Joseph Ragan, professor of accounting and Edward G. Sutula chair in accounting at Saint Joseph’s University Erivan K. Haub School of Business, joins us to talk sustainability reporting and environmental, social, and governance measures. Specifically, he details why businesses are looking at these issues more closely, the specific role CPAs have to play in conservation efforts, and what colleges and universities need to do to prepare students for these changes in the business world.
By Bill Hayes, Pennsylvania CPA Journal Managing Editor
With the importance of sustainability and environmental, social, and governance measures continuing to grow in society in general, the accounting profession is no exception. That means that learning on these issues needs to begin in the classroom. Today, Joseph Ragan, professor of accounting and Edward G. Sutula chair in accounting at St. Joseph's University's Erivan K. Haub School of Business, joins us to discuss the importance of sustainability reporting to the accounting profession, as well as what St. Joseph's University is doing to provide students with a solid background in environmental, social, and governance knowledge. Can you tell us a bit about sustainability reporting and why it's so important to businesses and society in general?[Ragan]
Well, the dramatic image in my brain of this is recently I attended a conference in California, and en route to Las Vegas by helicopter, I traveled over Lake Mead, and to watch the lowering of that sea bed. You can actually pick the levels how far that has gone down. There's a real crisis in America. Sustainability reporting is important to showcase an organization's environmental and performance levels with regard to how it responds to these kinds of crises. It's going to be a very interesting role in the future as this gets even more important down the road. It'll enable organizations to consider their impacts on a wide range of sustainability issues, not just environmental, but also more importantly even, social, issues of diversity, quality of life in businesses, and certainly even the economic impacts that derive themselves from those things. I think that's why it's a critical issue for accountants. It’s important to keep businesses accountable for their impacts on every aspect of the business life, not just revenue, but also the cost to the environment, the way it uses our climate, and how we will sustain that climate over time.
It's not just a political issue. It really becomes a significant economic issue. So significant, may I point out, that back in 2011, I think it was about 15% of firms provided some sort of sustainability report. In 2019, it was 85% provided such a sustainability report without the requirement to do so by the SEC. The SEC has recently announced that, in 2023, they will in fact be requiring that as a part of an annual report, you have a separate sustainability report, and therein lies the rub. How do you measure sustainability? How do you measure impact on environment, erosion of climate, if you will? How do you measure impact of a social environment inside a business? How do you measure employee education and engagement in the business? These are a lot of important things that have qualitative considerations that are oftentimes difficult to measure quantitatively.
Again, a majority of publicly traded Fortune 500 corporations now produce some type of what they call a CSR, corporate social responsibility, report. In this report, they obviously will be stressing what they're doing to try to deal with the environmental, climate, and social impacts on economic reality and the business. But these are often punitive statements. They're not things that are heavily measured. I think also a very important question here from a sustainability point of view is, can they be verified? You have a whole implication that will involve our auditors in figuring out not only how do you measure it, but how do you verify the measurements you provide? Sustainability reporting is a significant issue that will have a broad range of impact to government, to consumer, to public interest, to shareholders, and investors alike. It's a very interesting issue that will grow and evolve over time. I think it's very critical to get that into the classroom as soon as possible.You explored it to a degree there, and maybe we can delve into it even more: Why do CPAs in particular have to be aware of the importance of sustainability and environmental, social, and governance measures? Why is it so important to them?[Ragan]
It's important because of the, I think, critical impact on corporate reality. A good example: 140 ships are moored off of the coast of Los Angeles, Long Beach, ready to try to offload their goods. I understand by the end of the week, it could be as many as 200 ships. It takes about a day to offload one ship. So that's a 200-day bottleneck for the distribution of product. This is a sustainability issue because if your supply chain isn't working because you have economic dislocation, you have environmental impacts. Imagine the impact of the proceedings of supply chain when it comes to the people. One of the big issues when they offload these ships is going to come down to, can they actually move the goods from the shipping point, from the shop on the dock yard? They don't have truckers and they don't have people to move those particular items. These issues have to be explored and investigated.
Years ago, we in accounting always considered everything recordable in the financial statement under the guise “all-inclusive.” Our income statement was an all-inclusive impact on revenues and expenses. And if it wasn't in the income statement, we had something in the stockholder equity section called “other continuing items of income” or “other items of interest” that would impact the financials there. Of course, footnote disclosures always did the same thing. I think it’s increasingly important to realize that we have to have sustainability in that category also. It's not just enough to consider the impact on the revenue or the traditional lines of reporting. You've got to really have a separate statement that talks about the impact of these things that are happening today, be it global warming, be it supply chain disruptions, like with the ships off the coast of California. These are things that really have to be talked about because in a way we have to try to find ways to prevent them.
Accounting, to me, is not old and cold. It's looking at the future in the dynamic world we live in. What are we going to do to make things so they don't happen in this way? We've got to be pro forma oriented, oriented to make the changes needed. So, sustainability reports will serve as a major assessment of economic, environmental, and social impact on an organization's operations, products, and services to maintain that we have to secure or ensure that we have contribution to sustainable development. It's not just a past measure of what has gone right or wrong, but also more a projection of where we want to go and how we're going to get there.What sorts of regulations are currently underway to establish and maintain comprehensive sustainability accounting standards? What's in place currently? Do you think those standards will be strengthened as a result of how these issues are evolving?[Ragan]
This is an ongoing area of evolution. I will tell you that, back about 10 years ago, I was very impressed when the Global Reporting Initiative came out, called GRI, providing very detailed guidelines on integrated reporting with regard to environmental, social, and governance issues, what we call ESG. These people wrote very dynamic opinions on the impact on sustainability. They basically said reporting should be balanced, comparative, accurate, timely, and reliable. Of course, they addressed what these impacts would be. They would be mainly environmental, so looking at energy, water, issues of supply chain, which I talked about earlier, waste reduction, recycling issues. When you look at social, you look at community investments, employment practices, education, and engagement of employees on the job, health and nutrition, and, of course, most importantly, diversity and human rights. All of these issues have become ... everything they saw 10 years ago has become a reality from the political and economic forces within the United States.
From there, we go to 10 years ago to the more recent activities that have happened. The International Accounting Standards people have developed something called IR. And IR, information reporting it might be called, seeks to provide value to corporations in considering all the various factors. They have long been leaders in social causes, social cost issues, social cost reporting they sometimes call it. Their focus is always strategic. What are we doing to retain our environment and to manage it in a way that will provide consistent growth to businesses, at the same time without causing unnecessary disruption to the world we live in?
Finally, the one that has come out recently that I'm a big fan of, evolving in the last four or five years, has been something called SASB, the Sustainability Accounting Standards Board. Hard to believe that in addition to FASB and GASB, we now have SASB. Their mission is to develop and disseminate sustainability accounting standards that help public corporations disclose material decision-making information to investors regarding the environment, what things about the business provide for sustainability. Through their good work and a number of measures that they provide, one of the big issues here is how do you measure the impact on the environment? How do you measure social cost in a business environment? How do you measure improvement toward diversity in a business? The measurements are not always there. Many corporations that … some great examples. Coca-Cola provides incredible detail in their annual report on how they manage the flow of water, which is a critical component in making Coca-Cola carbonation. They really have a great report that explains their measurements and it can be detailed. It can be very quantitative and very interesting to read.
Econyl is a used by BMW in their automobiles. For them to be able to manufacture cars, they have to have a carpet on the base floor of the car. Well, that carpet is not ... it would be expensive and, frankly, environmentally difficult sometimes to actually make individual carpet fibers. So, what they do is they take old fishing nets and they break down the material, molecular components of those fishing nets, and build it into a carpet fiber. A great example of reusable materials being redesignated or redeveloped for other products. Econyl is a very popular byproduct, and they're proud when they announce it in their annual report. Again, the evolution today, I think, has been more and more awareness of where we are in the environment, and clearly a critical feel, a critical sense, that we have to provide reporting characteristics regarding that awareness.
That framework has been well established, again, by the GRI, the Global Reporting Initiative, and now followed up, and I think very nicely handled, by the SASB folks. In fact, the SEC has announced by 2023, there will be a requirement that in addition to the annual report 10K, they will require a separate report on sustainability, in conjunction and very much in compliance with the rules of SASB as they are written.What sort of information do accounting students need to learn about sustainability reporting? Are colleges and universities currently prepared to teach about it?
Well, colleges and universities are prepared to teach about it. The first question is, is it just an accounting issue? I think not. I think increasingly universities are aware that the students are going into a world that's going to have a lot of questions. Will our students be able to adapt? The greatest skill we can teach a student graduating may not just be a specific skill for performance on a job, a tool or technique on the job, but it might be the awareness that the world is changing, and we have to be at the vanguard of that change. We have to understand why the change is happening and what do we do about it. Increasingly, I think that many courses, I'm thinking right now about a good strategic management course, are going to talk about the strategy of how you manage a depleted resource in the environment, how you handle people, organizational behavior, how you handle people in a business environment, how you maximize their return by minimizing the social cost that you take from them.
Balance of life is very critical to the young people that I teach today. So, management, certainly marketing, the consideration of consumer research. More and more, I find when you look at products being sold and promoted, you realize that they're very heavy when they promote, this is a product that does not overutilize materials. It's packaged efficiently. Recycled materials in the packaging. The product itself is engineered in such a way as to use a minimal amount of resources. Even marketing, I should say, has taken a great interest in this, and makes it a part of the selling point of many of their products.
Now when you get to accounting, it gets much more interesting because we accountants have a responsibility to be at the vanguard of transparent reporting. You can't just show an income statement with a very strong, positive income figure, if in fact there's some costs that are being utilized by the firm, being engaged by the firm, that are not being fully measured as a part of that income statement. What we have here is a situation where we have to find a way to get costs explained as a part of the framework of reporting. Although it’s hard to do so because those measurables, it's hard to quantify and measure the depletion of resources. It's hard to quantify and measure pollution. It's hard to quantify and measure situations involving energy and the use of fuel oil. It's hard to quantify and measure disruption in supply chains and what impact that has on the company. In fact, there's attempts being made to do so. I see the role of accounting as coming up with, if I can use the word, adaptive ways to measure those impacts.
It's going to be a very interesting process because many courses today are very much triggered around the basics of accounting. We learn debits and credits. We learn the framework of reporting. We learn what is meant by a measurement of inventory. Increasingly now, we have other line-items that are going to be added to the course. We teach in St. Joe's a course called Financial Accounting Information Systems, which sometimes might be called advanced accounting. It's really a topics course. It covers a lot of great topics. But one of the topics we have recently incorporated, for at least maybe one-fifth of the course, is impacts of financial disclosure and consideration of what goes into disclosure regarding environmental sustainability governance issues.I guess we've discussed a few as we've gone here, but are there any other additional outside factors that are making sustainability reporting, or ESG, more important? Where do you see the growth of this area heading over the next five to 10 years?[Ragan]
I believe that the growth of the area of ESG is going to largely depend on what businesses are going to do. They are responding to it, and we know that the profession is responding to it, in a big-time way. They're looking at ways to build, again, additional reporting requirements. They're providing guidelines on how to measure the impact on the environment of these particular kinds of issues. We are seeing a real attempt to address these issues. One might argue that we have to broaden our concept though sometimes. A good example is the profession did a very good job years ago of the Foreign Corrupt Practices Act, which was an attempt to provide required disclosures on anticorruption and bribery and issues of what we call sensitive business issues that might not normally find a way into the financial statements, but should be brought to the attention of financial users to provide transparent reporting.
I believe that very likely ESG will go the same way. It may be that we just don't have real measurements, but we know that there's a problem and we also know that it has to be addressed. There'll be an attempt through footnote disclosure and certainly what they call specialized reporting to provide interesting insight to the world on what different companies are doing and how they're managing it. That leads us to the G word. In ESG, G means governance. The importance of a business is that it be properly governed. It's not just the bottom line that should be the focus of that governing process. It really is the environment. It's the way in which a business operates. Is it a good social citizen? Is there real accountability and transparency when it comes to their involvement as a participant and user of resources in the world?
I think, again, it ties into that strategic direction. What is a firm providing beyond merely the bottom number, the bottom line? Is it just providing information and value to its investors, or is it providing information and value to the world, to make ourselves world-oriented?
St. Joe's University has had a policy of maintaining a very strong orientation to that, that we want our students to know that they're not just individuals in a business, but rather they have to think big in the sense of we're world citizens and we have an obligation to provide world reporting. The university has recently developed with Johnson & Johnson something known as an SDD. The United Nations has 17 sustainability goals that they developed, and we have built an SDD, a sustainability digital dashboard, that will measure the impact on the environment and on social systems of each of these businesses, provided by those footnote disclosures that they give us. Although it started small, it has grown very beautifully, and we have a beautiful analytic product that we've developed here that's a dashboard that provides insight into what these companies are doing when it comes to environmental sustainability.You talked a little bit there about what St. Joe's is doing in this area. Are there particular steps you're taking in your own classroom at St. Joe's to teach about these topics, ESG especially, and what is the school's commitment to ensuring sustainability-related education meets those needs?[Ragan]
In a very real way, we are all citizens of the world and we are very global in our mindset. So, we are going to be doing a lot of stuff in various classrooms to talk about the impact on the environment and on social systems of decisions made by businesses. In the accounting program here, we are focused very heavily on developing awareness. The first thing starts with understanding and awareness. We've had speakers come in. I think the first thing is you build a speaker program in the courses to try to give a sense on what businesses are doing.
We've been able to bring in, for example, pharmaceutical firms. We're uniquely positioned here in Philadelphia to be within 50 to 60 miles of 17 of the 19 major pharmaceutical firms. We have a pharmaceutical marketing program here. These nice people come in and they provide a lot of insight on what's happening as you develop new drug products, the social process of testing those products to make sure they're safe. That is an impact that is considered under ESG. Certainly, how the environment's being used when these products are being developed, when they're being manufactured, what kind of packaging is being used, what type of raw materials go into the product, and how is that raw material found, how are they tested, and how are they made to prove themselves safe for the environment? We have a chance with speakers to do a lot of that.
Also, of course, there's a tremendous range of good cases that are out there now on ESG. So, we built them into our courses, certainly into the financial systems course that I currently teach. A big part of any course is how you provide the reporting. The magic word in education today is analytic reporting. Students are visual. We're all getting visual. When it comes to ESG, it's very easy to produce visuals. As long as you have some measures, you're able to produce some great dashboards or analytic reports that talk about measurements consistent over time, comparative to other companies in the same industry, and provide some sense of the depth of the growing field that is developing here.
Another area of a great interest is how you really verify the information. There's the auditing course that comes in. Increasingly there, it's a challenge, but we like challenges in the classroom because it forces the students to think. They're going to enter a world that's different than the world that we live in, and they're going to have to adapt many, many times to that world. As auditors, how do they really find new ways to measure these impacts and then report them? What's the valid reporting method? I've heard many accountants believe that there's going to be additional line items to the income statement that basically will do what they've done in your pre years, which is to create a social costing income statement. Right below income, you're going to have all the impact on the environment, on society, of the decisions that that businesses have made, if those things are measurable.
Again, how we develop the measurable, it's easy to talk qualitatively. We can do that in a footnote. We can do that in a special report, but we have to find ways of measuring the impact and then verifying that those measurements are correct. That's, I think, the real impact of accounting, certainly in this area we're exploring and building into our courses here at St. Joe's University