• Public interest in corporate social responsibility is steadily increasing. Although financial statements are primarily intended for investors and their advisers, there is growing recognition that companies actually have a number of different stakeholders. These include customers, employees and the general public, all of whom are potentially interested in the way in which a company’s operations affect the natural environment and the wider community. These stakeholders can have a considerable effect on a company’s performance. As a result many companies now deliberately attempt to build a reputation for social and environmental responsibility. Therefore the disclosure of environmental and social information is essential.
• There is also growing recognition that corporate social responsibility is actually an important part of an entity’s overall performance. Responsible practice in areas such as reduction of damage to the environment and recruitment increases shareholder value. Companies that act responsibly and make social and environmental disclosures are perceived as better investments than those that do not.
• Another factor is growing interest by governments and professional bodies.
  Although there are no IFRSs that specifically require environmental and social reporting, it may be required by company legislation. There are now a number of awards for environmental and social reports and high quality disclosure in financial statements. These provide further encouragement to disclose information.

• There is often a considerable delay between the activity that causes an environmental issue such as the contamination of a site due to industrial activity and its identification by the entity or the regulators.
• Accounting estimates do not necessarily have an established historical pattern and can exhibit wide ranges of reasonableness because of the number and nature of assumptions underlying the determination of these estimates.
• Environmental laws and regulations are evolving and interpretation can be difficult or ambiguous. Consultation with an adviser may be necessary to assess their impact on the measurement of assets and liabilities.
• Liabilities can arise other than as a result of legal or contractual obligations, for example, a voluntary commitment.
  

• In cases where there are material environmental impacts, they will normally expect to see a statement of corporate commitment, policies and strategy, showing the importance attached to such issues. There could well be a competitive advantage to be gained from being seen as a leader in responsible environmental practices. The statement would usually deal with the overall control over such issues, whether through a committee of the board or a senior manager with practical experience of environmental issues in a corporate context.
• Most users, particularly investors and lenders, will also be concerned to know whether there are any material financial impacts, actual or potential, arising from environmental issues. Where this is the case, discussion of environmental risks and
  uncertainties in the annual report, together with the related action taken, may therefore be appropriate as well as information about environmental performance. Depending on the nature of the entity, there could be a call for information about
  matters such as site remediation, disposal of waste, resource recycling or supply chain performance. In identifying the environmental matters likely to be of particular concern to report users, some form of stakeholder engagement is beneficial.
• Many fund managers have a department dealing with SRI. In reviewing a company’s annual report, the environmental matters attracting attention will tend to vary according to its nature, size and geographical location but, where environmental
  matters are significant, will generally fall within the following main areas:
  ** Commitments, policies and strategies.
  ** Environmental management/EMS and ISO 14001 certification.
  ** Principal environmental impacts.
  ** Environmental performance – absolute and relative.
  ** Fines, penalties or awards.
• In appropriate cases, it is often helpful to users if reference is made to compliance with voluntary codes, such as EMAS or The Natural Step, or certification of the EMS to a particular standard, such as ISO 14001 or Project Acorn. This would normally help to demonstrate the adoption of desirable environmental policies.            (Any 3 points)
  

• Financial accounting focuses on information needs of suppliers of capital and those making resource allocation decisions. (IASB – under the conceptual framework documents have decided who the key users are?).
• Problem of measurability – reasonable accuracy is not possible for many social and environmental impacts and so they are not recognised.
• Accountability is narrowly defined and corporate organisations are seen as being accountable to shareholders.
• Focus on single economic bottom line (i.e. financials)
• Ignores social and environmental externalities (e.g. BP deep water horizon spillage)
• Materiality used to make decisions as to whether to include items in financial statements
• Discounting of future liabilities for inclusion in financial statements or impairment testing does not make sense in the context of providing for environmental and social impacts.
• Entity assumption – of transaction does not impact the entity it is ignored for accounting purposes
• Recognition of assets depends on “control” hence environmental resources such as sir and water cannot be considered assets.

• Reporting on what is known as the Triple Bottom Line (i.e. economic, social and environmental). Problem with this is measuring social impacts – would any organisation seriously report that they are “unsustainable” in terms of their impacts on society and environment.
• Many of the top companies are now producing separate Sustainability Reports in addition to their annual financial statements. Should such reporting be mandatory?
• Global Reporting Initiative (GRI) guidelines – set out the key indicators organisations should report on. The Global Reporting Initiative is an international, multi-stakeholder effort to create a common framework for voluntary reporting of the economic, environmental, and social impact of organization-level activity. Its mission is to improve the comparability and credibility of sustainability reporting worldwide.

Social and environmental reporting is the measurement and reporting of information concerning the impact of a business and its activities on society. It is the disclosure of information in the published annual report or in separate report, of the effect that the operations of the business have on the natural environment. In other words, it is the collation and communication of data – financial, quantitative and/or qualitative – about an organisation’s interactions with society.

The backbone of social reporting is the explicit recognition that every organisation has a wide range of stakeholders – those who are influenced by and/or, in turn, influence the organisation. In addition to shareholders and other financial participants, the most important of the other stakeholders are usually taken to be the employees, the local community (ies), customers, suppliers, the environment and government(s).

From society’s point of view, each of these stakeholders have rights to, amongst other things, information about the activities of the organisation – whether or not the organisation chooses to recognise those rights. From the organisation’s point of view, it has a range of stakeholders that it must manage and whose interests it must balance if it is to remain a successful enterprise.