Sustainable Finance and Investments {BA562F} CIA - 2

Accounting For Sustainability

DONE BY GROUP - 3

Under the Guidance of

Prof. Aparna Hawaldar

CHRIST (DEEMED TO BE UNIVERSITY), BANGALORE

18th DECEMBER 2022

Done By:

Savio Jose – 2128123

Joel Jose - 2128109

Neil Jacob Abraham - 2127725

Joanna Maria Vinukanth - 2127742

Arsha Narayan - 2127539

Arjun Muralidharan - 2127507

SECTION – 5 MBA MAIN BA 2

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TABLE OF CONTENTS
Section 1: INTRODUCTION.................................................................................................................................................................... 3
Section 2: TRADITIONAL ACCOUNTING.....................................................................................................................................3
Section 3: ADVANTAGES OF TRADITIONAL ACCOUNTING SYSTEMS..................................................................9
Section 4: COMPARISON OF TRADITIONAL AND MODERN ACCOUNTING APPROACH.......................10
Section 5: DRAWBACKS OF TRADITIONAL ACCOUNTING METHODS...............................................................11
Section 6: Evolution of accounting for sustainability..................................................................................................................13
Section 7: GLOBAL STANDARDS.....................................................................................................................................................23
Section 8: Reference.................................................................................................................................................................................... 35

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SECTION 1: INTRODUCTION

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Like anything else, managerial accounting has evolved over time to reflect the world's shifting
needs. Because of how businesses operate today, management accounting has had to change to
survive. Managerial accounting has always remained in the background, waiting for its day to
shine, whereas financial accounting has long been the predominant type of business accounting.
While waiting, it altered and developed into many businesses' accounting techniques.

Two categories of approaches can be used to categorise financial accounts. The traditional way,
or the British approach, is to start. The American or Modern method is the alternative. Personal
and impersonal accounts are the main ideas in the traditional approach. While the modern
approach uses the accounting equation, the traditional approach classifies the accounts.

SECTION 2: TRADITIONAL ACCOUNTING

______________________________________________
Traditional accounting, commonly called "accrual basis" accounting, determines your earnings
based on when you submit or receive bills, not on whether you really got or spent money.

The traditional approach divides accounts into two categories - Personal accounts and
Impersonal accounts.

Personal accounts - These accounts belong to individuals, clubs, societies, firms etc. There are
three main types.

● Natural personal accounts - Humans are natural persons. In this instance, we take into
account accounts that are held by humans, i.e., by specific individuals.

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 ● Artificial personal accounts - These are the people who, although not being human, can
behave and perform human tasks under the law. In legal terms, artificial individuals have
a distinct identities. As a result, they are free to sign any contracts. Due to this, they are
also subject to punishment. Under the law, HUF, also referred to as Hindu Undivided
Families, partnership firms, co-operative societies, organisations of people, businesses,
municipal corporations, even hospitals, the baking industry, government entities, etc., are
all considered artificial persons.

● Representative personal accounts - These accounts just represent the accounts of the
people, as suggested by the name. These people could be human or perhaps
manufactured. This representative person's category includes the nominal accounts of
expenses and income that are outstanding, pre-paid, accumulated, or unearned. Thus,
accounts for unpaid wages, prepaid rent, accumulated interest, unearned commissions,
etc., fall under this heading.

Impersonal accounts - Impersonal accounts can be divided into two categories. They are

● Real accounts - Real Accounts are not closed at the conclusion of the accounting year
because they pertain to all of a company's assets and obligations. They are carried over to
the following accounting year and continue to be included in a company's financial
statements, including the balance sheet.

❖ Real assets that can be handled, seen, or measured are known as tangible real
assets. These include building accounts, furniture accounts, and cash accounts as
examples.

❖ The intangible real account includes all goods and things that have a monetary
worth but cannot be touched, seen, or measured. These can even be purchased and
traded. Goodwill, patents, copyrights, trademarks, and other examples are a few.

● Nominal accounts - Expenses, losses, earnings, and gains are all accounted for in
nominal accounts, which are transient accounts. At the end of the accounting year, these
balances are transferred to the trading and profit and loss account. No balance in these
accounts must be carried over to the following year.
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Source: The Knowledge Hub

It will be helpful to first discuss classic managerial accounting to grasp the more modern
variations of traditional managerial accounting.

Early years of cost accounting systems

During the early stages of managerial accounting, a product's cost was solely determined by its
direct labour and direct material costs. To obtain an exact measurement as we entered the 20th
century, overhead charges started to be factored into the product's final cost. During this time,
most businesses would calculate an item's indirect costs as a straightforward percentage of its
direct labour expenses. This implies that the direct labour costs would consider things like
administration and sales. The issue with this is that it might not be accurate because you are not
obtaining a true picture of the direct expenses incurred during the product's manufacturing.

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At this time, it was rather customary to simply average out a significant portion of expenses and
then express it as a straightforward part or percentage of pay or time. Because indirect costs were
unrelated to labour costs or production time, they led to a deceptive set of reports.

As a result, it was suggested that the plant be divided into production hubs in the early 20th
century. The costs of each department or centre might then be calculated using the production
centre technique. The hourly rate of each department was therefore expressed as a percentage of
the manufacturing centre's overall cost. The cost of the production department is then added to
the work (cost flow) that moves through the production process at an hourly rate.

Budgetary control systems

Overheads were not budgeted as a type of managerial accounting until 1911, when it became
necessary to keep costs under control and produce accurate results compared to the actual
expenditure for each department. Since the overheads were fixed and not modified for variations
in the number of products produced, this early style of managerial accounting budget was
inflexible. A fresh approach, however, was introduced a few years later with a flexible budget.
Henry Hess was able to compare the planned and actual spending, and for each group, he plotted
a straight line to show the relationship between costs and output. This implied that the levels of
output affected the expenses that were budgeted. This represented a significant advancement
over conventional managerial accounting methods and helped some forward-thinking businesses
make managerial accounting one of their main accounting practices.

Scientific management

Performance metrics play a significant role in traditional and modern managerial accounting.
Managerial accountants will evaluate employee performance to help managers make day-to-day
decisions about the company's direction and whether or not certain employees will be a part of it.

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As they are used in typical managerial accounting, performance standards can be traced back to
the Springfield Armory in 1842, which kept track of employees' performance and performance
deviations.

Standards for using labour and materials in the company's manufacturing operations had been
defined by the turn of the 20th century. They established the company's performance
requirements using time and motion studies or other scientific methodologies. To monitor labour
and material efficiency, these systems evaluated the actual labour and material with the
performance standards developed by scientific methods. By doing this, the railroads and later
businesses held workers responsible for their work, which in turn held managers responsibly. To
assess these reports and assist managers in making decisions that would increase business
efficiency and ensure everyone would have a job, managerial accountants were hired.

Traditional costs and variances

Companies used performance standards in the first half of the 20th century to estimate how much
it would cost to produce a good or pay for a procedure. Many businesses that had previously
employed subpar methods for figuring out the pricing for individual units of items or processes
saw this as a significant improvement. For these businesses, the cost of a product was the
benchmark price. Companies would multiply the standard use of labour, machines, energy, and
materials per product by the standard cost of labour, machines, energy, and materials to arrive at
the standard cost.

The managerial accountants might then compare the real expenses to keep track of the
production's efficiency. Managerial accountants would be aware that something had occurred on
a particular day to cause a deviation from the norm if it cost more than usual to produce a certain
set of goods on that day. They may present the management with this knowledge, and they
would decide how to move forward.

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Return on Investment

Mass producers started developing distribution networks and locating their raw material
suppliers at the turn of the 20th century. These companies might then complete the processes
previously completed by separate enterprises. For instance, if a business made boats out of steel,
it would only mine iron ore. These firms began to play a significant role in the duties of
manufacturing, delivering, and distributing these goods, and each department inside these big
firms operated at varying levels of efficiency. The issue was that these efficiency measures were
incompatible with the overall company profit, which meant that management accounting was not
employed in conjunction with financial accounting for the company's financial reports. A new
performance metric, return on investment, was developed to demonstrate the efficiency measures
in the overall firm profitability. A business divides its income by the capital it invests in,
determining its return on investment.

With the help of this new performance indicator, management could keep track of the actual and
projected profits generated by each business activity. It was a remarkable advancement for
managerial accounting in its drive to be integrated into the organization's broader financial
structure.

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SECTION 3: ADVANTAGES OF TRADITIONAL ACCOUNTING SYSTEMS

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● System errors - Avoiding data system failures and file corruption is a key benefit
of a traditional accounting information system. Most users don't fully comprehend
how computer systems keep data, so choosing the wrong file or running into
problems might taint the current data accountants need to effectively carry out
their duties. A single file is utilised for each account in a traditional accounting
system, which removes any potential for user confusion when a system provides
similar copies of the data.

● Improving errors - When comparing a traditional accounting system to a modern

one, the former allows for double input, allowing users to eliminate data entering
errors. Each transaction in a standard accounting system is noted down as a debit
and a credit in two different accounts. Users can do this to avoid data entering
errors, and businesses can do the same to avoid costly errors and save time and
money.

● A traditional accounting system also has the major advantage of allowing users to
access and work on account data even if the power or internet is unavailable. A
standard accounting system will serve the needs of any business that needs access
to their account data regardless of the state of the local electricity or internet.

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SECTION 4: COMPARISON OF TRADITIONAL AND MODERN
ACCOUNTING APPROACH

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Modern management accounting and traditional management accounting has a number of
differences. Modern accounting differs significantly from conventional accounting in its
reporting accuracy and quickness. Traditional management accounting's primary goal is to
assess, compile, and record spending; businesses do not look for patterns, trends, or swings in
expense behaviour.

Contemporary management accounting aims to track, tally, and evaluate expenditures and their
patterns, causes, and variations. Businesses did not previously engage in such intense
competition. As a result, they did not need to analyse their spending in such detail. Due to the
intense competition among businesses, it is imperative that they are aware of the expense drivers
and take steps to control them.

Companies can now record their expenses, categorise them, and analyse them at each production
or business cycle stage. Meeting milestones makes it simple for businesses to be on line with
their expense drivers, align their spending with the external environment, and create a win-win
situation by matching their expense structure with their entire business strategy.

Because the expense was immediately recorded to the account when the goods were sold,
traditional management accounting offers various potentials for manipulation. As a result,
managers had the ability to influence the manufacturing process to earn bonuses. In contrast,
manipulations are nearly impossible in modern management accounting since expenses are
credited directly to the appropriate accounts at the moment of occurrence, which reduces the
chance of misrepresentation.

Additionally, businesses can develop a long-lasting competitive advantage through the use of
modern management accounting. Companies can identify their expense-related strengths and
weaknesses and overcome them to achieve a competitive edge when they can learn more about
their expense drivers and assess the external environment.

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Modern management accounting has the ability to categorise expenses, immediately record
expenses, and project future expenses.

SECTION 5: DRAWBACKS OF TRADITIONAL ACCOUNTING METHODS

______________________________________________
Traditional accounting methods use procedures and standards that have been around for a long
time to track business performance. Accounting procedures must closely reflect the operations
they track, yet occasionally they lag behind in adapting to a shifting company landscape. Some
current accounting procedures can become obsolete due to new company practices. Traditional
accounting methods have issues, such as erroneous and poor performance measurement for
enterprises operating outside the norm. Traditional accounting methods must evolve throughout
time to reflect shifting aspects of the business they are used to measure.

Business environment keeps changing - To achieve better business outcomes, modern

companies are less reliant on the use of labour and don't always keep their equipment active. To
improve corporate performance, a company may instead look to technical innovation and
concentrate on quick inventory turnover and high-quality customer service while keeping fixed
consumption in labour and machinery. If an accounting process lacks the right metrics to
appropriately track the performance of a new business, it may cause challenges for standard
accounting methods. It may even measure things incorrectly in the wrong places.

Errors in data entry - Data input errors are far more common with a manual system than with a
standard accounting system, even though the latter attempts to reduce them with its multiple
entry processes. Users of a standard accounting system must enter data twice, which is labour-
and time-intensive. However, with an automated accounting system, individuals may enter data
more quickly and use it to discover and correct errors before they become serious problems for
the business.

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Changing accounting practices - Traditional accounting processes have made it difficult for
firms to measure performance, so they must adapt their accounting procedures to reflect these
changes. A company's accounting procedures should adjust to become more effective as it grows
leaner. When creating new accounting procedures that give decision-makers accurate and useful
accounting information, several commercial organisations have adopted the phrase "lean
accounting." A company cannot effectively manage its business priorities in customer service or
on-time delivery by relying on typical accounting indicators such as labour cost, capacity
utilisation, or inventory build-up.

Accounting measurement problems - Traditional accounting methods could provide

enterprises no longer engaged in mass manufacturing a particular product or providing
unremarkable services with false performance measurements. For instance, when utilising
standard accounting methods, decreased inventory value frequently correlates with decreased
profitability, which is probably untrue for a company attempting to implement just-in-time
inventory management. A company can lower expenses and boost profitability by maintaining a
low inventory level thanks to continuous, timely replenishment. A key performance indicator for
typical organisations, capacity utilisation, is likewise not as significant for companies that
prioritise customer pleasure over increasing output volume.

Loss of hard copies - Every firm is aware of the necessity of maintaining a hard copy of all
crucial information in the event that a system malfunction results in the system's complete data
deletion. Companies must maintain a physical duplicate of the data with a typical accounting
information system, which is easily lost or stolen in a fire or flood. However, with an automated
accounting system, customers can save hard copies of their data in the cloud, saving time and
money by eliminating the need to store physical copies off-site in facilities that prevent
destruction.

Cost - The potential cost of a traditional accounting system is a significant drawback. With a
standard accounting system, accounting tasks are labour- and time-intensive to complete. An
automated accounting system saves the company money and saves users time that could be used
to grow the business. An automated accounting system is far less expensive and time-consuming

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in the long term while also much safer to keep important corporate data, even though a
traditional accounting system is less expensive initially.

SECTION 6: EVOLUTION OF ACCOUNTING FOR SUSTAINABILITY

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The disciplines of sustainability accounting and reporting are relatively recent, having emerged
in the 1960s and 1970s of the 20th century. These words have been appearing in professional
literature since the 1990s. Financial and managerial accounting are the foundations of
sustainability accounting, which can be used at both the macroeconomic (state) and

microeconomic (business) levels. The system makes information available to all parties involved
in order to assist decision-making procedures that adhere to sustainability principles. Beginning
with Gray's work in the early 1990s and continuing through the issuance of the Sustainability
Accounting Guidelines at the World Summit on Sustainable Development in Johannesburg in
August 2002, sustainability accounting has gained ongoing attention in the academic accounting
literature.

Since the 1990s, the implementation of sustainability through accounting procedures has gained
popularity as a research issue. As a result, different legislative initiatives, intellectual currents,
educational initiatives, and empirical studies enhanced the naturally growing body of literature.
Still, the scientific literature has not yet produced an agreed-upon definition of sustainable
accounting. All that can be said is that the body of literature is constantly expanding and that it is
necessary to define scientific research in this subject in accordance with the language used by the
Brundtland Committee in 1987. There was some consensus in the literature over the past two
decades. According to studies that have been made public, the three basic components of
sustainability accounting—social, economic, and environmental—seem to be quite consistent.

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The concept of sustainability accounting has emerged from developments in accounting. Broad
developments in accounting have occurred over the past forty years, although narrow
developments have occurred over the past ten years. The development reveals two distinct lines
of analysis. The first line is the philosophical debate about accountability, if and how it
contributes to sustainable development, and which are the necessary steps towards sustainability.
This approach is based on an entirely new system of accounting designed to promote a strategy
of sustainability. The second line is the management perspective associated with varied terms
and tools towards sustainability. This could be seen as an extension of or modification to
conventional financial cost or management accounting. To develop sustainability accounting de
novo allows a complete reappraisal of the relative significance of social, environmental and
economic benefits and risks and their interactions in corporate accounting systems. The
developments that lead to sustainable accounting could be distinguished in several time periods
in which a number of trends were evident: 1971–1980, 1981–1990, 1991–1995 and up to the
present. These periods distinguish empirical studies, normative statements, philosophical
discussion, teaching programmes, literature and regulatory frameworks.

Evolution timeline

1971–1980

By the end of the decade, numerous papers discussing the development of models that encourage
social accounting disclosures as well as a sizable body of empirical research had been published.
These early efforts featured insufficient social and environmental accounting literature as well as
subjective analysis (SEAL). Most information on the social aspect of accounting has been related
to either employees or products. Environmental issues were handled as a part of a social
accounting movement that was largely undifferentiated and rather simplistic. Damage to the
environment also included generation of solid waste as well as damage to the land, the air, the
water, the noise, the aesthetics and other types of pollution.

1981–1990
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The social accounting field demonstrated greater sophistication in the first half of the decade,
while the second half of the decade seemed to witness a shift in focus toward environmental
accounting, with growing indications of literature specialisation. The analysis in empirical
research was greater. As an alternate strategy for reducing environmental damage, a focus on
environmental disclosures and regulation has taken the place of worries about social disclosures.
The environmental field started to grow as a result of normative pronouncements and model
construction. The creation of teaching curricula about social and environmental accounting
issues started at this time.

1991–1995

Environmental accounting nearly completely dominated social accounting during this time
period. Environmental auditing has undergone a number of extensions from environmental
disclosures, and a framework has been developed to help with its applications, particularly the
creation of environmental management systems. Social and environmental accounting
disclosures were still largely unregulated, and conceptual frameworks for accounting did not
include social or environmental quantification or non-financial matters.

While numerous nations developed distinct legislative and conceptual frameworks, the UK and
Europe's environmental legislation development lagged behind those of the US, Canada, and
Australia. Compared to others in the area of social accounting disclosures, the progress was
inconsistent but quick. During this time, both social and environmental accounting have been
covered in a number of textbooks and journal articles. Although environmental accounting has
not been revitalised since the models of the 1970s and has failed to adapt to the arguments about
the valuation of externalities, there has been a relative absence of normative/philosophical work
in accounting throughout this time. Growing interest has been shown in sustainability and the
topic of management accounting's contribution to sustainable development.

1995–present

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A subsequent high-level focus on international and national accounting resulted from the
convergence of global capital markets and the emergence of global and regional quality control
issues, which for the accounting profession culminated in the Asian financial crisis in 1997–1998
and the collapse of Enron in 2001. The accounting literature has seen a marked rise in interest in
accounting-related concerns related to sustainable development. The accounting profession is
expected to be involved in re-examining accounting fundamentals in light of the challenge of
sustainable development through the investigation of what sustainability accounting may entail.
In numerous international and national contexts, there are numerous ideas, major statistical
effort, and expanding body of measurement on accounting for sustainable development. Even
supranational policy organisations like the OECD and the United Nations have funded research
on accounting for sustainability.

There is still a lot of doubt about how this agenda will progress in the future due to the usage of
many frameworks and methodologies. There is no doubt that the existing style of development
has been called into question due to the perception that past economic development and
contemporary human (and thus corporate) activities are not sustainable. These new reporting
techniques have gained more acceptance in recent years, and even some enthusiasm.
Sustainability factors in accounting and reporting are extremely important, viable, and realistic,
according to active and innovative testing by forward-thinking organisations. Regarding this, the
International Federation of Accountants (IFAC), which aims to advance the accounting
profession and harmonise its standards, has 167 member bodies in more than 127 countries and
over two million accountants worldwide.

Development

There is nothing new about the creation of creative financial techniques and instruments to
address social and environmental issues. In the past, such financing has mostly supported the
"social economy" or "social and solidarity economy" by focusing on grants and concessionary
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financing. The provision of nonmarket goods and services outside of governmental or
mainstream markets has historically played a significant role in many countries. For instance, the
cooperative and mutual sector, which employs more than 1.2 billion people (one in six of all
employees), in more than three million businesses, is a significant component of many
economies around the world. The largest 300 cooperatives in 2019 generated more than $2
trillion in revenue, with 41 of them located in Asia.

Work integration, agriculture, microfinance, and consumer groups are the main industries in
which cooperatives and mutual organisations operate. The majority of cooperatives and mutual
organisations are modest in size, however some do it on a substantial scale. For instance, Amul
Dairy is India's top dairy producer. Furthermore, the larger social economy in the European
Union (EU) is a significant component of the overall economy due to its economic impact (13.6
million jobs, or 8% of GDP in the EU), as well as its broader social impact, which includes
innovations made to address difficult social, societal, and environmental problems. In the post-
COVID-19 world, the social economy also provides an alternative economic model that links
stakeholders from government, not-for-profit, and for-profit organisations. It may also offer
crucial insights into how to improve the robustness and heterogeneity of business ecosystems
generally and lessen the risk of exogenous shocks to the economy as a whole.

Sustainability was not a key priority for many in the finance industry 20 years ago. There were
undoubtedly socially conscious investors, some of whom came from charitable trusts or religious
organisations and others who were founded starting in the 1960s as the US mutual fund sector
began to boom. However, they made up a very small part of the investment community and were
virtually nonexistent in Asia. For corporations, the situation was comparable. In the 1980s and
1990s, the expansion of capital markets contributed to an improvement in governance at many
corporations, but social and environmental issues were not prioritised.

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Development and wealth creation were the almost sole objectives of business in Asia,
particularly in China, which was experiencing one of the biggest periods of economic expansion
in human history at the time. The year is 2019, and a lot has changed. The economic and political
landscape has changed as a result of the financial crisis. Most crucially, views regarding the
environmental, social, and governance (ESG) concerns facing the world have [Link] give
one recent example, governments all over the world have responded to popular calls for action
by outlawing or charging single-use plastics in order to reduce plastic pollution in our oceans.

The finance industry has adjusted to the changing opinions of the general public and legislators.
The concept of sustainable finance is currently quite popular among investors, banks, and
businesses worldwide. With the emergence of new frameworks, initiatives, and financial
products as well as a widening separation between the use of risk filters and impact investing or
financing, it is getting more sophisticated.

Financial sustainability milestones

Although the growth of sustainable finance has been gradual, a few recent developments show
how sustainability has begun to enter the mainstream.

● All of the nations and top development organisations in the world endorsed the UN's
Millennium Development Goals (MDGs) in 2000. They increased understanding of the
financial sector's impact on sustainability and established a framework for it (which,
importantly, was defined as including economic, social and environmental objectives).

● The 2015 UN Sustainable Development Goals (SDGs), which take a more

comprehensive and ambitious approach to development, social, and environmental
challenges, were directly influenced by the MDGs. Sustainable finance is now primarily
focused on finding creative solutions to fill the yearly US$2.5 trillion SDG investment
gap in emerging and low-income countries.

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 ● The MDGs were crucial in laying the groundwork for other initiatives. The Global
Reporting Initiative (GRI), for instance, assists organisations in comprehending and
communicating their influence on problems including climate change, human rights, and
corruption: The GRI criteria are now used by 93% of the 250 largest firms in the world to
report on their sustainability performance.

● The industry of investment management has made some strides but may yet be waiting
for its standards-breaking breakthrough moment. Investors now have it simpler to choose
businesses that take a best-in-class approach to economic, environmental, and social
challenges thanks to the development of the Dow Jones Sustainability Index in 1999, the
Asia Pacific Index in 2009, and other indices. In terms of public demand for ESG
investment products and the adoption of ESG screening by mainstream investors, ESG
investing is now on the verge of a tipping point.

● The UN Principles for Responsible Investment (PRI), which went into effect in 2006,
have made it easier for investors to fulfil their obligations to beneficiaries while also
coordinating their financial actions with more general ESG objectives. Global assets
managed by the 1,961 members of the UN PRI have increased by double digit
percentages in recent years and reached US$81.7 billion in April 2018. These assets are
frequently used as a proxy for ESG investment.

● The creation of green and social bonds has led to the creation of an important new
corporate financing tool (and sovereigns). The European Investment Bank issued the first
green bond in 2007 to fund its climate-related projects. Green, social, or economic
sustainability-related debt instruments were issued in 2018 to a record high of US$247
billion. China has grown to be a significant sustainable debt issuer in recent years, issuing
$25.5 billion in bonds in 2017. The market has been strengthened by the 2013 green bond
guidelines of the International Capital Markets Association and other organisations like
the Climate Bonds Initiative.

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Governmental and corporate changes are essential for the sustainability movement to take off.
Individual financial institutions can contribute to the advancement of sustainable finance as well
as sustainability more broadly by using their powers to support economic and social growth in a
sustainable manner.

For instance, to support the Republic of Seychelles in protecting marine regions, Standard
Chartered and the World Bank released the first sovereign blue bond in history in October 2018.
Additionally, Standard Chartered organised a group of financial institutions to create the Illegal
Wildlife Trade-Financial Taskforce. It provides local law enforcement with financial information
regarding the funding of the illegal wildlife trade. Additionally, Standard Chartered has been a
20-year supporter of Bangladesh's economically vital ship recycling sector and is striving to
enhance the industry's health and safety, environmental, social, and labour practises.

Evolution interms of publications on Sustainable Finance

Sustainable finance has grown increasingly influential on a global scale in recent years. Many
industrialised nations and international organisations, including the United Nations, the EU, the
United States, and the United Kingdom, have successively released policies and initiatives to
support sustainable financial development. The "Paris Agreement on Climate Change," which
the world adopted in 2015 in order to reduce the negative effects of climate change, and the
"2030 Agenda for Sustainable Development," which aims to examine the path toward the
sustainable development of the global economy, were both adopted by 193 UN members. The
European Commission released its Action Plan on Financing Sustainable Growth in March 2018.
In addition, it developed the EU's sustainable financial strategy and a roadmap for the future
operation of the entire financial system.

The European Banking Authority (EBA) initially launched the plan to include Environmental,
Social, and Governance (ESG) within the regulatory framework of EU credit institutions in
accordance with the plan's requirements. In order to help with the creation of an EU
classification system (which can assess the environmental sustainability of economic activities),
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EU green bond standards, EU climate benchmark and information disclosure specifications,
enterprise climate-related information disclosure guidelines, etc., the European Commission
established an expert group of sustainable financial technology experts in June 2018.

The EBA joined the network of central banks and regulators that promotes green development
efficiency in financial service organisations in December 2018. This network's goal is to hasten
the achievement of the Paris Agreement's worldwide environmental protection goals. The
"Action Plan: Financing Sustainable Development," which was officially released by the EBA on
December 6 and served as a crucial road map for continued sustainable development in Europe,
incorporated ESG risk elements into the financial sustainability assessment system.

The European Central Bank (ECB) published a guide on climate-related and environmental risks,
a list of supervisory expectations relating to business models and strategy, governance and risk
appetite, risk management, and disclosures, on May 20, 2020, to assist banks in implementing an
environmentally sustainable loan framework in line with regulatory expectations. The "G20
Sustainable Finance Roadmap" and "G20 Comprehensive Report on Sustainable Finance,"
jointly drafted by the People's Bank of China and the US Treasury Department, were approved at
the G20 Finance Ministers and Central Bank Governors' meeting on October 13, 2021. The
meeting noted that "sustainable finance is crucial to the green transformation."

Companies, investors, financial institutions, governments, and other actors encouraged

sustainable finance and investment plans to meet the problems. In conclusion, sustainable
finance has emerged as the newest development trend in the world of finance. Understanding the
global evolution of sustainable finance research will be crucial for both theoretical and practical
reasons.

Why green financing is becoming more popular

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Corporates and investment managers alike are increasingly accepting that taking ESG
considerations into account does not reduce investment results. In reality, it can help
performance and risk management. According to a Boston Consulting Group analysis, it is
statistically significant to predict the valuation multiples of companies across a range of
industries based on non-financial performance (as measured by ESG measures).

Additional data supports the substantial financial advantages of ESG aspects. According to an
IFC review of 656 companies in its portfolio, those with strong environmental and social
performance beat rivals in terms of return on equity and return on assets by 210 basis points and
110 basis points, respectively. Companies that care for the environment, their workforce, and
communities do well financially, according to the IFC.

According to an MSCI analysis, companies that prioritise ESG problems are more highly valued
and capable of delivering greater performance since they have a lower cost of capital due to their
superior risk profile (they are more successful and will outperform should unforeseen events
occur). In other words, adopting ESG as best practise appears to have demonstrable financial
benefits, even if one were to disregard any ethical imperatives for businesses to commit to ESG
and investors to take ESG aspects into account.

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SECTION 7: GLOBAL STANDARDS

______________________________________________
An overview of sustainable accounting's history

Much of the conceptual growth of sustainable accounting is credited to Gray, who names three
basic types of sustainability accounting:

 Sustainable cost.
 Natural capital inventory accounting.
 Input–output analysis.

Sustainable Cost & Full Cost Accounting:

Long-term cost savings can be attained by targeted initiatives and lean techniques that locate and
stop outflows from cost drivers. These savings are known as sustainable cost savings. An
organisation that preserves natural capital for future generations would be considered
sustainable. To get a notional level of sustainable profit or loss, sustainable costs are subtracted
from the accounting profit (calculated following generally accepted accounting principles). The
degree of unsustainability is quantified in monetary terms where the sustainable cost exceeds the
accounting profit.

Since critical natural capital cannot be replaced, any damage to it should theoretically be valued
at infinity, which leads to the conclusion that an organization's operations that harm critical
natural capital are unsustainable. An illustration of applying a well-known accounting principle
—in this case, capital maintenance—to natural capital as opposed to financial capital is provided
by sustainable cost.
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Even more beneficial than the financial information generated may turn out to be the act of
collaborating with an organisation and making an attempt to predict sustainable cost. This is
hardly shocking considering that, rather than a lack of knowledge, the (un)ethical foundations of
our consumer and wealth-obsessed culture play a significant role in ecological damage and social
unfairness.

Both full-cost accounting and sustainable cost accounting make an effort to account for
environmental costs that are external to the organisation and, when combined with internal costs,
give a more complete picture of total costs. However, these two accounting methods are not
necessarily interchangeable. This approach of accounting aims to correct the inaccurate
information that market prices convey due to the exclusion of social and environmental costs,
which results in an inefficient use of resources and extensive social and ecological harm.

Natural capital inventory accounting:

With variations in stock levels employed as a gauge of the (declining) quality of the natural
environment, natural capital inventory accounting entails the tracking of natural capital stocks
through time. Different natural capital stock types are identified, enabling

the monitoring, documenting, and reporting of improvements or decreases within specific

categories. Gray offers four classifications for natural capital.

 The ozone layer, tropical hardwood, and biodiversity, for instance, are crucial.
 Non-renewable or non-replaceable resources, such as mineral goods, oil, and petroleum.
 Non-renewable or substitutable resources, such as energy use and trash disposal.
 Renewable resources include fisheries and plantation wood.

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Although Jones proposes looking into the valuation of natural assets using financial units, natural
capital inventory accounting may be primarily non-financial, recording resource movements in
quantitative but non-monetary units.

In order to address the issue of accounting for biodiversity, Jones uses the inventory approach.
He adopts a three-step process that involves recording, valuing, and reporting natural assets such
as wildlife habitat, flora, and fauna. Jones also suggests combining the records of various
organisations to create national records of natural inventories.

The use of the capital maintenance concept and the management accounting instrument of
inventory control both demonstrate how conventional accounting has an impact on natural
capital inventory accounting. Invoking the axiom of strong sustainability, the capital
maintenance idea could be used to both natural and humanmade capital, acknowledging that
there are few chances to replace natural capital with humanmade physical or financial capital.

The exploration of natural inventories is still in its early stages. Further theoretical and empirical
research is required to evaluate the accuracy and potential utility of this information.

Finding the appropriate accounting entity to apply this method to—which can be at the local or
regional level rather than the company level—involves significant obstacles. The accounting
principle of materiality is crucial in determining the level of precision and depth required at the
data acquisition stage and reporting stage, in a similar manner. Despite the previous reasoning, it
is highly improbable that natural inventory records could accurately portray nature's immense
diversity and interconnection.

Input–output analysis:

The physical flow of materials, energy, and product and waste outputs in physical units is taken
into account by input-output analysis. The process's outputs of finished goods, emissions,

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recycled resources, and waste for disposal are all intended to be measured. Despite the possibility
of accounting in financial units, resource flows are measured in terms of volume. What goes in
must come out is applied in input-output analysis, which offers a structured method for
presenting environmental information. This methodology is familiar to accountants.

The identification of potential resource and energy savings is one of the reported benefits of
input-output analysis. It is frequently the first step in an environmental audit process and can also
help with product innovation and pollution prevention strategies, especially when it is
incorporated into a product and/or process life cycle analysis. Although it gives a transparent
account of the physical flows into and out of a process, input-output analysis does not quantify
sustainability or unsustainability; rather, it enables further research of environmental factors.

strategies with an eye toward sustainability.

In contrast to the other types of sustainable accounting previously addressed, input-output

analysis is based on materials accounting methods used in the physical sciences rather than on
the theories or practises of finance or management accounting.

Triple bottom line accounting and the Global Reporting Initiative (GRI):

Elkington outlines the triple bottom line (TBL) method of sustainability accounting, which
strives to report on an organization's economic, social, and environmental implications. The
growing three-dimensional notion of sustainable development serves as the foundation for TBL
accounting.

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Others, like the type used in the GRI Sustainability Accounting Guidelines, use a wide range of
indicators to measure performance toward the aim of sustainability. Some versions of TBL
attempt to use monetary units to quantify economic, social, and environmental performance.
Environmental science has a long history of using indicators to estimate variables that cannot be
measured accurately and is thought to be acceptable when complex variables cannot be directly
seen.

The World Summit on Sustainable Development (WSSD) in Johannesburg in August 2002 saw
the issuance of the most recent edition of the GRI Sustainability Accounting Guidelines, which
provide a strict framework for the implementation of TBL reporting.

The Global Reporting Initiative (GRI) is an international, multi-stakeholder effort with the long-
term goal of creating and disseminating Sustainable Reporting Guidelines (the "Guidelines").
Organizations may voluntarily follow these guidelines for reporting on the economic,
environmental, and social aspects of their operations, goods, and services.

The Guidelines are based on the widely-accepted three-dimensional definition of sustainability

and include both integrated indicators that assess several aspects as well as performance
indicators to measure each of the economic, environmental, and social components.

The economic category of indicators is intended to augment the financial data in traditional
financial accounting reports by supplying data on how an organization's operations affect:

1. Stakeholder economic situations.

2. Regional, national, and international economy.

Given that long-term economic repercussions are a crucial component of sustainability, it is

challenging to draw a direct connection between these performance measures and sustainability.
The extent to which an organization's stakeholders are dependent on it for financial support is

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revealed in its financial relationships with customers, suppliers, employees, and investors, and it
also provides some insight into potential financial risk in the event that the reporting organisation
ceases to exist.

Many cutting-edge environmental reports include the environmental indicators that are listed in
the Guidelines. Each factor listed in Table 1 is a criterion for evaluating the environmental
performance of an organisation. Environmental performance indicators should be stated in both
absolute and relative (or normalised) terms, with the latter allowing for comparisons between
businesses, as per the Guidelines.

The Guidelines' four areas of social performance indicators, which encompass consumer, worker,
and human rights as well as societal problems including bribery and corruption, are a significant
addition. The Guidelines demand that a variety of social policies be stated, together with a
description of the system used to monitor compliance with the policy and findings from the
monitoring process, because many of the social performance indicators are challenging to assess
in numeric units.

Gray refers to the social accounting field as the realm of potential accountings. This suggests that
the careful prioritisation of pertinent social information is necessary for social accounting
practise.

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Figure 1GRI Framework For Performance Indicators

The social dimension of sustainability accounting is derived from the developing concept of
sustainability, which includes the objective of intergenerational equity, which is typically
understood to mean the eradication of poverty. The GRI social performance indicators do not
specifically address the issue of poverty, despite the fact that some of its root causes (violations
of human rights, poor health, and lack of freedom) are obvious and the financial worth of
donations is listed as a fundamental economic performance indicator. Limited disclosure might

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be a result of the conviction that government, not corporate organisations, should be the main
force behind eliminating poverty. However, the business sector has a responsibility to guarantee
that its actions do not cause or sustain poverty, and any such actions must be made public.

In conclusion, the Guidelines represent a noble effort to increase the openness of organisations'
social and environmental impacts, with the hope that this will lead to organisational reform
toward sustainability. However, Broadhead highlights the inherent risk in the worldwide gradual
management of some environmental problems. According to Broadhead, the establishment of
regimes (such as the international regime on ozone depletion) and the compromise that results
from them not only fail to take decisive action but also conceal the lack of progress made in
preventing environmental crises, giving the appearance of real change.

The potential misuse of information generated using the Guidelines by corporate interests, which
would reduce sustainability accounting information to environmental propaganda and hide the
reality of the environmental crisis and the role of business as a primary cause, is similar to
Broadhead's worries. The choice between voluntary and mandatory compliance, independent
third-party audits of sustainability reports, and the question of who will pay for the creation of
sustainability accounting data are all crucial implementation concerns. The conclusion of this
essay discusses these concerns.

Financial accounting model components

Financial modelling projects the company's financial status using too generalised and idealised
assumptions. A solid financial model should be as straightforward and as detailed as is required.
Accounting records created using instruments like the journal, ledger, and trial balance, as well
as the double entry concept, which boosts dependability and affects the format of final reports,
are essential to the creation of traditional financial statements.

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The data flow and model structure must be carefully thought out and organised because financial
models can be extremely complicated. The model should have a consistent data flow. For
instance, the past, present, and future periods of models should always flow left to right, and the
sums should flow top to bottom. Additionally, a well-structured financial model improves
clarity, sustainability, and error rate.

The assumption that underlies the production of financial statements is that users are primarily
interested in the financial performance of the accounting entity, as measured by accounting profit
and cash flow, and the entity's financial condition, as assessed by the balance sheet. The financial
accounting model has developed to present data pertinent to these presumptive main financial
goals of business owners. In sustainability accounting, the objective of sustainability or
sustainable development is the goal allocated to the account.

The financial accounting model is identified as having five essential components:

 The accounting reports

 Principles of accounting
 The records of accounting
 The objective of the accounting model
 Qualitative attributes

Sustainability accounting study is justified by the fact that decision-makers in business, in

particular, need a balanced collection of data, encompassing economic, social, and
environmental information, in order to make judgments that will lead to the multifaceted aim of
sustainability.

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This report's identification of a financial accounting model serves as a broad framework for the
information gathering and reporting that has developed from financial accounting practise. In
order to give structure to sustainability accounting, which has developed in a very ad hoc fashion
over the past 15 years, this report attempts to specify a sustainability accounting model in the
form of the financial accounting model. It is challenging to predict whether this strategy will
ultimately be advantageous to the environment. Designing tools to lessen manipulation and
improve the qualitative characteristics of sustainable accounting information could be a crucial
function for accounting.

The Sustainability accounting framework

The specification of this framework is based on the assumption that the following critical issues
must be addressed during the development phase to add rigour and structure to the reporting of
sustainability accounting information: the objective of the reporting model; the principles which
underpin application of the model; data capture; reporting frameworks; and the qualitative
attributes of the information produced.

Figure 2 Components of the Sustainability accounting framework

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The five elements shown:

 The sustainability accounting framework's objectives

 principles that support using the framework
 Measurement methods, accounting records, and data collection instruments
 information presented to stakeholders in reports
 characteristics of information reported utilising the framework's qualitative criteria

The main goal of the sustainability accounting framework is to assess how well an organisation
is doing with regard to sustainability. Information on performance with regard to sustainability
could support either the accountability or decision-useful goals visible in the presentation of
information from conventional accounting.

The principles that direct the collection and reporting of accounting information are determined
by the sustainability accounting framework's main goal and the sustainability definition that has
been selected. These rules are comparable to the conventions surrounding the reporting entity
and accounting period as well as the historical cost, going concern, and conservative
considerations that support financial accounting.

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Figure 3 Comprehensive sustainability accounting framework

The journals, ledgers, and trial balances used by financial accountants to record financial data are
equivalent to the data management tools used to collect and store sustainability accounting data.
Performance indicators and methods for estimating environmental assets and liabilities, for
instance, are examples of measurement approaches.

The information gathered by the sustainable accounting framework must adhere to a number of
qualitative criteria and be presented to users as both quantitative and qualitative information.

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SECTION 8: REFERENCE

______________________________________________
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December 18, 2022, from [Link]

Khudyakova, L.S. Launching a sustainable financial system in the European Union. Mirovaya
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Cunha, F.A.F.d.S.; Meira, E.; Orsato, R.J. Sustainable finance and investment: Review and
research agenda. Bus. Strat. Environ.

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 Eccles, R. (n.d.). Accounting for Sustainability. IFAC. Retrieved December 18, 2022,
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Lamberton. (2005, January 21). Sustainability accounting—a brief history and conceptual
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Sustainability accounting - Wikipedia. (2013, September 24). Sustainability Accounting -

Wikipedia. Retrieved December 18, 2022,
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