Sustainability Concepts: Contrasts and Impact

Introduction

This paper is going to look into the manner in which the concepts of social and environmental sustainability contrast the going concern idea under financial sustainability. An evaluation of the implications the variations of the concepts will have on business operations and the manner in which they report their activities will then be looked into. Possible solutions to the reconciliation of these differences will be sought after and any possibilities of red flags to this process highlighted. The focus will then be turned to the consequences for the future of businesses if the divergent views are reconciled and also if they are not reconciled.

Differences between Social and Environmental Sustainability and Financial Sustainability

Sustainability is a methodology in business that looks into the framing of the environmental, social and financial effects of a business entity in a manner that the business entity (Appendix 1.0.) achieves developmental results first and then provides a much-needed contribution to the sustainable development of the economy and society (Crowther and Lausen, 2016).

The above figure shows how massive the evolution of financial sustainability has been. Going concern concept is an intricate primary hypothesis in the field of accounting that requires a business entity to have the ability to be in business for a prolonged period of time so as for it to achieve among others its objectives, obligations, and commitments (Appendix 2.0.). From the above definition, we can be able to get a clear picture of the difference in that, social and environmental sustainability denotes the resolve of a business entity`s social and environmental processes and systems that have been put in place (Ramiah and Gregoriou, 2016). Social and environmental sustainability draws its arguments from theories such as, the social contract theory that states that there are contracts that are implied and obvious that exist in the society between institutions, individuals and organizations. Contracts that changed over time to enable exchanges between the parties in an environment of synchronization and trust. Organizations get in to the contracts to get resources, goods and the approval of society of society to be in business due to good behavior. The other theory is social justice in which there is an argument that for a society to be just then the needs of all members need to be put under consideration and not only those who have wealth and power (Bergsteiner, 2012). On the other hand financial sustainability comes out as the resolve of the economic systems and processes that a business puts in place in regards to how they are used in the business environment to ensure that the business will survive the test of time in terms of finances (Appendix 2.0.). Emphasis are laid on the cost side of things more than the social and environmental responsibilities a business is supposed to undertake under this model. The financial sustainability proponents stick with the old traditional school of thought theory that the core mandate of a business is to make money and it should build its activities and functionalities towards realizing this (Bergsteiner, 2012).

Implications on Operations and Reporting

Critics of social and environmental sustainability put forward an argument that focusing on these two generally hurts the profits and growth of a business. But still, many businesses have slowly and surely been open to the two as a way of bettering their statuses and as a form of investment. There is an incompatibility between financial sustainability and social and environmental sustainability as critics argue, they generally drive the cost of doing business up and hurt businesses chances of making a profit (Cordonier-Segger, Gehring, and Newcombe, 2011). Those who support social and environmental sustainability argue that the two are well-matched and even symbiotic with financial sustainability. Numerous empirical studies have proven that most firms currently devote up to two percent of the revenue they generate to environmental and social issues. This makes the issue more and more essential for businesses to come up with policies that incorporate all the three pillars well. What is clear about this is that both sides of the divide have positive and negative implications but focusing on financial sustainability only in the present world has severe implications as compared to social and environmental sustainability (Boubaker, Cumming, and Nguyen, 2018). The risk in focusing on social and environmental sustainability is when organizations fail to include the impact on their reputation, cost of products, markets and cycle times. The positives emerge when the organization manages to be ahead of its competitors in making their achievements public and in sustainability. On the flip side if an organization puts its financial sustainability on the forefront, there is a chance of faster economic growth and a guaranteed existence in the future to meet its costs and expenditures. The risk comes in when there is backlash from the government and clients for lack of engaging in social and environmental sustainability thus putting its future at stake. The policies in financial sustainability are made to maximize profits and any involvement in social and environmental sustainability will be indulged in if there are extra funds to be spent (Appendix 2.0.). Meanwhile, social and environmental sustainability policies focus on the responsibility of a business to its social and environmental duties to propel it forward financially (Boubaker, Cumming, and Nguyen, 2018).

Sustainability reporting is a means in which a business, company or organization publishes a report on how its day to day activities affected it economically, socially and environmentally. It goes ahead to include the model of governance and values and highlights how a business’s strategy is aligned to its commitment to a global economy that is sustainable. It helps a business in evaluating, measuring and communicating their performance socially, environmentally and economically (Cordonier-Segger, Gehring, and Newcombe, 2011). As seen in the diagram below there is an attempt to depict the impact that sustainability has on reporting in businesses.

Reporting in the case of financial sustainability is largely restricted to results economically, and there generally is little or more to show socially and environmentally. Businesses finances are reported to the public in a more complex manner with priority given to stakeholders. They are keen to fulfill their interests and keep them on the loop about what is generally happening in the business especially with their investment and put less emphasis on the consumers. Currently, there is an overwhelming need and importance of focusing on reporting on social and environmental undertakings and efforts. This, in turn, includes highlighting the efforts made to come up with products that are sustainable by corporate world giants. This is viewed as a chance to brand recognition better and improve reputation. Publications on finances include the amount of money dedicated to social and environmental responsibility and are highlighted in a clear and understandable manner to the general public (Boubaker, Cumming, and Nguyen, 2018). The Volkswagen and Siemens report for the year 2010 are perfect examples of the lengths through which companies go to in terms of social and environmental sustainability reporting. They highlight their successes in the various undertaking they were involved in depicting their will and commitment to their social and environmental responsibility. The documentation does act as a great platform for marketing their products (Cordonier-Segger, Gehring, and Newcombe, 2011).

How the Differences Can Be Reconciled and the Major Obstacles

Businesses in the past have been focusing on either a financial sustainability approach or social and environmental sustainability approach with one or the other claiming how difficult and detrimental it can be if the two are reconciled. But as theorists and reality has proven over the years and the future the two can be reconciled and work perfectly well together complementing each other and propelling the business forward. Shareholder value has for a long time been the basis of performance measurement of choice in the financial community. However, it is possible to merge it with social and environmental sustainability. The integration can be done through cost savings, revenue enhancement, and risk reduction. Profits can be hugely maximized by reducing expenses; a perfect example is when a business uses inputs of production that are less costly but socially responsible. For numerous businesses, their target financially is to raise revenue and as it is with a deduction in cost the link between revenue and social and environmental sustainability can be direct or indirect. When clients pay a premium for the environmental or social traits of a product of a business that is considered direct. The link to revenue becomes indirect when a business seeks social and environmental responsibility to get a hold of a new clientele base. There is more value gotten out of the direct connection. Lastly on risk reduction, when a company`s cash flow reduces there should be a subsequent reduction in its financing and cost. This can be done through high taxes and regulations the money then in turn can be used to reduce the effects of the products created by businesses on the environment and society an example is when there was a high tax imposed on drinks with high calories content like Pepsi and Coca-Cola and the money was directed towards patients who are diabetic. (Alijani and Karyotis, 2017).

Another way in which the reconciliation can be done is through setting up special teams that will be able to look into the implications of all the three pillars of sustainability and develop a model framework that will be able to encompass all the three into the policy and long term future of the business. For this incident harmonized politics that will take into account all the dimensions necessary when coming up with the policy is very crucial pre condition.

Despite the efforts that several businesses have put in place towards the reconciliation of the differences, it cannot be ignored that a large number of businesses have not made an effort towards the same due to the obstacles that exist. Internal decisions on the allocation of capital do not encompass efforts to improving social and environmental sustainability. This is largely due to the lack of processes internally by many businesses that can accurately evaluate the gains from managing social and environmental sustainability (Alijani and Karyotis, 2017). There is also the dilemma of the financial decisions and environmental and social decisions not being at per. This means that the teams tasked with spearheading the two divergent issues do not effectively and regularly consult each other. This means there is little impact on the design of projects and financial decisions. The other obstacle is the lack of proper means to factor in the costs of social and environmental sustainability. This makes it difficult for companies to factor in such costs due to uncertainties. An example is pricing climate change risk to society. Lastly, the other two are not usually part of the long-term business strategy like financial sustainability usually is. When factoring in issues for the long life of the business a lot of attention is paid to financial matters that act as the driving force of businesses, due to this great opportunity that can be used to better the financial delivery by improving social and environmental products and processes are missed (Escobar and Miras-Rodriguez, 2018).

Reconciliation and Non-Reconciliation Impact

If the idea of reconciling these two different school of thoughts (Appendix 1.0.) was not as a result of operating businesses in a sustainable manner in all the three fronts then this discussion would not even be existing, businesses would not even be considering this as an option (Tolba, 2014). There are a number of issues that point out to the success of merging the two. There will be fewer or almost no risks to the operation of businesses. The figure below illustrates the possibility of reconciling the three sustainability issues in addition with culture and what the possible outcomes can be

The businesses that take action now with the continuous growth of the importance of social and environmental sustainability will have a huge difference with competitors (UNITED NATIONS, 2013). There is a great opportunity for an expenses reduction in the future. An example is when a business is made energy efficient it will significantly reduce costs linked to energy. A competitive edge can be gained due to investors and clients attraction. More and more consumers will be exposed to information and will know which businesses are acting responsibly. The positive news is that this move does not hurt a businesses’ chance of making a profit (Browning, 2012). Merging the two thoughts impacts positively on the public image and consumer conscience. Consumers will be able to place products into the ones that are the most ethical option, and this will impact their buying behavior. When consumers use a product or service that resonates with their values they get a sense of satisfaction that they have done a positive thing. Merging these two school of thoughts will paint business as socially responsible, market leaders and innovators. Business differentiation will be achieved. Without special characteristics that can be able to differentiate your business from the rest, there will always be direct competition. In the future after merging the two school of thoughts, it will set businesses apart from competitors (Kerste, 2011).

In terms of reporting there will be a need for an integrated reporting system. This will require businesses to look into social and natural capital (McIntyre, Ivanaj, and Uvanaj, 2009). This will be done to explain better the impact that society has on a business. The balance sheets of businesses are more inclusive in order to paint a clear picture of how business rely on non-financial resources even those that they do not and have no possibility to own. An example is the supply chain of business being dependent on goodwill and trust that is hidden and as well on the physical and monetary assets that it has (Browning, 2012). On the flip side not reconciling the two school of thoughts will have more harm than good on the business in the future. A sole focus on the growth of a business will lead to loss of touch with the consumers who place a high value in social responsibility. Loss of a competitive edge will drive down sales and profits. Products that do not make customers feel they have made a positive contribution to the society and the environment will lose an appealing touch. In terms of reporting the financials will be organized from the point of view of the stakeholders depicting how the business maximizes profits from capital, social and natural resources (Kerste, 2011).

Conclusion

In conclusion Social and environmental sustainability heavily rely on the social, and environmental processes put in place to propel the growth of the business while financial sustainability relies on the economic systems put in place to maximize on the environmental and social aspects in order to facilitate the growth of the business. All these aspects impact the operations and reporting of businesses in different ways with financial sustainability focusing on shareholders and maximizing profit and growth while social and environmental sustainability focusing on the environment and social responsibility to grow and make reports. The differences in the two views can be reconciled even though there are existing obstacles. Lastly, there exist implications for reconciling the two on operation and reporting of businesses just as much as there are for not reconciling them.

There is an essential change in the marketing, sales, design, operations and corporate reporting that lead to opportunities and risks of businesses that have been created by sustainable development. From the discussion above it remains clear that there is sufficient evidence that economic growth is compatible with sustainable development and encourages invention in the designs and service of products. In future opportunities will be created through looking at a strategic and general assessment of sustainability putting in mind that the rate at which the world is growing and paying more attention to social and economic impacts of businesses there is no other way to go about this. Leaders in the industry sector will work with and integrate all the three pillars of sustainability in order to be able to come up with innovations and grow shareholders worth.

References

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