1. EXECUTIVE SUMMARY

To maintain financial sustainability and to effectively compete in the global market, companies worldwide should integrate environmental sustainability into their business strategies and models. Many of the business disasters that have occurred over the past decade accentuate that corporate environmental responsibilities are vital to economic sustainability, the wellbeing of society and future generations. Companies should respond to environmental challenges and turn them into opportunities by strengthening their environmental management, adopting policies and practices that safeguard the global environment and improving their environmental performance. This chapter presents the environmental dimension of sustainability performance worldwide and particularly in Asia.

2. INTRODUCTION

The environmental dimension of sustainability performance enables business organizations to assess the impact of their operation on the environment. Many of the business disasters that occurred in the past decade underscore that corporate environmental policies are vital to economic sustainability and the wellbeing of society. Environmental sustainability is defined as a process of preserving the quality of the environment in the long term, assessing the environmental impact and creating a better environment for future generations while creating shareholder value. In 2010, the SEC released guidance reiterating the relevance and importance of adequate disclosure of material risk associated with climate change by public companies.¹ Current and future legislation coupled with society's increasing sensitivity to the environment (especially toward pollution, hazardous waste, human health, green house gas emission and other general environmental concerns) necessitate high-level management attention to companies' environmental practices and obligations.

The International Standardization Organization (ISO) has released ISO 14000, which requires executive management to conduct regular evaluations of the company's Environmental Management System (EMS) to ensure that the system is realizing the set goals and missions of the environmental policies.² The main goal for management's review of the EMS is to identify deficiencies and successes in order to improve environmental practices in the future. A company will benefit economically and socially through the implementation and continuous usage of an EMS that is relevant, accurate and sustainable in monitoring and developing environmental best practices, missions and goals. This chapter presents the environmental dimension of EGSEE sustainability performance with a keen focus on Asia including (1) environmental key performance indicators (KPIs) (2) global environmental initiatives (3) environmental management systems (4) environmental reporting (5) environmental assurance and auditing and (6) environmental best practices.

3. GLOBAL ENVIRONMENTAL INITIATIVES

The environmental dimension of sustainability performance reflects the company's efforts in leaving a better environment for the next generations and includes reducing an organization's carbon footprint, creating a better work environment and improving the air and water quality of the company's property and the surrounding community. Many of the business disasters (e.g., the BP oil spill) that occurred in the past decade proved that corporate environmental responsibilities are vital to economic sustainability, the wellbeing of society and future generations. Sustainability disclosures with respect to the environmental dimension are mainly related to effects on natural resources and environment that could directly or indirectly affect the living conditions of human beings. Environmental strengths in the environmental areas include (1) beneficial products and services (2) anti-pollution policies (3) recycling (4) clean energy and (5) other environmental strengths. Concerns include (1) hazardous waste (2) regulatory problems (3) ozone-depleting chemicals (4) substantial emissions (5) agricultural chemicals (6) climate changes and (7) other environmental concerns.

Widening sensitivities to the environment (e.g., pollution, hazardous waste, human health and other general environmental concerns) along with ever-increasing environmental laws and regulations force corporations to pay attention to their environmental practices and obligations. Reporting environmental performance in the United States in a corporate setting has been built on regulations and societal demand for accurate environmental reporting. Corporations have developed environmental reporting tools through voluntary and enforced standards via various social and governmental initiatives. Environmental initiatives and regulations have far-reaching consequences for how corporations are viewed in society and held liable for inadequate environmental consideration. Environmental business sustainability created through best practices, regulations or accounting standards is forcing Corporate America to rethink how business is conducted. Moreover, corporations are developing or adapting voluntary reporting tools to be compliant with regulatory bodies and to enhance their social responsibility. The United States Congress has recognized that human activities have a dramatic impact on natural ecosystems through population growth, urbanization, industrialization, resource use and technological advancements.³ It is critical that sustainable systems are put in place to maintain environmental, social and economic sustainability to ensure the success and livelihood of future generations. Furthermore, the US Congress stresses the cooperation of state and local governments as well as public and private organizations to facilitate the creation of solutions to environmental issues.

Developing an environmental strategy for a company is only the beginning. Companies which have large supplier relationships must ensure the integrity of the specific suppliers' environmental KPIs to ensure sustainability throughout the value chain. Implementing these practices is voluntary in the United States. However, the increase in environmental regulations has induced the Federal government to enforce the regulations through the Environmental Protection Agency (EPA). The EPA is responsible for identifying and enforcing environmental laws and regulations, and forcing companies to clean-up or seeking recovery of the cost of clean-up of a contaminated site. Companies that do not comply will be made liable for (1) clean-up costs (2) paying fines (3) reducing or eliminating future contamination (4) degradation of natural resources (5) societal litigation and (6) criminal charges. Effective compliance with environmental laws and regulations requires full commitment by companies to initiate environmental management systems, accounting and auditing practices.⁴

In general, corporations that are involved in resource intensive industries are required to follow environmental requirements, laws and regulations (e.g., the Clean Air Act and the Superfund Act). On a broad scale, the EPA issues and enforces health and environmental regulations relevant to the Clean Air Act, Clean Water Act, Solid Waste Act and Superfund Amendment and Reauthorization Act (SARA) as well as other regulations affecting environmental reporting. For specific industries such as construction, the EPA has developed a set of environmental KPIs for businesses to use as a guideline. The six basic guidelines are as follows: diesel emission reduction strategies, smart energy practices, green remediation, green building/construction practices, water management and environmentally preferable purchasing. The EPA uses a National Priorities List (NPL) to identify contaminated sites that need or potentially need to be cleaned up. An NPL site is defined as those having a release of hazardous materials, pollutants or contaminants that have negative effects on the environment and human health. At the end of 2009, the NPL concluded there were 1,111 seriously contaminated (non-federal sites).⁵ In 2009, the EPA spent over US$4 billion on clean-up efforts on sites that had severe human exposure or unknown exposure. From 2010 to 2014, the EPA expects to spend US$335–681 million each year on contaminated sites. As of April 1, 2011, the EPA had identified 1,132 non-federal sites and 158 federal sites that are in immediate need of clean-up with no direct cost estimations.⁶

In June 2009, Ceres (a Boston-based non-profit sustainability organization) and the Environmental Defense Fund released a joint report on their analysis of climate risk disclosures of 100 companies in five sectors for the 2007 fiscal year and concluded that investors have not received adequate climate information from corporate filings with the SEC.⁷ The SEC is currently addressing climate change and establishing guidelines for the proper disclosure if public companies responses to the challenges of climate change. The report, on climate change disclosures of about 6,400 10-K filings by S&P 500 companies from 1995 to 2009, reveals that there was “an alarming pattern of nondisclosure by corporations regarding climate risks.”⁸ A survey conducted by Ernst & Young in 2010 suggests the following five global themes regarding climate change:⁹

1. Appropriate tone at the top is crucial in dealing with emerging challenges of climate change.
2. Executive leadership is critical to effective governance and understanding and realizing the full potential of the business response to climate change. More than 90 percent of executives surveyed indicate that climate change governance should be addressed at board and top-management level.
3. Business drivers are dominated by top-line and bottom-line impacts of climate change initiatives with a keen focus on meeting changes in customer demand.
4. Business executives are committed to addressing the ever-increasing challenges of climate change.
5. Climate change investments have increased despite regulatory uncertainty.

In 2010, the SEC released guidance reiterating the relevance and importance of adequate disclosure of material risk associated with climate change by public companies.¹⁰ Relevant items in SEC documents S-K or S-X that trigger climate-related disclosure are items 101, 103, 503(c) and 303. Item 101 pertains to any material capital expenditures on facilities and environmental controls and related risk assessment and management during the company's current fiscal year and previous periods where the company finds it material.¹¹ Item 103 requires a company or its subsidiaries to describe any material legal proceedings it may be involved in.¹² Item 503(c) gives guidance on what risk factors a company should review assess, manage, and disclose regarding existing or pending regulation on climate change.¹³ Item 303 requires public companies to determine the effect any enacted climate change legislation or regulation will have on the company's financial position and operations.¹⁴ For example, pending legislation or regulations on climate change can affect costs of purchasing supply chain management or improving facilities and demand for products and services.

In a survey, conducted by Ernst & Young in 2010, respondents reported that the top three factors driving their climate change initiatives were (1) energy costs (2) changes in customer demand and (3) new revenue opportunities.¹⁵

A list of EPA regulations relevant to environmental issues can be found on the EPA website.¹⁶ The EPA has other programs which are voluntary and are helping to drive industry-wide adoption and awareness of environmental practices. The voluntary programs are: Green Lights, Climate Wise, Waste Wise and Energy Star. Corporations in the United States are not required to issue environmental reports or follow ISO 14000 environmental management, auditing and accounting standards. They are, however, liable for environmental degradation inflicted by them or their subsidiaries (e.g. the BP oil spill). Many large corporations like IBM, Pfizer, GE, GM, Google, and Apple have developed their own tools in developing environmental KPI-reporting items. The reports are produced annually and include tailored KPIs and goals which include energy conservation, waste reduction, green house gas emission reduction increased recycling and use of environmentally friendly materials.

The United Kingdom and the United States both have large corporations or conglomerates that operate worldwide. The UK has developed environmental laws that enforce environmental practices whereas the US has regulations that govern industries involved in the use of natural resources. Although both countries have laws and regulations to ensure public safety and reasonable use of natural resources now and neither has standards on how to disclose environmental practices. Furthermore, such disclosure is voluntary, but increasing in popularity as a result of societal demand. In the US, the SEC and the Financial Accounting Standards Board (FASB) have given corporations support in developing reporting standards. However, the major increase in reporting is mainly attributed to the increase in social awareness and governmental regulation.¹⁷ The EPA has influenced the types of KPIs being established monitored and used throughout the business world. Moreover, systems have been developed to help report environmental information. The EPA has put through several environmental regulations to control and monitor environmental degradation, which enables them to enforce the regulations when companies fail to act accordingly.¹⁸

General guidelines for implementing ISO 14000 are as follows:¹⁹

• ISO 14001—Environmental Management Systems—Specification with Guidance for Use
• ISO 14004—Environmental Management Systems—General Guidelines on Principles Systems and Supporting Techniques
• ISO 14010—Guidelines for Environmental Auditing—General Principles
• ISO 14011—Guidelines for Environmental Auditing—Audit Procedures—Auditing of Environmental Management Systems
• ISO 14012—Guidelines for Environmental Auditing—Qualification Criteria for Environmental Auditors
• ISO 14020—Environmental Labeling— General Principles
• ISO 14021—Environmental Labels and Declarations—Self-declaration Environmental Claims— Guidelines and Definition and Usage of Terms
• ISO 14022—Environmental Labels and Declarations—Self-declaration Environmental Claims— Symbols
• ISO 14024—Environmental Labels and Declarations—Environmental Labeling Type 1—Guiding Principles and Procedures
• ISO 14031—Environmental Management—Environmental Performance Evaluation—Guidelines
• ISO 14040—Environmental Management—Life Cycle Assessment—Principles and Framework
• ISO 14041—Environmental Management—Life Cycle Assessment—Goal and Scope Definition and Inventory Analysis
• ISO 14050—Environmental Management—Vocabulary

Environmental sustainability has become a strategic focus of corporations worldwide. The response to environmental challenges and the pursuit of opportunities has resulted in policies and practices that seek to safeguard the environment and improve the wellbeing of society. Global environmental calamities like the Union Carbide Bhopal chemical leak in 1984 and the 2010 British Petroleum oil spill in the Gulf of Mexico are examples of events that have forever changed the affected environments, ecosystems, corporations and communities.

Public awareness of both corporate and individual responsibilities has increased as has stakeholder input. Environmental risk mitigation is an integral part of economic sustainability, both present and future. Increased CO₂ levels from greenhouse gases (coal, oil and natural gas) are linked to atmospheric temperature, which will affect weather patterns. Volatility in climate patterns increases uncertainty about future demand, supply chains and the stability of infrastructure. Hence business policy will evolve as these patterns become better understood. Extreme weather conditions are well understood and responded to in most cases and this is generally part of an organization's business continuity plan. Both extreme weather and climate change impact sustainability. Energy and fuel supply uncertainties increase volatility in fossil fuel markets. Managing corporate reputation, customer expectations and efficiency drives interest to a greater extent than does legal compliance in most cases. Independent ranking agencies rate companies on emissions and goals. Carbon footprints are found in supply chains and are an efficiency and risk measure that is a liability demanding stakeholder management. Scarcity of material resources will increase in line with population growth and urbanization. Shareholders have become more educated about these challenges and recognize the corporate investment required to meet long-term sustainability. Several sustainability indices are being developed by agencies such as Bloomberg to provide valuation tools for the measurement and comparison of indices.

The stresses placed on the natural environment over the last century have increased strains and crises worldwide. In addition to the identification of ozone depletion in the late-20th century, the identification of climate change is a manifestation of this deterioration. Initiatives like the Kyoto Protocol, the European Union Emission Trading System (EU ETS), the Carbon Reduction Commitment (CRC), the Montreal Protocol and the Paris Agreement are all efforts to gain consensus on mechanisms by which to measure impacts to the environment and to set limits on activities deemed detrimental. Specifically, the Kyoto Protocol sets greenhouse gas emission limits and provides signature nations with three mechanisms by which to meet the necessary output level, namely emission trading, clean development mechanisms and joint implementation.

In addition to the numerous organizations, like the Alliance for Global Sustainability, which seek to improve the scientific understanding of global environmental challenges as well as the education of a new generation of leaders committed to sustainable development, the International Organization for Standardization (ISO) established global standards to assist firms in developing adequate environmental management systems.

The global success of the ISO 9000 quality assurance standards serves as the model for the ISO 14000 series standards. While not mandatory, many organizations are also required by their customers to be ISO 14000-certified prior to conducting business. Meeting ISO 14000 standards is increasingly becoming a prerequisite for competition in the global market. Further, the 14000 series standards can serve as the framework for environmentally sustainable business plans and mission statements, which, if well-built and adhered to, will likely limit a company's future liability and constrain the cost of enforcement. As energy dependence rises, further visibility and development of ISO standards which specifically address energy management throughout organizations is to be expected.

In total, there are numerous initiatives and organizations committed to creating sustainable business practices. Regardless of the mechanism by which any organization or nation decides to participate in and measure compliance with established protocols, the simple act of adopting and attempting adherence to any of the protocols makes members keenly aware of how their activities impact the environment. This awareness and understanding furthers advancements in technology which can negate or offset the harmful impacts of daily activities.

4. ENVIRONMENTAL INITIATIVES IN ASIA

5. ENVIRONMENTAL KEY PERFORMANCE INDICATORS

To help reduce their environmental footprint, corporations are adopting formal evaluation processes to measure their impact on the planet. Various environmental KPI measures are being developed and adopted. Best practices among the environmental KPIs adopted are:

• Production and delivery of environmentally safe products by the use of biodegradable, non-toxic and naturally derived materials in the production.
• Efficient and effective utilization of scarce natural resources like power, energy and scarce natural materials.
• Efficient and effective use of recycled materials.
• Low-carbon model towns.
• Leveraging technology to maximize utilization of scarce resources and replacement of non-renewable resources.
• Effective and efficient utilization of non-waste technologies.
• Minimization of the use of harmful and unsafe materials and products.
• Assessment and management of environmental risks including providing for appropriate insurance against risks and environmental remediation and disposal efforts.
• Environmental reporting that discloses environmental risk assessment and management, compliance with environmental requirements and measurement of environmental liabilities.
• Environmental external auditing and assurance on environmental reports.

6. ENVIRONMENTAL MANAGEMENT SYSTEMS

The Environmental Management Systems (EMS) within a corporation are programs established by the corporation to improve the environmental performance of the company. EMS programs allow companies to achieve environmental goals based on the company's control of its processes. EMS programs maintain themselves through mission statements and company policies. These policies and goals are available to all stakeholders. It is believed that when a company can control its environmental impact through goals, the company will improve its environmental performance. Most companies benefit from EMS programs through the saving of energy.

The management team is responsible for determining the policies and goals for EMS programs. Once goals and policies have been established, a plan is developed to attain the goals set. The company must then implement the plan and develop a monitoring system to determine the effectiveness and achievement of the goals and policies. This ultimately comes down to review by management to further develop goals and policies.

The documentation for EMS programs is specifically based on ISO 14000 standards. ISO 14001 is the leading standard for EMS programs. It requires extensive documentation as well as regular review of the documentation by executive management.

The corporation establishes its EMS programs and applies for ISO 14000 certification. The company will then be audited regarding its goals and policies. Once the company gains certification, it will be subject to periodic reviews. Some benefits of becoming certified include new market customers, increased employee morale, increased efficiency, and a better public image. Some of the best practices and goals of an effective EMS are:

• Appropriate tone at the top set by the board of directors and senior executives to provide leadership and commit adequate resources necessary for responsible environmental management.
• The compliance board committee and/or compliance officers are assigned primary responsibility for the environmental performance of the operations within their control.
• Proper education of all employees regarding environmental laws, regulations and best practices.
• Development of environmental policies and procedures in compliance with environmental rules and regulations.
• Assignment of qualified officers and staff to be in charge of compliance with environmental policies in order to advance the corporation's knowledge of environmental protection.
• Assessment and management of environmental risks and evaluation of environmental performance in ongoing monitoring process.
• Certification of compliance with established environmental operating procedures to ensure maintenance of environmental regulatory compliance and responsible environmental management.
• Establishment of an environmental audit program to ensure periodic review of environmental KPIs in operation.
• Proper disclosure of environmental policies, procedures, reporting and auditing to all stakeholders.

7. ENVIRONMENTAL REPORTING AND DISCLOSURE

Environmental KPIs should be managed, measured, and reported in compliance with the GRI reporting framework. Environmental reporting is often referred to as “green accounting” or “green reporting.”⁷⁰ Environmental information can be included in the corporate annual reports filed with the SEC and disseminated to shareholders, provided in Management Discussion and Analysis (MD&A), or presented in a standalone environmental report. Environmental information has traditionally been disclosed in both annual reports and MD&A. The GRI framework developed a set of principles to establish whether the type of information the company wants to report will be included in the sustainability report.⁷¹ The basic principles are as follows:

• Materiality—The organization should report information that has the greatest impact on short- and long-term operations, societal impacts, and environmental influences, fulfilling all dimensions of EGSEE. The materiality of reporting sustainability information should reflect the organization's overall mission, vision, strategies, stakeholder welfare, societal impacts, and environmental issues.
• Stakeholders—The report should disclose all major stakeholder expectations and address any concerns or interests. A stakeholder is any entity (living or not) that can be affected by an organization's operations.
• Sustainability context—The objective is to disseminate sustainability information across all areas of EGSEE performance, prepared in a format that best reflects all of these areas.
• Completeness—The report should reflect all areas of EGSEE in order to properly and transparently reflect the organization's overall sustainability performance.

There are a growing number of companies worldwide that now issue separate environmental reports. For example: “2,500 organizations in some 60 countries around the world now measure and disclose their greenhouse gas emissions and climate change strategies through the climate disclosure project (CDP) and over 1,300 organizations published a GRI based report in 2009.”⁷² There are several reporting and certification processes and guidelines to help develop proper reporting tools for public companies and government agencies and other stakeholders. Industry-led initiatives such as ISO 14000, ISO 26000, and Leadership in Energy and Environmental Design (LEED) are certification processes in the United States and in other countries that can be used to track environmental compliance and other sustainable business developments. These initiatives require companies to develop environmental management systems as discussed in the previous section, but do not require mandatory environmental accounting, auditing, and reporting. A more convincing argument for encouraging the issuance of separate environmental reports is that the existing annual reports presenting financial statements are already very complex. Addition of environmental disclosures in the annual reports would further increase the complexity of financial statements. More importantly, by producing a separate environmental report, the organization can signal that it considers and values environmental disclosures as being as important as financial information.

The Statement of Financial Accounting Standards (SFAS No. 5) on contingent gains or contingent losses discusses how potential gains and losses are accounted for in financial statements. Financial Reporting Standard 12 (FRS-12) sets the principles for accounting provisions, contingent liabilities, and contingent assets. In most cases, organizations faced with transforming their environmental management activities will need to report environmental provisions, contingent liabilities, and contingent assets. FRS-12 guidelines will help organizations to accurately report in accordance with generally accepted accounting principles (GAAP) and to deal with difficult accounting situations when dealing with environmental reporting.

Moreover, it is imperative that an organization seek an EMS to develop the necessary tools to report and track environmental performance. Through scientific advancement, e.g., global climate modeling, modeling of ecosystems, and alternative energy sources, society's awareness regarding the impact of humans on the environment has increased. This has multiplied the costs and obligations organizations will have to bear. Environmental laws and regulations will increase as well and will force organizations to take a more hands-on approach to voluntary environmental challenges. Voluntary disclosures of environmental information can create diversity in the format, structure, and content of environmental reporting whereas mandatory standardized environmental reporting promotes comparability and uniformity in environmental disclosures.

8. ENVIRONMENTAL ASSURANCE AND AUDITING

Environmental assurance and auditing is a broad term used to encompass environmental compliance, assessment of risks, and company environmental sustainability and audits. ISO 14010 is a systematic verification process that evaluates the effectiveness of the EMS. The audit will provide assurance that the company is complying with regulations, reducing insurance costs and appropriately assessing operational environmental liabilities. There is a growing trend toward having the sustainability report assured in part or as a whole as the value of these efforts becomes embedded in business strategy and stakeholder value. To ensure that the company is always improving its risk reduction efforts, a third-party independent assurance provider can be hired to provide assurance reports on compliance with applicable environmental rules, laws and regulations. The third-party assurance provider can examine chemical hazards and security vulnerabilities, facilitate and apply the appropriate risk-analysis technique for the risks identified, and recommend, prioritize and review options to manage risk to a level appropriate for each company's specific risk tolerance.

9. ENVIRONMENTAL BEST PRACTICES

Best practices are standards set informally through methods or processes that have proven successful over time. Generally, common sense plays a role in developing best practices, and standards such as ISO 9000 and ISO 14000 are examples of voluntary best practices. Environmental best practices are standards such as ISO 14000 that establish an EMS in the organization to fully integrate environmental best practices, leading to an environmentally sustainable organization. Some organizations choose to report, based on KPIs on an annual or quarterly basis, on company-specific missions, goals and accomplishments. Some examples are CO₂ output, energy consumption, recycled material, raw material used, recycled material used, employee health in the workplace, etc. However, useful internal KPIs such as ISO 14000 can set global standards for management to use to become leaders in environmental sustainability.

10. CONCLUSIONS

Stakeholder value creation can only be achieved when business organizations focus on all five EGSEE dimensions of sustainability. This chapter presents the non-financial environmental dimension of sustainability performance reporting and assurance. Given that a company is the property of its owners and not stakeholders, the owners have the right to decide how to handle their property as either for profit or for social good, or for both if they desire. However, there has been a move in recent years to a middle ground view of “doing well by doing good” by focusing on both financial and non-financial sustainability performance. Companies that are doing well financially have more slack resources to undertake social and environmental activities. By the same token, companies that are managed more effectively through robust corporate governance measures, that are run ethically, and that pay attention to their social and environmental initiatives are more sustainable in the long term.

Environmental sustainability is a process of preserving the quality of the environment in the long term and leaving a better environment for future generations while creating shareholder value for the current generation. Environmental sustainability has become a strategic focus of corporations worldwide and those in Asia. Responses to the global environmental challenges and the pursuit of opportunities have advanced policies and practices that seek to safeguard the environment and improve the wellbeing of society. Many organizations including the International Organization for Standardization (ISO) have established global standards to assist organizations in developing adequate environmental management systems, environmental auditing and reporting. Due to the fact that economic development in Asia is mainly at an emerging stage, environmental concerns have mostly been left for governments to take the lead. Many business enterprises have not advanced to the stage of “do[ing] well while doing good” in Asia.

11. CHAPTER TAKEAWAY

1. Various incentives and pressures driven by socially and environmentally responsible investors and activists have encouraged companies to focus on their non-financial governance, social, ethical, and environmental (GSEE) performance, reporting, and assurance.
2. Leave a better environment for future generations.
3. Integrate environmental initiatives and guidelines established by professional organizations into corporate culture, business environment, and strategic decisions.
4. Utilize ISO 14000 guidelines in developing environmental management systems, environmental risk assessment, and environmental auditing and reporting.
5. External and independent verification of environmental reports lend objectivity and credibility to environmental sustainability reports.