One of the reasons to do business has been to make profit and earn well for the investors.
Traditionally, there have been theories on what should be the objective of the business and how it has changed over a period of time. We have heard of profit maximization theory, wealth maximization and later value addition or value enhancement as well. As society progresses, there is a paradigm shift in the way business is looked upon. Yes, there is an objective to create wealth for the investors, but then at what cost? Business not only directly impacts the lives of the people with whom it works or associates but also indirectly affects the whole community or society at large. In 1994, John Elkington brought in the concept of Triple Bottom Line (Source: Wikipedia), which discusses the impact of social, ecological/environmental, and financial aspects. The Triple Bottom Line ('TBL') concept is more inclusive in nature than beyond the typical stakeholders whom we have known for so long.
Triple Bottom Line
The profit earned by the entity is for the shareholders or investors. But what about the damage or disruption it has caused to nature by consuming the natural resources or the community at large whose lives have changed because of the industry that has been set up. It is time for businesses to realize the fact that the definition of stakeholders needs to be relooked.
For example: We have heard about a global beverage manufacturer putting up a plant that literally significantly depleted the ground water levels thereby leading to a situation where the local community had challenges in getting access to safe drinking water. TBL concept looks at how the business has contributed not only in terms of financial terms but also in terms of value addition to the community and the planet at large. The triple bottom line means to consider Profit, Planet and People in decision making process.
Corporate Social Responsibility ('CSR')
Ever since the concept of CSR was introduced by the Companies Act and amended to some extent, there has been mixed response for the minimum quantum of profit that the companies should spend on social obligations, which are enlisted by law. There are corporate houses who view that CSR has to be a voluntary activity and cannot be enforced by law, with the concept that charity has to be willing, and the entity should be able to appreciate the need for CSR and do it voluntarily. There is another school of thought who disagree and believe in the concept of unless it is enforced by law, voluntary participation may not be great. But then this is a limited scope of spending profits on a particular cause and does not address the larger issue of how could you make business more accountable?
A business entity is just beyond an artificial legal person. We now look at it as a 'corporate citizen'. The corporate citizen is expected to showcase what an ideal citizen would normally be expected to do and beyond. Now businesses are expected to be accountable for their actions which potentially could be harmful or destructive to the community, planet and to the overall good of everybody. There are laws or frameworks in place to report how the business has achieved its goals without compromising on other factors.
Business is a continuous activity. Innovation is constant and entities which rediscover themselves and offer what is relevant is preferred. Companies expected to be a good corporate citizen also aims to ensure that their actions, in the long run, would also ensure that business, community, nature all co-exist together and realize the fact that these three in a way are inseparable. On one side, there is Profit that needs to be taken care of using latest technologies for cost reduction, better utilization of resources etc., at the same time care should be taken that the other two P i.e., Planet and People position are not compromised.
The Annual report of a company basically contained more of financial information in nature rather than non-financial aspects. The last decade has witnessed a change in the way business is being perceived. Businesses are now required to give a comprehensive report on their activities and to enable such activity, some of the globally recognized sustainability reporting frameworks are:
- United Nations Sustainable Development Goals which have indicated about 17 different goals that are important to transform our world (un.org).
- Global Reporting Initiative (GRI) (globalreporting.org) is an independent international organization whose framework is widely used.
- ISO 26000 Guidance on Social Responsibility
- Sustainability Accounting Standards Board, SASB predominantly used in US.
IFRS Foundation is also working on International Standards on Sustainability Reporting through International Sustainability Standards Board. In India, there are major changes in the regulatory framework requiring companies to comply with sustainability reporting. SEBI though their notification dated 5 May 2021 now requires Top 1000 listed companies to provide information on business responsibility and sustainability from FY 2022-23 on mandatory basis, and from FY 2021-22 on a voluntary basis. The format and the content of the reporting format is also given in the SEBI notification.
The stakeholders look forward to know about the company in a holistic manner. Instead of giving financial and non-financial information in different report which would need additional time and efforts not only to prepare but also to correlate the documents, the concept of integrated reporting is catching up. Integrated Report would include not only financial information but also all non-financial information including those relating to sustainability reporting in one document. This gives insights as to how the financial and non-financial factors are correlated and how has the company faired on various grounds (Refer Integrated Report/Annual Report | Tata Steel).
There are immense opportunities which is available including:
- To support the company on the preparation, presentation, contents of the sustainability reporting and correlating with that of the financial statements.
- To establish relevant internal controls in place to ensure that the information for the reporting is complete and accurate.
- To provide relevant attestation / audit services for the information being presented.
- To help management benchmark the reporting with similar companies in the same industry.
- Help in transition or compliance with other reporting framework.
The author Aditya Kumar S is a qualified Chartered accountant with 20+ years of experience in his field. He carries immense knowledge in his areas of expertise and interest, namely statutory audit, internal audit and SOX audit gained through numerous and varied client assignments he has dealt with.
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