2.1 WHAT IS NORMALLY FOUND IN ENVIRONMENTAL REPORTING?

5.3 STAGES IN CORPORATE ENVIRONMENTAL REPORTING

5.4 PERCEPTION ON ENVIRONMENTAL DISCLOSURE

PRACTICES

5.5 ENVIRONMENTAL ADVANTAGE FOR SHAREHOLDER VALUE CREATION

5.5.1 OVERVIEW OF SHAREHOLDER VALUE

5.5.2 VALUE DRIVERS

5.5.3 ENVIRONMENTAL ADVANTAGE PROCESS

5.6 IFRS AND ENVIRONMENTAL ACCOUNTING

5.6.1 A STATEMENT OF ENVIRONMENTAL ASSETS AND LIABILITIES

5.6.2 CONCLUDING REMARKS AND DIRECTION FOR FUTURE RESEARCH

113

Chapter-5

ENVIRONMENTAL REPORTING

5.1 INTRODUCTION

The overall objective of this chapter is to introduce reader to the development,

purpose, user and practice of public environmental reporting covering the discussion on what

is environmental reporting? and the drivers and benefit of such environmental reporting. An

additional objective is to identify stakeholder groups and their information needs. This

chapter incorporates conventional categorization of stakeholder groups and their needs.

Introducing the UNEP /sustainability 50 core principles.

5.1.1 WHAT IS ENVIRONMENTAL REPORTING?

Environmental reporting is the term now commonly used to describe the disclosure

by an entity of environmentally related data, verified (audited) or not, regarding

environmental risks, environmental impacts, policies, strategies, targets, costs, liabilities, or

environmental performance to those who have an interest in such information as an aid to

enabling/enriching their relationship entity through either:

• The annual report and accounts package

• A stand-alone corporate environmental performance report (CER)

• A site-centered environmental statement

• Some other medium (e.g. staff newsletter, video, CD Rom, internet site).

The Environmental Task Force of the European Federation of Accountants (FEE)

defines the objective of external environmental reporting in a similar way: ‘the provision of

information about the environmental impact and operational performance of an entity that is

useful to relevant stakeholders in assessing their relationship with the reporting entity’.

Note the similarity of both definitions to the objective of financial reporting as explained by

the International Accounting Standards Committee (1995):

‘ the objective of financial statement is to provide information about the financial position,

performance and changes in financial position of an enterprise that is useful to a wide range

of users in making economic decision’.

114

For the purpose of environmental reporting it is customary to drop the emphasis on the needs

of users to make ‘economic decision’.

5.1.2 CORPORATE GOVERNANCE, ACCOUNTABILITY AND

ENVIRONMENTAL REPORTING

Environmental reporting could be described either as a branch of the corporate

governance tree, or as one aspect of the so-called ‘triple bottom line’ – whereby data on

financial results, environmental performance and social impact are brought together in what

might be termed a ‘sustainability report’.

5.1.3 HISTORICAL DEVELOPMENT OF ENVIRONMENTAL

REPORTING

Historically, corporate public reporting has developed as follows:

1. Financial accounting and reporting From the 1850’s

2. Financial aspect of corporate governance From early 1990’s

3. Environmental reporting From early 1990’s

4. Social and ethical accounting and reporting From late 1990’s

1+3+4 = sustainability reporting or ‘the triple bottom line’

5.1.4 KEY MEASUREMENT AND ENVIRONMENTAL REPORTING

DRIVERS

Companies report a number of factor which drive them into the reporting process:

• International standards / mandatory requirement (US, Denmark, Netherlands,

Thailand)

• Competitive advantage / best in class

• Environmental management systems base

• Supply chain pressures

• Credit and investment conditionality

• Other stakeholder concerns

• Peer group pressure.

115

5.1.5 THE COSTS AND BENEFITS OF ENVIRONMENTAL

REPORTING

The costs of reporting are mostly direct The costs of not reporting are mostly

indirect

Installing the appropriate environmental

management systems

Poor environnemental profit vis a vis

competitors

Employing specialist staff / internal

auditors

Potential loss of markets / investors

Appointing external verifiers

Publication / distribution costs / web site

design costs

There is also a potential ‘reporting risk’

cost

The benefits of environmental reporting vary from company to company. Environmental

reporting:

• Provides strong focal point for internal EMS development and

management buy-in

• Enhances employee / workforce morale

• Includes the setting and publishing of performance standards which drives continuous

improvement

• Establishes environmental issues as a key policy / strategy element

• Enables companies to re-assure investors / lenders as to environmental risk and

corporate environmental engagement

• Enables good environmental performers to differentiate themselves from the also-rans

• May minimize risk of regulatory intervention

• May create local community opportunities

• May provide improved access to supply chain (including public procurement

opportunities)

• May provide quality public relations / profiling opportunities

• Support the audit / reporting culture which will make a company more receptive to

new development – e.g. social and ethical reporting

116

5.2 DIFFERENT APPROACHES TO ENVIRONMENTAL

REPORTING

Different methodological approaches to environmental reporting have evolved,

mainly because of local culture / regulatory differences.

Compliance based reporting

Reporting the level of compliance with external regulations and consent limits is a

common feature of the environmental reports of heavily regulated utilities (water,

electricity).

TRI (Toxic Release Inventory) based reporting

Many US companies are required by law to publish lists (detailed in physical

quantities) of emissions toxic substances.

Impact based performance reporting

Most private sector companies that are not subject to specific consent requirements

identify their key environmental impacts and base their reporting around target setting and

performance (over time) in achieving those targets.

The Eco-balance approach

Some companies (including many from Germany) construct a formal ‘eco-balance’

(=resources inputs vs. product and non-product output) from which they then derive

performance

The Eco-balance approach

ICI (the UK chemicals manufacturer) has developed an externally focused reporting

approach which quantifies the company’s impact on 6 or 8 environmental quality measures.

Greenhouse Gas Indicator

Converting energy use from sources into a measure of C02 emissions (and other

greenhouse gases) which can be expressed per unit c, f (say) turnover. Developed by UNEP

in conjunction with Nrl and Imperial College London.

117

Triple bottom line / sustainability reporting

Sustainability reporting involves combining environmental reporting with the

reporting of both financial and social / ethical / community performance measures.

In practice many companies combined one or more of the above approaches (e.g. TRI plus

impact based; impact based plus environmental burden; etc.).

5.2.1 WHAT IS NORMALLY FOUND IN ENVIRONMENTAL

REPORTING?

UNEP, working with the UK consultancy Sustainability, have developed a core set of

50 issues which merit separate disclosure in environmental reports. The main sub-headings

within which the disclosures can be grouped are:

I. Organizational overview, management policies and systems: core issues

II. Input/output inventory (take, make, waste) (Oko-blianz)

III. Finance

IV. Stakeholder relationship and partnership

V. Sustainable development

VI. Report design.

118

Table 5.2.1 Environmental Reporting

I. Organizational Overview Management Policies and System: Core Issues

Further Development

0. Introduction / overview / report

consent highlights section

Use of graphics / business process pictogram/

core EPIs

1. Senior management commitment

statement

The ‘CEO agenda’ including at minimum (i)

environmental performance improvement

commitment (ii) risk exposure and (iii)

sustainability intentions

2. Management responsibility and

integration into the business

process

Board of group structure.

Evidence of accountability

3. Corporate context /general site /

corporate information

Overview of products/ services/ staff/ finances/

geography etc.

4. Formal corporate environmental

(HS&E/ sustainability) policy

statement

Adherence to other charters (ICC, CEPHIC,

Responsible Care, CERES etc.)

5. Environmental management

system

EMS certification details and plans (EMAS/ISO

14401). Global application of environmental

(etc.) policies. Training issues/ procedural

manuals etc.; description of measures

implemented

6. Environmental auditing Internal and external auditing procedures, audit

cycles and results; attitude towards third party

verification

7. Consideration of significant

environmental aspects

Criteria for deciding what are the significant

aspect or impact. Discussion of industry related

issues.

8. Scope /purpose of the report E/H/S/Social/Sustainability? – extent of

group/site/business segment coverage

9. Goals and targets (i) realization of objectives over

reporting period

(ii) new goals for… foreseeable future

10. Legal compliance Laws to be complied with compliance record;

complaints (upheld); instances of

119

noncompliance; fines / penalties incurred;

11. Research and development Corporate attitude –expenditure details

12. Awards Details

13. Verification Scope of engagement; statement from external

party; reference to unsolved problems

14. Reporting & accounting policies Timing / regularity of report? Continuity of

report structure; data evaluation methods.

Comparability over time and within sector

II. Input/ Output Inventory (take, make, waste) (Oko-bilanz) Inputs

Further Development

15. Organization (or site) specific

information on material and

energy flows

Absolute physical data on materials use; energy

consumption; water consumption

Process management

16. Eco-efficiency / clean technology Details / EPIs

17. Health & safety H&S statistics & EPIs

18. Accident & emergency response Statistics

19. Risk management & EIAs Contingency planning details

20. Land contamination

&remediation

Financial liability and causation

details/contingent or actual liability?

21. Stewardship of local habitats &

eco-system

State of the environment / sustainability

indicators

Outputs

22. Waste / residual product Data /EPIs, environmental effects

24. Air emissions “

25. Water effluents “

26. Transportation “

Production

27. Life-cycle design Treatment of significant aspect of product life

cycle

28. Environmental impacts Policy towards environmental impacts

assessments

29. Product stewardship Presentation of significant aspect of product

development

120

30. Packaging Packaging issues; strategies; absolutes; EPIs

31. Any other significant factors Single figure composite performance index

III. Finance Further Development

32. Explicit linkage through to

financial statement

Annual report and accounts contain clear

environmental performance / financial message

33. Environmental /social/

community/spending

Environmental and /or social costs / investment/

charitable contribution etc.

34. Environmental liability and

provision

Details of contaminated land; decommissioning

costs; discount rates etc.

35. Financially quantified benefits Recycling revenues; costs savings; new market

opportunities

36. Market solutions; instruments

and opportunities

Government economic penalties and incentives;

impact of green taxes

37. Environmental cost accounting . Disclosure of conventional internal accounting

mechanisms

. Disclosure and discussion of experiment with

cost internalization and sustainability accounting

38. Future costs / investment needs

business opportunities & risks

Future technological / legislative changes

evaluation of market situation and potential

IV. Stakeholder Relationship and Partnership

Further Development

39. Employees Disclosure of stakeholder directed initiatives

(and consequent response) Different report

issued. Design of EPIs driven by stakeholder

interests

40. Politicians, legislators &

regulators

41. Local communities

42. Investors

43. Suppliers &contractors

44. Customers and consumers

45. Environment group

46. Science &education

47. Other

V Sustainable Development Further Development

121

48. Technology co-operation Corporate attitude towards sustainable

development / quality of the environment type

indicators

49. Global environment

50. Global development standards

51. Global operating standards

52. Vision, scenarios, future trends

VI Report Design Further Development

53. Report Design . Layout & appearance; clarity-easy to follow

. Presentation & structure

. Visual design: attractiveness; picture quality

. Graphics etc.; typeface

. Comprehensibility of information; information

value of headings; style; quick overview of

content

122

5.3 STAGES IN CORPORATE ENVIRONMENTAL REPORTING

Chart 5.3.1 Stages in Corporate Environmental Reporting

Sustainable

development

reporting. Aim

No meet loss of

carrying

capacities

linking of

environmental

economic and

social aspects of

corporate

performance

supported by

indicators of

sustainability

integraps of Fall

cost accounting

Provisional of

Full Tri Style

Performance

data on annual

basis 1/0 date

for service

companies

corporate and

site regarts

available on

diskette or

online

environmental

report referred

to in annual

report.

Annual

Reparting

linked to

Environmental

Management

System bat

more text then

Figures.

One off

environme

ntal often

linked to

First

Formal

policy

Statement

Green

Glossies

Newsletters

Videos Short

Statement in

Annual

Report

Stage - 5

Stage - 4

Stage - 3

Stage - 2

Stage - 1

Meeting global Priorities & Stakeholder Information Needs.

Source : UNPIE = 1994

123

5.4 PERCEPTION ON ENVIRONMENTAL DISCLOSURE

PRACTICES

Table 5.4.1 Perception on Environmental Disclosure

NO INFORMATION TO BE DISCLOSED IN

CORPORATE ENVIRONMENTAL REPORTING

STRONGLY AGREE %

AGREE %

STRONGLY DISAGREE

% 1 POLICY, PROGRAMME AND

INITIATIVE FOR ENVIRONMENTAL

PROTECTION

66.67 33.33 0

2 ENVIRONMENTAL MANAGEMENT

SYSTEM 46.67 42.50 10.83

3 ENVIRONMENTAL AUDIT REPORT 81.67 12.50 5.83

4 LEGAL COMPLIANCE WITH

ENVIRONMENTAL ISSUE 55 35 10

5 R&D ON ENVIRONMENT 50.84 38.33 10.83

6 HEALTHY AND SAFETY ISSUE FOR

ENVIRONMENT 59.17 33.33 7.5

7 ENVIRONMENTAL IMPACT ASSESSMENT AND RISK MANAGEMENT

35 58.33 6.67

8 ENERGY CONSUMPTION AND ITS ENVIRONMENTAL EFFECT

53.33 36.67 10

9 ENVIRONMENTAL CAPITAL AND

OPERATING EXPENDITURE 78.33 21.67 0

10 LIABILITY FOR ACCUMULATED

POLLUTION 68.34 23.33 8.33

11 POLLUTION CHARGES & TAX PAID 52.50 31.67 15.83

12 ALLOCATION OF EXTERNAL

ENVIRONMENTAL COST 41.67 49.17 9.16

13 AWARENESS PROGRAMME ON

ENVIRONMENTAL ISSUE 35 45.83 9.16

14 COMMUNITY DEVELOPMENT

ACTIVITY UNDERTAKEN 25.83 63.34 10.83

15 GLOBAL ENVIRONMENTAL ISSUE AND

STANDARD 14.17 67.50 18.33

Source :The Management Account(journal) – August 2006

124

5.5 ENVIRONMENTAL ADVANTAGE FOR SHAREHOLDER

VALUE CREATION

To understand the potential of environmental value creation, one has to understand

the significance of intangibles in the shareholder value equation. The intangibles include

human, intellectual, social and structural capital of an organization that add value but are not

traditionally accounted for the balance sheet. The study entitled ‘Measures that Matter’

established that the correlation between intangibles and a company’s price-to-earnings ratio

varies according to industries that have a close relationship between key value drivers and

shareholder value creation. Chart 5.5.3 establishes the close link of the tangible and

intangibles in value creation process.

Market demand for greater transparency, ethical behavior and corporate governance

has led to an increase in voluntary disclosure as well demanded by the constituents of

stakeholders at large. Chart 5.5.3 shows that the quantum of contribution by the intangible

asset group has been more linked with the creation of shareholder value.

Chart 5.5.1 Shareholder Value Creation Process

Shareholder Value Creation Process

↓

Equity Market Value

↓

Increase of Equity Market Value

↓

Shareholder Value Added

↓

Shareholder-Return

↓

Required Return to Equity

↓

Created Shareholder Value

125

Over a period of time sustainability has become a comprehensive concept that stands

for economic prosperity, environmental quality and social equity (triple bottom line). It has

not only matured into a holistic view that implies an environmental challenge but also new

opportunities for wealth creation and technological innovation. It is also observed that the

hard environmental and socio-economic factors are changing the competitive landscape for

corporate sectors all over the world. Many signals are emerging in this respect and many

drivers are already pushing corporate sectors to behave in an ethical and responsible manner.

The prominent factors are as follows.

Chart 5.5.2 Internal & External Factors

Innovation Repositioning

Growth Path Tragedy

Profit Risk Reduction

Repetition

Legitimacy

Transparency Account

Stockholders dialog

Environmental Management

Eco Efficiency

New Business Models

New Technology

Meet unmeet needs

Raise the bottom

I N T E R NA L

EX T E RNA L

TOMORROW

TODAY

126

5.5.1 OVERVIEW OF SHAREHOLDER VALUE

Within the industrial economic paradigm, corporate sectors are dealing with

sustainable issues and they adopt a linear thinking approach that focuses on the generation of

continuous incremental improvements at both the environmental and socio-economic level.

Environmental achievements are mainly based on the implementation of eco-efficient

practices, like process-oriented-by use of cleaner technology, internal recycling systems and

environmental management system, standards and product-oriented-by use of eco-design

principle, and life-cycle analysis.

� Environmental legislations and social policies

� Employees motivation and stakeholders value

� Cost of coverage pressures

� Socially conscious financial investments

� The rise of the civic society, and

� The new emerging value.

In the emerging knowledge and service economy, linear and deterministic thinking

has been replaced by a system-thinking approach and broke down the traditional value

chains-in which a single company usually provides stand-alone-products to begin operating

in a partnership framework for the co-creation of sustainable solution. Sustainable value

modal can be seen from Following chart 5.5.3.

127

Chart 5.5.3 Sustainable Value Model

Sustainable value creation requires strategy, capability, decisions, actions and results

to be aligned and focused on the key drivers of value for an organization. There are lots of

myths about shareholder value creation like:

Myth No. 1 – Growth necessarily creates value.

Myth No. 2 – Traditional sources of value creation are dead.

Myth No. 3 – The right value-based measure is the panacea.

Myth No. 4 – Value drivers are the same for all companies.

After all, shareholder value at the corporate level is the increase in the value of the

company from a starting point, and most easily measured by Total Shareholder Return (i.e.,

stock price appreciation plus dividend). The shareholder value at business segment level is

the increase in the business value, again from a starting point, which is best captured by the

Product & Process

Innovation

Reduced waste & emission

Efficient use of

Resources

Occupational Health

and Safety

Stack holder

engagement

Employee

Satisfaction

Environmental

Problem

Community Quality

of Life

Tangible

outcomes

Intangible

Outcomes

Reduced

Risk

Repetition and

Brand image

License to

operate

Intellectual

capital

Customer

Satisfaction

Improved Capital

utilization

Increased

profitability

Shareholder’s value

Overview of

Pathways linking

list to shareholder

value

128

discounted cash flow of the business. In both the case, fundamentally, cash flow generation is

the key determinant, but the role of intangibles in the process of aligning, strategy,

management process, performance measure and rewards around the creation of these

capabilities cannot be avoided.

5.5.2 VALUE DRIVERS

The value drivers are the fundamental and persistent characteristics of a business

enterprise, which influence the market value. Authentic value drivers are fundamental, in that

they represent a strong, intrinsic characteristic of an enterprise and they are persistent in that

they will have a lasting impact on the value regardless of market fluctuations. The intangible

value drivers having linkages with environmental frameworks have more influence on

shareholder value creation.

Ten intangible value drivers identified by GEMI EVI work Group reflect significant

pathways for value creation through Environment, Health, Safety and Sustainability (EHS) as

shown in Table-5.5.1.

129

Table-5.5.1 Indicators that Contributes to EHS Intangible Value Drivers

Value Drivers Sample Performance Indicators

Customers Customers satisfaction which EHS performance

Extent of customer relationships across product life cycle

Collaboration with customers on EHS solutions

Leadership and

Strategy

Commitment to EHS/sustainability principle and goals

Articulation and execution of EHS strategy

Expression of diverse EHS views at Board level

Level of reporting for EHS function

Transparency Disclosure of governance policies and procedures

Stakeholder engagement

Timeliness of communications

Quality and depth of EHS/sustainability reporting

Brand Equity Perception of brand as environmentally and socially responsible

Value added due to product stewardship

Presence in environmentally or socially-screened investment funds

Environmental and

Social Reputation

Regulatory compliance record

Third-party recognition and awards

Participation in EHS/sustainability consortia

Community development and philanthropy

Collaboration on EHS/sustainability throughout the supply chain

Partnerships with EHS/sustainability-oriented organizations

Alliance and

Networks

Participation in industrial ecology networks

Leadership in EHS/sustainability technologies and business practices

Design for EHS/sustainability processes and results

Technology and

Processes

Energy and material conservation

Ecosystem impact minimization

Workforce diversity, employee benefits and compensation

Risk Leadership and patent position in EHS technologies

Cost savings product or service differentiation

EHS-related product or service differentiation

Inherent product or process hazards

Effectiveness of risk prevention and risk management

Effective response to challenges and opportunities

130

Chart 5.5.4 Value Driver Prioritization Matrix

As we have seen that value drivers can be traced back directly to line items on the

financial statements or indirectly to intangibles with operating and financial results. An

integrated focus on the key drivers of value for a company may be on the basis of priority on

both sensitivity to creation of shareholder value and the manageability of the value driver

within the planning horizon on the basis of strategy, culture, competitive position,

capabilities or other factors within the same company across different business units or

geographic and indeed different overtime for specific entities.

Once the key value drivers have been identified and prioritized, it is critical to the

right measure of success, which are external measures of increased shareholder value and

internal measure of value, aligned in a meaningful way to enable management focus and

accountability, and consequently improved decision-making.

5.5.3 ENVIRONMENTAL ADVANTAGE PROCESS

The identified value drivers are part of the corporate vision, hence it requires a

systematic process that enables companies to recognize and take advantage of the

opportunities for value creation, which will lead to the creation of sources of competitive

advantage. During this process an effective manager should overcome agency effect, which

often runs contrary to the interest of shareholders. The concerned agency imparts negative

Factors

Key Value Drivers

Distractions

Tactical

High

Sensitivity

Low

Low High

Manageability

131

effects such as: different in time horizon, risk difference, over-retention of free cash flow and

over consumption of perquisites.

The environmental, clean, green or sustainable advantage implies a system of

production and consumption, which is able to assure greater equity, quality of life and

environmental well being not only for present but also for future generations. To carry out

the advantage, a cross-functional value generation team under the guidance of EHS value

companion has to be formed for greater legitimacy, which should include key senior

personnel from strategic planning, new product development, marketing, operations, finance,

engineering and human resources. The environmental advantage has six cyclical steps as

depicted below in Figure

Chart 5.5.5

Environmental Advantage Process

Step 1 : Identify Key Value Drivers

The nature and relative importance of value drivers varies by industrial, geographical

and economic setting. The strategic planning and investor relation groups within a company

will identify the initial list of perceived value drivers related to environmental advantages.

The following guidelines may be identified:

� Develop a generally accepted list of key value drivers that contribute to shareholder

value creation.

� Evaluate the key value drivers on the basis of expertise and insights.

� Rank or cluster the key value drivers on the basis of relative importance.

Step 2 Assess

environmental

contributions

Step 3 Develop

value enhancing

strategy

Step 4

Implement strategy

and measure result

Step 1 Identify key

value drivers

Step 5

Communicate to

Management and

investors

Step 6 Assure

continuous

improvements

132

� Develop an understanding of strength or weakness of key value drivers vis-à-vis

competitors.

Step 2 : Assess Potential Contributions

The value drivers, which have been developed for intangibles, need to be leveraged

on the basis of company needs and it should be understood on its relative magnitudes. From

the variety of different conceptual frameworks developed for tangible and intangible assets

that drive long-term performance, the Balanced Scorecard of Kaplan and Norton and the

Intellectual Capital Model of Stewart may be the right ones to be considered to broaden the

financial performance. Balanced Scorecard framework includes the leading indicators of

financial success, learning and growth, internal process and customer relationships, whereas

intellectual capital includes human capital-skills and knowledge of management and

employees; structural capital-patents and proprietary data, methodologies or process and

relationship capital-bonds with customers and suppliers, and brand identify. The mapping of

environment key value drivers into the intellectual capital framework using an approach

similar to the balanced scorecard can be seen in Figure.

133

Chart 5.5.6

BALANCED SCORE CARD FRAMEWORK

Financial Perspective

(if we succeed how will we look to shareholders)

CUSTOMER PERSPECTIVE INTERNAL PERSPECTIVE

(TO ACHIEVE MY VISION (TO SATISFY MY CUSTOMER AT

HOW MUST I LOOK TO WHICH PROCESS I MUST MY

CUSTOMER) EXCEL)

STRATEGY

LEARNING PERSPECTIVE

(TO ACHIEVE MY VISION HOW MUST MY ORGANIZATION LEARN

AND IMPROVE)

In the process of assessing the potential contributions, the core team has to look into

its contribution by a creative exercise. In a nutshell the following points may be considered:

A set of hypotheses about environmental performance that represents significant

opportunities for value creation.

� Identify the value drivers that can be improved.

� State the specific contribution and value outcomes.

� Continue assessing the significance of value drivers.

134

Step 3. Develop Value-Enhancing Strategy

In the step, emphasis is to be on enhancing strategy for capturing new opportunities

to enhance shareholder value within a set of hypotheses about value creation opportunities.

The emphasis is also on linking intangible value contributors with value-based management

models to develop a unique model for each individual company, so that the intangible value

drivers are linked with the firm’s financial variables, which have tangible outcomes. The

conceptual model of intangible value creation can be seen in Figure 7.

The following guidelines may be adopted for linking with the financial indicators:

� Consider the opportunities for setting goals for influencing particular value drivers.

� Justify these goals in terms of expected outcomes.

� Identify specific, measurable indicators of improvement for both the value drivers and

anticipated outcomes.

135

Table-5.5.2

GEMI Intangible Value Drivers Populate the Balanced Scorecard Framework

Balance Scorecard

Framework

GEMI Intangible Value Drivers

Financial Perspective

Transparency

Risk

Opinions of an organization with

regards to sharing information – how I

operates

The ability to effectively manage the

balance between potential liabilities and

potential opportunities

Internal Perspective

Technology and

processes

Human capital

Strategy education : IT capabilities;

Inventory management; Turnaround

times; Flexibility; Re-Engineering;

Quality; Internal transparency

Talent acquisition, work force retention,

employee retentions, compassion: what

makes a great: place to work

Learning Perspective

Innovation

Leadership and

strategy

The RND pipeline; effectiveness of

new-product development; patents;

Know-how; business creates

Management capabilities; Experience

and leadership vision for the future

Customer Perspective Customer

Brand equity

The ability to develop customer

relationship, satisfaction and loyalty

Strength of market position, the ability

to expand the market, perception of

product/service quality, investor’s

confidence

Environmental and

social reputations

How the company is viewed globally

such as; environmental concerns,

community concerns, inclusion in most

admire company list, triple bottom line.

136

Chart 5.5.7 Conceptual Model of Intangible Value Creation

STOCK PRICE

EARNINGS

SALES PER EMPLOYEE

MARKET SHARE

Customer

Leadership and Strategy

Transparency

Brand Equity

Environmental/Social

Reputation

Alliances and Networks

Technology and Processes

Human Capital

Innovation

Risk

INTANGIBLE VALUE DRIVERS

� Evaluate the costs, risk and benefits associated with the strategy, in comparison to the

risk of maintaining status quo.

� Develop an action plan, with clear accountabilities, for realizing the proposed

improvements and assure compatibility with existing business priorities.

Step 4: Implement Strategy and Measure Results

The developed strategy has to be implemented in this stage and linked with the

expected financial performance. At the time of implementation, the comprehensible picture

must be available to the senior executives. The following points may be kept in mind in the

process of implementation:

� Identify and secure the needed resources.

137

� Gather needed data to measure both the effectiveness of internal process changes

designed to influence value and outcomes.

� Expand the strategy developed to assign detailed implementation responsibilities to

value creation teams.

� Convene periodic team meeting to evaluate progress and adjust the ongoing action

plans as appropriate.

� Remain watchful for signals of change that may run contrary to previously conceived

strategic assumptions and rationale.

Step 5: Communicate to Management and Investors

Realization of shareholder value through environmental factors requires recognition

of value by the environmental advantage process which is the subject of the investment

community. Therefore, effective communication is an essential component of intangible

value drivers in general, and contributions in particular, are still relatively new.

Environmental and social performance messages fall outside the mainstream investor

communications. Accordingly, careful design of these value creation messages is needed to

assure that they are both easily understood and responsive to investor interests.

The format and language in which the value creation message is framed must be carefully

chosen. In addition to assisting in the construction of these messages, the EHS value creation

team may need to assist in the development of supporting materials for investor

communication. The following guidelines may be adhered to:

� Monitor quantitative and qualitative implementation results to capture evidence of

successful value creation.

� Develop internal communications regarding successful outcomes for presentation to

senior management and investor relations.

� Advocate incorporation of the EHS value massage into investor communications.

� Support development of investor communication materials as needed to establish a

mechanism to record EHS contributions and to validate the long-term impacts on

value drivers and market valuation.

138

Step 6: Assure Continuous Improvement

The final step in the environmental advantage process is, in reality, an ongoing

process – assuring that the initial promise of EHS value creation is realized through

systematic monitoring and improving continuously. This can be designed and carried out by

members of the EHS value creation team. The following points may be kept in mind for

continuous improvement:

� Monitor the execution of the value creation strategy and capture the lessons learned.

� Promote regular evaluation and refinement of the strategy, including selected value

creation opportunities, goals, and mechanisms for action.

� Research and understand company experience with investor communications that

address environmental value creation and recommend improvements.

� Monitor changes in the competitive landscape and company characteristics that might

prompt adjustment of the environmental advantage process.

� Monitor the selected company performance indicators and remain alert for leading

indicators of significant changes.

� Review and re-consider key value drivers, hypothesized pathways to value, and

business rational, as appropriate.

� Conduct periodic, informal, surveys of internal staff to assure that the environmental

advantage process is operating effectively and efficiently.

5.6. IFRS AND ENVIRONMENTAL ACCOUNTING

As financial globalization proceeds, international financial reporting and auditing

standards are increasingly becoming important instruments of integration. This has been

observed in both the London and Pittsburg summits of the G20 leaders in 2009. The G20

leaders reinforced the influence of International Financial Reporting Standards (IFRS) in that

they called for the implementation of global accounting standards by 2011. By the end of

2008, there were over 100 countries that had adopted IFRS (Cabrera, 2008; Barth, et al

2008). Another parallel summit was the United Nations special summit on the environment

which was held on 22 September 2009. The United Nations’ summit underscored the link

between environment and finance.

139

When the existing body of IFRS is examined from an environmental perspective, a

number of insights can be made. A quick glance through the conceptual framework and a

number of standalone standards provide useful grounds for monitoring environmental assets,

liabilities and expenditures. Furthermore, since accounting is characterized by recognition,

measurement and disclosure, mandated accounting for the environment brings accountability

to the boardroom. Added to this is the fact that IFRS has legal backing in more than 100

countries, and hence it has a unique advantage of bringing environmental accountability into

both financial markets and regulatory frameworks.

For most companies environmental factors are no longer off balance sheet risks.

Notwithstanding this, research on corporate social and environmental reporting has not been

able to disentangle commitment from propaganda (Freedman and Jaggi, 2006; Bebbington,

Gonzales and Moneva, 2008; Gray, Kouhy and Lavers, 1995). Furthermore, anecdotal

evidence shows that few companies have actually set aside provisions or contributed to

independent funds for decommissioning of plant assets and the rehabilitation and restoration

of the environment. Additionally, few global companies have complied with financial

reporting standards that relate to contingent liabilities which arise from past events. Law

firms are specializing in environmental litigations and lawsuits against environmentally

sensitive industries have been increasing. Surprisingly firms that face lawsuits and

reputational damages in one area get honored for their social and environmental

(sustainability) reporting. This study examines whether the voluntary disclosure route is able

to resolve market and non market (regulatory) failures in monitoring public goods like the

environment.

The environment is both a complex and an eclectic matter. Carbon emissions and

contaminations of rivers that cross national boundaries are only the trans-boundary

environmental problems. Non-trans-boundary environmental problems are the ones whose

direct effects and externalities remain within the country that is producing it or agreeing to

receive other countries’ dumps (such as toxic waste dumping). Hence, policy formation

requires enforceable global treaties, sound national policy and the examination of advances

in a number of disciplines. The mainstream financial reporting literature addresses the

environmental accounting problem from the usual voluntary-mandatory-market reaction

perspectives or from social contract and institutional perspectives. The voluntary disclosure’s

140

conceptual bases are mostly agency and market efficiency theories while social contract and

institutional perspectives are embedded in social theory. The management accounting and

strategy literature approaches the problem from a reward and penalty framework for

executives and the firm’s stakeholders. For instance, Wisner, Epstein and Bagozzi (2006),

using data from 179 responses of executives and structural equation modeling find an

association between financial performance and environmental performance. Policy research

however requires bringing together a number of disjoint concepts and disciplines into one

coherent framework.

Emission standards, waste management, air and water pollution, climate change,

extraction of exhaustible resources, bio-fuels, energy savings, biodiversity, desertification,

forestry, agriculture and land use, cattle farming, food security, population, poverty,

urbanization, transport, carbon related financial products, El Nino, eco efficient technology,

and development related matters are both national and international issues. This study uses a

conceptual schema to synthesize causes and effects of environmental degradations, and

argues that a global REA (resource, event, action) accounting model in the context of public

good and IFRS is necessary for monitoring the environmental behavior of global firms.

Global financial reporting and auditing standards will be able to discriminate among the

beauty contestants in environmental disclosures. The nonfinancial and financial information

can be reported through a mandatory separate statement of environmental assets and

liabilities.

REA is a generalized framework of accounting system that uses a shared data

environment. The concept was first developed by McCarthy (1982). Public policy research

requires the distillation of trans-boundary, national, and micro level information. An

integrated shared data environment that is generated through well founded recognition,

measurement and reporting system reduces disclosure differences among firms (Swanson,

2006). The challenge for International Accounting Standards Board (IASB) is whether it will

make the statement of environmental assets and liabilities part of the mandatory set of

financial statements that firms in environmentally sensitive industries should periodically

publish. In other words whether improved environmental (sustainability) reports can be

produced through IFRS is the central question.

141

The discussion on corporate sustainability reports can be linked to the earnings

quality literature. Cormier, Magnan and Van Velthovern (2005); Murray, Power, Gray,

(2006); Konar and Cohen, (2001); Klasson and McLaughlin, (1996); Barth and McNichols,

(1995); for instance examined the association between information disclosure and financial

performance. Givoy, Hayn and Katz (2008) in their study of ownership structure synthesized

the earnings quality research into four dimensions. The four dimensions were the persistence

of accruals, estimation errors in accrual process, the prevalence of earnings management and

the prevalence of conservatism. Barth, Landsman and Lang (2008), in their study of IAS

adoption internationally, developed a three dimensional index of accounting quality. The

elements of accounting quality were earnings management (including earnings smoothing),

timely recognition of losses and the value relevance of accrual accounting information.

Comparing the earnings figure internationally is even more problematic as it is affected by

accounting differences and a number of institutional differences, development, ownership

structure, education and similar factors (Choi and Meek 2008). Bhattacharya, Daouk &

Welker (2003) for instance used earnings aggressiveness, loss avoidance and earnings

smoothing as earnings opacity measures to rank 34 countries. When one invokes trans-

boundary and non-trans-boundary environmental issues into the earnings quality literature, it

is evident that the absence of provisions for decommissioning and rehabilitations, and

reserves set aside for contingent liabilities for activities that are related to the firm’s past and

present activities, suggests earnings inflation by domestic and transnational companies.

Hence, there is a paucity of research on the link between accounting quality studies and

environmental accounting studies.

As noted earlier, another cluster of research argues that the firm’s environmental

disclosure effort is a self serving exercise of obtaining social legitimization. Social

researchers argue that the firm achieves this through isomorphism (coercion, mimicking and

normative pressures). See for example DiMaggio and Powell (1983); Patten (2005); Chen

and Chen (2009); Cho, Freedman and Patten, (2009). In other words, firms engage in

impression management, and want to create an image of environmental friendliness when in

fact the nature of their activity is environmentally sensitive. If this is correct, the voluntary

disclosure mechanism breaks down. Hence, decoupling the protection of public good from

corporate public relation exercise is necessary.

142

A quick glance through IASB and FASB standards reveals that there are several

standalone standards and interpretations that are in one way or another linked to

environmental and resource (REA) accounting. For instance, IFRIC 3 deals with emission

rights (allowances) and is related to trans-boundary matters. IFRS 8 also defines reportable

segments. IAS 27 defines who should consolidate and how consolidation of inter-related

entities should be done. IAS 28 and IAS 31 respectively deal with associates and joint

ventures while IFRS 3 deals with mergers and acquisitions. IAS 38 deals with the

impairment of emission rights (intangibles). IAS 32, IFRS 7 and IAS 39 (new IFRS 9,

November 12, 2009) deal with presentation, disclosure, and recognition and measurement of

financial instruments. IFRS 6 (effective January 2009) deals with exploration for and

evaluation of mineral resources. IFRIC#1 addresses changes in existing decommissioning,

restoration, rehabilitation and similar liabilities. IFRIC #5 provides for rights to interests

arising from decommissioning, restoration and environmental rehabilitation funds. As

regards liabilities arising from past events, IAS 37 deals with provisions, contingent

liabilities and continent assets. In short IASB already has the basis on which environmental

information at corporate level can be reported.

The overall conclusion from the three financial statements can be summarized as

follows:- (i) From a compliance perspective, it is impossible to conclude that the companies

are indeed meeting the requirements of IFRS. (ii) All the global companies did not disclose

the size and adequacy of the provisions that they have set aside for normal provisions and

contingencies in respect of the environment. (iii) The notes and descriptions of the companies

appear similar, indicating the global convergence of financial reporting practices and the

entrenchment of the audit industry. In other words, no global company produced a separate

statement on the environment. Finally, from an earnings quality perspective, the implications

of the non recognition, non disclosure and inadequacy of provisions for past and present

environmental responsibilities points to one direction:- the inflation of earnings and values

(fundamental/intrinsic) of equities.

Chart 5.6.1 is drawn following the conventions of structural equation modeling. In

order to improve the readability of the figure, certain connectors (associations) between

nodes and mathematical notations were omitted or reduced to the minimum. Note that there

are five nodes in Chart 5.6.1:- emission, production, depletion, projects and urbanization.

143

Each node in turn contains multiple factors. For instance, the emission node has factors from

X11 to X1n, and X11 can represent Co2 or an equivalent element that contributes to emission

of pollutants that affect air and water quality. The production node in turn has multiple

factors ranging from X21 to X 2n. The nodes and the rest of the factors can be identified by

carefully reviewing ISO and other industry standards and the emerging literature. ήi is a

policy node that is caused by activities (X11 to Xnn) that lead to emission, production,

depletion, large projects and urbanization activities. The policy node is further mediated by

market and nonmarket forces. Market forces are product, labour and financial markets

(including financial intermediaries in carbon securities) while nonmarket forces are State and

non-State actors. Another necessary factor is it is necessary to delineate the trans-boundary

causes of environmental degradation from the non-trans-boundary causes. The interesting

question for this paper is the extent to which accounting policy makers can influence the

policy node, ήi and make accountancy as an instrument of good local and international

environmental governance.

Before we proceed to the examination of mandated financial reporting standards, it is

important that we noted the usefulness of indices produced by institutions that advance

sustainability ratings. As noted earlier, Freedman and Jaggi (op cit) summarise that it is

difficult to decouple a firm’s propaganda from genuine information disclosure. Bebbingtonet

at (2008:371) also argue that though social and environmental reporting is widespread, the

phenomena under which such reports are produced remains largely unexplored.

Notwithstanding this, a number of stock exchanges produce sustainability indices/metrics

and rate companies. Audit firms involve themselves in either the rating or the adjudication

process. For instance, the Dow Jones sustainability index sets three broad criteria of

economic reporting, environmental reporting and social reporting. The weights and criteria

can be criticized. A similar criticism can be made about the Johannesburg Securities

Exchange’s (JSE) Socially Responsible Investment (SRI) index. With regard to the

environment, the JSE classifies firms into high, medium, and low

144

Chart – 5.6.1 Structural Equation Modeling

145

Relevant financial reporting standards

As noted earlier, a number of existing standards and interpretations directly and

indirectly deal with environmental issues. In this respect, IFRS 6 (implementation January

2009) for example directly deals with extractive industries and IFRIC 5 provides the

guidance for decommissioning, rehabilitation and restoration of environment related

expenditure. IFRIC 3 (still under discussion) and IAS 38 (intangibles) deal with government

allocated emission rights, trades in these rights and the impairment of the emission

allowances. Furthermore, it is important to note that a number of other standards provide an

indirect support for the recognition, measurement and disclosure of environmental assets and

liabilities. IAS 37 (provisions for contingent liabilities and assets) can be linked to

environmental liabilities. IFRS 3, IAS 27, IAS 28, IAS 31, IAS 24 and IFRS 8 respectively

deal with business combinations, investments in joint ventures and associates, related party

disclosures, and specify the reportable segments of a geographically dispersed global

company. Listed global companies, subject to certain exemptions, are expected to comply

with IFRS. An environment perspective to global financial reporting standards therefore

provides a new insight; an insight that is useful for monitoring and protecting the

environment. The relevant standards are discussed below.

“In accordance with IAS 37 Provisions, continent liabilities and contingent assets, an entity

recognizes any obligations for removal and restoration that are incurred during a particular

period as a consequence of having undertaken the exploration for and evaluation of mineral

resources”.

Furthermore, paragraph 3 of IAS 37 defines provisions as “liabilities of uncertain

timing or amount”; and contingent liability is defined as “a liability that arises from past

events, and its existence will be confirmed only by the occurrence and nonoccurrence of one

or more of uncertain future events that are not wholly within the control of the entity.”

Paragraph 14 of IAS 37 requires that provision should be recognized when (a) an entity has a

present obligation (legal or constructive) as a result of a past event; (b) it is probable that an

outflow of resources embodying economic benefits will be required to settle the obligations;

and (c) a reliable estimate can be made of the amount of the obligation. Paragraph 17 further

defines an “obligating event” as a past event that leads to present obligation. It states that for

an event to be an “obligating event”, it is necessary that the entity has no realistic alternative

to settling the obligation created by the event. Finally, paragraph 27 of IAS 37 deals with the

146

disclosure conditions for contingent liabilities. If the liability is not expected to lead to an

outflow of resources and where an entity is jointly and severally liable for an obligation, that

part of the obligation that is expected to be met by other parties is treated as contingent

liability. The standard therefore leaves the application to the management, audit committee

and external auditors. In other words, even though the two standards do not define the time

limit or the size (amount) of the event or what construes a “constructive” obligating event,

they provide the technical ground for the recognition of environmental liabilities that arise

from past events (activities) that lead to, for example, the deterioration of air and water

quality as shown in chart 5.6.1.

IFRIC 3 (emission rights) was issued in 2004 but was withdrawn in 2005.4 The 2004

document was prepared against the backdrop of the Kyoto Agreement on the environment,

and the trend in government preparations for reductions in greenhouse gas emissions. The

economic concept is largely founded on the externality theorem, and the long held European

subscription to the polluter pays principle (PPP) for example while polluting a trans-boundary

water such as the River Rhine. The policy assumes that the government can create an

artificial scarcity by limiting (capping through quota allocation to “qualifying firms”) the

amount of total emissions of pollutants during a period of time.

This approach makes sense at global level if the effects of the emissions are

distributed equally across the globe. Furthermore, given that there are about 200 political

jurisdictions in the world, each country’s contribution to global permissible emissions is

different, and the incentives for not observing a treaty (if any) are many, hence the issue

becomes complex. Hence, the interesting question again is whether global financial reporting

standards have a role in influencing and implementing monitoring mechanisms from

intergovernmental change of emission rights to microeconomic level trade in these rights and

their derivatives. Furthermore, since nonpolluting or under polluting countries can also issue

sovereign emission, production, depletion, project and urbanization rights, designing the

appropriate mechanism and product might lead to the reallocation of resources globally.

The main issues in the original draft have not changes. Rights (allowances) to emit

pollutant continue to be treated as intangible assets to be accounted for according to IAS 38

(Intangible Assets). When the rights are allocated by government department for amounts

less than its fair value, the difference is recognized as deferred income (liability) in the

statement of financial position. When the firm starts polluting, it records provisions according

to IAS 37. The original draft did not raise issues about past events. Furthermore, according to

www.iasplus.com of Deloitte, in May 2008 the IASB staff defined emission trading scheme

147

as a “ an arrangement designed to improve the environment, in which participating entities

may be required to remit to an administrator a quantity of tradable rights that is linked to

their direct or indirect effects on the environment.” In its November 2009 meeting of IASB

the technicalities of defining an “obligating event” and the timing of recognition of liability at

cost or market value and recording of initial government allocation right (at cost of market)

and provisions, whether it should be treated as intangible asset and face impairment annual

test are finalized. However, the lesson from this IFRIC is that a number of standards IAS 38

(Impairments), IAS 20 (Government Grant), IAS 37 (Provisions, contingent liabilities and

contingent assets) and the standards that relate to financial instruments (IAS 32, IFRS 7 and

IAS 39) will be affected, and require amendments.

IFRIC 5 (decommissioning, restoration, rehabilitation and similar liabilities) deals

with accounting for trust funds set aside for the environment. Paragraph 1 of IFRIC 5 defines

the purpose of the fund as “to segregate assets to fund some or all of the costs of

decommissioning plants (such as a nuclear plant) or certain equipment (such as cars) or in

undertaking environmental rehabilitation (such as rectifying pollution of water or resorting

mined land), together referred to as “decommissioning”. Above states that contributions to

this fund may be voluntary or required by regulation or law, and the fund might be

established by a single contributor or multiple contributors for individual or joint

decommissioning costs. In other words, even though the discussion does not appear to have

linkage with IAS 37, here too the standard setters appear to be prudent in providing the

guidance for the management of the funds set aside for provisions and contingencies that

relate to past events.

IAS 8 deals with selecting and applying accounting policy. Changes in accounting

policies, changes in estimates and correction of prior period errors are complex issues. The

scope of IAS 8 covers fundamental errors, retrospective adjustments of financial statements

(as far back as practicable, per paragraph 26), and when and how material omissions or

misstatements should be practically treated, and corrected. The only unsettled matter is

whether the retrospective restatement of financial statements for environmental costs and

liabilities is impractical and indeterminate (paragraph 5 of IAS 8). IFRS 8 also requires firms

to disclose their products, services and the geographical areas in which they are operating.

Paragraph 13 of IFRS 8 sets the quantitative thresholds of 10% of combined revenue.

However, both paragraph 23 and paragraph 33 are silent about segment risks and rewards

arising from engaging in environmentally sensitive activities in each of the geographical

areas that the company is operating. When IFRS 8 is examined in conjunction with IAS 27

148

(consolidation) and the above mentioned standards the implication for global companies

operating in environmentally sensitive industries becomes serious.

IAS 32, IFRS 7 and IAS 39 (IFRS 9) respectively deal with presentation, disclosure,

and recognition and measurement of financial instruments. Hedge accounting (cash flow

hedge, fair value hedge and hedge of net investment in foreign operations:- paragraph 86 and

87 of IAS 39) require that gains and losses, and effective and non effective hedges be

reported in the comprehensive statement of income. Given the rise of carbon related financial

instruments, and increases in pending lawsuits against companies the combined impacts of

IAS 27, IAS 37, IFRS 6, IFRIC 5, IAS 8 and standards that deal with derivative instruments

is to strengthen the political costs (Watts and Zimmerman, 1986) for global companies that

are operating in environmentally sensitive industries.

Table-5.6.1 contains a summary of environment related financial reporting standards. The

table identifies relevant terms, phrases, paragraphs and provides remarks.

149

Table 5.6.1 Environment related financial reporting standards

IFRS/IAS number

Title and / or description

Relevant paragraph(s)

Paragraph number in parenthesis

Remarks

Frame work Framework for preparation & presentation of financial statements

Accountability (14), relevance (26), materiality (29 &30), substance (35), neutrality (36), prudence (37), completeness (38), liabilities & obligation (60), capital maintenance (81), probability (85), measurement reliability (86), recognition of liabilities (91)

Statement to the effect that sustainability is within the bounds of the conceptual framework of IASB and FASB

IAS 41; Specialized industries

Sector’s sensitivity to the environment. See ISO classification and Wiseman’s disclosure scores.

IFRS 6 Exploration & evaluation of mineral resources

Paragraph (11): requirement for provision and contingencies

Refer to statistics about emissions; production of pollutants; toxic waste disposal systems, ground water pollution & land degradation; depletion, industrial accidents; environmental impact studies.

IFRIC 3

(Withdrawn)

Emission rights and allowances

Several paragraphs deal with whether government allocated rights; and the accounting treatment at the start of emission, and the setting aside of provisions.

Kyoto Agreement, Copenhagen Summit; Agreement versus treaty; efficiency of national and global allocation systems, speculation and transferability of emission rights; whether climate change has o boundaries; markets for trading emission and similar rights and their derivatives; sovereign rights; global shared databases (REA).

IAS 20 Government Grants

Initial acquisitions of emission rights & allowances recorded as assets whose valuations are subject to impairment tests.

Government grants could be influenced by the politics of the day. Government can over/under supply the rights certificates; endemic corruptions in

150

the public sector might frustrate the system.

IFRIC 5

Jan 2006

Decommissioning, restoration & environmental rehabilitation funds

Purpose of fund (1), voluntary & required contribution to the fund (2), geographically dispersed sites (2), independent trustees, accounting for interest in the fund (7), obligations to make additional contributions (10), contingent liability (10), reimbursement rights (BC 12)

Disclosure of the size of the fund; arms length of the trustees; plans for additional contributions; responsibility for past degradations; adequacy of the fund.

IFRS 8 Operating segments

Core principle (1), nature of an operating segment (5), aggregation criteria (12), quantitative thresholds (13), disclosure (20), profit/loss/ assets and liabilities (23), measurement (25), geographical information (33)

For a global company whether its branches and subsidiaries are operating in environmentally sensitive sectors; and whether the segment meets the quantitative threshold, or whether it is required to prepare consolidated financial statements, and whether its segments meet international standards.

IAS 27, IFRS 3,

IAS 28 and

IAS 31, SIC 12

Consolidation, investments in mergers and acquisitions, interests in joint ventures and associates; consolidation of special purpose entities

Several paragraphs relate to ownership, risk, reward, and significant influence.

Group & consolidated statements are prepared for listed legal entities. Listed and unlisted companies might be sued for violating environmental standards in countries where their segments operate/operated in the past. This in turn might trigger an unbundling wave.

IAS 37

Provisions, contingent liabilities & contingent assets

Several paragraph that require charging current earnings for setting aside normal provisions and contingent liabilities.

Absence and inadequacy of provisions suggests earnings inflation which in turn affects intrinsic (fundamental) values of equities.

IAS 8 Accounting policies, changes in accounting estimates and errors

Accounting policies (10), retrospective application (22), warranty obligations (32 &33), errors (41), prior period errors (49),, impracticability of retrospective adjustments (51, 52&53)

The extent to which past earnings require restatement, and how this is going to be shown in past, present and future financial statements (retrospective & prospective adjustments).

151

IAS 1 Presentation of financial statements

Material omissions (7); purpose of financial statements (9), fair presentation (15), rectification of accounting policies (18), going concern (25), provisions (54), estimation uncertainty (125)

Minimum set of information that must be included in the comprehensive financial statements of environmentally sensitive companies.

IFRS 1 First time adoption of IFRS

Accounting policy 97), fair

value (16), compound financial instruments (23), parents, subsidiaries, joint ventures & associates (24), changes in decommissioning, restoration and similar liabilities (25E), non IFRS comparative information (36), reconciliations (39)

Fair value of environment

related assets, liabilities and provisions.

IFRS 7, IAS 37 & IAS 39, IFRS 9, IAS 38

Financial instruments disclosure, presentation and recognition and measurement, intangibles & impairment

Disclosure of past and present environment related risk(s); qualitative and quantitative description of the effective and non effective hedging strategy; fair value of carbon derivatives and other environment related assets and liabilities.

5.6.1 A STATEMENT OF ENVIRONMENTAL ASSETS AND

LIABILITIES?

The above discussion leads to two financial reporting policy alternatives that the IASB board

might wish to consider. The first option is a mandated separate statement that focuses on the

environment. The second option is to require the disclosure of certain elements of

information within the existing reporting framework and strengthening the offsetting rule. As

the world continues to be preoccupied by issues of environmental degradation, trans-

boundary issues get confused with non-trans-boundary issues. The production of a separate

statement on the environment would be a preferred policy to decouple trans-boundary issues

from non-trans-boundary issues in the context of segment (geographical) reporting. The

statement can combine nonfinancial and financial information. The minimum information

that ought to be disclosed in the proposed statement can be determined by amending IAS 1

and providing a transition clause in IFRS 1. The standards that deal with provisions (IAS 37)

152

and changes in accounting policy (IAS 8) can be revised to require that provisions for the

environment liabilities or asset replacements/impairments be backed by ring fenced cash or

cash equivalents. IFRIC 3 and IFRS 6 can be connected, and a standalone standard on

environmental sensitive sectors might be necessary. Table 5.6.2 contains some of the

elements of the proposed separate statement for the environment.

153

Table 5.6.2 Statement of Environmental Assets and Liabilities*

As of December 31, 20XX ----------------------------------------------------------------------------------------------------------------

Financial information / Comparative year Environmental assets:-

• Cash in trust funds

• Investments in trust funds at fair value

• Emission rights held

• Emission rights held for sale (at fair value)

• Insurance & similar products held against environmental risks

• Contributions to voluntary & mandatory schemes

• Inventory of natural & biological assets & depletions

• Investments in air & water quality

• Capitalized research & development

• Capitalized net site preparation & restoration costs

Environmental Liabilities and uncertain liabilities (provisions or contra asset accounts)

• Present value of decommissioning, restoration & rehabilitation

• Legal and constructive liabilities arising from past events

• Deferred income from government allocations of emission rights

• Uncertain liabilities (Provisions or contra asset accounts)

• Provision for decommissioning, restoration & rehabilitation (current)

• Provision for decommissioning, restoration & rehabilitation of (past)

• Provision for contingent liabilities from past events

Net adjustments to retained earnings for past errors & material omissions

Net surplus (deficit) for current year+

Estimate of net environmental assets (liabilities)

*The statement can be accompanied by the disclosure of minimum nonfinancial information such as actual & ISO permissible standards of emissions, production and disposals of waste, depletion of natural resources & replacement (forestry), major capital projects that lead to deterioration of air & water quality and habitat, and urbanization +Net surplus (deficit) is arrived after consideration of recurrent income & expenditure such as interest and dividend incomes from environment related investments, tax rebates and dues, recurrent expenditure on environmental protection, current charges for normal provisions for decommissioning & rehabilitation, past errors and omissions, current contribution to independent environmental rehabilitation fund & tax gains and losses arising from hedge activities on environment related products, etc.

154

5.6.2 CONCLUDING REMARKS AND DIRECTION FOR FUTURE

RESEARCH

This study examined whether global financial reporting standards can be used as a

device for monitoring the environmental behavior of global mining and oil companies. The

study reviewed the literature in economics, finance, environmental accounting, technology,

and examined the voluntary-mandatory mechanisms of corporate disclosure. I summarise

that the proprietary cost (Verrecchia, 1983) and voluntary disclosure mechanism is infeasible

for monitoring public goods such as the environment. Mandated environmental public

information therefore cannot be discounted on the grounds of voluntary disclosure and

Keynesian beauty contest. Second, a careful examination of the existing IASB standards

provided useful avenues for improving the current set of financial statements, and the

production of mandated separate statement of environmental assets and liabilities.

The separate statement on the environment that is prepared in accordance with IFRS

has a number of advantages, including the decoupling of reputation management efforts of

environmentally sensitive firms from their genuine information disclosure efforts. The

separate statement emerged from the analysis of the multifactor model in Chart-5.6.1, and the

analysis of existing financial reporting standards. The proposed statement is consistent with

the REA concept, and certain information can be aggregated for planning and monitoring at

sector, macro, regional and global levels. The information can be used by both market and

nonmarket (State and pressure groups) actors. It can be linked to the UN system of

environmental accounts(SNA) and XBRL’s taxonomy (classification). Furthermore, since

most of the companies are already producing lengthy social and environmental reports the

incremental cost of preparing the separate statement outweighs the ramifications of climate

change and lawsuits on the part of the firms.

There are number of avenues for future research. Replication of this research on other

environmentally sensitive sectors might provide corroboration for the conclusions of this

paper. Examining the form of association between nonfinancial information and financial

information that purports to serve the environment is another avenue. Expanding the

taxonomy of XBRL in the context of REA, IFRS and SNA requires a shared database

environment. This is another direction for future research.

155

REFERENCE

• Aronsson, T. Johansson, P. and Of gren, K. (1997).Welfare measurement,

sustainability and green national accounting, Edward Elgar Publishing Williston VT,

USA.

• Ball, R. and Shivakumar, L. (2008). How much new information is there in Earnings?

http://ssrn.com/abstract=1105228

• Barth, M. Beaver, W. and Landsman, W. (2001). The Relevance of Value Relevance

Literature for Financial Accounting Standards Setting: Another View, Journal of

Accounting and Economics, 31:[77-104].

• Barth, Mary E., and Maureen F. McNichols, "Estimation and Market Valuation of

Environmental Liabilities Relating to Superfund Sites," Journal of Accounting

Research 32 (Supplement) (1994), 177-209.

• Barth, M., Landsman W and Lang, M. (2008). International Accounting Standards

and Accounting Quality, Journal of Accounting Research, Volume 46, Number 3,

June pp. 467-498.

• Bebbington, J. Larrinaga Gonzales C. MonevaAbadia, J. (2008). Legitimating

reputation/ the reputation of legitimacy theory, Accounting, Auditing and

Accountability Journal, Volume 21 No 3 pp 371-374

• Berkman, H. and Koch, P. (2008). “Disagreement, Short sale constrains and

speculative trading before earnings announcements; (http://papers.ssrn.com/sol3/

papers.cfm?abstract _id=1213265.

• Bhattacharya, Daouk& Welker (2003). The world price of earnings opacity, The

Accounting Review 78 (3), July.

• Buhr, S. and Reiter, S. (2006). Ideology, the environment and one world view: A

discourse analysis of Noranda’s environmental and sustainable development reports,

Advances in Environmental Accounting & Management, Vol. 3, 2006, pp 1-48.

• Burnett, R. Wright, C. and Sinkin, C. (2009). Market valuation of the long-run effects

of adoption of effective environmental cost strategies

http://aaahq.org/AM2009/abstract.cfm?submissionID=2293

• Cabrera, L. (2008). Widespread Acceptance of IFRS Continues. Is it time for the U.S.

companies to prepare for the transition? The CPA journal, March,

http://www.nysscpa.org/ cpajournal/2008/ 308/ essentials/p36.htm

156

• Chen, JC. And Chen JC. (2009). The Accuracy of financial report projections of

future environmental capital expenditures, American Accounting Association

Conference, New York, http://aaahq.org/AM2009/abstract.cfm?submissionID=2250

• Cho, C., Freedman, M. and Patten, D. (2009). Corporate disclosure of environmental

capital expenditures: A test of alternative theories, American Accounting Association

Conference, Abstract available at http://aaahg.org/Am2009.

• Choi, F and Meek M 2008. International Accounting, 6th edition. Pearson, Prentice

Hall.

• Cormier, D. Magnan, M and van Velthoven, B. (2005). Environmental disclosure

quality in large German companies: Economic incentives, public pressure or

institutional conditions? European Accounting Review Volume 14 No 1 pp 3-39.

• Daske, H, Hail, L; Leuz, c. and Verdi R (2008a). Mandatory IFRS reporting around

the world: early evidence on the economic consequences. http://ssrn.com/abstract=

1024240.

• Derwall, J., N. Guenster, R. Bauer and K. G. Koedijk. (2005). The Eco-Efficiency

Premium Puzzle." Financial Analysts Journal, 61 (2): 51-63.

• DiMaggio P. & Powell, W. (1983). The iron cage revisited, institutional isomorphism

and collective rationality in organizational fields, American Sociological Review 48

(147-160).

• Durand, R. and Tarca A. (2008). An investigation of the usefulness of accounting data

in extractive industry operations, www.business.uwa.edu.au

• Freedman, M and Jaggi, B. (2006) eds. Environmental Accounting: commitment or

propaganda, Advances in environmental accounting and management, Volume 3,

Holland, Elsevier, Ltd. Freedman, M. and C. Wasley (1990). The association between

environmental performance and environmental disclosure in annual reports and 10Ks,

Advances in Public Interest Accounting (1990), pp. 183–193.

• Frynas, JG. (2004). Social and environmental litigation against transnational firms in

Africa, The Journal of Modern African Studies (2004), 42:3:363-388.

• Givoy, D. Hayn C. and Katz, S. (2009). Does Public ownership of equity improves

earnings quality? www.ssrn.com

• Gao, P. (2008). Keynesian beauty contest, accounting disclosure, and market

efficiency, Journal of Accounting Research, Volume 46, Issue 4 pp 785-807.

• Global Reporting Initiative (GRI).www.globalreporting.org/

157

• Graham, J. Harvey, C. and Rajgopal, S. (2005). The Economic Implications of

Financial Reporting, Journal of Accounting and Economics, 40 (3-73).

• Gray, R, Kouhy, R and Lavers, S. (1995). Corporate social and environmental

reporting: a review of the literature and a longitudinal study of UK disclosure,

Accounting, Auditing and Accountability Journal 8 pp. 47–77.

• Haripriya, G. S. (2000). Integrating forest resources into the system of national

accounts in Maharashta, India. Environment and Development Economics, 5, 143–

156.

• Henning, E. (2004). Finding your way in qualitative research, Pretoria, van Schaik

publishers.

• Institute of Directors (2009). King III code of governance,

http://www.iodsa.co.za/products _reports.asp?CatID=150

• Klasson, R. and McLaughlin, C. (1996). The Impact of Environmental Management

on Firm Performance, Management science, Vol. 42, No. 8, August 1996, pp. 1199-

1214

• Konar, S., and Cohen, M. (2001). Does the Market Value Environmental

Performance?, The Review of Economics and Statistics 83 (2): 281-289.

• Kuosmanen, T and Kuosmanen, N. (2009). How not to measure sustainable value

(and how one might), Ecological Economics 69, pp. 235–243.

• Lang, G. (2003). Policy Applications of environmental accounting, The World Bank

Environment Department, Environmental Economics Series Paper No 88.

• Makina, D and Negash, M. (2007).The winners and losers from Stock Market

Liberalization, Evidence from Johannesburg Stock Exchange.25 pages,

http://ssrn.com/abstract=1132322.

• Mathew, M. (1997). Twenty-five years of social and environmental accounting

research: Is there a silver jubilee to celebrate? Accounting, Auditing an

Accountability Journal, Volume 10, Issue 4 pp 481-531.

• McCarthy, W. (1982).The REA Accounting Model. A Generalized Framework for

Accounting systems in a shared data environment, The Accounting Review, LVII No

3 pp554-578

• Murray, A., Sinclair, D. Power, D. And Gray R(2006). Do financial markets care

about social and environmental disclosure?: Further evidence and exploration from

158

the UK, Accounting, Auditing and Accountability Journal, Volume:19, 2, pp228 –

255

• Negash, M. (2001).Uncertainty, Cost of Capital and Financial Disclosure: A Review

of the Theory and Some Evidence, SA Journal of Accounting Research, Volume 15,

Number 2, pp 49-76.

• Negash, M and MacKinnon, SN (1998).Analysing the Economic Implications of

Ergonomic Interventions: Some Conceptual and Policy Issues, Ergonomics SA,

Volume 10 No. 1.

• Penman, S. Zhang, X. (2002). Modeling sustainable earnings and P/E ratios with

financial statement analysis, http://ssrn.com abstract 318967

• Stulz, R. (2005). The Limits of Financial Globalization, The Journal of Finance, LX

(1595-1638).

• Yee, K.K., (2006). Earnings Quality and the Equity Risk Premium: A Benchmark

Model, Contemporary Accounting Research 23, 833–877.

• Yusoff, H. and Hehman G (2008). Understanding corporate environmental reporting

through semiotics: the case of Malaysian and Australia, Ninth Annual Asian

Academic Accounting Association Conference, unpublished.

• Van Berkel, R. (2006). Eco efficiency in the Australian minerals processing sector,

Journal of cleaner production, Volume 15 Issues 8-9 pp 772-781.

• Verrecchia, R. (1983). Discretionary disclosure. Journal of Accounting and

Economics 5 pp. 179–194

• Walden, w. and Schwartz, (1997). Environmental disclosures and public policy

pressure, Journal of Accounting and Public Policy 16 pp. 125–154.

• Watts R. and Zimmerman, J. (1986). Positive Accounting Theory, Prentice Hall.

• Wiseman, J. (1982). An evaluation of environmental disclosures made in corporate

annual reports. Accounting, Organizations and Society, 7(1), 53-63.

• Wisner, P. Epstein, M and Bagozzi, R. (2006). Organizational antecedents and

consequences of environmental performance, Advanced in Environmental Accounting

and Management, Freedman and Jaggi (eds), Volume 3, Holland, Elsevier, Ltd.