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Theoretical Frameworks for Sustainable Reporting

Within the context of the sustainability report of an organisation of your choice (to be approved by the module leader by 21 November, 2017) you are required to critically discuss the above statements. Your essay should draw upon relevant academic literature and discuss a theoretical framework that could be used to support your arguments.

Sustainability accounting refers to that concept of accounting, which primarily focuses on the non-financial information that has been presented in the financial report, prepared by the management or administration of an organization. A sustainable report is essentially a corporate social report that concentrates on the non-financial information that has been disclosed by the management in regards to the performance of the firm. A sustainable financial report is of great help to the external stakeholders as they get a clear image of the company. This helps the external stakeholders to make particular financial decisions (Ioannou & Serafeim, 2017).

This particular study aims to critically analyze the statement that has been provided in the question. The statement that has been provided effectively summarizes the fact that the sustainability reports that have been prepared by the listed organizations do not present crucial information in regards to the non-financial performance of the company. The sustainable reports that are prepared by the management of the listed organizations instead represent the particular way in which the management has addressed the concept of sustainability. This particular perspective conveyed by Gray, in his social accounting journal has been aimed to be analyzed in this particular study (Fonseca, McAllister & Fitzpatrick, 2014).

The company that has been chosen for the purpose of determining the usefulness of the sustainability accounting principles is BHP Billiton. The sustainability report of BHP Billiton for  the financial year of 2017 and 2012, has been attempted to be analyzed in regards to the global framework reporting standards. This particular study also focuses on the different sustainability theories and tries to determine whether the sustainable report has been published complying to the proposed theories. The study also aims to find out whether the sustainability of the proposed organization has been achieved by the practice of measuring, disclosing and being accountable to the internal and external stakeholders of the firm.

The theories that are, in general adopted by the organizations in executing their corporate social responsibilities can be counted as legitimacy theory, stakeholder theory, signaling theory and social contract theory (Hughen, Lulseged & Upton 2014).

BHP Billiton’s Sustainability Report

The legitimacy theory refers to the theory that depends upon the notion that there a social contract exists between the organization and the surroundings in which it operates. This means that the corporate body operating in the society is obligated towards positively contributing to its surroundings, which further justifies its existence. According to this theory, some executives utilize the corporate social responsibility as an effective tool for managing the complexities of the multinational companies (Fernandez-Feijoo, Romero & Ruiz, 2014).

Next, the stakeholder theory states that the management of a particular organization are not only accountable to the stakeholders but also is obligated to reveal the respective interests of the stakeholders that are in collision with the organizational objectives (Deegan, 2014).


The social contract theory is same as the legitimacy theory that indicates the existence of a social contract between the organization and the society. This obligates business to be positively contributes to the society in which it operates (ArAs, 2016).

Lastly, the signaling theory refers to the theory that states that firms should have an incentive structure for disclosing information voluntarily to the capital market. The effectiveness of the voluntary disclosures lies in the fact that such disclosures give a healthy boost to the competing strength of the company using the signaling theory (Frias?Aceituno, Rodríguez?Ariza & Garcia?Sánchez, 2014).

The essence of the stakeholder theory lies in the fact that it focuses on the primary entity of any organization that are the stakeholders. This means that entire objective of services contributed towards the society revolves around the stakeholders of business. The stakeholder theory essentially postulates that there are various groups in the society that an organization can impact upon. The stakeholder theory states that it is the primary responsibility of business to incorporate the expectation of its stakeholders into their policies and planning.

The particular challenge that the businesses face while implementing the stakeholder theory as a primary tool for sustainable reporting is that the identification of the potential stakeholders of business becomes difficult. However, the stakeholder theory is the major element of the corporate social responsibility in case of every organization that engages itself in interaction with the open society. The company being discussed in this particular report has successfully aligned the corporate social responsibility program with the expectations of its stakeholders.

Nonetheless, the preparation of a sustainability report is a complex procedure and cannot be supported by just one theory. The simultaneous integration of the environmental, economic and social theme is a complicated process. Thus, experts in this field are of the opinion that no single theory can ever be conclusive. (Cho, 2015) is of the opinion that legitimacy theory is another potential theory. The legitimacy theory as mentioned earlier assumes the existence of a contract between the society and the organization. The reporting on the social, economical and environmental aspects of business is a part of fulfilling that contract. (Reimsbach & Hahn, 2015) is on the other hand of the opinion that compliance to the agency theory while reporting can invariably decrease the information asymmetry that exists between the management and the stakeholders of the business thus resulting in the reduction of the agency costs. The agency theory also focuses on the importance of specific disclosures that are effective in winning the trust and loyalty of the investors. Thus, the common factor of the all the above mentioned theories is that all of them can be integrated and incorporated within the stakeholder theory. Thus, the management of BHP Billiton adopting the stakeholder theory appears to be beneficial for the purpose of reporting.

Challenges in Sustainability Reporting

In case of BHP Billiton the particular theory that has been utilized by the management of the organization is the stakeholder theory. This is because the management of the organization has focused on the welfare of its stakeholders. The management of the company has also established compliance codes and policies for protecting the interests of the stakeholders. Therefore, it is evident from the above discussion that the particular theory adopted by the organization in executing the corporate social responsibilities is the stakeholder theory.

The Global Reporting Initiative Framework has been established for the purpose of serving the requirement of a generally accepted framework that has to followed for evaluating the organization’s environmental, social and economic performance. (Cheng, 2014).

The sustainability reporting guidelines essentially consists of the principles that ensure the quality of the content or the reported information. The three major elements of the reporting procedure consist of the Reporting Principles, Reporting Guidance and Standard Disclosures. The component of the reporting principles and reporting guidance fundamentally consists of guidelines that define the content of the report, its quality and boundary. These principles help the management of the organization in determining the areas that should be invariably included in the sustainability report and ensure that, such reporting should be done by maintaining the proper quality standards. The standard disclosure component on the other hand specifies the base content that should appear in a sustainability report(del Mar Alonso-Almeida, 2015).

The regulating body has also been updating its principles in order to improve the quality of the sustainability report. The G4 sustainability reporting guidelines were in effect from 31st December, 2015. The new guidelines have been presented in two parts. Here, in this part focus has been more on the materiality aspects. The core options and the comprehensive options of the sustainability principles efficiently list out the essential elements of the sustainability report and the comprehensive option specifies the additional disclosures in regards to the organizational strategies, governance, ethics and integrity.

However, as mentioned in the journal articles, presented in the question, ‘social accounting practice in the form of corporate self-reporting, has systematically failed to open up substantive critique’. This may be because of the specific issues that have been reported by the entities in preparing a sustainable report. The sudden jump from the ongoing discussion of preparing a sustainable report to the establishment of the mandatory principle of preparing a sustainable report annually has left the organizations unprepared and made the procedure of sustainable reporting, an issue (Ioannou & Serafeim, 2017). (Grey 2010) has been partially correct in his assumptions that the sustainability reports have been a green wash in the eye of the regulators. This may be supported by the fact that annual publishing of the sustainability reports may be an issue for the small-scale companies that are the suppliers for the conglomerates. For instance, Apple had requested detailed information from their suppliers instead of the fact that Apple itself did not release a sustainability report (Fonseca, McAllister, & Fitzpatrick, 2014).

Conclusion

Though the inclusion of a sustainability report has not been mandated by the regulators, the recent trend has been such that the stakeholders all over the world have been  demanding more information in the form of disclosures. This has made the regulators include in their sustainability policies that the companies disclose viable information, wherever possible. This in turn has resulted in the management of a particular organization to include huge amount of information that may appear to be irrelevant or non-crucial from the viewpoint of the stakeholders. The stakeholders frustrated with such information may in turn push the management to disclose more information. Thus, this vicious cycle of disclosing more information that leads to demand for the disclosure of more information is one of the major sustainability issues (Cheng, 2014).


The above mentioned issues are the primary reasons that the firms are facing in the preparation of a sustainable report. This has invariably made the sustainable reports, as stated by Rob Gray in his journal, nothing to do with sustainability. These issues have resulted in the preparation of the sustainability reports in such a format that, the reports summarize the way in which the management addresses the concept of sustainability rather than providing enough information as to how the administration has ensured the achievement of the sustainability goals.

However, (Hughen, Lulseged & Upton, 2014) is of the opinion that entities preparing their sustainable reports in accordance to the global framework standards will in all probabilities generate reports that promote essential ethical values within the organization. Essential values like building of trustful environment within the organization improve internal control and decision making processes, pull out an effective analysis of the strengths and weaknesses of the organization that is necessary for the stakeholders to understand and further make financial decisions, reduction in the compliance costs are facilitated by the proper preparation of the sustainability report. Therefore, in order to understand whether the chosen organization has prepared the sustainability report properly, the components of the report have been evaluated and analyzed in order to ensure that the sustainability report has complied with the sustainability principles that have been developed by the global reporting initiative framework.

BHP Billiton is an Anglo-Australian conglomerate that deals in mining, petroleum and metals. The merger of the Australian Broken Hill Proprietary Company Limited (BHP) and the Anglo-Dutch Billiton plc marked the formation of the company in the year of 2001. BHP Billiton has been listed among the 90 companies that have been marketing and extracting fossil fuels. The management of the company has also been criticized for lobbying against carbon pricing in Australia. The sustainability report published by the management of BHP Billiton for the financial year of 2017, has been analyzed in order to find out whether the sustainability report has complied to the reporting standards.

The sustainability report produced by the entity promotes the values of sustainability, integrity, respect, performance, simplicity and accountability. This has been mentioned in the cover page of the sustainability report. This enhances the ethical aspect of the sustainability report and assures the user of the integrity of the information provided in the report.

The first guideline of the sustainability principle is that the content of the report should be such that it provides a balanced and rational view into the operational proceedings and the organizational performance of the company (Barkemeyer, Preuss & Lee, 2015).

The concept of materiality refers to the material considerations or events that are worth highlighting and should be reported in the annual financial report. BHP Billiton in its financial report for the financial year of 2017, states that the materiality that has been considered by the management not only includes the financial aspects but also the non-financial aspects of business. It has been further revealed in the annual report that the materiality for the audit of the financial statements have been set at US$400 million. Enough explanation has also been provided in the proceedings of the determination of the amounts of materiality. The assertions in regards to the material misstatements that have occurred in the financial statements also provide enough overview into the integrity of the workforce of the company. Thus, enough overview has been provided in the materiality context of business, which indicates that the management of BHP Billiton has successfully achieved the first GRI 4 sustainability principle. The materiality analysis disclosure that has been provided in the sustainability report also state that the materiality assessment has been conducted by a review of the sustainability risks and opportunities that have been identified with the help of analyzing inputs that concern the internal and external stakeholders (Barkemeyer, Preuss, & Lee, 2015). In comparison to the sustainability report that has been prepared by the entity for year of 2012 strongly adheres to the GRI 3.1 sustainability principles.


Stakeholder inclusiveness refers to the act of identifying the potential stakeholders of business and evaluates the way in which the report has responded to the reasonable interests and expectations. The potential stakeholders of business can include entities like employees, shareholders, suppliers, local community groups and the government. (Reimsbach & Hahn, 2015). The sustainability report for the financial year of 2017 has been prepared in accordance to the GRI 4 principles. This is evident from the fact that materiality section has been disclosed in details. The report also features the core options and the comprehensive options properly which is evident from the fact that more stress has been given on the particular areas of application levels, boundary, discussion on management approach, governance and increased disclosure on emission.

The sustainability report for the financial year of 2012 though includes the topics of materiality and other necessary components like people, environment, society and governance. But the report does not appear to be structured as for the financial year of 2017. Moreover, the critical disclosures have been missing from the sustainable report.

The GRI 4 sustainability principles have stated that the primary duty of the organization preparing the sustainability report is to disclose the information that concerns the stakeholders of business. A particular charter and BHP Code of Business Conduct has been constructed by the administration of the organization for the purpose  of articulating the standards that control or regulate the quality of the information that is disclosed in the report and also keeps an eye on the degree to which such information concerns the stakeholders. The BHP Forum on corporate responsibility is constructed for the stakeholder engagement program. The management also has stated in its sustainability report that the media via which the company communicates with its stakeholders are the Annual General Meetings, Annual Report, Sustainability Report, market and media releases, stakeholder engagement activities like reports, newsletters, consultation groups and community perception surveys. The publications of the key stakeholders indicate that the organization has potentially identified the stakeholders of business. This has also enabled the management to design the content of the report in such a way that it contains information concerning the identified stakeholders. The administration of the company has also maintained enough transparency in order to enable the stakeholders to better understand the operational proceedings of the company. This effort however is missing, as revealed by the sustainability report for the year of 2012. This also indicates that GRI has improved the sustainability principles in order to increase the effectiveness of the sustainability reports.

BHP Billiton has managed to draw up a table showing the performance of the company in regards to the sustainability goals set by the management starting from the financial year of 2013 to the financial year of 2017. The target performance table also highlights the particular sustainable projects that have still not been completed and provides satisfactory reasons behind such failings. Next, the management has published another table that displays the future sustainability targets of the company. The targets related to organization environment that have been aimed to achieve are zero work related fatalities, improvement of the total recordable injury frequency.


Thus, it is evident from the above mentioned facts that the sustainability report of BHP Billiton has successfully complied with the GRI 4 principles. Furthermore, the comparison between the sustainability reports of the company reveals that the sustainability principles have also improved over the years which have effectively increased the quality of the reports. The opinion conveyed by the journals as mentioned in the question have been proved wrong with the newest reporting guidelines. This is evident from the reporting success that has been achieved by the management of BHP Billiton from 2012 to 2017.

BHP Billiton has also included an assurance disclosure in the sustainability report. The audit of the company has been carried out by KPMG and in the Independent Assurance Report to the Directors and Management of BHP, it has been stated that the criteria used as the basis of reporting are the Global Reporting Initiative Standards. It has been further stated that the sustainability operations has been conducted in accordance to the Assurance Engagements ISAE 3000 and ISAE 3410. Thus, here the management too has adhered to the sustainability principles.

This has been disclosed in a much transparent manner in the sustainability report thus, satisfying the assurance standards of the GRI 4 sustainability principles. However, in the sustainability report belonging to the year of 2012, no information in regards to the assurance engagements has been provided. Thus, the required corrections have been carried out in the sustainability report belonging to the year of 2017 that has been prepared in accordance to the GRI 4 sustainability principles.

Conclusion

The role of sustainable development has truly become central in determining the quality of performance delivered by a particular organization. This opinion that has been conveyed in the journal Accounting Organisation and Society’, 39(6):395-413 truly holds today. This is because with the numerous instances of accounting scandals the role of a sustainable report becomes imperative. Moreover, the contributions by business towards the society, economy and the environment also are an important consideration that is revealed by a sustainability report.

The perspective that has been highlighted in the journal, Social accounting's emancipatory potential: A Gramscian critique’, Critical Perspectives on Accounting, 20(2):205-227 however, stands corrected today. This is because the emergence of the GRI 4 sustainability principles makes the sustainability report effective and to the point in nature. Therefore, it can be concluded here that the initiative taken by the Global Reporting regulating body has been commendable.

Lastly, the opinion conveyed by (Gray 2010) is not applicable anymore as an organization preparing its sustainability reports in accordance to the sustainability principles gets no scope for creating a green wash in the eyes of the regulating bodies. Moreover, Grey comments that in the discourse of preparing a sustainability report most of the organizations explain the way they have approached the concept of sustainability. The company that had been chosen for evaluating the effectiveness of such a comment reveals that the compliance with the GRI 4 principles has resulted in a quality sustainability report that reflects all the necessary crucial information. Thus, the viewpoint communicated by the journal is no more applicable.

Therefore, as it can be concluded from the above discussions, the sustainability report prepared by the management of the company has been prepared in perfect adherence to the Global Reporting Initiative principles. This has further enabled the management of the company to derive the benefits of the preparing a sustainable report. Though there is a huge quantity of literature criticizing the effectiveness of a sustainability report, the organizations preparing their reports in compliance to the global sustainability principles, in all probabilities will reap its benefits.

References

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