Shortcomings in reporting contributions towards the sustainable development goals
Introduction
TFCD was established to develop some guidelines and recommendations related to climate-change disclosures. This is aimed at helping investors make a more informed investment decision. It is also aimed at giving stakeholders more information about the concentration of carbon-related assets and the related exposure risks. TFCD recommends disclosure in four thematic areas: governance, strategy, risk management, metrics and targets. The reporting requirement is important to help in measuring and maintaining natural resources. However, several areas for improvement and challenges are associated with this reporting. This paper discusses these shortcomings as experienced by the reporters.
Under governance, a firm must disclose its governance on climate-related risks and opportunities. Under the strategy, it is required firms should disclose the actual and potential impacts of risks and opportunities that are related that are associated with climate. The firms should disclose the employed strategies and plans to handle such risks and opportunities. Companies must also disclose how it identifies, assesses, and manages climate-related risks. A company’s metrics and targets to assess climate-related risks and opportunities should be disclosed whenever such information is material (Diaz-Sarachage, 2021). However, disclosure and related requirements pose some risks to the reporting firms.
Policy and Legal risks
Various risks make adherence to these requirements difficult, especially for young companies. One of the risks related to this kind of reporting is the increased pricing of GHG emissions. Such costs will increase operating costs since they call for high compliance measures, which could increase insurance costs. The requirement to report on emissions as a result of the production of goods and services and the strategy employed to handle them may call for early write-offs and high impairment costs as a result of changes in policies (Rambaud, 2015). It also exposes firms to litigations when its report contains information that would be prosecutable. This increases costs or lowers the demand for a company product.
Technical risks
To commit to the climate goals, some companies are forced to substitute their products and services for those with lower carbon emissions(Rambaud, 2015). This will call for changes in production processes and equipment, increasing costs to the reporting company. The product change may lead to reduced demand. Product change will also call for research and development, further increasing costs.
Market risks
Any change in company products or services will lead to a change in demand due to customer preferences. Such changes increase market uncertainty since the change cannot be measured on the bases of customer change in preference upfront. Change in product line can also lead to increased costs of raw materials, which may call for increased production costs.
Among the above risks, sustainable reporting needs to be improved. One major problem is the data and time required to collect and analyses for reporting. The data required comes from many sources, requiring more resources (Rambaud & Richard, 2016). Analysing such data and preparing reports is also time-consuming as many people and departments are required. Getting reliable data is also challenging because there are different ways of preparing data, and those who do it may need more knowledge. Preparing, planning, and implementing strategies as required may also be challenging since fighting climate change requires complicated strategies. There is also a problem of data overload. Such data is so much such that some may need clarification. This makes reporting difficult and sometimes inaccurate.
Conclusion
One of the main aims of the millennium development goals is to help combat climate change’s adverse effects. Companies want to align their strategies with the government’s in committing towards achieving sustainable development goals. These strategies do not bring immediate benefits to the company, but in most cases, they increase costs, lowering company profits. According to Friedman (1970), managers’ main responsibility, as the shareholders’ agents, is to maximise the latter’s wealth. This is achieved by making as much profit as possible and paying high dividends to shareholders or increasing the firm’s value so that the shareholders can benefit from the increased price of their stock. Sustainability reporting works against this objective by increasing costs, which are not directly going to benefit the company.
The role of socio-environmental accounting frameworks in supporting the implementation of IR by comparing and contrasting TBL and TDL frameworks.
Social-environmental accounting (SEA) can be defined as the process used to communicate the social-environmental effects of a firm’s economic actions to various stakeholders. Sustainable development is based on three dimensions: social, economic, and environmental. Sustainable development advocates for meeting the current generation’s needs without compromising those of future generations. Socio-economic management is a tool that many firms have employed that aim to control their impacts on the environment. To achieve this, firms must account for their actions and environmental impact. A socio-environmental accounting framework has assisted such accounting. There are several socio-environmental accounting frameworks, but this paper analyses two of them: the Triple Bottom Line and Triple Depreciation Line frameworks.
Triple Bottom Line socio-environmental accounting framework is based on the reason that firms should be committed to social and environmental concerns as they do to profit. It suggests that firms should focus on triple goals: profits, the planet and the people (Rambaud & Richard, 2015). Elkington introduced the concept to help in capturing sustainability measurement of a firm impact on the world based on shareholders’ values, profitability, as well as its environmental, social, and human capital.
In TBL, while it is easier to measure profitability using currency, it is not easy to measure social capital and environmental or economic health (Rambaud, 2015). Some suggest that these should be monetised to help in measurement challenges, but others object to this by philosophically challenging the rationality and logic of monetising some elements, such as endangered species and wetlands. There is a big challenge in getting the right price for such. Such challenges fail TBL regarding the accuracy and reliability of the reports prepared using it. Some firms take advantage of such challenges to make the readers of the report believe in their commitment to pursuing one objective while, in the actual sense, they are committed to another or no objective. TBL framework must be stronger in accounting for human and natural capital conservation efforts. It is hard to account for the decreasing value of human and natural capital from the usage of the firm.
Triple Depreciation Line becomes the better option for a socio-accounting framework since it helps in accounting for human and natural capital. TDL method helps in resolving the vagueness in TBL. TDL employs historical cost accounting principles to determine how well to account for human and natural capital. A clear logic of preserving capital begins by understanding the definition of capital and reasoning what is at stake when it is used. Using ontological investigation, human and natural capital value can be assessed by measuring the willingness of the consumer to pay the cost of their consumption. Continuous monitoring and assessment over a long period can measure the loss of value of something.
To achieve the objective of TDL, several assumptions need to be factored in. Concerning social maintenance, there are two assumptions (Rambaud, 2015). The first assumption is that three types of capital exist: financial, human, and natural. The second assumption is that the maintenance of this capital requires ontological investigation. The other four objectives are based on corporate maintenance objectives, which are. First, firm usage of human and natural capital comes with the responsibility of maintaining them. The second assumption under this is that the repeated use of this capital leads to their degradation (Demarty & Tremblay, 2019). Thirdly, the firm use of these resources is necessary for achieving the profit-making objective of the firm.
Conclusion
TBL is a good framework for accounting for sustainable development. It accounts for capital by continuously reducing its value to raise effectiveness in its use. TBL is aimed at improving efficiency in the use of natural resources. However, this method has no basis for holding accountability and reliability on the reports prepared. This is because the method needs to be more specific since it does not offer guidelines on quantifying natural capital. However, people have different motives and objectives. The preparers of sustainability development accounting reports have different motives, and their judgement of accounting measures depends on their objectives. Thus, some will report just for the sake of it to show the public that the firm is committed to the sustainability of natural resources while, in the real sense, it is not.
This problem is solved by the TDL method. The TDL method is based on various points of view and perceptions. The firm’s objective is to make a profit using the resources available, and their continued usage leads to their degradation. Hence, the user has a responsibility to maintain them. Thus, depreciation should be accounted for using the method in place for accounting for depreciation. Thus, the TDL framework can be considered superior, reliable, and accurate for financial, human, and natural capital accounting.
References
Demarty, M. and Tremblay, A. (2019). Long-term follow-up of pCO2, pCH4 and emissions from Eastmain 1 boreal reservoir and the Rupert diversion bays, Canada. Ecohydrology & Hydrobiology, 19(4), pp.529–540. doi:https://doi.org/10.1016/j.ecohyd.2017.09.001.
Diaz-Sarachage, J. M. (2021). Shortcomings in reporting contributions towards the sustainable development goals. Oviedo, Spain: Wiley.
Rambaud, A. (2015). How accounting can reformulate the debate on the Natural Capital and help to implement its ecological conceptualisation.
Rambaud, A., & Richard, J. (2015). The “Triple Depreciation Line” instead of the “Triple Bottom Line”: Towards a genuine integrated reporting. Critical Perspectives on Accounting, 25.
Rambaud, A. and Richard, J. (2016). The ‘Triple Depreciation Line’ Accounting Model and Its Application to the Human Capital. doi:
https://doi.org/10.1108/s2043- 905920160000011010.
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