Financial, Environmental and Social Sustainability in Business - Literature review Example

Social and environmental sustainability versus financial sustainability A sustainable business strives to have a minimal negative impact on its global and local environments by linking all its operations and decisions to sustainability principles (Jean-Francois, 2014). Such a business also supplies environmentally friendly goods and services and doing everything possible to ensure that it addresses the current environment in its processes of making a profit. Aras and Crowther (2012) argues that for a business to be sustainable, it has to: i. Establish a departure point from which to design its future because the present situation lays the basis for reaching the future, ii. Make sure that it does not forget its organizational culture and societal influence because both are part of every step of its operations and processes, iii. Consider its impact on the environment and ensure that it is taken care of and preserved, iv. Ensure the participation of the entire society and the consensus, v. Establish a sound financial point of view and elaborate proper financial forecasts. In order for the business to meet its financial objectives and forecasts, it has to be properly programmed. Social and environmental sustainability describes an organisation’s responsibilities in terms of creating social and environmental value respectively (Management Association, 2013). Sustainability goals cannot be achieved only by creating value or providing good and services that improve life standards but also be solving the environmental and societal problems through business operations. Environmental sustainability ensures that the business operates without harming the environment and creating over-dose emission. On the other hand, social sustainability implies that business organisations manage their operations according to the stakeholders’ needs. The operations should also be in accordance with the value system of the organization. On the other hand, financial sustainability creates value for the business in terms of economic dimensions. Financial sustainability concerns itself with the business organisation’s internal factors whereas social and environmental sustainability concerns itself with the external factors that affect the business organization. In general, sustainability implies that the organization must not use more resources that can be generated (Aras and Crowther, 2012). As stated by Management Association (2013), all these factors present a long term based view, ensuring an extensive framework. The main determinant of the financial sustainability of a business is its ability to generate a steady stream of cash flow from profit. To ensure that the business has a long-run financial sustainability is to ensure that it continues as a going concern, without the need of external financial support. On the other hand, social sustainability demands that a business seek ways of working that enable people to lead healthy, fulfilling, and secure lives, without destroying the environment and without endangering people and animals’ lives (Aras and Crowther, 2012). There is a common assumption that any business could benefit socially, environmentally, and financially by sustainability and could use it as a strategy. That explains why business organisations most likely invest in sustainability first. Adopting sustainability as a strategy lies in the question of whether a business is bound to do better if all matters of sustainability such as financial, environmental, and social are taken into consideration. Aras and Crowner (2012) argue that financial sustainability of a business comes from various elements such as: i. Honesty and trust from transparency in what the business does, ii. Its commitment to higher purposes that maximise profit, iii. Customer loyalty if the businesses meet societal expectations, iv. Business’s durability as well as the society, v. An organization has innovative strategies that create value for money The sustainable business theory was conceived by Howard R. Bowen in 1953. Bowen (1953) based his argument on a broadly conceived account of the goals of the economic system. These goals include not only economic progress and stability, but the wider goals of freedom, community improvement, justice, and personal integrity among others. In Bowen’s theory of sustainable business, stewardship is associated with the idea that business leaders are servants of society, for whom “management merely in the interests of stockholders is not the sole end of their duties” (Bowen, 1953, p. 44). This theory faces a number of challenges because it is seen to pose challenges to competitive business (Wells, 2012). The critics of this theory argue that because of the costs that accompany the requirements proposed by the theory, the socially responsible firm will be uncompetitive. Bowen (1953) defended his theory by arguing that better employment practices (social sustainability) historically have resulted in greater productivity. The stakeholder theory stemmed from sustainable business theory. The stakeholder’s theory suggests that organisations are driven to be environmentally and socially sustainable due to pressures from stakeholders (Jones and Wicks, 1999). Stakeholder theory is, therefore, a good starting point for anchoring an enquiry into corporate sustainability practices. Stakeholders are a group of people who can affect or who can be affected by the outcomes of the organisation’s objectives (Freeman, 1984). The attributes of a stakeholder are neither in a steady state nor an objective reality. Instead, these attributes are socially constructed and variable. Therefore, the importance of the stakeholder in the organization is transitory and subject to change. Traditionally, there are stakeholders who were considered secondary to the organisation such as scientific agencies and environmental groups. However, currently, these stakeholders are considered significant in environmental and social sustainability of a business. The stakeholder theory proposes strategies in which the organisation and the stakeholder depend on each other. A withholding strategy is used when stakeholders affect the allocation of resources. It assumes that stakeholders can withhold critical resources needed by an organisation with the intention of making the organisation change its behavior and actions (Wells, 2012). Stakeholders suffer no harm after withdrawing from a relationship. Maintaining the relationship between an organisation with stakeholders entails maintaining social-environmental sustainability. Therefore, environmental and social factors directly or indirectly affect the financial sustainability of an organisation. The resource-based logic to organisation social and environmental practices provide a theoretical rationale for understanding stakeholder salience and provide a basis for understanding how secondary stakeholders can become important catalysts for driving corporate social and environmental sustainability. Resource Dependence Theory (Pfeffer and Salancik, 1978) proposes that the more dependent a firm is on stakeholders for critical resources, the greater the extent to which that stakeholder can influence the firm’s response. Withholding strategies can be used when the balance of resource dependence favours the stakeholder. If the social and environmental factors of the organisation are not maintained, the stakeholder withholds and attaches conditions for the continued use of a resource. Wells (2012) suggests that integrating perspectives from resource dependence theory into stakeholder theory suggests that stakeholders who can marshal the requisite resources will be successful in driving organizations towards social and environmental sustainability. The institutional theory explains how pressures from social institutions such as governments, media, professional associations and public opinion can affect the organisation. Organisations have to obtain social approval and legitimacy. Failure to conform to critical institutional norms can threaten an organisation’s survival and legitimacy. Therefore, the financial sustainability of an organisation highly depends on its adherence to critical social norms. Traditional business organisations had a tendency of reporting financial practices solely focusing on financial and economic outcomes while disregarding the social and environmental outcomes of their business operations and activities. However, recently, there is growing recognition of the potentially significant negative social and environmental impacts of human actions. Business organisations are attempting to bridge the gap between social and environmental sustainability and financial sustainability. All the three factors were previously treated as externalities, without considering the long-term impacts they are likely to have on the business. Currently, the three factors are being brought into the decision-making processes of the business. However, there are conflicting issues between the three factors with financial sustainability being seen as superior of the three. These conflicts pose significant challenges to the businesses, the public sector, and the society as a whole. In order to mitigate these challenges, organisations have increased sustainability reporting. Hopwood, Unerman and Fries (2013) observe that both social and economic sustainability are posing major challenges to business organisations. The biggest challenge, however, is in balancing financial, social, and environmental sustainability at the organisational level. The financial sustainability issue is overemphasised in the annual reports of organisations. However, Hopwood et al. (2012) observe that there are little integration and analysis of both social and environmental sustainability issues within the annual reports and accounts. Both social and environmental sustainability would be material to the organisation’s future performance. Therefore, lack of evidence of social and environmental sustainability could affect the long-term financial sustainability of the organization. Currently, there is a little explicit connection in the reporting of financial sustainability with environmental and social sustainability. Failure of connection between these factors makes it difficult for both external and internal users of sustainability and financial information to fully grasp the dynamic interactions between an organisation’s financial, environmental and social sustainability, and their significance. Based on finance theory, the effect of non-integration of social and environmental sustainability is an eventual increase in equity capitals cost due to lack of demand from socially and environmentally responsible investors. This rise in turn decreases the profits from the organisation’s activities. Therefore, there is reduced financial sustainability. Therefore, a decrease in social and environmental sustainability leads to reduced financial sustainability. Several studies have established a negative correlation between social and financial sustainability and also between environmental and financial sustainability. Poelle (2010) established a negative correlation between social responsibility and financial performance. Poor financial performance translates to poor financial sustainability. Another empirical study by Evans and Peiris (2010) also found that more involvement by a company in socially sustainable activities negatively affects its operating performance and stock return. Hopwood et al. (2012) argues that accounting is one of the factors that play a major role in effective response to the challenges of balancing financial, environmental and social sustainability. They further argue that accounting helps business organisations to identify their past and potential future social and environmental benefits and impacts as well as forecast the financial outcomes from their activities. Accounting also provides forward-looking information on how a business organisation can implement strategic solutions to strength its performance and respond to the challenges of sustainability. Accounting has an ability to make visible, through both qualitative and quantitative information a broad range of financial, social, and environmental consequences of organisational operations and strategies. There is need to connect or integrate these issues within the annual reports and accounts. Such a connection can help to embed considerations of social and environmental sustainability within the day-to-day operations and management practices. By so doing, the investors and other stakeholders can better appreciate the financial sustainability reports of business aimed at greater environmental and social sustainability. One of the companies that have taken the lead in integrating financial, environmental, and social reporting in their business is Novo Nordisk. AICPA (2013) argues that the economics of sustainability should link financial and non-financial performance. It further argues that the organisation’s culture of sustainability impacts market performance. In 2010, Novo Nordisk launched a white paper series titled “Blueprint for change: the climate challenge” (AICPA, 2013). In that paper, Novo discussed how it has placed climate change as its focal point in its environmental strategy. The company made a public commitment to reduce carbon emissions by an absolute 10 percent from 2004 to 2014. It also grouped the value-creation of this initiative into two namely value for business and value to society. Since 1994, Novo has gained the reputation as a leader in the area of sustainability reporting (Hopwood et al., 2012). Novo has spent five years developing its approach which it refers to as ‘integrated reporting’. This approach seeks to measure financial, social, and environmental performance within a single comprehensive document. As observed by Hopwood et al. (2012), Novo started to take sustainability seriously after the 1970’s incident where the then consumer advocate Ralph Nader accused the company of using new detergent enzymes in its production process that in turn affected the health of employees involved in the process. These claims seriously damaged its reputation and caused its sales in the US market to fall by half (Hopwood et al., 2012). To make a turnaround, Novo had to integrate sustainability issue in its reporting. Adams and Narayanan (2007) argue that the reporting of sustainability has progressed beyond superficial treatment in organizations. However, the practice of environmental and social sustainability is still in its developmental stages (Adams and Narayanan, 2007; Bebbington, 2001). Many organisations view social institutions concern over environmental problems in their operations as intrusive and likely to impede financial development. There is a need to reconcile such differing views in order to ensure that a balance is maintained. Reporting on organisation sustainability performance has become very challenging. Sustainability has a high degree of complexity that seems to lack a clear endpoint. In addition, organisations struggle with contradicting and differing views of different stakeholder. This issue is further complicated by the fact that stakeholders perspectives are continuously changing. Even if organisations seem to have developed an understanding of what sustainability entails, they must resolve the questions of the differing perspectives of social, environmental, and financial sustainability. Each of these branches has potential drawbacks that make them conflict with each other. Social and environmental sustainability may give rise to increased costs, and this may conflict with the view of financial sustainability that appears to consider reduced costs. Financial sustainability also concerns itself with the risks associated with disclosing too much information to competitors. There is difficulty in determining what to report and what not to report. There are mandatory issues that have to be reported especially the ones that are driven by the requirements of secondary stakeholders. These issues are usually favoured by stakeholders such as customers. However, they are not likely to be favoured by the organisation because some of them may harm the reputation of the organisation making it lose in terms of sales and profits. There is a need to address these challenges and strike a balance in social, environmental, and financial sustainability. Towards the Future An organization may not achieve financial sustainability if it fails to consider the social and environmental sustainability issues. AICPA (2013) states that investors are showing increased interest in non-financial issues such as social and environmental sustainability issues. The nature of organisation’s sustainability is broad, and the three branches of sustainability hold differing views. Sustainability is a matter of supreme importance to all creatures of the world. Voluntary initiatives of financial, social, and environmental reporting have been a complete failure. This failure is attributable to organisations’ inability to reconcile differing views of the three branches of sustainability. Bebington, Unerman, and O’Dwyer (2012) argue that it would be foolish to place further faith in organisations. However, organisations cannot be ruled out because they are the main players. Producing genuine accounts of the environmental and social impacts of corporations is not a kind of mystery. Research and experimentation over the years have shown that there are a number of ways through which differing views can be reconciled. The solution to all this resides in the organisation. Some of the most important data about the pressures on social and ecological systems resides within the organisations themselves. If the society is to make sensible decisions about the pressures on the future capacity of the social and environmental factors on which it relies, it needs this data. This line of reasoning has led to one of the most potentially promising initiatives of recent years. This initiative is the Prince of Wales Accounting sustainability (A4S) project (Bebbington at al., 2012). Apparently initiated out of a frustration with the lack of voluntary progress and a belief that accounting for sustainability should not be an impossible task, the project appears to have become derailed at some point. It seems as if the project proved incapable of addressing the essential conflicts that sustainability poses business, eventually producing a range of highly stimulating but partial projects that owe at least as much to environmental management as to sustainability (Hopwood et al., 2010). There are three important insights and legacies that can be drawn from A4S project. First, there is need to exercise more nuance in the discussion of ‘regulation versus voluntary’ as a way of transforming the behaviour of the organisations in order to strike a balance between the three branches of sustainability. Second, the project demonstrates that clever individuals working with innovative organisations can produce important and unexpected steps forward. It appears that useful breakthrough can emerge from unexpected places. Finally, the A4S project provided something it referred to as “connected reporting” (Bebbington et al., 2012) that might produce a merging of financial and sustainability accounting. In its current form, sustainability reporting appears as a combination of communication on social, environmental, and financial issues related to the organisation doing reporting. “Connected reporting” may appear as a well-meaning but ill-informed suggestion. However, this type of reporting together with support from the GRI has transmogrified into ‘IR’ and has produced the IIRC. The Global Reporting Initiative (GRI) establishes sustainability reporting principles, offers guidance on the boundary of the sustainability report, and lists a number of standard disclosures. As observed by Bebbington et al. (2012), the IIRC shows every sign of determining the shape of the future. The formation of IIRC has drawn wide support from big names in the international arena and the worlds of accounting and reporting. Many people are optimistic that there is a new, exciting and positive direction for sustainability reporting. Conclusion Sustainability goals cannot be achieved only by creating value or providing good and services that improve life standards but also be solving the environmental and societal problems through business operations. Environmental sustainability ensures that the business operates without harming the environment and creating over-dose emission. Adapting organizational strategies and operations to meet the combined needs of a sustainable finance, a sustainable environment, and a sustainable society is a pragmatic, rational and prudent process that every successful organisation needs to undertake. The organisations that will be successful in future are the ones that will adapt to embed a connected understanding of environmental, social and financial sustainability into their organisational DNA. Their strategic and operational decision-making will be based on this appreciation of the interconnectedness of differing aspects of sustainability. Accounting has been found to play an important role in helping organisations to meet the urgent challenges of differing views of sustainability issues. References Adams, C. and Narayanan, V. 2007. The ‘standardization’ of sustainability reporting, inO’Dwyer, B., Bebbington, J. and Unerman, J. (Eds). Sustainability Accounting and  Accountability. Oxon: Routledge, pp. 70-85. AICPA 2013. The Economics of Sustainability Initiatives. Available from http://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/downloadabledocuments/whitepaper_economics_of_sustainability_initiatives.pdf Aras, G. and Crowther, D. 2012. Business Strategy and Sustainability. Bingley: Emerald Group Publishing Bebbington, J., Unerman, J. and ODwyer, B. 2014. Sustainability Accounting and Accountability. Oxon: Routledge Bebbington, J. 2001. 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