Sustainability accounting

Peterson K. Ozili

Abstract

This paper discusses sustainability accounting. Sustainability accounting is the contribution of

accounting to sustainable development. Sustainability accounting has grown in importance in
many countries. This paper highlights the motivation for sustainability accounting, the definition
of sustainability accounting, the objectives of sustainability accounting and the tools of
sustainability accounting. Some directions for further research are offered.

Keywords: Sustainability accounting, sustainability, accounting, sustainability reporting,

JEL Code: M41, M42, M48, Q01

Electronic copy available at: https://ssrn.com/abstract=3803384

1. Introduction

This paper discusses sustainability accounting.

Think of two similar companies – Company A and B. Company A makes a turnover of $13million
a year from extracting mineral resources from the environment. The activities of Company A
degrade the environment and makes it unsustainable for people living in the immediate
community. Company A does nothing about the environment and goes on to plan for next year’s
extraction activities. On the other hand, Company B also makes a turnover of $13million a year
from extracting mineral resources from the environment. The activities of Company B also
degrade the environment. Company B takes action to protect the environment and discloses
information to insiders and outsiders about what it is doing to reduce harm to the environment and
minimize the hardship its activities may bring to members of the immediate community. From the
two scenario above, which of these two companies will be more valuable to investors? and which
of the two companies will have greater legitimacy to operate in the environment and in the
community? The answer is rather obvious – Company B. The behaviour of Company B
demonstrates in part what sustainability accounting is all about.

In simple terms, sustainability accounting is defined as accounting that integrates social,

environmental and economic facets of organization’s activities (Lamberton, 2005; Schaltegger and
Burritt, 2006b; Thomson, 2007). Sustainability accounting is the contribution of accounting to
sustainable development (Schaltegger et al, 2006). Sustainability accounting is considered to be
the branch of accounting that require organizations to pay attention to environmental, social and
governance matters by disclosing non-financial information about the organization.

For example, an organization should disclose information about wage inequality because
employees may want to know whether the CEO earns up to 10times more than the average
employee. Also, an organization should disclose information about its environment protection
activities because members of the community may want to know whether the organization ejects
harmful waste into the environment, and may want to know what the organization is doing to
reduce harm to the neighborhood. Also, an organization should disclose information on non-
financial performance because investors may want to know the level of customer satisfaction, the

Electronic copy available at: https://ssrn.com/abstract=3803384

level of employee satisfaction, board gender diversity and corporate reputation. The examples
above demonstrate how sustainability accounting can address the interest of multiple stakeholders.

Practitioners and academics have used several titles to describe sustainability accounting such as
environmental accounting (Larrinaga-Gonzalez and Bebbington, 2001; Lamberton, 2005; Jones,
2010), environmental reporting (Gray et al, 1995; Sahay, 2004; Clarkson et al, 2011), social
accounting (Dillard, 2014; Retolaza et al, 2016; Perkiss and Tweedie, 2017), social and
environmental accounting (Ball and Craig, 2010; Cormier et al, 2011; Brennan and Merkl-Davies,
2014), corporate social reporting (Sotorrío and Sánchez, 2010; Carnevale et al, 2012), corporate
social responsibility reporting (Bouten et al, 2011, Belal and Cooper, 2011; Dhaliwal et al, 2011);
non-financial reporting (Stolowy and Paugam, 2018; La Torre et al, 2018; Dagilienė and
Nedzinskienė, 2018).

The paper contributes to the literature that examine the role of accounting in assessing the social
and environmental outcomes and impacts that affect organizations and society (see, for example,
Gray et al, 1995; Sahay, 2004; Clarkson et al, 2011; Khan and Ozili, 2021). The paper also
contributes to the literature that offer conceptual insights on how organizations can use
sustainability accounting to address climate and environmental changes.

The rest of the paper is structured as follows. Section 2 discuss the objectives and motivation of
sustainability accounting. Section 3 present the literature review. Section 4 identify some tools of
sustainable accounting. Section 6 discuss some future directions, and section 6 concludes.

2. Objectives and motivations for sustainability accounting

2.1. Objectives of sustainability accounting

There are three objectives of sustainability accounting. The first objective is to prepare accounts
concerning organizations’ interactions with society and the natural environment (Peršić et al,
2017). The second objective of sustainability accounting is to disclose financial and non-financial
information about an organization’s performance in relation to society and the environment. The
third objective is to extend traditional financial accounting to take into account a wide range of

Electronic copy available at: https://ssrn.com/abstract=3803384

monetized information, covering environmental, social and economic impacts, on which
organizational decisions are made (Elkington, 1999; Bent and Richardson, 2003).1

2.2. Motivation for sustainability accounting

 To avoid greenwashing

Greenwashing is a concept used to describe a situation where an organization spends more time
and money on advertising themselves as environmentally friendly when they are not.
Organizations can use several tactics to mislead or persuade the public that their products,
objectives and policies are designed to promote a sustainable environment and society (Delmas
and Burbano, 2011; Seele and Gatti, 2017). They make people believe that the organization is
doing a lot more to protect the environment than it is actually doing. Sustainable accounting, or
sustainability reporting, has emerged to mitigate greenwashing. Sustainability accounting ensures
that organizations are truly doing what they claim to be doing to protect the environment.
Sustainability accounting provides an opportunity for organizations to report the exact steps or
action they are taking, or have taken, to protect the environment.

 Mimicry and industry pressure

Another motivation for sustainability accounting is mimicry and industry pressure. There is a
global shift towards sustainability in almost every industry. Several industries have begun to
incorporate sustainability considerations into their practice. For example, the banking industry in
sustainable banking, the marketing industry in sustainable marketing, and the development sector
in sustainable development. Each industry is mimicking the other industry to avoid the criticism
that the industry does not care about protecting the environment and the society at large. There is
increased pressure for the accounting industry, and the accounting discipline, to incorporate all
relevant social and environmental factors into all aspects of accounting, and to understand how
these factors affect the performance of organizations.

 Legislative pressure

Another motivation is legislative pressure. Legislative pressure occurs when legislation is passed
that require organizations to comply with certain sustainability disclosure and reporting

1
https://davidbent.files.wordpress.com/2013/01/sigmasustainabilityaccounting.pdf

Electronic copy available at: https://ssrn.com/abstract=3803384

requirements (Guia Arraiano et al, 2017). In some countries, sustainability reporting is backed by
legislation through the securities and exchange commission such as the United Kingdom, United
States, China and India. In other countries, sustainability reporting is not backed by legislation
because it is difficult to legislate on which sustainability information is decision-useful to investors
at each point in time since the usefulness of sustainability information is time-dependent. For
example, environmental disclosures may become highly decision-useful during a climate crisis,
and less decision-useful under stable climate conditions. Therefore, imposing legislation for
sustainability reporting may lead to the disclosure of information that investors do not find useful.

 Stakeholder pressure and gaining legitimacy

Another motivation for sustainability accounting is stakeholder pressure and legitimacy.

Environmentally-conscious stakeholders can pressure organizations to shift from traditional
accounting to sustainability accounting. Making a shift from traditional accounting to
sustainability accounting will help organizations to reaffirm their legitimacy in the environment
and society. Also, the involvement of stakeholders in sustainability accounting can help to align
accounting with sustainable development (Schneider, 2015). It will ensure that sustainability
accounting takes into account both economic, social and environmental considerations.

3. Literature review

Several studies have examined issues in the sustainable accounting literature. Adams and
Larrinaga‐González (2007) observes that the academic literature in the field of sustainability
accounting has largely ignored practice within organizations. They suggest that further research
engaging with organizations is needed to identify how accounting and management systems might
reduce their negative sustainability impacts. Passetti et al (2014) points out that sustainability
accounting is in the early phase of development and the lack of engagement by most organizations
is negative for the construction of a more balanced relationship between business, environmental
and social issues.

Electronic copy available at: https://ssrn.com/abstract=3803384

Schaltegger and Burritt (2006a) state that the development of sustainability accounting can be
achieved by a top-down approach and the stakeholder approach. The top-down approach to
sustainability accounting development starts with the broadest definition of sustainable
development and corporate sustainability. Then, the term ‘sustainable development’ is broken
down into partial indicators and measurements in the most systematic way possible. Meanwhile,
the stakeholder driven approach to sustainability accounting is determined through stakeholder
engagement processes. Gabrusewicz (2013) and Richardson (2013) show that the triple bottom
line (TBL) concept is a common framework used to describe sustainability accounting in
organizations because it recognizes that corporations not only add economic value to society, they
also add social and environmental value to society.

Schaltegger et al (2006) suggest that sustainability accounting is a crucial trigger for management
towards corporate sustainability. They argue that if corporate sustainability is seen as being the
result of management attempts to address sustainability challenges, then it makes sense for
management to use sustainability accounting as a basis to address sustainability challenges. Burritt
and Schaltegger (2010) show that two factors: (i) raising awareness about sustainability, and (ii)
management decision making, through problem solving and scorekeeping, are crucial for the
development of sustainability accounting. They suggest that the development of sustainability
accounting should be orientated more towards improving management decision making. Kaur and
Lodhia (2018) observe that stakeholder engagement in the sustainability accounting process of
Australian local councils is important, and is achieved through the development of strategic plans,
sustainability indicators, measuring sustainability performance and the preparation of
sustainability reports.

Huchzermeier (2019), in a case study, examines Puma’s decision to create an ‘Environmental

Profit and Loss account’ to increase the sustainability of their business. PUMA is a leading
sportswear and sports lifestyle products manufacturer with three main product categories:
footwear, apparel, and accessories. They measured the activities that harmed nature (loss) and
those that benefited nature (profit). In this way, corporate decisions are founded on impacts on the
environment and profitability. Larrinaga et al (2018) show that, in 2011, the Spanish government
made sustainability accounting a mandatory requirement for public sector organizations in Spain.

Electronic copy available at: https://ssrn.com/abstract=3803384

The outcome was very disappointing. This adds to the argument that making sustainability
accounting a mandatory requirement for organizations may not be a good idea.

4. Some tools of sustainability accounting

Sustainability accounting tools are the tools used by organizations to become more sustainable.
The demand for information about the economic effects of environmental and social activities have
led to the development of sustainability accounting tools for use in corporations (Schaltegger and
Burritt, 2010). Some sustainability accounting tools include:

1. Corporate sustainability reporting (CSR)

2. Triple-P reporting, also known as reporting on People, Planet and Profit. This is also known
as the Triple bottom line reporting (Elkington, 1999). Triple bottom line reporting is the disclosure
of information on how business performance affects ‘people’, ‘profit’, and the ‘planet (Slaper and
Hall, 2011).

3. The Global Reporting Initiative (GRI)2. The objective of the GRI is to ensure that
environmental and social reporting is comparable to financial reporting. It achieves this by
developing reporting principles and information qualities similar to those used in corporate
financial reporting (Roberts and Koeplin, 2007).

5. Future directions for sustainability accounting

5.1. Pay more attention to social and governance matters

The sustainability accounting discourse needs to pay more attention to social and governance
matters not just environmental matters. Currently, much priority is given to environmental impact.
Organizations are placing high importance on carbon neutrality and waste reduction in their supply

2
https://www.globalreporting.org/

Electronic copy available at: https://ssrn.com/abstract=3803384

chains. Organizations need to also pay much attention to social and governance matters such as
wage inequality, female representation on the Board, employee ethnic diversity matters, customer
satisfaction, human capital quality disclosure, and community acceptance. Future studies should
undertake further research on the social and governance matters underlying sustainability
accounting.

5.2. Exploring the need for new standards of sustainability accounting and reporting

There is a debate about whether we need a separate standalone sustainability reporting standard or
whether existing accounting standards should be expanded to incorporate sustainability accounting
requirements. It is difficult to determine which approach is more appropriate due to cost, conflict
of interest, political economy and country-specific issues. Further research is needed to explore
the possibility of setting a new standard for sustainability accounting and reporting. Such studies
should take into account the benefit of creating a standalone sustainability accounting standard and
the challenges that might be encountered.

5.3. Exploring the limitations of sustainability accounting

Sustainability accounting, often considered to be the accounting profession’s response to

sustainable development and climate change risk, has its limits. The biggest limitation is that it
focuses only on disclosure and reporting of ESG matters. It does not provide organizations with
the financial resources they need to make a meaningful contribution to the environment or society.
An organization that is short of cash, or financially constrained, may be unable to make a
significant ESG contribution, and is likely to make disclosures that analysts may consider to be
negative or below-the-benchmark ESG performance, thereby making the organization look bad
both in its financial position and its ESG disclosures. Therefore, it is important for the accounting
profession to recognize this limitation of sustainability accounting and other limitations. Future
research should examine other limitations of sustainability accounting in relation to the sustainable
development agenda.

5.4. Developing relevant sustainability performance indicator for stakeholders

Several efforts are ongoing to develop key performance indicators for sustainability reporting
(Gnanaweera and Kunori, 2018). Some performance indicators will be more relevant to
stakeholders while other performance indicators will be less relevant to stakeholders. Future

Electronic copy available at: https://ssrn.com/abstract=3803384

studies should determine, based on certain criteria, the key performance indicators that are most
relevant and important to stakeholders.

6. Conclusion

This paper discussed sustainability accounting at the conceptual level. It highlighted the definition,
motivation and tools of sustainability accounting. It showed that sustainability accounting can help
organisations to identify and assess environmental and social challenges. The first step to develop
sustainability accounting standards is to first understand what sustainability accounting really is -
this is the goal of this short paper. Although significant innovations have emerged in sustainability
accounting in the last two decades, the concept of sustainability accounting is still relatively new
in some countries, while its development in other countries is still patchy. As more organisations
continue to embed societal and environmental considerations into their business processes, it will
hasten the development of accounting for sustainability.

Electronic copy available at: https://ssrn.com/abstract=3803384

 Reference

Adams, C. A., & Larrinaga‐González, C. (2007). Engaging with organisations in pursuit of

improved sustainability accounting and performance. Accounting, Auditing & Accountability
Journal.

Ball, A., & Craig, R. (2010). Using neo-institutionalism to advance social and environmental
accounting. Critical Perspectives on Accounting, 21(4), 283-293.

Belal, A. R., & Cooper, S. (2011). The absence of corporate social responsibility reporting in
Bangladesh. Critical Perspectives on Accounting, 22(7), 654-667.

Bent, D. & Richardson, J. (2003). The SIGMA Guidelines-Toolkit: Sustainability Accounting

Guide. London, Sigma Project

Bouten, L., Everaert, P., Van Liedekerke, L., De Moor, L., & Christiaens, J. (2011). Corporate
social responsibility reporting: A comprehensive picture? In Accounting Forum 35, (3), 187-204.

Brennan, N. M., & Merkl-Davies, D. M. (2014). Rhetoric and argument in social and
environmental reporting: the Dirty Laundry case. Accounting, Auditing & Accountability Journal.

Burritt, R. L., & Schaltegger, S. (2010). Sustainability accounting and reporting: fad or trend?
Accounting, Auditing & Accountability Journal.

Carnevale, C., Mazzuca, M., & Venturini, S. (2012). Corporate social reporting in European banks:
The effects on a firm's market value. Corporate Social Responsibility and Environmental
Management, 19(3), 159-177.

Clarkson, P. M., Overell, M. B., & Chapple, L. (2011). Environmental reporting and its relation to
corporate environmental performance. Abacus, 47(1), 27-60.

Cormier, D., Ledoux, M. J., & Magnan, M. (2011). The informational contribution of social and
environmental disclosures for investors. Management Decision.

Dagilienė, L., & Nedzinskienė, R. (2018). An institutional theory perspective on non-financial

reporting. Journal of Financial Reporting and Accounting.

Delmas, M. A., & Burbano, V. C. (2011). The drivers of greenwashing. California management
review, 54(1), 64-87.

Electronic copy available at: https://ssrn.com/abstract=3803384

Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G. (2011). Voluntary nonfinancial disclosure
and the cost of equity capital: The initiation of corporate social responsibility reporting. The
accounting review, 86(1), 59-100.

Dillard, J. (2014). 14 Legitimating the social accounting project. Sustainability accounting and
accountability, 233.

Elkington, J. (1999). Triple bottom-line reporting: Looking for balance. Australian CPA, (March),
19–21

Gabrusewicz, T. (2013). Sustainability accounting–definition and trends. Prace Naukowe

Uniwersytetu Ekonomicznego we Wrocławiu, (302), 37-46.

Gray, R., Kouhy, R., & Lavers, S. (1995). Corporate social and environmental reporting.
Accounting, Auditing & Accountability Journal.

Guia Arraiano, I., Miralles-Quirós, M. D. M., Miralles-Quirós, J. L., & Sánchez-Hernández, M. I.

(2017). Sustainability reporting in Europe: differences in terms of legislation and valuation. R-
LEGO: Revista Lusófona de Economia e Gestão das Organizações, 105-120.

Huchzermeier, A. (2019). Puma: how sustainability accounting creates a win-win for companies
and stakeholders. The Business & Management Collection.

Idowu, S. O. (2013). Encyclopedia of corporate social responsibility (Vol. 21). N. Capaldi, L. Zu,
& A. D. Gupta (Eds.). New York: Springer.

Jones, M. J. (2010). Accounting for the environment: Towards a theoretical perspective for
environmental accounting and reporting. Accounting Forum, 34 (2), 123-138).

Kaur, A., & Lodhia, S. (2018). Stakeholder engagement in sustainability accounting and reporting.
Accounting, Auditing & Accountability Journal.

La Torre, M., Sabelfeld, S., Blomkvist, M., Tarquinio, L., & Dumay, J. (2018). Harmonising non-
financial reporting regulation in Europe: Practical forces and projections for future research.
Meditari Accountancy Research.

Lamberton, G. (2005). Sustainability accounting—A brief history and conceptual framework.

Accounting Forum, 29(1): 7–26

Electronic copy available at: https://ssrn.com/abstract=3803384

Larrinaga-Gonzalez, C., & Bebbington, J. (2001). Accounting change or institutional
appropriation? A case study of the implementation of environmental accounting. Critical
perspectives on accounting, 12(3), 269-292.

Larrinaga, C., Luque-Vilchez, M., & Fernández, R. (2018). Sustainability accounting regulation
in Spanish public sector organizations. Public Money & Management, 38(5), 345-354.

Passetti, E., Cinquini, L., Marelli, A., & Tenucci, A. (2014). Sustainability accounting in action:
Lights and shadows in the Italian context. The British Accounting Review, 46(3), 295-308.

Perkiss, S., & Tweedie, D. (2017). Social accounting into action: religion as ‘moral source’. Social
and Environmental Accountability Journal, 37(3), 174-189.

Peršić, M., Janković, S., & Krivačić, D. (2017). Sustainability accounting: upgrading corporate
social responsibility. In The Dynamics of Corporate Social Responsibility (pp. 285-303). Springer,
Cham.

Retolaza, J. L., San-Jose, L., & Ruíz-Roqueñi, M. (2016). Social accounting for sustainability:
Monetizing the social value. Cham: Springer.

Richardson, J. (2013). Accounting for Sustainability: Measuring quantities or enhancing qualities?

In The Triple Bottom Line (pp. 56-66). Routledge.

Roberts, D. H., & Koeplin, J. (2007). Sustainability reporting practices in Portugal: greenwashing
or triple bottom line? International Business & Economics Research Journal, 6(9).

Sahay, A. (2004). Environmental reporting by Indian corporations. Corporate Social

Responsibility and Environmental Management, 11(1), 12-22.

Schaltegger, S., & Burritt, R. L. (2010). Sustainability accounting for companies: Catchphrase or
decision support for business leaders? Journal of World Business, 45(4), 375-384.

Schaltegger, S., Bennett, M., & Burritt, R. (2006). Sustainability accounting and reporting:
development, linkages and reflection. An introduction. In Sustainability accounting and reporting
(pp. 1-33). Springer, Dordrecht

Schaltegger, S., & Burritt, R. L. (2006a). Corporate sustainability accounting: a nightmare or a

dream coming true?

Electronic copy available at: https://ssrn.com/abstract=3803384

Schaltegger, S., & Burritt, R. L. (2006b). Corporate sustainability accounting. In S. Schaltegger,
M. Bennett, & R. Burritt (Eds.), Sustainability accounting and reporting. Dordrecht: Springer
Publishing. pp. 37–59.

Schneider, A. (2015). Reflexivity in sustainability accounting and management: Transcending the

economic focus of corporate sustainability. Journal of Business Ethics, 127(3), 525-536.

Seele, P., & Gatti, L. (2017). Greenwashing revisited: In search of a typology and accusation‐
based definition incorporating legitimacy strategies. Business Strategy and the Environment,
26(2), 239-252.

Sotorrío, L. L., & Sánchez, J. L. F. (2010). Corporate social reporting for different audiences: the
case of multinational corporations in Spain. Corporate Social Responsibility and Environmental
Management, 17(5), 272-283.

Stolowy, H., & Paugam, L. (2018). The expansion of non-financial reporting: an exploratory study.
Accounting and Business Research, 48(5), 525-548.

Khan, T., & Ozili, P. K. (2021). Do Investment Funds Care About the Environment? Evidence
from Faith-based Funds. In New Challenges for Future Sustainability and Wellbeing. Emerald
Publishing Limited.

Thomson, I. (2007). Mapping the terrain of sustainability accounting. In J. Unerman, J.

Bebbington, & B. O’Dwyer (Eds.), Sustainability accounting and accountability (pp. 19–37).
London and New York: Routledge.

Electronic copy available at: https://ssrn.com/abstract=3803384