Accounting for sustainability

A sustainable business model is one where the enterprise in question redresses the negative impact it could have on the global and local environment, society, community and economy. Achieving this requires the enterprise to incorporate the principles of sustainability into each of its business decisions.

The financial institutions (FI), with their huge network, multiple products and services on offer, can be important contributors to sustainable development.

This can come not only from their linkages with other sectors of the economy, but also through their own financing, investment and trading activities. The way for banks to do it is by internalising the external costs of their decisions on all stakeholders (consumers/customers, shareholders, employees, supply chain participants), besides the society, environment and the economy in general, into their business model.

There is vast literature on what banks should do to promote sustainable business.

We have the Collevecchio Declaration, signed in January 2003, which dwells on the role and responsibility of FIs, while highlighting the commitment to environmental and social sustainability. Endorsed by more than 200 organisations, the declaration is a benchmark, by which civil society can measure the banking sector’s commitment to sustainability.

‘The Equator Principles’ developed in 2003 by four of the largest private sector banks – Citigroup, ABN AMRO, Barclays and WestLB (now Portigon), are a benchmark for the financial industry to manage environmental and social issues in project financing. Another internationally recognised standard is the ‘Principles on Responsible Investment’, which concerns social, environmental and corporate governance issues.

Not by finance alone

That financial results of an organisation alone no longer satisfies the informational needs of shareholders, customers, communities and other stakeholders is only part of what is clearly a growing collective sentiment.

A significant portion of the market value of an organisation is today, in fact, derived from intangible assets such as reputation, capacity to innovate, quality of assets, loan portfolio and commitment to social well-being.

This is where sustainability reporting (SR), a process of publicly disclosing an organisation’s economic, environmental and social performance, in tandem with the ‘Triple Bottom Line principle of Profits, Planet and People’ advocated by John Elkington, finds relevance.

It provides information on an organisation’s achievement of performance goals as well as what it is doing for environmental protection and social development. SR’s significance lies in delivering a holistic picture of the organisation’s business to all its stakeholders, revealing whether or not it is undertaking value creation in a sustainable manner.

While more and more companies are undertaking SR in India with each passing year, the exercise so far has by and large been confined to those in the industrial sector.

Only a handful of ‘banking and financial services’ institutions in India are now publishing such reports. The sluggish response is attributable to lack of awareness, inadequate subject expertise and lack of skilled personnel to produce sustainability reports.

Furthermore, in the absence of a common set of guidelines to adhere by, the voluntarily published reports by many businesses are non-comparable and do not capture the full spectrum of stakeholders’ interests. A commonly accepted framework that simplifies report preparation and assessment will help both reporters and report-users gain greater value from SR.

Evolving guidelines

One of the most widely used frameworks for SR is the Global Reporting Initiative’s (GRI) G3 guidelines. More than 100 GRI-based reports have been published by Indian companies till now. Launched in March 2011, the latest G3.1 guidelines include expanded assistance for reporting on human rights, local community impacts and gender, and are the most comprehensive sustainability reporting guide available today.

The above guidelines are categorised under ‘economic’, ‘environmental’ and ‘social’. While the economic indicators are centred on aspects such as economic performance, market presence and even indirect economic impacts, the environment and social categories capture a broader range of aspects.

The environment indicators include action-based features such as initiatives to mitigate the environmental impact of products and services, strategies and future plans for managing impacts on bio-diversity, and also day-to-day operational features like total usage of water, energy, materials or total emissions of greenhouse gases and ozone depleting substances.

The social category is broken down further by labour, human rights, society, and product responsibility sub-categories, besides being supplemented by gender-disaggregated data.

In recent years, India has seen the involvement and commitment of regulatory authorities towards non-financial reporting (NFR), by way of guidelines and notifications issued on the same.

The Reserve Bank of India, on June 6, 2011, and December 20, 2007, issued separate notifications on ‘Non-Financial Reporting and Risk Management for Financial Institutions in India’ and ‘Corporate Social Responsibility, Sustainable Development and Non-Financial Reporting’.

The above notifications introduce the idea of NFR and emphasise it as “basically a system of reporting by organisations on their activities in this context, especially as regards the triple bottom line, that is, the environmental, social and economic accounting”.

Other guidelines include ‘Sustainable Development and Corporate Social Responsibility Guidelines for Central Public Sector Undertakings’ and also ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business’ issued by the Ministry of Corporate Affairs.

In line with these guidelines, the Securities and Exchange Board of India (SEBI) has stipulated the requirement to include Business Responsibility reports as part of Annual Reports.

This has been made mandatory for the top 100 listed entities based on market capitalisation at the BSE and NSE as on March 31, 2012. It is expected that this mandatory requirement will be extended to all listed companies in the near future.

With growing awareness, guidelines and mandates issued by supervisory bodies on responsible business strategies and their reporting, firms will soon have to imbibe the sustainability aspect as an integral part of their decision-making and report the same. SR will soon become tougher to evade.

(The author is an economist with IDBI Bank Ltd.)

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