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Accounting for sustainability


Accounting for Sustainability

Accounting for Sustainability

Can accountants and auditors become agents for real social change and make businesses more sustainable?

In today’s business environment, where the insatiable desire to grow profits overshadows environmental and social interests, it is easy to overlook how the actions of economic actors can shape corporate – and environmental – outcomes.    

In the accounting profession, practitioners exercise scepticism and critical thinking to get their jobs done on a daily basis. But without recognising the true power of reporting, not many have questioned the fundamentals of financial accounting nor challenged accounting assumptions with the same degree of scepticism and grit.

As it stands, accounting standards relate mostly to large, publicly listed corporations rather than different economic agents. This can probably be explained by the predominance of capitalist economic structures in the United Kingdom and the United States (the origins of the “Big Four” accounting firms). Only when we recognise that power and conflict exist in society can we go about finding ways to better reflect differing interests and concerns. 

Accounting reports could well be the means to achieve social balance by influencing the distribution of income, wealth and power – if we dare challenge their current architecture.

Make room for sustainability in reporting

With growing interest in the United Nations’ Sustainable Development Goals, ESG (environment, social and governance) investing and impact investing, more companies are developing sustainability reports due to stakeholder pressure or to fulfil corporate social responsibilities (CSR). In practice, this typically involves including additional content on sustainability on top of conventional financial reports. But this is not enough. 

How can we make the change towards a more sustainable world if we leave the financial information used to communicate business performance unchanged? We need to rethink reporting architecture so that sustainability information can be better integrated into reports. In other words, the ways we measure and report success must change.

Essentially, integrating sustainability information into mainstream reporting is at the intersection of social, environmental and financial accounting. CSR needs to be integrated into business, and measured and reported in a way that is financially, socially and environmentally sustainable. We need guidelines on how to move from the old concept of CSR to doing business differently.

Not just adding, but value-adding

As the leader of the sustainability business solutions unit in Chile at PwC, Luis Perera-Aldama* pioneered the creation of a “fourth financial statement”, a concept that was later adopted by several large Latin American corporations. This approach was not a prescriptive solution, but a dynamic learning tool that fostered exploration, development and adaptation to diverse circumstances and industries. 

Following his research at INSEAD as an executive-in-residence, Perera-Aldama realised that according to academic literature, this “fourth financial statement” was, in fact, a value-added statement (VAS) of unique characteristics. Essentially, a VAS provides a societal perspective by reinventing the commonly accepted measure of a company’s performance, typically presented as profit and loss, into wealth generated by a firm and wealth distributed to stakeholders. This realisation sparked Perera-Aldama’s ambition to develop a framework to integrate sustainability and financial information, as well as reshape social financial information with a sustainability frame.

The first VAS surfaced in the 1950s, but it has been – and still is – a marginal subject in accounting literature today. However, VAS initiatives abound in practice worldwide, and the Global Reporting Initiative (GRI) proposed a similar indicator and standard on direct economic impacts for sustainability reporting.

Perera-Aldama’s interest to understand and document how companies implement VAS effectively led to a doctoral project on the question: How does the presentation and use of VAS contribute to the practice of integrated reporting? 

Towards an integrated and integrative model

The VAS that Perera-Aldama developed while at PwC was not just a theoretical concept, but a practical tool that two large Colombian conglomerates adopted. Over a decade, these corporations integrated sustainability information into their annual reporting cycles, adapting Perera-Aldama’s VAS not only to different industry segments and geographies, but also accounting change and organisational learning. This real-world application provided a fit-for-purpose ground for a descriptive case-based study, offering valuable insights into the process and product of incorporating the tool.

The VAS proved to be a means to bridge the financial and CSR functions in the two Colombian conglomerates, not only linking financial numbers with sustainability aspects but also the functional with the strategic parts of the business. Internal negotiations between executives, CSR leaders and top management, alongside sponsorship and structural support from all levels, were critical for the successful integration of the VAS into reporting.

Based on these real-world cases, Perera-Aldama proposed a normative model for integrating VAS reporting into the financial accounting architecture in his doctoral thesis. Importantly, two innovative features could significantly reshape the way financial information is reported and understood, placing a greater emphasis on the social and environmental impacts of business operations. 

First, the model introduces a statement of accumulated social financial value-add retained in the business. This means the VAS cannot be just an isolated annual exercise, but an ongoing and integrated representation of the cumulative social financial flows the business generates, distributes and retains. Second, it proposes to elevate the social financial VAS to the mainstream view of corporate reporting, thereby positioning society as the ultimate beneficiary of business endeavours. 

The landscape of sustainability and integrated reporting is marked by vibrant discussions about the construct of materiality. In practice, integrating sustainability into reporting cannot be done without a good grasp of the concept of materiality. The concept is widely discussed in the realm of business sustainability and encompasses economic, social, environmental and governance dimensions. However, there is no set standard, and it is in fact highly context-specific. The VAS architecture allows sustainability-related social financial issues (and indicators) to be contextualised, making it an appropriate starting point for materiality analysis in integrated reporting processes. 

Not just accounting, but accountability 

More than half a century after the notion of VAS was first raised, accountants are taking the stage. Developments such as the GRI Standards, the SASB (Sustainability Accounting Standards Board) Standards, the World Economic Forum guidelines by the Big Four, and climate-focused initiatives such as the Task Force on Climate-Related Financial Disclosures spotlight the role of the accounting profession in influencing sustainability outcomes. 

Yet, none have questioned conventional financial accounting nor attempted to mainstream a VAS. When sustainability is left in the periphery, it will, at best, be an afterthought. We need to update mainstream financial accounting from its 19th century roots and 20th century shareholder-predominant views to realign shareholders, stakeholders and society. To do so is to redefine success, progress and corporate performance.

The model resulting from this research aims to make sustainability an integral and central part of mainstream reporting. It is a positive step towards a paradigm change in how we view a company’s performance and the value it creates – not only for shareholders, but also for society. Thus, it is a step towards reshaping the social contract between business and society. To effect real change in sustainability outcomes, change the frame and the rules.

*Luis Perera-Aldama was INSEAD’s first Executive in Residence, attached to the INSEAD Social Innovation Centre. A career accountant and pioneer in sustainability reporting, he transitioned to academia and completed his PhD at the University of Burgos. 

Edited by:

Geraldine Ee

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Related Tags

Sustainable Development Goals
Research for the World

About the series

Sustainable Business
The INSEAD Sustainable Business Initiative is a collaborative platform for academic institutions and businesses to develop solutions relating to business challenges at the interface between social and environmental responsibility.
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