The Emergence of Business Sustainability and Its

Practical, Educational and Research Implications

ZABIHOLLAH (ZABI) REZAEE, PHD, CPA, CMA, CIA, CFE, CGFM, CSOXP,

CGOVP, CGRCP, CGMA, CRMA

Thompson-Hill Chair of Excellence & Professor of Accountancy

Fogelman College of Business and Economics

The University of Memphis

The 6th World Business Ethics Forum (WBEF)

Business Sustainability and Social Impacts

Hong Kong Baptist University and University of Macau

Hong Kong, December 11-13, 2016

Purposes • Examine four themes of business sustainability, including: the focus on

stakeholder aspect, the main objective function of creating shareholder value, multidimensional, and time horizons.

• Discuss all five dimensions of sustainability performance including: economic, governance, social, ethical, and environmental (EGSEE) with a keen focus on economic sustainability performance.

• Present business sustainability theories, standards, guidelines, and best practices.

• Examine corporate sustainability risks including: strategic, operation, financial, compliance, reputation, and cybersecurity risks.

• Address international status and best practices of sustainability performance, reporting, and assurance.

• Present research opportunities in corporate sustainability performance, reporting and assurance.

• Discuss the integration of sustainability education into the accounting and business curricula.

• Provide some suggestions regarding the future of business sustainability performance, reporting and assurance.

• Explore business sustainability performance, reporting and assurance in Asia.

• Address the issue of “where we go from here”.

Corporate Sustainability: Winner of

2013 Axiom Gold Award Corporate Sustainability explores business sustainability

and accountability reporting and their integration into

strategy, governance, risk assessment, performance

management, and the reporting process. Written by

renowned experts in the field of managing for sustainable

performance, this important book also highlights how

people, business, and resources collaborate in a

business sustainability model.

A significant contribution on how to put sustainability

principles to work, Corporate Sustainability offers real-life

tools and practices for creating an authentic corporate

framework for sustainability.

Joel Makowner writes, “Companies seeking to embrace

sustainability must navigate a thicket of policies and

standards, from ethical performance to environmental

protection to executive compensation – and do so

transparently, comprehensively, and globally. Ann

Brockett and Zabihollah Rezaee have created a valuable

field guide to this brave new world of multiple bottom

lines, providing guidance on how companies can

engender public trust and investor confidence while

pursuing their economic goals.”

Business Sustainability, Greenleaf, October

2015 Review by O.C. Ferrell:

Rezaee takes a more inclusive approach to sustainability

performance and reporting by recommending that businesses use

a multiple bottom line (MBL) approach rather than the more

basic triple-bottom line approach. An MBL approach examines

economic, governance, social, ethical, and environmental

performance of an organization’s activities to determine

sustainability. This approach expands the definition of

sustainability beyond environmental or economic indicators to

advocate for a holistic methodology that factors in the well-being

of the organization and its impact on stakeholders.

Review and Interview by Forbes:

The review and interview conclude that business sustainability is

about creating the right balance of short and long-term

continuous improvement of both financial economic

sustainability performance (ESP) and non-financial

environmental, social and governance (ESG) sustainability

performance. The interview can be found online at (Forbes)

Importance of Business Sustainability • Demanded by Investors: More than 1,300 institutional investors worldwide,

representing $59 trillion in assets under management, have signed on to the U.N. Principles of Responsible Investing, which seek to integrate sustainability concerns into investment objectives.

• Mandated by regulators worldwide: 6,000 European Companies will be required to disclose ESG and diversity, in 2017. Hong Kong listed companies are now require to disclose both ESP and ESG (2015 and onwards).

• Reported by companies: Now more than 12,000 global public companies disclose their Economic Sustainability Performance (ESP) and Environmental, Social and Governance (ESG) sustainability Performance.

• Business sustainability is advancing from greenwashing and branding to, very recently, business imperative with integration into business model and corporate culture.

Sustainability Framework • Definition: a process of achieving all five EGSEE dimensions of

sustainability performance in creating shared value for all stakeholders by generating revenue for shareholders and protecting interests of other stakeholders.

• Create shared value for all stakeholders

• The main goal and objective function is to maximize firm value

• Time horizons

• Multidimensional nature of sustainability performance in all EGSEE areas

• Tensions among EGSEE

Shared Value Creation

Organization/

Shared Value Government

Shareholders

Environment

Employees Suppliers

Customers

Society

Future Generation

Tensions Between ESP and ESG

Sustainability Performance

• ESP and ESG can complement/complete each other or

compete/conflict each other.

• Tensions can also exist among different dimensions of ESG

sustainability performance.

• The most severe tension (and thus potential conflict of interest)

is between the financial and non-financial dimensions of

sustainability performance.

• Consideration of non-financial ESG sustainability activities can

create both synergies and conflicts.

Components of S&P 500 Market Value

“What is important is often not measured and what is measured is often not important”

17%

32%

68% 80% 84%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1975 1985 1995 2005 2015*

Intangible Assets Tangible AssetsSource: Ocean Tomo, LLC

*January 1, 2015

Measuring Strategic Capital, Equity Capital, Intellectual

Capital, Reputational Capital, and Environmental Capital

Ways Of Promoting Business Sustainability • Integrate business sustainability into corporate culture,

business model, strategic planning, decisions and

actions.

• Mandatory corporate reporting on financial ESP and

non-financial ESG sustainability performance.

• Mandatory regulatory requirements or market

mechanisms.

• In recent years many countries (e.g., Australia, Austria,

Canada, Denmark, Malaysia, Hong Kong, and the U.K)

have adopted stand-alone sustainability/integrated

reports.

Sustainability Opportunities and Challenges • Build awareness of sustainability challenges and programs — both

within the company and among stakeholders, including investors.

• Identify and analyze material issues and create alignment within the

organization to ensure an integrated response.

• Invest in and focus on tangible and measurable sustainability

outcomes instead of positions on ratings lists.

• Formulate a strategy once tangible sustainability measures are

established.

• Incorporate the sustainability strategy into the overall corporate

strategy, including a clear business case or proof of value.

• Engage investors, and a broad range of stakeholders, to discuss

the company’s sustainability strategy and progress.

Best Practices of Sustainability

1. Long-term Sustainability Investment Strategies: Individual investors as well as institutional

investors should focus on long-term and sustainable investments rather than short-termism

market movements.

2. Sustainability tone at the top in engaging in sustainability initiatives:

• First, socially responsible investors place in proxy proposals a need for the election of at least

one director with sustainability interests and skills.

• Second, creation of a board sustainability committee consisting directors with adequate

sustainability expertise.

• Third, the entire board of directors is being required to engage in sustainability issues and

initiatives, being held accountable for achieving sustainability performance and to provide the

needed sustainability leadership.

3. Executive Commitments for Promoting EGSEE Sustainability Performance:

• First active oversight function of the board of directors demanding sustainability performance

from executives.

• Second, include a sustainability performance target clause in executive compensation contract.

• Third the labor market to reward sustainability executive leadership and punish managerial

short-termism.

4. Sustainability Investment initiatives and innovation.

5. Integration of sustainability performance reporting and assurance into corporate reporting.

• Some definitions focus on protecting the

“triple bottom line”.

Human impact… People

Environmental impact… Planet

Financial impact… Profit

• Sustainability means balancing these

interests for long-term success.

Definitions: Triple Bottom Line

14

Entity Performance

Performance

Goals

Governance

Roles and Responsibilities

of CG Participants

Economic

Value creation and

Enhancement for all

Stakeholders

Reports

Assurance

CG Report

Assurance Report

Audit Report

Financial Reports

Ethical

Ethical and Moral Values

Codes of Conduct

Assurance Report

Social

Social Issues regarding

Products and Services

Social Responsibility

Report

Assurance Report

Environmental

Environmental Audit Report

Environmental Management

and Report

Performance

Sustainability Promoting Organizations Several Organizations are currently promoting sustainability including:

The Global Reporting Initiative (GRI), 2013G4 sustainability guidelines,

promotes integrated reporting on the five EGSEE dimensions of sustainability

performance with the ethical dimension being incorporated into other

dimensions.

http://www.globalreporting.org/

The International Integrated Reporting Council (IIRC), in 2013 developed

the International Integrated Reporting Framework

http://www.theiirc.org/consultationdraft2013

Sustainability Accounting Standards Board (SASB) is currently developing

sustainability accounting standards intended to assist public companies in

disclosing material sustainability issues for the purpose of mandatory filings to

the SEC, such as the Form 10-K and 20-F through the first quarter of 2015.

http://materiality.sasb.org

Corporate Reporting Dialogue

http://corporatereportingdialogue.com/

Sustainability Education Rezaee, Z and S. Homayoun. 2014. Integrating Business

Sustainability Education into the Business Curriculum: A Survey of

Academics. Journal of the Academy of Business Education.

Spring 2014:11-28.

We examine both the supply and demand sides of sustainability

education by:

Presenting a content analysis of a sample of 45 business sustainability

courses offered by universities worldwide

Conducting a survey of 85 business faculty throughout the world regarding

the demand, importance, benefits, coverage, and delivery of sustainability

education.

Rezaee, 2016. Relevance of Business Sustainability Education for

Hospitality Management, Journal of Business & Hotel

Management. 3:1.2016, Survey of Students in US and HK.

Overall Results

• Sustainability Education (SE) continues to increase

• More universities are planning to provide SE

• Numerous SE topics are considered important

• Methods of integration

• A stand-alone course in SE

• Infusion of SE topics into business courses

• Curriculum Implications of SE

Sustainability Research More than 100 Published papers on Corporate Social Responsibility (CSR) and Social Sustainability:

• Effects on Financial Reporting

• Effects on Earnings quality

• Effects on Cost of capital

• Effects on Tax avoidance

• Effects on Stock Prices

• Effects on Financial Performance Two articles published in the Journal of Accounting Literature provide synthesis of research on CSR and Sustainability. Rezaee, Z. 2016. Business Sustainability Research: A Theoretical and Integrated Perspective, Journal of Accounting Literature, 36 (2016): 48-64

Huang, X. B., & Watson, L. (2015). Corporate social responsibility research in accounting. Journal of Accounting Literature, 34, 1- 16.

Synthesis (overview) of Sustainability Studies

Author(s) Data Source(s) Purpose Findings

Rezaee,

2016

Descriptive

Journal of Accounting Literature,

2016

Present a synthesis of research in

business sustainability in the past

decade

The goal of firm value creation can be

achieved when management create shared

value for all stakeholders

Hoi, Wu, Zhang, 2013

The Accounting Review, 2013,

KLD database, Compustat

Investigate the association between

corporate social responsibility

(CSR) and tax avoidance

Firms with excessive irresponsible CSR

activities are more aggressive in avoiding

taxes, suggesting that corporate culture affects

tax avoidance.

Davis, Guenther, Krull

and Williams

The Accounting Review, 2016,

KLD Database

Examine the association between

corporate tax payments and

corporate social responsibility

(CSR)

CSR is negatively associated with five-year

cash effective tax rates and positively linked to

tax lobbying expenditures, suggesting that Our

evidence suggests that, on average, CSR and

tax payments act as substitutes.

Khan, Serafeim and

Yoon

The Accounting Review, 2016,

KLD Database’

Sustainability Accounting

Standards

(SASB) Database

Develop a novel data set to measure

firm investments on material

sustainability issues by

hand-mapping recently-available

industry-specific guidance on

Sustainability materiality

Firms with good ratings on material

sustainability issues outperform firms with

poor ratings on these issues whereas firms

with good ratings on immaterial sustainability

issues do not outperform firms with poor

ratings on the same issues.

Author(s) Data Source(s) Purpose Findings

Hummel and

Schlick

Journal of Accounting and Public

Policy, 2016

KLD database, Bloomberg

Examine the relation between

sustainability performance and

sustainability disclosure using

voluntary disclosure and legitimacy

theories

consistent with voluntary disclosure theory

Superior sustainability performers choose high-quality

sustainability disclosure to signal their superior performance

in compliance with voluntary disclosure theory whereas poor

sustainability performers prefer low-quality sustainability

disclosure to disguise their true performance and to

simultaneously protect their legitimacy based on legitimacy

theory.

Huang and

Watson

Journal of Accounting Literature,

2015

Review research on corporate social

responsibility (CSR) published in 13

top accounting journals over the last

decade.

Present information on (1) determinants of CSR; (2) the

relation between CSR and financial performance; (3)

consequences of CSR; and (4) the roles of CSR disclosure

and assurance.

Jain, Jain and

Rezaee

Journal of Management

Accounting Research, 2016

KLD and Bloomberg Databases

Investigate whether short sellers take

into consideration CSR/ESG

sustainability performance in making

investment decisions

Find that firms’ market value and future financial

performance are lower, whereas operating risk,

is higher for firms with low composite ESG scores. Also find

a negative association between ESG scores and short selling,

indicating that short sellers avoid firms with high ESG scores

and tend to target firms with low ESG scores.

Ng and Rezaee Journal of Corporate Finance,

2015

KLD Database

Examine the association between

economic sustainability performance

and ESG sustainability performance

and cost of capital

Find that economic and ESG sustainability performance is

negatively associated with cost of equity and

Economic and ESG sustainability performance interactively

affect cost of equity.

Research Continued

Sustainability Theories

• Agency/Shareholder Theory: Create shareholder value, but

the interests of principals (owners) and their agents

(executives) are often not aligned.

• Stakeholder Theory: Create shareholder value while

protecting interests of all stakeholders, recognizing

maximization of sustainable performance and the long-term

value of the firm as the criterion for balancing interests of all

stakeholders.

• Legitimacy Theory: Accomplish social and environmental

sustainability performance; built on a socio-political view;

suggests that firms face social and political pressure to

preserve their legitimacy by fulfilling their social contract.

Others • Signaling/Disclosure Theory: Firms with superior sustainability

performance have more incentive to disclose their superior

performance and choose to signal their sustainability achievement by

issuing sustainability reports.

• Institutional Theory: Focuses on the role of normative influences in

decision-making processes that affect organizational structure and

views a firm as an institutional form of diverse individuals and groups

with unified interests, transaction governance, values, rules, and

practices that can become institutionalized.

• Stewardship Theory: Views management as steward of all

corporate assets (financial, social, environmental) in considering the

long-term interests of a variety of stakeholders rather than its own

self-serving and short-term opportunistic behavior under agency

theory.

Sustainability (ISO) Standards

• ISO 9,000: Provides a set of requirements for a quality

management system to improve quality of products and services.

• ISO 14,000: Addresses various aspects of environmental

management from the requirements for an environmental

management system (EMS) guideline to environmental

performance, reporting, and auditing.

• ISO 20,121: Entitled “Sustainability Events”; addresses resources,

society, and environment which can generate significant waste.

• ISO 26,000: Addresses the triple bottom line’s (TBL) key financial

and nonfinancial performance relevant to people, planet, and profit.

• ISO 31,000: These standards set out principles, frameworks, and

processes for risk assessment and management.

Risk Management

Sustainability/Integrated Reporting and Assurance

• Mandatory: In recent years many countries (e.g.,

Australia, Austria, Canada, Denmark, France,

Germany, Malaysia, Netherlands, Sweden, Hong

Kong, and the United Kingdom) have adopted stand-

alone sustainability/integrated reports.

• Voluntary: More than 8,000 companies worldwide

issue sustainability reports.

• Auditors also provide assurance on these reports.

The International Status of Business Sustainability

Sustainability Reports Sustainability Assurance

2012 2013 2014 Total (3 Yrs) 2012 2013 2014 Total (3 Yrs)

Country # % # % # % # % # % # % # % # %

North

America 558 15% 618 15% 628 14% 1804 14% 88 8% 106 9% 97 7% 291 8%

Europe 1435 37% 1482 36% 1716 37% 4633 37% 541 48% 559 45% 610 44% 1710 46%

Asia 882 23% 944 23% 1185 26% 3011 24% 235 21% 297 24% 405 29% 937 25%

Latin

America

and the

Caribbea

n 449 12% 571 14% 608 13% 1628 13% 140 12% 177 14% 173 12% 490 13%

Africa 350 9% 337 8% 333 7% 1020 8% 63 6% 45 4% 51 4% 159 4%

Oceania 161 4% 180 4% 170 4% 511 4% 65 6% 54 4% 50 4% 169 4%

Total 3835 100% 4132 100% 4640 100% 12607 100% 1132 100% 1238 100% 1386 100% 3756 100%

Assurance Standards in

Sustainability Reporting • PCAOB Auditing standards in the United States

• International Auditing and Assurance Standards (IAAS)

• The International Standard on Assurance Engagements

(ISAE) 3000

• ISAE 3400

• AA1000AS

• American Certified Public Accountants (AICPA) AT 101

• The Canadian Institute of Charted Accountants (CICA)

Handbook Section 5025

• ISO Standards

Sustainability Information Disclosure

• Annual reports to shareholders

• Management Discussion and Analysis (MD&A)

• A stand-alone voluntary reporting disclosing all five EGSEE

dimensions of sustainability performance

• Integration into business and market indices and/or credit

rating metrics

• Mandatory standardized and globally accepted

sustainability reports (Integrated Reporting)

SEC and Sustainability Disclosures

The SEC concept release on disclosure reform was released on

April 22, 2016, which includes 11 pages of discussion of

sustainability disclosure, and poses the following questions:

1. How sustainability disclosure fits within existing regulatory

requirements (Regulation S-K)?

2. What is the current cost of sustainability disclosure?

3. What are the challenges with line-item requirements?

4. How a market standard for sustainability disclosure can benefit

companies?

5. Should the focus be on ESG sustainability disclosures or just

environmental and climate change matters?

Hong Kong Exchange “Environmental, Social and

Governance Reporting Guidelines”

The “Environmental” subject area includes three

aspects: emissions (A1), use of resources (A2), and

the environment and natural resources (A3).

The “Social” subject area includes eight aspects:

employment (B1), health and safety (B2), development

and training (B3), labor standards (B4), supply chain

management (B5), product responsibility (B6), anti-

corruption (B7) and community investment (B8). Each

“aspect” contains both “comply or explain” items and

“recommended disclosure” items.

Business Sustainability in Asia

2011 Asian Sustainability Rating (ASR)

• 2011 Country Rank 2011 Average 2010 Rank* 2010 Average

• 1. South Korea 48% 1 48%

• 2. Thailand 43% 4 40%

• 3. Malaysia 39% 3 42%

• 4. India 38% 2 43%

• 5. Taiwan 36% 6 38%

• 6. Singapore 35% 5 39%

• 7. China 34% 10 27%

• 8. Indonesia 34% 7 38%

• 9. Hong Kong 32% 8 33%

• 10. Philippines 26% 9 29%

Best Practices of Sustainability

Performance Sustainability:

• Enables cost reduction and efficiency improvement

• Incentivizes organizations to focus on risk assessment

• Creates new competitive and revenue-generating opportunities

• Encourages innovation

• Promotes talented employee recruiting development and

retention

Best Practices of Sustainability

Reporting and Assurance

• Sustainability strategies

• Principles-based approach in integrating both financial and

non-financial sustainability information into their corporate

reporting

• Sustainability risk assessment

• Sustainability/integrated reports

• Sustainability assurance reports

Fundamentals of Sustainability

Accounting (FSA) Credential

• Sponsored by the SASB

• Part I: The Need for Sustainability Accounting Standards

• Part II: Understanding SASB Sustainability Accounting

Standards

• Part III: Using SASB Standards

• Candidate information for Level I and Level II, FSA@sasb.org

Emerging Trend in Sustainability

Reporting

Emerging trend in sustainability reporting are (E&Y, 2012):

1. A rise in sustainability reporting

2. An increase in the CFO's sustainability role

3. Employee as Stakeholder

4. GHG Reporting

5. Risk of Strategic Materials

6. Ratings and Rankings

7. Sustainability Assurance

Integrated/Sustainability Thinking

• Define sustainability shared value creation in your

organization

• Identify and assess the positive and negative impact of trends

shaping your organization’s five EGSEE.

• Identify non-financial metrics on non-financial dimensions of

sustainability performance (governance, social, ethical, and

environmental)

• Link non-financial sustainability performance metrics to the

sustainable financial success of the business.

Integrated/Sustainability Thinking

• An integrated financial and non-financial sustainability

performance is the key to the goal of achieving sustainable

value creation.

• Integrate strategy, objectives, performance, risk, and

incentives across financial and non-financial information

dimensions of sustainability activities.

• Use holistic and integrated internal and external reports in

effectively communicating your business sustainability

strategic decisions, actions and performance to both internal

and external users of sustainability reports.

Chief Sustainability Officer

• Effective achievement of all five EGSEE dimensions of

sustainability performance demands “tone at the top”

commitments to business sustainability strategies and actions.

• Commitment by the board of directors and top executives is

essential in effectively coordinating all sustainability strategies

and activities and successfully implementing sustainability

strategies.

• There is an urgent need for the establishment of the position of

chief sustainability officer (CSO) in C-suite executives of

business organizations.

Role of the CSO • Have profit-oriented mentality and practice. Seek profit from

increasingly difficult avenues of growth

• Be multi-disciplinary in both their own knowledge and that of

their staff.

• Find ways to reach out to new stakeholders or increase the

participation of and communication with existing ones.

• Demonstrate flexibility in new endeavors that seek to increase

the company’s future growth aspects.

• Communicate effectively to other officers and employees about

best practices in sustainability and enforce compliance with the

same.

• Learn to leverage company strengths, such as technology,

manpower, expertise, resources, and market positions.

Sustainability Integrated Approach

Questions?

Thank you for your attention!