Aims and Objectives of the Report
Write a research report aims to determine the effects of sustainability disclosure on the economic performance of a company.
The importance of sustainability reporting cannot be underestimated for any organization in the modern age. This is happening because of the increasing trend for companies to improve business reporting through provision of non-financial information in their annual reports. Most organizations today are faced with both Obligatory as well as voluntary reporting regulations within the countries they operate and therefore the need for a sustainable way of disclosure in reporting. Sustainability reporting can be defined as the openness and the mutual concern with which a company shares its information regarding social and environmental issues in the area they operate on. (Herbohn, Walker & Loo, 2014). According to IRFS, sustainability reporting helps in ensuring there is a standard way of reporting and thus avoiding plurality and hence compelling companies to behave in a responsible and ethical manner and therefore have a care for the environment and social impacts of the company on the physical areas they operate on.
Aims
This research report aims to determine the effects of sustainability disclosure on the economic performance of a company.
Objectives
- To discuss the nature of sustainability disclosure in accounting.
- To identify and elaborate the consequences of sustainability disclosure on the company and the economy of a country.
- To explain how sustainability disclosure should be reported in accounting as required by accounting standards such as USGAAP, UNPRI and JSE.
- To find the correlation between sustainability disclosure in corporate reporting and economic performance of the reporting entity.
The significance of the Study
This research will be helpful to a number of stakeholders. At the forefront, it would help companies to see the importance of sustainability disclosure in corporate reporting and the consequences it has on the overall economy of the country. Secondly, the research will also help the members of the public to identify themselves with companies that promote good social and environmental practices as evidenced by their good corporate responsibility reports. Members of the public usually prefer to deal with companies they trust and therefore disclosure of non-financial information is key to the company’s present and future performance. (Hedberg & von Malmborg, 2003). In essence, a company that adheres to sustainability disclosure reporting is doing a lot in building its future because the members of the public will have more trust in it. Thirdly it helps the governments of the day to come up with proper policies and regulations on how companies should operate in their respective countries (Gadau, 2016). Finally, it helps to account standard setters in coming up with proper regulation and policies on how reporting should be done by companies as well as academia who are intrigued by sustainability disclosure and would wish to perform further research on the subject.
Nature of Nonfinancial Information in Sustainability Reporting
According to IFRS guidelines, all large corporations should disclose information on its policies, the risks and results regarding a number of aspects of its operations including the environmental, social and sustainability issues related to employees, the company’s actions towards respect for human rights, issues to do with corruption and bribery and the diversity of the director’s directors. The information to be disclosed should, therefore, follow a certain guideline to avoid a plurality of information among different firms operating in the same industry (Gazdar,2007). Various international and local accounting standards such as the United States Generally Accepted Accounting Principles (USGAAP), and International Financial Reporting Standards (IFRS) and other institutions including the United Nations Principles for Responsible Investment (UNPRI) and Johannesburg Stock Exchange (IFRS) have provided the correct formats which are recommended for companies to prepare non-financial reporting to be included in annual reports. These bodies have been aiming at enhancing uniformity and facilitate easy of understandability from the side of the stakeholders and other users of financial information so that they can make informed decisions regarding the company. Furthermore, having a standard format of non-financial reporting ensures that the administrative costs attached to the creation of such sustainability reports are kept at a minimum level at all times (“Providing clarity on the benefits of non-financial reporting”, 2018).
Nature of Nonfinancial Information in Sustainability Reporting
The US Generally Accepted Accounting Principles View on Non-Financial Reporting
In conformity with other internal accounting bodies such as IFRS, USGAAP have backed up the practice of non-financial reporting by corporates as a measure of improving the quality of the financial reports presented through the annual reports. USGAAP has encouraged corporations to improve both their financial and non-financial accountability through disclosure of environmental, social and risk practices that are undertaken by the company (“The Comprehensive Guide to Understanding GAAP | Accounting.com”, 2018). This requirement goes hand in hand with reporting of corporate social responsibilities that are being undertaken by a company during a certain financial period. The importance of non-financial reporting according to USGAAP is that sustainability and CSR activities usually have an overall effect on the financial image of the company and so the need for disclosure.
Economic Impacts of Non-Financial Reporting
Disclosure of non-financial information of any company has many economic benefits. One of the key benefits is that the disclosure usually leads to an increase in the volume of shares being traded for the company at the stock exchange. This is because such a practice encourages more people who are willing to sell their shares and those willing to buy, to have some direct link to the affairs of the company because of the non-financial information being disclosed. Research has shown that companies whose sustainability disclosure is higher, usually tend to have more shares traded and therefore the share price will rise up steadily over time. (“Sustainability Reporting | UPS Sustainability”, 2018) Conversely, if the sustainability disclosure is negative, then the share volume traded at the stock exchange drops drastically over time because no one would wish to be associated with a company that does not address its social and environmental obligations in the correct way (Gnanaweera & Kunori, 2018).
Companies may, therefore, withhold crucial non-financial information if it feels that the disclosure will negatively affect its financial performance by negatively altering the perception of members of the public.
Importance of Non-Financial Information Reporting to the Economy
Companies that address the environmental aspects through its sustainability disclosure will in the long run help in controlling adverse climate change and consequently help in lowering global warming. This can be achieved by adopting environment-friendly methods and practices that do not affect the environment negatively (Hedberg, & von Malmborg, 2003). Reduction in global warming will in effect enable economic activities that depend largely on weather and climate change to be carried out without any hitches (team, 2018). Such economic activities include farming which is practised by most members of the public in most countries. The members of the public earn an income through such activities and therefore uplifting their living standards.
Non-financial reporting practices such as reporting of corporate social responsibility activities undertaken by the firm have a positive impact on the economy of the country as well as the performance of a company. This is because when a company engages in corporate responsibility, it reputation improves and this translates into a better relationship between the company and members of the public, government officials, Bankers, and investors (Jones, S., & Ratnatunga, 2012). As a result, the company will be able to access capital easily because bankers will gladly lend money to the company and the investors will commit their money comfortably in the company.
The US Generally Accepted Accounting Principles View on Non-Financial Reporting
An attraction of additional workforce to the company is another internal benefit of non-financial information sharing to a company. Most people will be attracted and will be eager to work for the company because of its good reputation. Employees who are employed at the same company will have good working conditions because the company reports well on its employee relation activities and safety policies it has put in place (Songini, & Pistoni,2015; Mio & Fasan, 2013). Staff turnover will be low and the productivity of each employee higher since most of them will stick to the company and achieve greater experience in their dockets. As a result, the company will perform better and its profitability increase with time and all this is attributed to sustainability disclosure by the company.
Challenges of Non-Financial Information Reporting
The negative aspect of non-financial reporting are costs attached to the practice of corporate social responsibilities. CSR activities of a company usually have an effect of making the organization incur additional costs especially when it focuses on making charitable contributions that are extensive, promoting plans in the community such as assisting in the construction of community projects (H?bek,2017; Herbohn, Walker & Loo, 2014). The additional costs may put the company at an economic disadvantage as compared to other companies who do not engage themselves in such corporate responsibility activities.
Bribery and corruption are one of the most destructive vices of any company the world over. Through sustainability disclosure, this vice can be reduced drastically if not eliminated by companies which put in place policies on ethical principles which should be followed by the company. This will reduce the material risk associated with the vices of bribery and corruption and save funds that will otherwise have been lost. The economic impact of bribery and corruption is like cancer eating away a country and the solution to the vice is by nabbing it in the bud by having policies to prevent such an occurrence.
How Sustainability Disclosure Should Be Reported
The major source of nonfinancial information in the annual report of any corporate organization is the sustainability disclosure reports. Most of the information found in these sources are linked to corporate responsibility policy of the company and are mostly not sufficient for investors to make decisions based on them. (“Sustainability Reporting”, 2018). Therefore, the non-financial information should be integrated into the financial information of the company in such a way that it is comparable to other companies which compete with each other. Key performance indicators are important while reporting on non-financial information in order to assess the sustainability disclosure in a company.
Importance of Sustainability Reporting for Companies
The importance of sustainability reporting cannot be underestimated. Such a practice brings a number of positive implications for the company. This can be evidenced by several studies that have been done worldwide where it has been found that organizations with good sustainability disclosures perform well in terms of equity because their stock prices increase in value and the volume of shares traded also rise (Cronjé & Buys, 2015; “2017 in Review: Tools for Non-financial Reporting”, 2018). This is because investors will be willing to invest in companies that have good sustainability disclosures and reporting because of the goodwill the company enjoys in the market. Capital will be available to expand the operations of the company and lead to more profits for the shareholders in the long run (Gnanaweera, & Kunori,2018). Bankers will also be willing to lend to any organization that has a good sustainability disclosure because of the goodwill the company has in the market which translates to better financial performance (Jones & Ratnatunga, 2012). Most members of the public will be willing to do business with the company and this translates to better performance of the organization financially in the long run. The organization will be able to repay back its loans if the financial performance is better. Therefore, an organization that complies with the sustainability disclosure will, in the long run, have greater economic benefits as compared to the company that does not share any of it non-financial information (“The Value of Sustainability reporting”, 2018).
Conclusion
To sum up, the relationship between sustainability disclosure and its economic consequences on a company is becoming increasingly important. Firms, therefore, must have a standard way of reporting non-financial information in companies all over the world. The impact of such disclosures is clearly evident in most companies because it will improve the economic well-being of the company in the long run. In the short term, costs associated with carrying out corporate responsibility can seem much for an organization but the benefits that will accrue as a result of such disclosures will far surpass the costs.
References
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