Incorporating sustainability

impacts in capital investment decisions:

Survey evidence

CPA Australia Ltd (CPA Australia) is one of the worlds largest accounting bodies representing more than 144,000 members of the financial, accounting and business profession in127countries.

ISBN: 978-1-921742-43-9

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Contents

Executive summary 4

Introduction 5

1.1 Capital investments 5

1.2 Defining sustainability for management accounting research 5

1.3 Capital investment models 6

1.4 Connecting capital investment and sustainability 8

1.5 The role of qualitative data 8

1.6 Regulatory impacts on capital investment appraisal 9

2. Research approach and methods 11

2.1 Motivation and scope 11

2.2 Methods and data collection 11

3. Results: Incorporating sustainability impacts in capital investment decisions 13

3.1 Introduction 13

3.2 Profile of respondents 13

3.3 Capital investment appraisal: Tools and practices 15

3.4 Capital investment appraisal: Items included and associated key drivers 18

3.5 Capital investment appraisal: Decisions and weighting of qualitative and quantitative data 19

3.6 Capital investment appraisal: Issues and impediments 21

3.7 Capital investment appraisal: Accounting responsibilities 21

4. Conclusions and implications for practice 23

4.1 Incorporating sustainability impacts in capital investment decisions 23

4.2 Key findings 23

4.3 Potential areas for further research 24

References 25

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Foreword

Corporate and business reporting is undergoing a period of major transformation. This year sees substantial steps towards a framework for Integrated Reporting and the release of a new version of the Global Reporting Initiatives Sustainability Reporting Guidelines (G4). These two developments have positive implications for helping corporations and businesses bridge the gap between external reporting and internal business decision-making that is increasingly taking sustainability-related impacts into account.

This research looks at one highly significant dimension of business decision-making investment appraisal and internal allocation of capital. We find that on the whole companies and businesses are increasingly recognising the need to commit to sustainability practices, but are still facing a number of barriers, across people, skills, systems and organisational capabilities.

In this report we also stress the need for complementary developments in governance practices and show the compelling need for accountants to adapt to changing business needs and imperatives. In the coming years, we are likely to see the broadening out of traditional roles and the creation of new roles, where new experts will be in demand. Those in the accounting profession need to step up to this challenge.

Alex Malley FCPA

Chief Executive CPA Australia

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About the authors

Gillian Vesty, Principal Researcher, PhD Melbourne University. Gillian is a Senior Lecturer, in the School of Accounting at RMIT University. She currently teaches in both management accounting and forensic accounting courses and is co-author of a tertiary textbook Management Accounting. Gillians research interests are largely focused around management accounting, public healthcare governance and risk. More recently, Gillians teaching and research has been in the area of accounting for sustainability. Her recent contributions to the profession included earlier contributions to this study (Vesty, G. (2011), The Influence and Impact of Sustainability Issues on Capital Investment Decisions, CPA Australia Research Report, available online: cpaaustralia.com.au/sustainabilityissues

Judy Oliver is Senior Lecturer in Accounting in the Accounting, Economics, Finance and Law Group at the Swinburne University of Technology. Judy has taught financial and management accounting courses at both undergraduate and postgraduate level both domestically and internationally, and she is co-author of two tertiary-level accounting texts. Her research interests relate to corporate governance, management accounting practice, organisational learning and continuous improvement.

Albie Brooks is a Senior Teaching Fellow in management accounting at the University of Melbourne. His background includes teaching at the undergraduate and postgraduate levels both domestically and internationally. His current teaching focuses in the area of performance management. He is co-author of two tertiary-level accounting texts, has co-authored materials for the profession and has conducted workshops for the accounting profession in the management accounting area. Albies research and scholarship interests are in management accounting innovation, corporate governance, accounting education and the development of case-based teaching materials.

1 We would like to thank Joe Ferguson for his research assistance throughout this

project. Thanks also to Frances Good, Emma Wellington and Andrew Lewinsky for their assistance during the data collection phase. We thank CPA Australia for its financial assistance with the project, and John Purcell in particular. We also acknowledge the advice kindly provided by Stathis Gould (IFAC), Matty Yates and Sarah Nolleth (HRHs Accounting for Sustainability Project) and Mike Sewell CPA Australia ESG CoE.

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would be interesting to explore in more detail. For example, this project highlighted the need to better understand the role, and needs, of management accounting when dealing with large amounts of qualitative data that is uncertain, subjective and long-term in nature. What gaps are there between theory and practice, and how might further research and professional development assist? Given this study is based on survey data we can provide only summary-level, indicative results. We recommend more in-depth analysis, which could be obtained through detailed case studies that investigate individual investments and the associated processes from initiation of investment proposal through to model development, decision and follow-up.

Key findings from the study

Costbenefit analysis features prominently as a capital investment appraisal tool.

The decision type has influence over the use of different appraisal tools.

The decision type influences the extent of the use of qualitative data, and the mix between quantitative and qualitative data, in capital investment appraisal.

Key sustainability-related items that are included in capital investment appraisal include OH&S compliance, employee health and wellbeing effects, the impact on brand and reputation, and clean-up and remediation costs.

One possible explanation for not including sustainability -related impacts in capital investment appraisal is that sustainability-related issues may be viewed more as a corporate-wide issue rather than specific to individual projects.

With the increasing prominence given to sustainability issues confronting organisations, an interesting question emerges as to how (if at all) organisations are incorporating sustainability issues into their capital budgeting decision models and organisational processes. This report is conducted on behalf of CPA Australia, International Federation of Accountants (IFAC) and The Princes Accounting for Sustainability (A4S) Project. This work contributes to IFAC (2013) guidance on capital investment appraisal tools and techniques and builds on a small exploratory study of Australias G100 companies, on sustainability-related impacts and how they are considered in capital investment appraisal (Vesty, 2011).

CPA Australia in association with IFAC and A4S further supported an extension of this earlier study, and we now draw more broadly on accounting practices in publicly listed, private as well as government organisations in Australia. The researchers use an online survey of a sample of organisations, drawn from the Australian Stock Exchange (ASX) 300 list and the National Greenhouse and Energy Reporting (NGER) register, to investigate our research questions. Organisations on the NGER register are deemed to be high energy and water consumers, regardless of their ownership structure. It was considered that the activities by NGER organisations to mitigate greenhouse gas emissions would provide descriptive evidence of organisational practices with respect to capital investment decisions and the role of sustainability-related issues.

This report reveals that sustainability-related developments are evident in capital investment appraisal practice. In particular, we find that qualitative sustainability attributes are considered alongside the quantitative models and play a role in influencing decisions. Nevertheless, our findings suggest there is still some way to go before sustainability impacts are fully embedded in the capital investment appraisal tools and organisational practice. In conclusion we find, somewhat surprisingly, that the role of accounting in this process remains on the boundary of sustainability-related capital investment developments, focused largely on servicing cost management traditions. Importantly, our work suggests a number of avenues for further investigation.

This research builds on very limited work in this area. We suggest a number of areas for further research. Further replications of this survey outside Australia would be beneficial in providing more generalised results on capital investment appraisal tools commonly used, and how they are adopted and adapted to embed sustainability-related impacts in everyday practices. Insights from this study

Executive summary

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1.2 Defining sustainability for management accounting research

With an increasing focus on sustainability-related impacts, this research focuses on what organisations are doing with respect to this issue. Several decades ago Middleton argued that:

decision-makers in the private sector of the economy have a social responsibility; that they have an obligation to consider the social and environmental effects of investment proposals. From this standpoint, profitability is seen as an important but not overriding factor in decision-making. It will be assumed that decision-makers wish to know the profitability of projects as a primary factor in the making of investment decisions. Given knowledge of a projects profitability, the decision-makers may then consider all other relevant factors (e.g., social, strategic, possible employee reaction, etc.) before reaching a decision (1977: 3).

In bringing Middletons views to our political present, our accounting models of choice should logically include a consideration of both quantitative and qualitative data. Where applicable, they should also capture factors such as risk and sustainability-related impacts (environmental, social and ethical) associated with every individual investment. Given the ubiquitous understanding of the term sustainability we draw on the following definition of sustainable development, with its two key concepts, to provide a broad platform for this work:

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts:

the concept of needs, in particular the essential needs of the worlds poor, to which overriding priority should be given; and

the idea of limitations imposed by the state of technology and social organization on the environments ability to meet present and future needs. (Brundtland, 1987, p. 43)

We use this definition to help examine capital investment appraisal techniques in order that we might reveal the challenges and limitations associated with valuing and maintenance of finite resources over extended time frames (TEEB, 2008). The challenge is how best to operationalise this planetary view of sustainability within the organisational

1.1 Capital investmentsCapital investments made by organisations result in the commitment of significant resources to projects expected (in most cases) to enhance the value of the organisation and/or provide shared community benefits over time. Capital investment decisions usually have the characteristic of a long-term effect requiring significant resources (Eldenburg et al., 2010). The IFAC Good Practice Guidance Statement (2013: 8) suggests typical capital spending and investment decisions include:

Make or buy decisions, and outsourcing organisational functions

Acquisition or disposal of subsidiary organisations

Entry into new markets

Purchase or sale of plant and equipment

Development of new products or services (or discontinuation of them), or decisions on related research and development programs

Acquisition (or disposal) of new premises or property by purchase, lease or rental

Marketing programs to enhance brand recognition and to promote products or services

Restructure of supply chain

Replacement of existing assets.

Management accountants in business are not only confronted with a choice of appraisal techniques, but also must decide on the extent and type of data included to optimise decision making. The management accounting academic literature has consistently conveyed the message that all relevant data must be included in capital investment analysis to ensure fully informed decisions (Eldenburg et al., 2010). Nevertheless, there is minimal research demonstrating how sustainability-related impacts are included in everyday capital investment appraisal. Similarly, we do not know to what extent traditional or alternative sustainability-focused models are being used by companies. What is relevant sustainability-related data, and is it included within the accounting model or does it sit alongside the accounting model of choice? What accounting models are being used for varying investment decisions, whether strategic, operational/replacement or regulatory in nature? Is the data largely quantitative or qualitative and who, in particular, takes ownership of sustainability data? Little is known about the extent to which professional boundaries are drawn when sustainability-related expertise is required.

1. Introduction

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boundaries (Gray, 2010). The profession suggest that accounting should make their business-relevant contributions towards achieving this sustainable state (IFAC, 2006a, 2013, Hopwood et al., 2010).

In taking this business case approach to sustainability, it is proposed that managers focus only on the direct financial or readily quantifiable impacts of their inputs (materials and packaging, water and energy consumption) and outputs (by-products and varying forms of waste, including solid, atmospheric, water and hazardous, as in ISO 14000 series standard compliance) (Schaltegger & Burritt, 2000; ISO, 2006; IFAC, 2006b). Nevertheless, stakeholders continue to show interest in organisations sustainability-related credentials, demanding more detail on investment practices (Vesty, 2011; Epstein & Yuthas, 2012). It is argued that corporate strategies aimed at mitigating negative sustainability impacts can lead to improved future values (Austin & Sauer, 2003; Sauer & Wellington, 2005). The challenge rests in the uncertainty of measurement and identifying future material sustainability-related impacts. This makes investment planning and risk mitigation an extremely complex process (Tyler & Chivaka, 2009).

1.3 Capital investment modelsThe selection and use of suitable processes and techniques to make important investment decisions are crucial (Arnold & Hatrzopoulos 2000). The capital budgeting literature includes many studies of the techniques used to evaluate such potential investments (see, for example, Arnold & Hatrzopoulos, 2000; Graham & Harvey, 2002; Ryan & Ryan, 2002; Haka, 2007). Mostly these studies shed light on the popularity of particular techniques and consistently show the priority given by corporations to discounted cash flow techniques such as net present value (NPV) and internal rate of return (IRR). Good practice guidance suggests discounted cash flow (DCF) analysis is the more appropriate tool from which to evaluate an organisations capital expenditures (IFAC, 2013). While net present value and internal rate of return are generally both classified as DCF techniques and can be used as complementary techniques, IFAC appears to favour the use of NPV over IRR. Most management accounting academic and practitioner literature also tends to favour the DCF techniques as being superior to other traditional methods such as payback period and accounting rate of return (ARR) (Eldenburg et al., 2010; Bhimani et al., 2012). This choice stems from the use of the time value of money and a consideration of the entire life of the project in discounted

cash flow analysis methods. Nevertheless, prior research indicates that other traditional evaluation tools such as payback period remain popular among many organisations (Pike, 1996; Truong et al., 2008).

The extent of use of traditional techniques is highlighted in Table 1. There is also evidence of the use of more sophisticated capital budgeting techniques such as real options, Monte Carlo simulation, decision trees and sensitivity analysis. It is argued that these techniques, in particular Monte Carlo simulation, are designed largely to overcome issues associated with subjective judgement or reliance on soft methods when including all relevant data to estimate the value of capital project risk (Verbeeten, 2006; Tyler & Chivaka, 2009; Jackson, 2010).

When cash flow projections or risk profiling is challenging, it is argued that real options theory offers flexibility over DCF techniques alone (Tyler & Chivaka, 2009). Real options extends financial models, such as Black and Scholes (1973), to options on real assets whereby the investor or owner of the asset is provided with a right but not an obligation to invest. (Examples might include the ownership of an underlying asset, such as mining rights to a piece of land, or a right to develop a carbon sink.) Rather than the invest/not invest situation presented with DCF, real options reasoning suggests delaying investment until more favourable opportunities present or better information is made available and is potentially quantifiable. Real options also gives the owner the rights to expand, abandon, adjust or alter the nature of the investment. This even includes compound options, where the options value is dependent on the value of another, rather than the underlying asset (see Tyler & Chivaka, 2009, p. 5). Monte Carlo simulations are based on computational algorithms that arguably better predict the cost impacts of long-run investment decisions than do the subjective or soft methods associated with management judgements (Ryan & Ryan, 2002; Graham & Harvey, 2002). Similarly, decision trees are frequently associated with probability models and aim to quantify the success or otherwise of the projects meeting strategic goals.

Although providing a common inventory of appraisal techniques, Table 1 does not show how these tools are used. For example, payback may be a common tool for early-stage evaluation, if ultimately not a key driver of the investment decision.

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Table 1: Use of capital investment appraisal tools across different studies

Appraisal tool Pike (1996)Graham & Harvey

(2002)***Ryan & Ryan

(2002)***Hermes et al. (2007)

Truong et al. (2008)

Netherlands China

Net present value 74% 75% 96% 89% 49% 94%

Internal rate of return

81% 75% 92% 74% 89% 80%

Payback period 94% 57% 74% 79% 84% 91%

Accounting rate of return

50% na 34% 2% 9% 57%

Real options na 25% 11% 32%

Monte Carlo simulation

na 13% 37%

Sensitivity analysis** na 52% 85%

Other na 2% 13%

* Data has been averaged from Table 2, Ryan and Ryan (2002).

** Some might argue that sensitivity analysis may be used within any of the other appraisal tools. Moreover, sensitivity analysis is a popular risk management/appraisal tool (Pike, 1996).

*** The results for this study report those respondents who reported always or almost always using the technique.

Emerging from these studies are a number of interesting observations that cannot be ignored when reviewing the selection of appraisal technique. Some of these conclude that no one technique seems to be used exclusively:

Most organisations use a combination of techniques (Pike, 1996; Alkaraan & Northcott, 2006; Truong et al., 2008).

Comparisons of adopted techniques are based on studies from different times and different samples, which may be problematic (Pike, 1996).

Differences in adopted techniques have been noted for organisations of different size (Pike, 1996) and organisations in different countries (Hermes et al., 2007).

Notwithstanding the rise of DCF techniques, the payback method seems to be an enduring technique still used by a large proportion of organisations (Graham & Harvey, 2002; Jackson, 2010).

More sophisticated decision tools have emerged in recent years, including Monte Carlo simulations and real options (Graham & Harvey, 2002; Ryan & Ryan, 2002; Truong et al., 2008).

Complicating factors, such as the growing pressure from shareholders and other stakeholders around issues involving strategy, risk and uncertainty, have highlighted the importance that sustainability places on management control system design (Henri & Journeault, 2010).

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1.4 Connecting capital investment and sustainability

Missing from the management accounting literature (and Table 1) is any direct reference to connections between sustainability and capital investment appraisal. This work does not mention that costbenefit traditions continue to be popular, largely utilised by governments. Costbenefit analysis in the public sector is seen as an economic means to weight societal costs against societal benefits in policy decisions that involve capital infrastructure decisions (Lohmann, 2008). Epstein and Yuthas (2012) develop a costbenefit decision-making tool that incorporates sustainability-related factors, such as environmental, labour practices, human rights, society and product responsibility issues, in cash flow calculations.

Interpretation of cost-benefit in the private sector is not well explored in the literature, and as a technique is also missing from Table 1. While a DCF model is arguably one form of cost-benefit, but potentially limited when decisions are based on an NPV that ignores broader sustainability impacts (Lohmann, 2008; Tyler & Chivaka, 2009).

Costing methodologies, such as life cycle costing, arguably provide a means to calculate holistically the sustainability-related life cycle costs of the capital project EPA, 1998; Reich, 2005; Soonawalla, 2006; also see International Organization for Standardization [ISO 14040], which comprehensively outlines the principles and framework for life cycle assessment and environmental management accounting (EMA) (Bebbington, 2001; Deegan, 2003; Bennett, 2009; Schaltegger et al., 2011; Burritt, 2012). EMA techniques and auditing are at the heart of the International Organization for Standardization (ISO) 14000 series. One of the standards within the 14000 series specifically provides a means for companies to measure and manage their material cost flows1. Recognised as Material Flow Cost Accounting (MFCA), the monetary costs associated with waste and energy are applied to the product in two ways: as energy and materials cost (positive output) and as waste (negative output) from individual operational processes. Much of this literature focuses on detailed analysis of process inputs and outputs and ways that environmental impacts can be quantified and included in operational management accounting systems (Christ & Burritt, 2013). On one hand, Reich (2005) proposes a narrower life cycle assessment that fits within the business case and corporate boundary; on the other, Soonawalla (2006) claims that

2 See ISO 14051:2011, Environmental management Material flow cost accounting General framework http://www.iso.org/iso/news.htm?refid=Ref1527. PwC, 2007. Corporate reporting Is it what

broader insights and innovative life cycle developments better support subsequent investment decisions.

These models have developed over time as a result of the belief that traditional discounted cash flow techniques are not adequately addressing the strategic uncertainty associated with climate change (Lohmann, 2008; Tyler & Chivaka, 2009). The use of a real options valuation methodology arguably enhances sustainability-related decisions (Miller & Waller, 2003; Tyler & Chivaka, 2009). For example, companies faced with entering cap-and-trade markets have the ability to delay their investment until the uncertainty associated with valuing potential revenue streams (the value of carbon credits) becomes known and consequently quantifiable. Tyler and Chivaka (2009) claim that real options offers a benefit over DCF analysis, providing a previously unrecognised source of corporate value in an option value that is likely to increase. In one practical example, a sustainability-adjusted NPV/costbenefit model has been developed in-house to ensure sustainability-related factors are included in long-term water infrastructure investments (Atkins, Bell & Fu, 2010). Most of these models attempt to calculate the costs and benefits associated with cash flows and investments.

1.5 The role of qualitative dataOrganisations may also consider other qualitative factors in their capital investment decision process, such as strategic fit, culture fit, availability of staff and technology platform building (Arnold & Hatzopoulos, 2000; Truong et al., 2008). These and other sustainability factors might be considered direct or indirect to the organisation; however, the extent to which they are included (whether in qualitative format or quantified in some way) in practice is relatively unexplored. Prior studies offer some support for the combined use of financial and non-financial information, particularly in settings where competing projects exist (Larcker, 1981), and it has been pointed out that decisions might not necessarily be based on financial analysis alone (Larcker, 1981; Hall, 2010; Vesty, 2011). The safety of employees and the public are two examples of factors that influence, and potentially override, financial results in capital investment decisions (Hall, 2010; Vesty, 2011).

The role of qualitative analysis and the use of non-financial factors in capital investment appraisal decision making is largely considered a normative expectation designed to sit alongside the objective quantitative techniques. However, Graham and Harvey (2002) add to the complexity when they point out that real options (complex quantitative) methodology is commonly used as a qualitative strategic

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planning tool. Questions can also be raised about the extent to which Monte Carlo techniques substitute management intuition in strategic capital investment decisions.

In acknowledging the uncertainty and difficulties associated with quantifying many of the stakeholder reactions, efforts to link sustainability-related impacts in investment appraisal tend to promote calculation in capital investment appraisals. In an earlier study of US EPA companies it was found that the quantifiable environmental costs were more commonly tracked than those that were difficult to quantify (White et al., 1995). Similarly, environmental costs were considered more at a summary, company-wide level than as part of an individual project or investment (White et al., 1995). Schaltegger and Burritt (2000) concur with the potential strategic benefit of considering sustainability-related factors, but also warn of the high costs associated with data collection, practical issues associated with inconsistent and incomplete data, and the ultimate noisy measurement on which decisions are based if this data is quantified.

While these earlier results provide little scope for the stand-alone use of qualitative data, more recently Bennett et al. (2013) suggest sustainability-related information is frequently used in its rawest physical form and not quantified in monetary terms. In addition, Deloitte suggest that overall CFOs were disappointed in the robustness and usefulness of the sustainability data they were receiving, yet recognize the importance of this data in successfully managing business performance (2012: 15).

These findings have implications for management accounting and associated decisions about whether or not to include sustainability data in capital investment models.

1.6 Regulatory impacts on capital investment appraisal

Around the world, regulators play an important role in influencing capital investment appraisals. Sustainability-related regulation is prompted by the efforts of individual, community and other interest/activist groups concerned about the environmental, social and economic impacts of business activity. Any proposed project that has the potential to harm human health or degrade the environment (such as housing and infrastructure developments, offshore gas projects, mining projects and road constructions) is increasingly scrutinised by all stakeholders, including governments. While governments around the world might legislate for sustainability-related impacts in different ways,

they are basically following a common theme based on local needs.

At a broad level, accounting is impacted by compliance to accounting standards as well as the growing movement towards integrated reporting (IR) and compliance with sustainability-related assurance standards and guidelines provided by the Global Reporting Initiative (GRI, G3 indicators). In Australia, the legal aspects of sustainability-related activities, which are covered by the Corporations Act 2001, include s299(1)(f), which requires companies to include details of breaches of environmental laws and licences in their annual reports, and ss1013(A) to (F) of the Corporations Act 2001, which require providers of financial products with an investment component to disclose the extent to which labour standards or environmental, social or ethical considerations are taken into account in investment decision-making (for further discussion, see Parliament of Australia, sustainability reporting at http://www.aph.gov.au).

In general, stock exchange listing rules and guidelines set minimum standards for corporate governance expectations and associated sustainability-related practices. In Australia, sustainability issues are introduced via Principle 7 of the ASX Corporate Governance Council Principles and Recommendations. Principle 7 recommends companies disclose and communicate how they are managing their material business risks, which include risks associated with operational, environmental, sustainability, compliance, strategic, ethical, reputation or brand, technological, product or service quality, human capital and financial reporting, as well as market-related risks. This means they must be able to assess the materiality of sustainability-related impacts on their business and manage them satisfactorily.

For example, the recent amendments to the Australian Environment Protection and Biodiversity Conservation Act 1999 would require, say, a proposed mining project with deemed significant residual ecological impacts to factor the costs of an environmental offsets package over the life of the project. In relatively complex net present value calculations, their (mining) offsets packages must include details of activities that create, improve, protect and or/manage threatened habitats. While all project proposals are evaluated according to their overall ecosystem damage and associated level of controllability, it is expected that approved projects will invest in offset packages that deliver early outcomes or connect with social, economic and/or environmental co-benefits. Examples might include mining site restoration above and beyond requirements to increase

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landscape connectivity, the use of Indigenous rangers to undertake management actions, funded education programs, or payments to rural landholders to protect and manage land for conservation purposes (for discussion of further examples, refer to the government website http://www.environment.gov.au/epbc/publications/pubs/offsets-policy.pdf).

Polluting organisations also face increasing regulatory compliance requirements, in particular activity associated with the legislation of greenhouse gas emissions for Kyoto Protocol compliance. Under the Australian National Greenhouse and Energy Reporting (NGER) Act 2007, polluting organisations must be seen to be mitigating their carbon emissions footprint. Organisations that emit above-threshold greenhouse gas emissions (25 kilotonnes of CO2-e [carbon equivalent emissions] energy production or consumption of 100 terajoules of energy) must report according to NGER measurement guidelines. Organisations must be seen to be proactive in reducing their emissions over time. Investment must be made to reduce costs associated with gas, electricity and other fuel use; water consumption; and carbon credits or the cost to offset carbon emissions (see EREP Toolkit [2008], which is part of Victorian EPA legislation).

Other activities that companies might deem strategically important and a necessary part of cash flow determination include measures associated with compliance to initiatives put in place by bodies such as the United Nations Global Compact, carbon footprint accounting, International Organization for Standardization (ISO 14000 environmental management series, as mentioned above, and ISO 26000 social responsibility), the USs Dow Jones Sustainability Index (DJSI) and the UKs FTSE4Good Index. The Greenhouse Gas Protocol initiative is a further important multi-stakeholder partnership launched in 1998 to develop and provide internationally accepted greenhouse gas (GHG) accounting and reporting standards for companies. Governments, industry and NGOs use this as a standard for their sustainability accounting and reporting systems. As an example, companies preparing sustainability reports using the Global Reporting Initiative guidelines are required to include information on GHG emissions in accordance with the GHG Protocol Corporate Standard (GRI, 2002). Many of these initiatives, while voluntary in nature, are subject to rigorous external audit. The decision to become a member of these organisations frequently is aligned with reputational benefits and other supply chain partnerships.

It can be argued that, either directly or indirectly, these guidelines not only influence investment decisions but provide guidance for activities related to sustainability. In following such sustainability philosophies, related practices are more than likely included in investment decisions and related cash flow determination, and become part of accepted routine practice (Vesty, 2011).

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2.1 Motivation and scopeOur broad research question asks if and how organisations are incorporating sustainability-related impacts in their capital investment decisions. Where this data is qualitative in nature, how is this captured? This project was designed to provide insights for the profession about emerging management accounting practices relating to sustainability and capital investment.

Our work has four key aspects. Firstly, we consider the operational aspects of environmental management accounting and if it forms part of capital investment cash flows and investment decisions. We investigate how environmental wastes are accounted for in routine investment appraisals and extend the EMA view to other sustainability factors that might not be readily quantified.

Secondly, we contribute to the capital budgeting literature by examining how commonly accepted appraisal tools capture sustainability-related impacts. Given the uncertainty that, it is argued, exists around the timing, measurement and inclusion of sustainability-related impacts in cash flows, we contribute with research on the appraisal methods adopted to overcome such uncertainty in investment decisions. Moreover, we provide evidence on the extent of the use of sophisticated quantitative methods and qualitative data in shaping capital investment appraisal.

Thirdly, comprehensive frameworks and methodologies have been developed to aid measurement of corporate sustainability (Atkinson, 2000), but little is known about their adoption in practice. Our intention is to expand on this largely normative work by providing evidence of organisational decision-making processes. In doing so, we are able to extend this stream of research with insights from practice.

Finally, at this stage guidance from the profession for industry participants is limited. Suggested tools for capital investment appraisal tend to be relatively traditional and do not include details about how sustainability impacts should be incorporated in investment appraisals (see, for example, IFAC, 2008). While governments and regulatory authorities have provided some practice guidance for organisations, good practice guidelines from the profession remain relatively underdeveloped. To this end, our contributions have implications for practitioners by assisting with the development of good practice guidelines that meet the emerging sustainability-related accounting needs of professional accountants.

2.2 Methods and data collection Our objective was to capture data from as many organisations as possible, particularly as we were seeking to identify organisational practices around capital investment appraisal and sustainability issues. Consequently, a survey by questionnaire was deemed the most suitable data collection method, as it is the generally accepted tool for capturing such practices (Pike, 1996). Moreover, this study builds on the earlier pilot survey of a small sample of Australian G100 companies (Vesty, 2010). For the purposes of this study we operationalised Brundtland (1987) by defining sustainability for our respondents as a term that requires social and environmental impacts to be considered alongside economic appraisal.

Our sample was selected to reflect organisations where sustainability-related issues are more likely to be present. As a result we combined two databases to generate our sample. These were the Australian Stock Exchange top 300 companies (ASX300) and the National Greenhouse and Energy Reporting (NGER) register, which includes organisations that meet threshold levels of emissions as required by the Australian Government. The number of organisations in the database at any one time may vary, depending on whether the entity breaches the targets defined by the National Greenhouse and Energy Reporting Act (2007). Companies that were previously required to report under this Act may have found ways to reduce their threshold level of carbon emissions and subsequently are removed from the register. Some of the ASX300 are also NGER-registered entities, and the combination of these two databases helped us to capture the practices not only of major public corporations but also of non-listed organisations, such as major subsidiaries of international companies and large private companies, as well as the relevant government and not-for-profit organisations.

2. Research approach and methods

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At the time of executing the survey, the combined sample contained 1021 organisations. The companies that were on both ASX300 and NGER registers were consolidated, and those on the NGER list that were designated trusts or multiply registered were removed or combined to the one contact site. This effort resulted in a list of 679 organisations. We then elected to use a combination of telephone and email contact followed by the administration of a web-based survey instrument using Qualtrix software. All organisations in our sample were initially telephoned to:

explain the purpose of the survey;

gauge the interest of the organisation and seek cooperation through identification of a suitable contact person (ideally the chief financial officer or similarly titled manager) to whom the link to the survey could be sent via email; and

obtain email contact details for the identified contact person.

This initial process yielded 600 contact people/organisations and email addresses.2 An email was sent in November 2012 containing a covering letter and link to the online survey to each of the contacts. Follow-up reminder emails were sent in December 2012 and again in January 2013. We had 139 respondents commence the survey and complete at least some portion of it (representing a 23 per cent response rate); 69 respondents completed the majority of the survey (representing a response rate of 11.5 per cent).3

2 Reasons for those not providing contacts or email addresses included: no response to telephone call, responses of no interest and incorrect telephone numbers.

3 Note that as a consequence, in the presentation of the results, the value of n varies between responses.

13

3.1 IntroductionIn this section we present our findings on practices to incorporate sustainability impacts in capital investment decisions. We begin by discussing the profile of the respondent organisations and individuals who have completed the online survey. We briefly highlight details of the sustainability-focused culture and strategic intent of the respondent organisations. In the following subsections we provide details of the capital investment tools being used by organisations. Discussion also focuses on the sustainability-related items included in appraisals, and whether they are quantified and included in cash flows or remain as separate qualitative data. We ask respondents about the issues and impediments associated with embedding sustainability in capital investment appraisal and conclude with discussion on the role of accounting and responsibilities associated with accounting for sustainability.

3.2 Profile of respondentsDetails of the respondent organisations as well as the individual within the organisation who completed the survey on behalf of the organisation follow. Figures 1(a) and (b) provide a breakdown of respondent organisation by industry classification and type of ownership.

As evident in Figure 1, the majority of respondent organisations were either private companies (40 per cent); publicly listed (33 per cent) or government entities (14 per cent). The more dominant industry classifications were manufacturing and automotive (22 per cent), transportation (20 per cent) and mining (14 per cent).

3. Results: Incorporating sustainability impacts in capital investment decisions

Figure 1(a) Type of ownership

Publicly listed company

Private company

Government entity

Not for profit

Other

Figure 1(b) Industry

Transportation

Manufacturing and automotive

Mining

Energy and utilities

Education

Construction

Real Estate

Other

33%

20%

22%

22%

14%

9%

5%

4%

4%

40%

20%

5%

2%

14

Table 2 shows the breakdown of size of the organisations by both revenue and head count. It indicates that 71 per cent of organisations have annual revenues in excess of $100 million, with 49 per cent having in excess of 1000 employees.

Table 2: Respondent organisation by size

Measured by annual revenue Measured by head count

Revenue range

% of respondents

Head count range

% of respondents

$0$20 m 4% < 100 employees

22%

$20$50 m 14% 100500 employees

29%

$50 m$100 m

11% 5011000 employees

13%

$100 m$500 m

36% 10012500 employees

13%

$500 m$1 b 14% 25015000 employees

11%

> $1 b 21% 500110 000 employees

9%

> 10 000 employees

4%

As to the individual within the organisation who completed the survey on behalf of the organisation, Figure 2 indicates that 44 per cent were chief financial officers, 7 per cent were sustainability managers, 2 per cent were chief executive officers, and the remaining 47 per cent held some other position of responsibility.

Figure 2: Survey Respondents (%)

0

10

20

30

40

50

Other (delegated by CFO assistant - i.e accounting, management)

Chief executive officer Sustainability manager Chief financial officer

44%

7%

2%

47%

In order to estimate the importance placed on sustainability within the organisation, respondents were asked to comment on whether or not a focus on sustainability had a positive effect on overall performance. Most respondents (69 per cent) agreed that this was the case (see Figure 3).

Figure 3: A focus on sustainability has a positive effect on overall performance

Strongly disagree

Disagree

Neither agree or disagree

Agree

Strongly agree

24%

58%

11% 7%

In Figure 4 we summarise findings on the perceived importance employees assign to enhancing overall sustainability performance. Most respondents (62 per cent) answered affirmatively when asked whether employees were empowered to take actions to enhance sustainability performance.

Figure 4: Employees are empowered to take actions to enhance our sustainability performance

Strongly disagree

Disagree

Neither agree or disagree

Agree

Strongly agree

27%

55%

11%7%

15

To further examine the focus on sustainability, respondents were asked whether there was a designated role for sustainability, and whether this role was an individual responsibility or disseminated throughout the organisation. Results, summarised in Figure 5, indicate that 52 per cent of respondents noted that their organisation does not have a designated role for sustainability, with 38 per cent suggesting a shared role throughout the organisation and 11 per cent noting the position of a sustainability manager. Generally the sustainability manager reports directly to the CFO, HR or Operations. The majority of respondents (83 per cent) indicated that they do not have a Sustainability Governance Committee, while 13 per cent indicated that they incorporate sustainability issues in other committee activities.

Figure 5: A designated role for sustainability

Currently under considerationNo designated roleMultiple roles (shared throughout the organisation)

Single Role (Individual)

11%

38%

41%

11%

Respondents were asked to comment on their participation in sustainability-related reporting initiatives. Our results are presented in Table 3.

Table 3: Participation in sustainability- related initiatives

Sustainability-related initiative Yes

National Greenhouse and Energy Reporting (NGER)

69.2%

International Organization for Standardization (ISO 14001)

43.7%

Greenhouse Gas Protocols 26.0%

Global Reporting Initiative (GRI) 12.7%

International Organization for Standardization (IOS 26000)

11.6%

Integrated Reporting (IIRC) 7.3%

Dow Jones Sustainability Index (DJSI) 6.6%

Equator Principles (Banking) 4.6%

Apart from the mandatory requirement for organisations with high greenhouse and energy emissions, compliance to other guidance or reporting initiatives is voluntary in nature. In total nearly 70 per cent of our respondent companies were required to monitor energy usage (according to their Scope 1 and Scope 2 greenhouse gas emissions) by membership to NGERs; 43.7 per cent of respondents indicated their voluntary accreditation to ISO 14001 environmental management system guidelines and 11.6 per cent to ISO 26000, which provides guidance on social responsibility; 26 per cent of respondents acknowledged their use of Greenhouse Gas Protocols. Overall, where membership is voluntary the take-up by organisations is surprisingly low.

3.3 Capital investment appraisal: Tools and practicesTable 4 provides a summary of capital appraisal tools used by respondents in this study and compares these, where applicable, with the results of prior studies. As with the other studies, this study notes the use of multiple methods for capital appraisal. The most widely used method (76.8 per cent of respondents in this study) is net present value, which is shown to be the preferred tool in all studies (except China). This study shows less use of internal rate of return (55 per cent), accounting rate of return (58 per cent), payback (58 per cent) and sensitivity analysis (43.4 per cent).

16

Table 4: Use of capital appraisal tools

Appraisal toolThis study

(n=69)Pike

(1996)

Graham & Harvey (2002)***

Ryan and Ryan (2002)

Hermes et al. (2007)Truong et al.

(2008)

Netherlands China

Net present value 76.8% 74% 75% 96% 89% 49% 94%

Internal rate of return

55% 81% 75% 92% 74% 89% 80%

Payback period 58% 94% 57% 74% 79% 84% 91%

Accounting rate of return

58% 50% na 34% 2% 9% 57%

Real options 24.6% na 25% 11% 32%

Monte Carlo simulation

8.6% na 13% 37%

Sensitivity analysis**

43.4% na 52% 85%

EVA 17.4%

Cost benefit analysis 61%

Life cycle analysis 29%

Decision trees 17.4%

In this study the second most used method for capital appraisal is costbenefit analysis (61 per cent of respondents), which interestingly did not feature in previous studies. Other contemporary methods also seen to be used in the appraisal process are life cycle costing (29 per cent), real options (24.6 per cent), decision trees (17.4 per cent) and EVA (17.4 per cent). The least used methods are Monte Carlo simulation (8.6 per cent) and marginal abatement curves (1 per cent).

For each appraisal tool, respondents were further asked to identify its use in a range of investment decisions. The responses detailed in Table 5 highlight a number of interesting findings. For strategic and operational/replacement investment decisions, respondents adopt a multifaceted approach, not only using capital appraisal tools that rely on quantitative data but also incorporating qualitative analysis through the use of costbenefit analysis, life cycle costing and sensitivity analysis. These findings are consistent with Alkaraan and Northcott (2006), who noted the preference for DCF techniques in relation to more complex strategic projects. For OH&S and regulatory decisions there appears to be a broader focus on the investment decision overall through the use of costbenefit analysis.

Table 5: Multifaceted use of capital appraisal tools for investment decisions

Method OH&SOther regulatory

StrategicOperational/ replacement

NPV 24% 33% 87% 80%

Payback 30% 35% 78% 78%

IRR 23% 26% 97% 72%

ROI 22% 22% 93% 63%

EVA 31% 31% 100% 62%

Costbenefit analysis

55% 48% 64% 86%

Life cycle costing

30% 40% 55% 85%

Sensitivity analysis

28% 31% 97% 76%

17

Given the compulsory nature of such investments, the lower use of quantitative techniques suggests that investments need to meet the regulatory requirements rather than a specified financial target. It is also interesting to note that life cycle costing is used most for operational/replacement decisions, which may suggest that the longer term environmental impacts are considered important. However, most respondents admitted that sustainability costs or benefits associated with capital investments were calculated for only 25 years, in particular for operational investments (see Figure 6).

Figure 6: Time frames that sustainability cost/benefits are calculated

More than 20 years10-20 years5-10 years2-5 years1 year or less

Strategic

Operational/Replacement

While this finding does not necessarily mean sustainability-related costs and benefits were not considered over the longer term, it may suggest that these items did not form part of the calculative models beyond a certain time frame, perhaps because of the impediments, acknowledged by respondents, to the collection and measurement of sustainability-related impacts in the longer term. Interestingly, 47 per cent of respondents agreed that they consider cash flows capture all relevant data (Figure 7).

Figure 7: Cash flows capture all relevant data for capital investment appraisal

Strongly disagree

Disagree

Neither agree or disagree

Agree

Strongly agree

24%

24%

40%

7% 5%

In the following subsection we discuss the type of sustainability-related cost and benefit items likely to be included as standard policy in capital investment appraisals.

18

3.4 Capital investment appraisal: Items included and associated key driversTable 6 summarises the items that management policy determines are important to include in investment appraisal, either quantified or remaining qualitative.

Table 6: Items included in capital investment appraisal due to company policy/standard procedures

Yes NoUnder

considerationn=

OH&S compliance 85% 8% 6% 62

Employee health and wellbeing

77% 13% 10% 62

Impact on brand/reputation

63% 17% 20% 64

Energy and water consumption

61% 31% 8% 62

Environmental fines, penalties, insurance

60% 27% 13% 60

Clean-up and remediation costs

58% 35% 7% 60

Supply chain impacts

55% 33% 12% 58

Cost of purchasing offsets

44% 44% 11% 57

Contingency amount to reflect uncertain sustainability impacts

43% 43% 12% 58

Organisational waste levels

40% 48% 12% 60

Environmental revenues and credits

32% 58% 11% 57

Sustainability-related tax payments to government

25% 63% 12% 57

The OH&S and employee health and wellbeing factors are rated highly by respondents (85 per cent and 77 per cent respectively); the importance is noted by a respondent who refers to the impacts of failure on profit and key officer liability.

For those respondents noting the more intangible items such as brand and reputation and employee health and wellbeing, comments given shed some light on how these factors are considered in the appraisal process. In relation to the impact on brand/reputation, comments suggest that these factors are considered from a qualitative perspective (either just considered or included in the risk matrix assessment, which denotes qualitative measures of consequence). For employee health and wellbeing, respondents note that any potential project must at least maintain OH&S standards to ensure employee safety, with attention given to the selection of technology and consideration of whether the investment will impact on overall staff engagement, happiness and culture. Some respondents emphasised the importance of employee health and wellbeing by stating that it would be a determining factor in the investment decision even if the internal rate of return was not achieved. Projects with lower risk options in relation to safety are always the preferred choice.

Table 7 details the importance of several drivers that influence the inclusion of items in the capital appraisal decision process. The most important drivers relate to the strategic objectives (mean 4.25) and requirements of the Board/CEO (mean 4.16). Reviewing the findings, it is interesting to note that the key drivers relate more to the business objectives than to the needs/demands of external parties. However, looking at external stakeholders, the most important to the organisations are shareholders, regulators, employees and local communities. Lobby groups are the least important stakeholder with regard to influencing the decision process.

19

Table 7: Importance of key drivers for inclusion of items into capital investment appraisal

Mean* SD

Strategic objectives 4.25 0.575

The Board/CEO 4.16 0.812

Customers 3.88 0.810

Shareholders 3.86 1.025

Regulators 3.79 0.695

Employees 3.64 0.831

Local communities 3.58 0.835

Government 3.53 0.842

Supply chain partners 3.35 0.744

Lenders 3.33 0.715

Lobby groups 2.95 0.811

3.5 Capital investment appraisal: Decisions and weighting of qualitative and quantitative dataIn building an understanding of the role of sustainability in decision making, we first asked whether systems flag when sustainability-related data is required. Only 16 per cent of respondents agreed that they used screening techniques to flag the requirement for sustainability-related data collection. Similarly, there were mixed views on whether the financial effects of sustainability initiatives were specifically tracked (32 per cent agreed and 33 per cent disagreed). As highlighted earlier (and demonstrated in Table 9), this response could be linked to respondent views on the impediments associated with sustainability data collection and measurement.

When it came to using the data for decision making, it was interesting to note, as illustrated in Figure 8, that 40 per cent of respondents suggested that a positive financial analysis will always outweigh qualitative analysis, while 26 per cent disagreed with this view.

Figure 8: A positive financial analysis (E.G +NPV) will always outweigh qualitative analysis

Strongly disagree

Disagree

Neither agree or disagree

Agree

Strongly agree

22%

34%

35%

5% 4%

In circumstances where sustainability impacts are identified at project level, 37 per cent of respondents agree that these impacts will override their specified financial hurdles, as shown in Figure 9.

Figure 9: We accept projects below financial hurdles where there are significant sustainability impacts

Strongly disagree

Disagree

Neither agree or disagree

Agree

Strongly agree

37%

39%

19%

3% 2%

20

Respondents were asked a series of questions to identify the type of data (whether qualitative or quantitative) input into the capital investment decisions. The findings suggest that a mix of qualitative and quantitative data is used, and it appears that the mix is determined by the type of investment decision. In weighting the importance of qualitative data for the different investment types, we find qualitative data is used more for OH&S decisions and other regulatory decisions, whereas strategic and operational/replacement decisions focus more on quantitative data (see Table 8). This is in line with the types of tools used for different decision types outlined in Table 5.

Table 8: Relative weighting of qualitative data to quantitative data

Qualitative: Quantitative

OH&S n=65

Other regulatory n=61

Strategic n=64

Operational/replacement

n=63

100 Qualitative

0% 0% 0% 0%

10:90 3% 3% 2% 8%

20:80 6% 11% 11% 10%

30:70 6% 10% 19% 17%

40:60 2% 2% 9% 19%

50:50 23% 26% 31% 19%

60:40 6% 7% 9% 3%

70:30 18% 18% 3% 2%

80:20 20% 16% 5% 11%

90:10 8% 3% 5% 3%

0 Qualitative

8% 3% 6% 8%

When asked how the qualitative data is incorporated into the decision process, the majority of respondents (98 per cent) noted that it is included in consideration of the investment but not quantified, and for some organisations it is included as a ranked item in order of importance or given a notional value. This is interesting when compared with the 47 per cent of respondents who indicated that they consider that cash flows capture all relevant data.

In drilling further we determined the extent to which sustainability-related costs or benefits are treated as a corporate charge rather than being allocated to individual project. As highlighted in Figure 10, we found that 45 per cent of respondents indicated that they considered sustainability as a corporate overhead and not necessarily detailed in investment appraisal.

Figure 10: Some sustainability related costs/benefits are treated as a corporate wide cost/benefit and not allocated to individual appraisal projects

Strongly disagree

Disagree

Neither agree or disagree

Agree

Strongly agree

39%

45%

0%

0%16%

21

3.6 Capital investment appraisal: Issues and impediments Table 9 lists factors which impede the collection of sustainability-related data for capital investment appraisals. Questions were asked about measurement difficulties, cost issues with collecting the data as well as other issues around the availability of resources to help collect and analyse data.

Table 9: Impediments affecting collection of sustainability-related data for capital investment appraisal

Mean* SD

Difficulty in measurement of sustainability-related impacts

3.36 0.950

Cost of external expertise 3.30 1.057

Lack of availability of data 3.30 0.922

Cost of collecting data 3.26 0.923

Regulatory uncertainty 3.25 0.799

Lack of internal expertise 3.24 0.922

Complexity of internal processes and systems

3.19 0.856

Difficulty in assigning sustainability costs to individual investment projects

3.08 0.967

Difficulty evaluating stakeholder impacts

3.00 0.752

Lack of readily acceptable accounting software/technologies

2.87 1.030

Access to external expertise 2.76 0.942

* range 1 to 5 where 5=always

It appears that the major hurdles to the inclusion of sustainability-related impacts in capital appraisal are the difficulty of measurement (mean 3.36) coupled with the lack of available data (mean 3.30), the cost of external expertise (mean 3.30) and the cost of data collection (mean 3.26). Respondents comments also suggest that organisations are in the early stages of sustainability-related data collection and are currently building up the necessary resources and skills. For example, respondents noted that to overcome these hurdles they are making use of other available data of similar industries, installing NGERS software and setting up general ledger codes to track

costs. One respondent commented: As time passes, bank of knowledge and thereby internal expertise increases . . . likewise increased clarity on the regulatory environment occurs and external expertise increases . . .. Another theme emerging from respondent comments was the roles of internal and external experts. Many organisations have created new positions internally to address business sustainability and introduced information technology systems to capture the relevant data. At the present time this poses a challenge for organisations, as respondents have noted that although external expertise is available the cost is an impediment.

3.7 Capital investment appraisal: Accounting responsibilitiesWe were interested in gaining insight into the role accounting plays throughout the process of capital investment appraisal (see Figure 11). Our results show that the accounting responsibility includes membership of the Capital Investment Committee (with an average 53 per cent representation and 55 per cent advisory responsibility).

Figure 11: Capital investment committee involvement

AdvisorMember

Accounting Staff

Non-Accounting Staff (i.e sustainability, engineering)

We explored the extent to which accounting is involved in deciding and systematising the non-financial sustainability-related data that is to be included in capital investment proposals. In Figure 12, we show the comparisons between the accounting and non-accounting staff when qualitative factors are involved. Aside from assigning notional dollar values to qualitative factors and playing an equal role in system development, in general it appears that the non-

22

accounting staff (sustainability managers, engineering or others) play a greater role in initiating, ranking and verifying the sustainability-related factors that must be included in proposals.

In some ways these results reinforce the traditional financial role of accounting. This would be an area for further investigation, particularly on questions about current and future perceptions of the role of accounting. That is, how is the role of accounting perceived by the organisation, by the accountant, by the researcher/academic and by the profession, both now and in the future?

Development of system for incorporating qualitiative data

into decision process

Ranking all qualitiative factors

Assigns notional dollar value to all qualtiative factors

Verifies sustainability-related factors included in proposals

Initiates sustainability-related factors that must be included in proposals

Accounting Staff

Non-Accounting Staff (i.e sustainability, engineering)

23

4.1 Incorporating sustainability impacts in capital investment decisionsThe objective of this descriptive study was to contribute to the growing body of literature around sustainability-related impacts. In particular, we were interested in how capital investment appraisal tools have been adapted to cater for sustainability impacts. Our broad research question was: Are organisations incorporating sustainability-related issues in their capital investment decisions, and if so, how? Moreover, where some of this data might be qualitative, how is it captured? We used an online survey of a sample of organisations drawn from the Australian Stock Exchange (ASX) 300 list and the National Greenhouse and Energy Reporting (NGER) register to investigate the research question and as a consequence provide descriptive evidence of organisational practice with respect to capital investment decisions and the role of sustainability-related issues.

The standard limitations of surveys apply. In particular, generalisation across organisations should be approached with caution. Nonetheless, we do provide evidence of organisational practice around capital investment and sustainability-related issues for some 69 organisations. As our research question has remained relatively unexplored until now, our contributions here provide a foundation for further investigation either by broader survey application in other jurisdictions and/or by more depth studies of individual organisational practice.

4.2 Key findingsSome of our key findings were:

Costbenefit analysis features prominently (second to the use of net present value) as a capital investment appraisal tool.

The decision type seems to have some influence over the use of different appraisal tools. Some differences occur in the prominence of use of appraisal tools, whether the decision is more strategic or related to operational/replacement, OH&S or to some other regulation.

The decision type also seems to influence the extent of the use of qualitative data, and the mix between quantitative and qualitative data, in capital investment appraisal. The use of data in qualitative form, rather

than quantifying it (mostly in financial terms), suggests some confirmation of the results of Bennett et al. (2013) and the broader EMA literature about the use of physical flows in decision making. The use of qualitative data is further supported by the nearly 30 per cent of respondents who claim cash flows cannot capture all relevant data for capital investment appraisal.

Key sustainability-related items that are included in capital investment appraisal include OH&S compliance, employee health and wellbeing effects, the impact on brand and reputation, and clean-up and remediation costs.

One possible explanation for not including sustainability-related impacts in capital investment appraisal is that sustainability-related issues may be viewed more as a corporate-wide issue rather than specific to individual projects. This is partly supported by the 45 per cent of respondents who report that they treat sustainability-related issues as a corporate-wide overhead rather than an individual project overhead. This finding, while in line with the findings of White et al. (1995) regarding the corporate view of sustainability-related impacts, is worthy of further investigation in terms of the willingness/capability of organisations to identify sustainability-related impacts at the specific project level.

Sustainability-related impacts seem to be having an impact on the investment decision-making processes within organisations. For example, one-third of respondents claim to specifically track the financial effect of sustainability initiatives; 39 per cent believe projects that generated returns below the financial hurdle rates may still be accepted where sustainability benefits are significant; while 69 per cent of respondents claim a focus on sustainability has a positive effect on overall performance. Notwithstanding the perceived importance of sustainability-related issues, some 40 per cent of respondents indicated they do not have a specifically designated sustainability role.

4. Conclusions and implications for practice

24

As to who completes certain sustainability-related tasks with respect to capital investment decision making, a number of interesting observations emerge. Accounting staff seem to hold a more traditional view of accounting than we might otherwise expect. For example, accounting staff seem to play a relatively minor role in initiating sustainability-related factors for consideration, play a slightly greater role in verifying sustainability data, and are slightly less involved than others in dealing with qualitative data. The role of accounting and accounting staff with respect to the identification and use of sustainability-related information warrants further investigation.

4.3 Potential areas for further research

In general, we note an obvious divide between those who believe that cash flows capture all relevant data versus and those totally opposed to this view. Further research would be useful to explore this opposing viewpoint alongside the apparent reliance on qualitative data. We also found some indecisiveness around what sustainability data should either be made real (through specifically calculations and inclusion in individual investment models), or best kept at a summary corporate level. Nevertheless, there was no doubt that specific sustainability factors, such as OH&S and employee health and wellbeing, were given high visibility in capital investment appraisal as well as being managed at the operational level.

While costbenefit analysis appears to be regarded highly by our respondents, further work is warranted to explore the definition of a benefit in the popular technique. How is this definition considered from an organisation-wide perspective? Is costbenefit analysis being adopted as a means to confirm broader strategic or policy-related decisions, or is it regarded as a qualitative extension of a DCF- and NPV-related decision? More work needs to be done to examine the competition between management intuition (qualitative reasoning) and the requirement and use of more sophisticated quantitative techniques.

In summary, there is a plethora of normative literature providing guidance for accountants in practice. Nevertheless, there appears to be a gap between this literature and what is apparent in practice. We do find some willingness by organisations to commit to sustainability practices but note that constraints exist, particularly with respect to the incorporation of sustainability issues in decision models such as capital investments. Constraints seem to be common in relation to people, skills and overall system or organisational boundary concerns. Further research is required to gather more detail on these constraints and the role that the accounting profession can play. In particular, this research will contribute to further education and practical guidance on how to overcome similar issues with capital budgeting techniques.

25

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CPA123208 08/2013

Executive summaryIntroductionThe issuesIssue 1: Investors never read IFRS financial statementsIssue 3: IFRS financial statements are too complex