Corporate accountability, CSR, ESG and sustainability — student companion

Accounting Ahead | Original study resource | accountingahead.com.au

Corporate accountability: key ideas

MODULE 5 | PART A.1 | STUDENT COMPANION

Our idea of who a company answers to has widened in three stages. Each stage added a new kind of capital

that the company is expected to account for.

1. Shareholder responsibility

Accountable to shareholders and

lenders for the financial capital they

provide

Underpins corporate governance and

agency theory

2. Corporate social

responsibility

An implied social licence:

accountable for the environmental

and human capital it uses too

A return is owed to the owners of

those capitals

3. Corporate sustainability

Economic, environmental and human

capital depend on each other

ESG builds environmental and social

risks and opportunities into company

values

Each view widens who the company answers to. Today, corporate accountability includes sustainability.

Four terms you must not mix up

Term What it means Scope Little Fern Coffee

(imagined)

Sustainability Keeping environmental, social and

economic outcomes in balance over

time, so none is traded away

Any level: people,

companies,

governments

A world where coffee

farms, communities and

the climate can all keep

going

Sustainable

development

Meeting present needs without

compromising future generations'

ability to meet theirs

A global goal; shaped

by the UN's 17 SDGs

Not borrowing from future

generations to grow today

Corporate social

responsibility (CSR)

A commitment grounded in values:

responsibility for how decisions affect

society and the environment, shown

through open, ethical behaviour

The organisation Fair-trade beans, reusable

cups, pay above the

award

ESG The metrics used to measure

environmental, social and

governance performance, mainly for

investors

The organisation, as

scored by analysts

and raters

Emissions in tonnes, staff

turnover, independent

directors

The one-line test: CSR is an organisation's commitment, grounded in its values. ESG is the set of

measurements used to track that commitment, mostly for investors. Writers often use the terms

interchangeably, so check the context.

ETHICS & GOVERNANCE | M5 PART A.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Pillars, goals and ratings

MODULE 5 | PART A.1 | CONCEPTS AND A CASE NOTE

Three pillars, seventeen goals

Sustainability thinking is usually organised around three pillars: planet (environment), people (society) and

profit (economy). In 2015 the United Nations adopted 17 Sustainable Development Goals, such as ending

poverty, clean water, decent work and climate action. Together with the definition of sustainable development,

they have shaped how sustainability reporting developed.

CSR is one way a company moves towards sustainability. It formalises the company's commitment and is the

foundation for its wider sustainability efforts. It links to stakeholder theory: a business must manage the needs of

many groups, not only investors, to stay viable in the long term.

Case note: an ESG rating is not a green label

In May 2022, at its annual rebalance, S&P Dow Jones Indices removed the electric car maker Tesla from the

S&P 500 ESG Index, while the oil company ExxonMobil remained in it. Tesla's chief executive, Elon Musk,

called ESG a scam.

S&P explained that Tesla's ESG score had fallen into the bottom quarter of its global industry group, as its peers

improved. It cited Tesla's low-carbon strategy and business conduct codes, and controversies, including claims

of racial discrimination and poor working conditions at its Fremont factory, and its handling of a US vehicle safety

investigation.

The lesson: an ESG score measures how well a company manages a wide range of environmental, social and

governance risks compared with its industry peers. It is not a verdict on whether its products are good for the

planet.

Sources: S&P Dow Jones Indices blog on the S&P 500 ESG Index rebalance (17 May 2022); ESG Today, 19 May 2022. Little Fern

Coffee is an imagined business.

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Accounting Ahead | Original study resource | accountingahead.com.au

Practice questions

MODULE 5 | PART A.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Name the term

Label each statement as sustainability, sustainable development, CSR or ESG.

Statement Your label

(a) "Our aim is a world where farming, communities and nature all thrive, with none

traded off against the others."

(b) "Growth today must not leave our grandchildren less able to meet their own needs."

(c) "We pledge to buy only fair-trade beans and to pay every team member above the

award."

(d) "Scope 1 and 2 emissions fell 12% to 3,400 tonnes, and 40% of our directors are

independent."

(e) "A ratings agency scores the company AA for managing environmental, social and

governance risk relative to its peers."

(f) "The board has written its responsibility to the local community and environment into

our values and strategy."

Question 2 - Green product, weaker rating

Explain, in your own words, how a company in a polluting industry could receive a better ESG rating than a

company whose main product helps the environment. What does this tell you about the difference between ESG

and sustainability?

Statements in Question 1 are original teaching examples.

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 5 | PART A.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Name the term

Statement Answer Why

(a) Sustainability Balance across environmental, social and economic outcomes, none

sacrificed

(b) Sustainable development The future-generations test from the classic definition

(c) CSR A values-based commitment by the organisation

(d) ESG Measured indicators: emissions and board independence

(e) ESG A rating of how risks are managed relative to peers, for investors

(f) CSR Responsibility for impacts built into the organisation and its strategy

Question 2 - Green product, weaker rating

An ESG rating compares how well a company manages a wide range of environmental, social and governance

risks against companies in the same industry. A company in a polluting industry can still be the best manager of

risk among its peers, while a company with a green product can score poorly because of weak governance,

workplace problems, controversies or poor disclosure. The Tesla and ExxonMobil index decision in May 2022

shows this.

So ESG is a set of investor-focused measurements, not a verdict on whether a business is sustainable overall.

Sustainability asks whether the economic, social and environmental outcomes stay in balance over time.

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