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13.2 Identify User Needs for Information
The concept of the triple bottom line expanded the role of reporting beyond shareholders and investors to a
broader range of stakeholders – that is, anyone directly or indirectly affected by the organization, including
employees, customers, government entities, regulators, creditors, and the local community. Naturally,
companies may feel their first obligation is to their present and potential investors. But it also makes good
business sense to consider other stakeholders who can affect the company’s livelihood. Let’s examine the
various users of sustainability reports and their particular information needs. Primary users would be
considered shareholders and investors, whereas secondary users would be customers, suppliers, the
community and regulators.
Shareholders
Many consider the company’s shareholders to be its primary information user group. These equity investors
may be small single investors or they may be part of an institutional investment fund charged with investing
on behalf of its members. As shareholders they concern themselves with the future viability of the company
and want profits to be sustained or increased over the long term. Shareholders often use financial ratios, such
as earnings per share (EPS), return on investment (ROI), and the price/earnings ratio to evaluate the financial
health and the sustainability of financial growth of the company. Shareholders not only evaluate whether
there is current value in owning stock of the company but also whether there will continue to be value in
owning that company’s stock. Otherwise the shareholder is likely to divest of their ownership interest.
One ratio that shareholders often use to measure the value of the company’s stock relative to the company’s
earnings is the price-earnings ratio, or P/E ratio. In the P/E ratio, the market price of the stock is divided by the
earnings per share of the company’s stock. This ratio indicates the amount an investor is willing to pay for one
dollar of the company’s earnings. For example, if a stock is trading at a P/E of 30, then this indicates investors
are willing to pay $30 for $1 of current earnings. A high P/E ratio indicates investors expect high future
earnings. A low P/E ratio has several interpretations but could indicate a company is undervalued. Many
investors use the P/E ratio as a measure of whether or not a stock should be purchased, but no single metric
T H I N K I T T H R O U G H
Do Friedman’s Ideas Stand the Test of Time?
In a 1970 New York Times Magazine (https://openstax.org/l/50business) article, economist Milton
Friedman argued that for a manager acting as an agent of the business owner (principal), “there is one
and only one social responsibility of business—to use its resources and engage in activities designed to
increase its profits so long as it stays within the rules of the game, which is to say, engages in open and
free competition without deception or fraud.”
Given what we have learned about Earth’s environment since this article was published, do you think
Friedman’s statement that the “sole purpose of business is to make profits” is valid? Explain your
answer.
Chapter 13 Sustainability Reporting 681
https://openstax.org/l/50business
should be used alone. In addition, the P/E ratio is only useful when comparing changes across time for a single
company to see trends or lack of trends. The P/E ratio is most useful if compared across companies within a
given industry sector. Most often, growth will vary widely between different sectors but will be more similar
within a particular sector. Investors buy and sell stock for many reasons, both financial and non-financial. They
can sell a stock due to lack of current growth in value or an expected drop in future earnings. They can also
buy a stock because the company participates in activities that the shareholder values, such as fair wages and
greenhouse emission reductions even if the company has a low P/E ratio. Let’s look at an example of an
investment driven by more than just the company’s current financial situation.
In 2008, Warren Buffett’s MidAmerican Energy Company, a subsidiary of Berkshire Hathaway, bought a $230m
stake in BYD, a Chinese battery maker about to begin auto production.[52] Although the auto industry initially
ridiculed Buffet’s investment in such a little- known company, he may well have the last laugh. Since 2008, the
company has evolved into the world’s leading producer of electric cars, and its shares now trade at almost 10
times what MidAmerican paid for them. This increase in value reflects the market’s optimism about the future
of the company based on the Chinese government’s commitment to speeding up the phasing out of fossil
fuels.
The new ethical investing movement focuses on eliminating investments that conflict with shareholders’
values, such as dependence on environmentally damaging fossil fuels. The movement is growing each year. In
2016, ethical investments topped $8.7 trillion, up 33% from 2014, and they now account for 20% of all
investment under professional management.[53] Ethical investors are increasingly avoiding polluters, weapon
manufacturers, and tobacco companies as well as companies with a poor track record on human rights or
philosophies that do not align with a fund’s religious tenets. Pension funds, such as the New York City Pension
Fund[54] have announced a move away from investing in companies in the fossil fuel industry, a move that will
put substantial pressure on these companies to seek out alternatives to the non-renewables business model.
On the opposite side of the country, the California Public Employees’ Retirement System announced that it had
divested from most of its holdings in thermal coal stock.[55]
Investors are also increasingly looking to the future to evaluate whether a firm’s stock price is sustainable.
Consider that, as the cost of renewable energy alternatives become cheaper, non-renewable resources
become less able to compete. That is, the price of the non-renewable commodity falls to a point where the
costs of extraction become greater than the price that can be obtained for the asset, and so the non-
renewable resource remains in the ground.[56] At this point, the value of the asset, the mine, is impaired, which
leads to a reduced share price.
For example, in mid-2017, Coal India, the largest coal-mining company in the world, announced that it would
close 96[57] of its 394 mines[58] by March 2018 because they would be no longer economically viable after the
52 Keith Bradsher. “Buffet Buys Stake in Chinese Battery Manufacturer.” New York Times. September 29, 2008. https://www.nytimes.com/
2008/09/30/business/worldbusiness/30battery.html
53 Matt Whittaker. “Ethical Investing Continues to Grow.” U.S. News and World Report. January 27, 2017. https://money.usnews.com/investing/
articles/2017-01-27/ethical-investing-continues-to-grow
54 William Neuman. “To Fight Climate Change, New York City Takes on Oil Companies.” New York Times. January 10, 2018.
https://www.nytimes.com/2018/01/10/nyregion/new-york-city-fossil-fuel-divestment.html?
55 Randy Diamond. “CalPERS Reveals It Divested from Most Thermal Coal Companies.” Pensions & Investments. August 7, 2017.
http://www.pionline.com/article/20170807/ONLINE/170809876/calpers-reveals-it-divested-from-most-thermal-coal-companies
56 M.K. Linnenluecke, J. Birt, J. Lyon, and B.K. Sidhu. “Planetary Boundaries: Implications for Asset Impairment.” Accounting & Finance 55, no. 4
(2015).
57 IANS. “Coal India Could Close 53 Underground Mines This Fiscal.” The Economic Times. September 12, 2018.
https://economictimes.indiatimes.com/industry/indl-goods/svs/metals-mining/coal-india-could-close-53-underground-mines-this-fiscal/
articleshow/65783526.cms
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Indian Government announced it would cut its commitments to purchase coal after 2022.[59]Investors, including ethical investors, must look to the future of their investments, buying shares that are
sustainable for the long term to provide better returns. A recent Harvard Business Review study showed that
socially responsible companies post higher profits and stock performance than those that were not focused on
social responsibility.[60] This result is supported by a Deutsche Bank analysis of more than 2,000 studies dating
back to the 1970’s, 90% of which suggested that socially responsible investing gives better returns than
passive investing.[61]
Lenders
Sustainability reports provide useful information for lenders. Lenders want to know that the company
borrowing from them does not have any going-concern risks that could affect its ability to repay the loan
(Figure 13.8). They want to know the company will not be sued for human rights violations at home or abroad,
E T H I C A L C O N S I D E R A T I O N S
Millennials Are Demanding Sustainable Investments
According to the Forum for Sustainable and Responsible Investment, a U.S.-based membership
organization, “sustainable, responsible and impact investing is an investment discipline that considers
environmental, social and corporate governance criteria to generate long-term competitive financial
returns and positive societal impact.”[62] Demand for this type of sustainable investments is being driven
in a large part by millennials who prefer that their investments align with their personal beliefs and
values. Ethical companies are seeing value in the millennial investors because “millennials are poised to
receive more than $30 trillion of inheritable wealth.”[63] Forward-looking companies need to develop an
awareness of millennial values.
Forward-looking companies and investment advisor companies also need to adapt to a sustainable
investment environment. This changes the perspective of accounting because managers will need to
look to other factors besides profits to guide management’s business decisions. Management and
accountants will need to look beyond just numbers, and this will require a change in culture, technology,
and operational and financial reporting to investors, potential investors and stakeholders.
58 Coal India. Annual Report and Accounts 2016–2017. n.d. https://www.coalindia.in/DesktopModules/DocumentList/documents/
Annual_Report_&_Accounts_2016_17_Deluxe_English_07112017.pdf
59 Harriet Agerholm. “World’s Biggest Coal Company Closes 37 Mines as Solar Power’s Influence Grows.” Independent. June 21, 2017.
http://www.independent.co.uk/news/world/asia/coal-india-closes-37-mines-solar-power-sustainable-energy-market-influence-pollution-
a7800631.html
60 MoneyShow. “Socially-Responsible Investing: Earn Better Returns from Good Companies.” Forbes. August 16, 2017.
https://www.forbes.com/sites/moneyshow/2017/08/16/socially-responsible-investing-earn-better-returns-from-good-
companies/#7f73a8a1623d
61 MoneyShow. “Socially-Responsible Investing: Earn Better Returns from Good Companies.” Forbes. August 16, 2017.
https://www.forbes.com/sites/moneyshow/2017/08/16/socially-responsible-investing-earn-better-returns-from-good-
companies/#7f73a8a1623d
62 US SIF. “SRI Basics.” n.d. https://www.ussif.org/sribasics
63 Ernst & Young. Sustainable Investing: The Millennial Investor. 2017. https://www.ey.com/Publication/vwLUAssets/ey-sustainable-investing-
the-millennial-investor-gl/$FILE/ey-sustainable-investing-the-millennial-investor.pdf
Chapter 13 Sustainability Reporting 683
be unable to repay its loans because consumer boycotts have hurt its cash flow, or that they maintain valuable
property assets in high-risk areas. For example, after the 2017 Houston floods, a number of Houston-based
banks were examined to find that they had a high level of exposure in commercial real estate in Houston.[64]
This type of investment concentration in a single geographic area can be risky for lenders as a single disaster
can have a more damaging effect than on a portfolio spread over a broader geographical area.
Figure 13.8 Sustainable Investment. Lenders appreciate sustainable investment because it gives them
assurance that their loans will be repaid. (credit: modification of “Money Coin Investment” by
“nattanan23”/Pixabay, CC0)
Employees
Employees and potential employees want to know that the company they work for is concerned about their
safety and is an ethical organization. They want assurance that they will be fairly compensated and that all
employees have equal rights and opportunities, regardless of gender, race, religion, or sexual orientation.
Recent studies show that employees increasingly want to work for companies that align with their own values
and will be more loyal to those organizations. In 2016, 76% of millennials said that a company’s social and
environmental commitments were considerations in employment, with 64% of millennials indicating that they
would not work for a company that did not have strong corporate social responsibility practices.[65]
Employees also report higher levels of satisfaction when their employers engage in corporate giving programs
that are aligned with employee values or are chosen by employees.[66] For example, Intel will donate $10 to an
educational institution, environmental program, or other community organization for every hour an employee
volunteers there. More than 40% of Intel’s U.S. employees have donated time that totals hundreds of
64 Ely Razin. “As Harvey Leaves Houston Reeling, These Banks Are More Exposed Than Others.” Forbes. August 31, 2017.
https://www.forbes.com/sites/elyrazin/2017/08/31/as-harvey-leaves-houston-reeling-these-banks-are-more-exposed-than-
others/#423dcb5e6355
65 Cone Communications (Whitney Dailey). “Three-Quarters of Millennials Would Take a Pay Cut to Work for a Socially Responsible Company,
According to the Research from Cone Communications.” November 2, 2016. http://www.conecomm.com/news-blog/2016-cone-
communications-millennial-employee-engagement-study-press-release
66 America’s Charities. “Facts and Statistics on Workplace Giving, Matching Gifts, and Volunteer Programs.” n.d. https://www.charities.org/
facts-statistics-workplace-giving-matching-gifts-and-volunteer-programs
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thousands of volunteer hours.[67] Other firms have corporate giving programs that match employee’s
charitable donations dollar for dollar.
Customers
Customers often have many choices about where to spend their hard-earned dollars. They want to know the
companies to which they give that money reflect their own values and beliefs. If a company is seen to be
uncaring about an issue, then customers may arrange campaigns to boycott the company (see the Nestlé
story for an example of such consumer activism).
A 2016 study by Unilever showed that 33% of consumers buy from brands they believe are doing social or
environmental good and that this presents a €966 billion (over 1.1 trillion $USD) opportunity for brands. As
such, it is important for a company to demonstrate their commitment to CSR, and sustainability reporting
offers a medium to do this.[68]
Governments and Regulators
Governments and regulators want to be able to see that a company is behaving responsibly. If they are
confident that it is, there is less need to design laws and regulations that might restrict the company even
more than if it undertook best-practice measures on its own. Many companies form industry alliance groups
that aim to implement best practices in trade, social responsibility, or environmental initiatives.
Community
The community at large also wants to know that the organization is behaving at the level of society’s
expectations. This reflects the existence of a social contract, the expectation that companies will hold to an
unwritten contract with society as a whole. If a firm is undertaking actions that might harm society or that
reject its general values, community backlashmay cost the firm dearly.
In summary, a company’s accountability to a wider group of users is an element of stakeholder theory. This
theory presents a view that asserts a corporation has an obligation to groups beyond just its shareholders.
Y O U R T U R N
Identifying Stakeholders
Locate the sustainability report of a Fortune 500 company and read the management discussion in it.
Explain who you think the company considers its primary and secondary users. What information about
itself and its operations does the company attempt to convey to each audience? Do you think its choices
meet the information needs of these two groups of stakeholders? Why or why not?
Solution
67 Intel. “Giving Back: How Our Employees Make a Difference.” n.d. https://www.intel.com/content/www/us/en/jobs/life-at-intel/usa/giving-
back.html
68 Unilever. “Report Shows a Third of Consumers Prefer Sustainable Brands.” May 5, 2017. https://www.unilever.com/news/Press-releases/
2017/report-shows-a-third-of-consumers-prefer-sustainable-brands.html
Chapter 13 Sustainability Reporting 685
	Chapter 13. Sustainability Reporting
	13.2. Identify User Needs for Information*