Accounting for sustainability reflects the practice of considering the environmental and social costs of doing business when measuring the performance of a firm. Often used interchangeably with the phrase "going green", accounting for sustainability drives the "triple bottom line" consideration of economic viability, corporate social responsibility, and environmental stewardship and their integration with a firm's values, culture, decision making strategy and operations. Accounting for sustainability is an evolving concept whose underlying construct has changed over time. During prosperous times, this triple bottom line has often been emphasized as a means to increase the goodwill of a firm by conveying an image of being socially responsible and environmentally conscious. Even in the current downturn, major firms in Europe and the U.S. continue to claim sustainability credentials, backed by the production of social and environmental responsibility reports, despite there are currently no official rules regulating how a firm should report on these efforts. Advocates view accounting for sustainability not only as a reputation builder but as a competitive business tool that contributes to the economic and environmental health of society, but as a positive influence on a firm's bottom line. Critics, however, take a different view, one of sustainability serving simply as mechanisms for firms to "greenwash" rather than providing meaningful contributions to stakeholders or society.
The purpose of this paper is to review the prior literature on accounting for sustainability, an area of firm activity which appears to fall outside of the conventional domains of both financial reporting and disclosure and economically-motivated firm behavior, with the goal to understand how accounting for sustainability concepts are defined in the accounting literature along with its relationship to varying theoretical perspectives. Accounting for sustainability, and its sub-areas corporate social responsibility and environmental stewardship, can be seen through various lenses; however, for purposes of this review, accounting for sustainability will be considered in terms of voluntary sustainability disclosures, social and environmental, and their link to such things as management's disclosure policy decisions, firm value and market reactions, and investor relations and analyst behavior. An understanding of the extant literature relative to this view of sustainability in the accounting domain will be obtained by summarizing the hypotheses tested, results obtained, research methods utilized and limitations noted. The final goal of this paper is to propose future research questions related to voluntary sustainability disclosures in consideration of the potential for the accounting for sustainability to become an increasingly significant factor in determining firm performance.
BACKGROUND
Significant regulations govern corporate financial reporting and disclosure worldwide. Firms provide reporting and disclosure through regulated annual financial reports which include the financial statements, footnotes, and management discussion and analysis as well as through other regulatory filings. In addition, certain firms engage in voluntary disclosure activities such as providing management forecasts, conducting conference calls, issuing press releases, publishing firm information on internet sites and preparing other corporate reports. Finally, there are disclosures about firms made by information intermediaries, such as financial analysts and the financial press. Despite the abundance of information that firms disclose to the public, sustainability disclosures, whether environmental or social, are predominantly voluntary with few instances of required or mandated disclosure. As a result, there are multiple forms of sustainability disclosures that may be made outside of the context of the annual report for example via a Social Responsibility Report, Corporate Responsibility Report, and Environmental, Health and Safety Report all of which fall under the sustainability disclosure umbrella. The credibility of such sustainability reporting might be enhanced if it was externally audited and verified as part of a firm's normal assurance process; however, few published reports are submitted to such a process. For this reason, the focus of much empirical research in accounting for sustainability has been limited to the disclosures made in firm's annual reports which are subject to auditor scrutiny and verification.
A number of organizations have released documents providing guidance on various aspects sustainability reporting; however, in terms of evaluating the content of sustainability disclosures, the most widely supported framework, put forth by the Global Reporting Initiative (GRI), provides voluntary reporting standards based on a set of reporting principles deemed important to analysts and investors. The full set of reporting principles, closely linked to financial reporting principles, include: transparency, inclusiveness, completeness, relevance, sustainability context, accuracy, neutrality, comparability, clarity, timeliness and auditability (GRI 2002). The principles help firms define report content, quality, and boundaries for reporting on sustainability impacts. Performance against the framework is measured via the GRI index which identifies indicators on three sustainability dimensions: economic, environmental and social. Most current accounting research in sustainability disclosures is performed using the GRI framework as its base.
ROLE OF DISCLOSURE
Disclosure and the institutions (i.e. auditors and intermediaries) created to ensure the credibility of disclosure play an important role in mitigating information and incentive problems inherent to the theory of efficient capital markets. The information or "lemons" problem arises from different levels of information held by investors and firms and conflicts of interest related to in the provision of that information. Solutions to this problem are found in the creation of contracts providing incentives for full disclosure of private information, regulation requiring firms to fully disclose their private information, and production of private information by intermediaries who uncover superior information (Healy and Palepu, 2001).
The incentive, or agency, problem arises in the delegation by firm owners of responsibility for management of the firm to managers who have incentives to make decisions in their own best interest. Solutions to this problem are optimal compensation and debt contacts which align the interests of all parties, a board of directors whose role is to monitor and discipline management on behalf of firm owners, and information intermediaries who aid in uncovering the misuse of firm resources by managers (Healy and Palepu, 2001). Research on corporate disclosure, therefore, focuses on how and to what extent contracting, regulation and information intermediaries eliminate the information asymmetry and agency problems and the related economic consequences.
In addition to the role of disclosure in mitigating the problems of agency theory, the role of voluntary sustainability disclosures, in particular, used by managers to send specific signals and messages to various stakeholders, can be expressed in terms of social performance goals, financial performance goals and political visibility. First, a firm may disclose sustainability information in order to create an impression of sensitivity to important non-market influences that may be in the long-term interest of shareholders (Belkaoui et al., 1989). Second, as financial performance goals may be materially affected by a firm's sustainability strategies, a firm's decision to disclose sustainability information may be intended to signal lower risk through transparent and easily accessible disclosure. For example, prior research has shown a firm is able to reduce its market-based risk profile through its 'social' business relationships which facilitate a firm's access to equity markets (e.g. Waddock and Graves, 1997), lower transaction costs (e.g.Hill, 1990), and reduce costs of monitoring and coordination (e.g.Milgrom and Roberts, 1992) affording an extensive competitive advantage in the global market place. Finally, political visibility (essentially a size factor) may influence a firm to make sustainability disclosures to satisfy a given constituency or regulatory body in the avoidance of additional social or environmental regulations or taxes being levied on the firm. What about Dye and Verrechia's voluntary disclosure theories?
MANAGER'S DISCLOSURE DECISIONS
Research on disclosure focuses on the information role of financial reporting for capital markets. Disclosure studies assume that, even in an efficient capital market, managers have information superior to outside investors on the firms' future performance. However, managers must trade off between making disclosures to communicate their superior knowledge of firm's performance to investors and to manage reported performance for contracting, political or corporate governance reasons. Healy and Palepu 2001 summarize five forces affecting managers' disclosure decisions:
While agency theory considers voluntary disclosure (of which social and environmental disclosure is a large part) by corporations as a means for the reduction of agency costs or of forestalling future agency costs that could arise in the form or legislation or regulation (Gray et al., 2001), researchers on sustainability disclosure employ an entirely different basis. Research on sustainability disclosure relies on various theoretical frameworks developed from political economy theory (e.g. Benson, 1975) which explicitly recognizes the power conflicts that exist within society and the various struggles that occur between various groups within society. The perspective is that society, politics and economics are inseparable and economic issues cannot meaningfully be investigated in the absence of considerations about the political, social, and institutional framework in which the activity takes place (Deegan, 2002). With this perspective, a researcher is able to understand broader issues impacting how a firm operates, including what information, and in this case voluntary social and environmental information, it elects to disclose. The insights provided by stakeholder theory (e.g. Ullman, 1985),institutional theory (e.g. DiMaggio and Powell, 1983), and legitimacy theory (e.g. Mathews, 1993) further build on those emanated from the political economy theory.
Stakeholder theory
Stakeholder theory, as seen from the managerial (or positive) view, emphasizes the need to "manage" particular stakeholder groups, specifically those that are deemed to be "powerful" because of their ability to control resources that are necessary to the firm's operations (Ullman, 1985). Therefore, the more important the stakeholder group is deemed to the firm, the more effort will be exerted in managing the relationship. Information (i.e. disclosure) is a major element that can be strategically employed by the organization to manage the stakeholder in order to gain their support or approval or to distract their opposition and disapproval (Gray et al., 1996). Empirical results from a study by Roberts (1992) supported that measures of stakeholder power, strategic posture, and economic performance are significantly related to levels of corporate sustainability disclosures. Further research indicates that managers involved in determining disclosures, especially voluntary disclosures, base their decisions on the effects of such disclosures on their firm's cost of capital, information risk and the disclosure's ability to reduce uncertainty about the firm's future prospects (Graham, Harvey, and Rajgopal 2005).
Institutional theory
Under institutional theory, firms will change their structure or operations to conform to external expectations about what forms or structures are acceptable (legitimate). Institutional pressure for conformity can occur at the country level as well as the industry level. For instance, the dynamics of corporate sustainability are driven by a country's institutional regime as it affects both the relative benefits and costs of information for firms and capital market users and the functioning of capital market participants (e.g. Bushman and Smith, 2003; Bushman, Pietroski and Smith, 2004). Additionally, from the industry perspective, where the majority of firms in an industry might take a particular approach to accounting for and disclosing sustainability practices due to the specific social or environmental regulations applicable to that industry, there will be institutional pressure on a firm to also take a similar approach. As a result, social and environmental disclosures will vary according to the institutional environment as mandatory disclosures and the volume and subject of voluntary disclosures are different.
Legitimacy theory
The additional perspectives provided by legitimacy theory indicate that organizations are not considered to have any inherent right to resources, or in fact, to exist unless society considers they are legitimate and confers upon the organization the state of legitimacy (Mathews, 1993). The idea of legitimacy can be related to the concept of a social contract where a firm's survival will be threatened if society perceives that it has breached this contract. For example, when society is not satisfied that the firm is operating in a legitimate manner, they can reduce or eliminate their demand for the firm's products or lobby the government for increased regulations to prohibit actions that don't conform to the expectations of society. Managers will therefore pursue disclosure strategies, including the voluntary disclosure of sustainability issues, which assure society of the legitimacy of their operations.
The notion of legitimacy theory is also linked to impression management theory. Researchers employing impression management theory see sustainability disclosures as an element of the firm's maintenance of its status and reputation with influential stakeholders. On the one hand, firm disclosure may be motivated by a desire to legitimize various aspects of a firm's operations when particular events occur that are perceived by management as being detrimental to the firm and, perhaps, its ongoing survival. Otherwise, as found by Neu et al (1998), firm disclosure may be motivated by responsiveness to demands or concerns of powerful stakeholders such as government regulators rather than to the concerns of social or environmental groups. Because environmental disclosures included in annual reports generally provide relatively more verbal as opposed to numerical information, they tend to be described as accounting narratives which can be deliberately tailored to manage public impressions. Thus, corporate management can use environmental disclosures as an impression management tool by self-servingly biasing the narrative through decisions on the amount of information (quantity), the range of topics (thematic content), and the rhetorical devices (language and verbal tone) to be included in their disclosures (Merkl-Davies & Brennan, 2007).
SUSTAINABILITY IN THE ACCOUNTING LITERATURE
Although sustainability research has only been the focus of research attention since the mid-1970s, firms have made voluntary disclosures of their interactions with society and the environment since long before. Recognition of interest in the subject grew with an apparent growth in anxiety about corporate ethics, corporate power, social responsibility and ecological degradation (Gray, 2002). Major streams in the research have attempted to assess the association between sustainability reporting and disclosures and (1) economic performance, (2) firm characteristics and external influences, and (3) social and environmental performance, with the most significant body of research examining the influence of firm characteristics and external events on sustainability disclosure. In each stream, sustainability disclosures have been measured on sustainability disclosure scales, using a social scale derived from Ernst and Ernst (1973) and environmental scales derived from Wiseman (1982) and, more recently, a scale put forth by Clarkson, Li, Richardson and Vasvari (2008) based on GRI guidelines.
Economic Performance
According to the corporate disclosure literature, the lemons problem in capital markets creates incentive for managers to provide voluntary disclosure to reduce the cost of capital and voluntary disclosure quality has been shown to be associated with firm value through direct or indirect effects on a firm's cost of equity capital and/or indirect effects on a firm's cash flows (Lambert, Leuz and Verrechia, 2006). The sustainability disclosure literature has attempted to address both of these topics. In terms of sustainability disclosures and a firm's economic performance, the hypotheses are that (a) sustainability disclosure reduces investors' information uncertainty and (b) sustainability disclosures are correlated (positively or negatively) with economic performance. The first hypothesis looks at the relationship between disclosure and economic performance based on market variables while the second examines the relationship in terms of accounting variables (Belkaoui et al., 1989). The measures of reduction of investor's information asymmetry are linked to financial analyst performance whereby analysts, perceived as capital market gatekeepers, gather and analyze information from various sources and relay it to other stock market participants. Therefore, with respect to increased following by financial analysts, voluntary disclosure affects the ability of financial analysts to effectively perform their work through more precise earnings forecasts leading to an increased following, less dispersion in analyst forecasts and less volatility in revisions (Lang and Lundholm, 1993). In relation to the second hypothesis, the measures of economic performance include measures of stockholder returns, measures of rates of return in equity, and measures of expected cash flow. Evidence from the sustainability literature suggests that a firm's level or quality of voluntary social and/or environmental disclosure is associated with:
Corporate characteristics
As noted, the area of most consistent interest seems to have been the attempts to explain sustainability disclosure by reference to observable corporate characteristics- typically size and industry affiliation. In this area researchers have consistently speculated that larger, more profitable firms, and those in more 'socially-' and 'environmentally-sensitive' industries can be expected to make greater use of the (typically voluntary) disclosure of information about their social and environmental activities (Gray et al., 2001). Firm size has been proxied by total sales or total assets while industry sensitivity is measured by... The studied relation between corporate characteristics and sustainability disclosure suggests that firms' voluntary social and/or environmental disclosure increases with firm size and membership in environmentally sensitive industries such as oil and gas, chemicals, forest and paper products or utilities (Alnajjar, 2000; Barth, McNichols and Wilson, 1997; Bewley and Li, 2000; Cormier and Gordon, 2001; Cowen, Ferreri and Parker, 1987; Elijido-Ten, 2004; Neu et al., 1998; Patten, 1991; 1992; 2002b;). For example, the Cowen et al. (1987) study of corporate characteristics on social responsibility disclosure worked to extend the knowledge of the relationship between a number of corporate characteristics and specific types of social responsibility disclosures, based on an extensive sample of U.S. corporate annual reports. Corporate size and industry category were found to correlate with certain types of disclosures.
Social and environmental performance
A considerable number of studies have sought to examine whether companies with either an observable social responsibility performance and/or a better social and/or environmental reporting performance also have a better financial performance (Richardson et al., 1999). For example, a study of the sustainability disclosures and financial market performance of the UK's largest companies conducted by Murray, Sinclair, Power, and Gray (2006) indicates that better financially performing companies do manifest a better level of observable social and environmental performance and/or sustainability disclosure behavior over a period of ten years, despite finding no direct relationship between share returns and sustainability disclosures. Despite research on the relationship between corporate social responsibilities, sustainability reporting and the stock market was relatively inconclusive, research examining the relationship between disclosure and sustainability performance has met with a marginally better result, hypothesizing that the extensiveness (quality) of sustainability disclosure is correlated with environmental performance (Belkaoui et al., 1989). Social and environmental performance has been measured through environmental litigation and reputational or performance indexes such as the one put forth by the Council for Economic Priorities (CEP). In relation to sustainability performance, evidence suggests that firms' voluntary sustainability disclosures are:
RESEARCH METHODOLOGY AND LIMITATIONS
With the development of accounting for sustainability is still in its infancy and predominantly a voluntary exercise as compared to the historical practice of required financial reporting there is still much debate on the issue of what sustainability means and how it should be accounted for, reported or disclosed. For example, in relation to external reporting, there is a lack of consensus on key issues such as the objectives of reporting, the characteristics the information should possess, the audience of the reports, the best format for presentation and so forth (Deegan, 2002). With the subject matter apparently ill-defined, transient and subject to trends, development of substantial research in the area of accounting for sustainability may be limited. Further, as presented within this paper, research in sustainability disclosure has been built on several distinct, but related, constructs and therefore the research community is lacking one commonly agreed upon basis on which to build its agenda.
As evidenced within this paper, research in sustainability has spanned the range from descriptive (what is) to normative (what should be) to attempted theory building; however, a large body of positivist (empirical) research exists. This empirical research is conducted primarily utilizing regression or structured equation models linking the variable being studied to a voluntary disclosure quality index (i.e. the Wiseman (1982) index previously mentioned). Sample size or selection may have been an issue as a relatively small proportion of firms that are listed worldwide actually provide sustainability disclosures, lending to the absence of data and potential self-selection bias. Moreover, Gray and Bebbington (2007), highlight that even among firms disclosing sustainability activities, the average quality of disclosure is so uneven as to be useless for meaningful analysis and comparison.
Additionally, the quality of the Wiseman disclosure index itself has been subject to intense scrutiny such that, in more recent studies, the voluntary disclosure quality index has been adapted based on the Global Reporting Initiative framework. Despite this framework seems to be considered by the business community as dominant to other standards, the scope of the GRI framework is continuously being revised and augmented making sustainability performance a moving target and complicating its reliability for use in a research setting. Similarly, criticism has been directed at studies relying on the CEP to build their performance index, as this organization only followed a small group of firms in particular industries and did not use the same criteria or consistent methodology to assess corporate environmental performance in different industries.
CONCLUSIONS AND IMPLICATIONS FOR FUTURE RESEARCH
As evidenced by the literature reviewed for this paper, various academic research journals are publishing articles on accounting for sustainability issues, most notable among these are Accounting, Organizations and Society, Accounting, Auditing & Accountability Journal, Critical Perspectives on Accounting, European Accounting Review, and the Journal of Accounting, Auditing and Finance. This volume of research is in contrast to what was occurring up to the early 1990s when much less research was being published in the area "and when it was being published it was typically emanating from a small number of people who had gone against the "trend" and embraced issues associated with social and environmental issues" (Deegan, 2002). Additionally, although there seems to be a gap in research in this area from the early to late 1990s, governments, industry bodies and the accounting professions have shown a steady increase in the attention devoted to accounting for sustainability issues, making it more likely to remain a presence in the accounting research agenda. Future research in corporate sustainability reporting might be considered, including the following:
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