Socio-Ecologic Accounting

Ashutosh Dash

The Five Generations Of Corporate Codes Of Conduct

1st : Conflict of Interest 2nd : Commercial Conduct 3rd : Employee and third party 4th : Community and Environmental concerns

5th : Accountability and Social justice

Emergence of FR Reason Behind

First crossroad : 1930 1940

Stock exchanges & Regulatory

SEC 1934 (Skinner, 1981)

LSE 1939 (Parker, 1981)

Reporting- Solution to Lemon Problem

Flow of Capital Household Savings Flow of Information

Financial Intermediaries

Information Intermediaries

Market Regulators

Accounting Regulator

Business Firms

Reporting For Efficiency & Growth

Financial Reporting

Market Uncertainty

Capital Market Size

Market Information Processing

Capital Market Risk sharing

Efficient Allocation of Resources

Economic Growth

Source - Ndubizu (1992)

Regulation Essential for Reporting

Regulation:

Provides commonly accepted language

Reduces processing cost for users

Provides New and Relevant Information

1930 - 1970

Recommendations for practices

Practice by deductive theories (Normative)

Financial Reporting - Crises

1970s Accounting crisis - Tissue Rejection Decline in relevance : Preoccupation with profit Exclusion of non-financial performance Lacks Value Base

FR Not enough
Assets

Tangible
License to operate

Intangible
Intellectual Reputation Capital

Brand

Value Drivers
Affected by Social & Environmental factors

Disclosed

Not Disclosed

How Accounting Can Do It? Communication gap prevents market value from reflecting underlying value.

Mgmt view of MV Quality of Information Importance of a Measure How actively measure Is communicated
Understanding Gap

Value Gap
Investors view of MV Importance of a Measure How adequately measure Is communicated

Perception Gap

How Accounting Can Do It?

Reporting Socio-Environmental performance back to the people you do business with Preparing Sustainability Accounts:
Direct Accounts- Sustainability Information hidden in traditional accounts Indirect Accounts- Financial expression of selected externalities.

Value Added Reporting

Superior to traditional reporting VAR provides: Future growth expectation FGV = MV COV Helps in Analyzing: Risk & Return associated with asset Helps in strategy formulation Develops positive attitude of employees

Sustainability Reporting Buzz Word

Wealth (Gold Value) must be linked: Social Justice (Blue Value) Preservation of Environment (Green value)

Integration of all into

Business activities & Reporting practices

Alternative View:
Corporate must have (Not Should) SR

Whats the rationale of such Convergence?

Legitimacy theory explains between two value systems congruence

Social Value associated with activities

Norms of acceptable behaviour of larger social system.

Contd..

Sustainable development programme:

Increases wealth (Gold Value) Promotes social equity (Blue value) Preserve ecological integrity (Green Value)

Most Recent Trend- KPMG 2005

Dramatic Change CER till 1999 CSR in mainstream by 2005 Separate CSR - 80% of N100 Top 2 countries in Separate CSR: Japan (80%) UK (71%)

Highest Increase in CSR:

Italy, Spain, Canada, France

Most Recent Trend- KPMG 2005

CSR Contents: Based on GRI Guidelines CSR Includes: Corporate Governance (2/3) Social Topics (2/3) Supply Chain (80%) Environmental issues (85%) Stakeholders Dialogue on SR policy (40%)

Why Socio-Ecologic Accounting? The principal reasons for introducing socio-ecologic reporting are (Cherp, 2004):

Business leadership and achievement Market advantage Assurance to investors Legal requirements

Disclosure Why companies Volunteer?

Motives: Economic Legitimacy (Impression Mgt) Business Drivers for CSR : (KPMG, 2005) Economic 74% Ethical 53%

Economic Motives
Economic Motives: (PWC, 2002) Improves Stock Liquidity Reduces cost of capital Increases Access to Capital Reduces legal Damage Economic Drivers: (KPMG, 2005) Innovation & Learning Employee Motivation Risk Management

Some Evidences
Canadian Scenario: - 72% to buy from ethical companies - 79% to work for such a company - 68% are to invest their money European Scenario: - 70% prefer to buy - One in five is to pay more for products

Corporate Legitimacy
Leaders in reporting : (KPMG, 2005; Cerin,2002) Industries with high Envn Impact G250 80% N100- 50% 90% of US companies follow SR (PWC,2002)

- To Enhance or protect their reputations

CER: (Teoh, Pin, Joo and Ling, 1998) Not linked with Eco Performance Achieve cleaner and greener Image

Something Broader
Legitimacy: Too Narrow* Increased Accountability Demand of Modern Society CER (UNEP) Market Demand to Rank Companies

Public & Legislative Pressure: Produces Best Environment report**

*Mathew and Reynolds, 2001 **Cerin, 2002; KPMG,1999

Civil Society for Socio-ecologic Reporting

Pressure group of Civil SocietyFor Socio Eco Information Pressure groups Stock Exchanges Financial Institutions Fund Managers NGOs/ NPOs Media