CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Review

2.1.1 Concept of Sustainability

Sustainability or triple bottom line was first coined in 1994 by John, the founder
of a British Consultancy called Sustain-Ability (Elkington, 1998, 2004). His argument
was that companies should be preparing three different (and quite separate) bottom
lines. One is the traditional measure of corporate profit. The “Bottom-line” of the
profit and loss account. The second is the bottom line of a company’s “People
account” – a measure in some shape or form of how socially responsible an
organization has been throughout its operations. The third is the bottom line of the
company’s “Planet” account – measure of how environmentally responsible it has
been. The triple bottom line or sustainability accounting consists of three ‘Ps’ profit,
people and planet. It aims to measure the financial, social and environmental
performance of the business entity over a period of time. The triple bottom line is
made up of “social, economic and environmental” factors. “People, planet and profit”,
was also carried by Elkington in 1995 while at sustainability, and was later adopted as
the title of the Anglo-Dutch oil company shell’s first sustainability report in 1997.

Nigeria as a member of united Nation impliedly adopted the UN global

compact on global reporting initiative (GRI) which provided sustainability reporting
guideline in 2000 to design and build acceptance of a common framework for
reporting on the linked aspects of sustainability. It is in the light of the above amidst
growing demand by the society, over economic, social and environmental accounting
company’s performance that more research work on sustainability accounting
becomes imperative.

During the past 40 years, pressures from a variety of sources have come to bear
on the business community regarding their responsibility towards stakeholders, the
environment and the society in which it operates (Asuquo, Dada & Raphael, 2019),
hence, the need for an interdisciplinary reporting that reflects a simultaneous
integration of economic, environmental and social factors into corporate behaviour to
sustain resources for future generation (Okafor, Adeusi & Adeleye, 2021).
Sustainability reporting has emerged as an attempt to respond to the demands for
interdisciplinary reporting. While there is no single globally accepted definition of
sustainability reporting, Elkington (1997) stated that the term “sustainability
reporting”, in its narrowest term, is a framework for measuring and reporting
corporate performance against economic, social and environmental parameters. In its
broadest term, it is the whole set of values, issues and processes that companies must
address to minimize any harm resulting from their activities and to create economic,
social and environmental values.

Sustainability refers to the ability to meet present needs without compromising

the ability of future generations to meet their own needs. It involves balancing
environmental, social, and economic considerations to ensure long-term well-being
for people and the planet. Sustainability accounting is the process of measuring,
analyzing, and reporting an organization’s environmental, social, and economic
impacts. It helps businesses, governments, and organizations assess their
sustainability performance and integrate it into decision-making. Sustainability is the
most critical issue faced by an organization today; having the potential to influence
overall performance and profitability of organization. Sustainability reporting refers to
the process by which companies disclose their economic, social and environmental
performance on stakeholders. It is often used interchangeably with corporate social
responsibility (CRS) reporting, sustainable development reporting, and triple-bottom-
line reporting. (Akuboere S. Korolo,2024) According to the Global Reporting
Initiative (GRI), sustainability reporting enables organization to be transparent about
their sustainability effort and their impact on society and the environmental (Lancee
L.&Whetman 2017)

Companies worldwide are increasingly recognizing the importance of

sustainability reporting, driven by regulatory requirements, stakeholders demands,
and the need for better corporate governance. The Dow Jones Sustainability Index
defines sustainability reporting as a business approach that integrates financial
objectives with environmental and social responsibilities

Sustainability in financial reporting refers to the integration of environmental,

social, and governance (ESG) factors into financial disclosures to provide
stakeholders with a more comprehensive understanding of a company’s risk,
opportunities, and long-term value creation. It goes beyond traditional financial
reporting by providing insights into how a company’s operations impact sustainability
and how sustainability issues, in turn, affect financial performance

Global Reporting Initiative (2011) defines Sustainability Reporting‟ as – “The

practice of measuring, disclosing, and being accountable to internal and external
stakeholders for organizational performance towards the goal of sustainable
development.”

2.1.2 Key Aspects of Sustainability in Financial Reporting

1. ESG Disclosure (Environmental, Social, and Governance Reporting)

ESG disclosure is the foundation of sustainability reporting. It reflects how a
company’s activities affect, and are affected by, environmental, social, and
governance issues.

 Environmental disclosures may cover carbon emissions, energy efficiency,

water use, pollution control, and climate risk mitigation strategies.
 Social disclosures involve labor standards, employee health and safety,
diversity and inclusion metrics, and community engagement.
 Governance disclosures relate to board composition, executive remuneration,
ethical business practices, internal controls, and anti-corruption policies.

Implication for Sustainability Accounting:

ESG data is not just non-financial information—it has become financially material,
influencing investor decisions and firm valuation. Sustainability accountants must
develop expertise in measuring and reporting these indicators with the same rigor as
traditional financial data. Furthermore, ESG disclosures are becoming an integral part
of risk management, influencing credit ratings and cost of capital.

2. Standards and Frameworks

Sustainability reporting must align with credible frameworks to ensure

comparability, consistency, and transparency. The following are most influential:

• Global Reporting Initiative (GRI)

Focus: Stakeholder impact

Implication: GRI requires companies to report on their external impacts on the
economy, environment, and society. Its flexibility allows industry-specific
customization, but can lead to non-comparability if not applied rigorously.

• Sustainability Accounting Standards Board (SASB)

Focus: Financial materiality to investors

Implication: SASB emphasizes ESG factors that affect financial performance. Its
sector-specific standards bridge the gap between sustainability and financial reporting,
making it crucial for integrating ESG into corporate valuation models.

• Task Force on Climate-related Financial Disclosures (TCFD)

Focus: Climate risk disclosures

Implication: TCFD introduces scenario analysis and climate-related risk integration
into financial planning. It pressures firms to quantify transition and physical risks,
making sustainability accountants responsible for robust climate-risk modeling.

• Sustainability Standards Board (ISSB)

International Focus: Global unification of sustainability standards
Implication: ISSB aims to harmonize fragmented standards. It promotes global
baseline reporting that supports investor comparability. Accountants must stay
informed about the ISSB's standards (e.g., IFRS S1 & S2) which are becoming de
facto international rules for ESG reporting.

• European Sustainability Reporting Standards (ESRS)

Focus: EU-specific regulatory compliance under CSRD

Implication: ESRS mandates double materiality requiring disclosures on both the
company's financial risks from ESG issues and its impacts on society/environment.
This increases reporting scope and data demand. Accountants in EU or EU-linked
firms must design systems to capture both inward and outward ESG impacts.

3. Integrated Reporting (IR)

IR combines financial and non-financial (sustainability) data to provide a
comprehensive view of value creation over time. It moves beyond static financial
results and focuses on how an organization uses various capitals (financial,
manufactured, intellectual, human, social, and natural) to achieve strategic objectives.

Implication
Integrated thinking influences resource allocation, performance measurement, and
long-term strategy. For accountants, IR means a shift from backward-looking
financial reporting to forward-looking disclosures that incorporate intangible value
drivers. It also raises the bar for data integration and internal control systems that can
handle complex, multi-dimensional reporting.

4. Regulatory Compliance
Governments and regulatory bodies are mandating ESG disclosures to improve
transparency and mitigate systemic risks:
  US SEC: Proposed climate disclosure rules require registrants to disclose
climate-related risks, GHG emissions, and governance processes. This moves
ESG reporting from voluntary to legal compliance in the U.S.
 EU CSRD (Corporate Sustainability Reporting Directive): Expands the
scope of entities required to report under ESRS and demands audited
sustainability information.

Implication:
Accountants must now treat ESG data like financial data subject to assurance, audit,
and legal risk. Non-compliance could result in fines, investor lawsuits, or
reputational damage. Additionally, firms must invest in ESG reporting
infrastructure and talent, creating new roles for sustainability-focused accountant.

5. Investor & Stakeholder Demand

Stakeholders including institutional investors, customers, employees, and civil society
are demanding greater ESG transparency. Black Rock, for instance, has stated it will
evaluate companies based on their sustainability performance.

Implication
Sustainability disclosures now directly affect:

 Investment decisions
 Access to capital
 Customer loyalty
 Employer attractiveness

Accountants must produce ESG data that is not only accurate but also timely,
comparable, and decision-useful. This creates pressure to develop non-financial KPIs
and link ESG performance to financial outcomes, such as risk-adjusted returns.

6. Challenges in Sustainability Accounting and Reporting

Sustainability reporting faces several technical and operational challenges:

a. Lack of Standardization

 Multiple frameworks (GRI, SASB, TCFD, etc.) lead to inconsistencies and

“reporting fatigue.”
 Firm cherry-pick metrics, leading to green washing (exaggerating ESG
performance without substance).

b. Data Collection & Verification

 ESG data is often non-quantitative, non-standardized, and decentralized,

making it difficult to verify.
 Many companies rely on estimates or third-party data, leading to concerns
about data integrity and auditability.

c. Cost & Complexity

 Implementing ESG systems requires investment in technology, training, and

external assurance.
 Smaller firms often struggle to comply due to resource constraints.

d. Assurance & Audit

 Assurance of ESG reports is becoming mandatory (e.g., under CSRD), yet few
accountants are trained in ESG audit methodologies.
 The risk of material misstatements in ESG disclosures is increasing, raising
auditor liability.

e. Green washing Risks

 Without clear standards and assurance, companies may mislead stakeholders

about their sustainability credentials.
 Regulators are beginning to penalize misleading ESG claims, increasing
reputational and legal risks.
2.2 Theoretical Review

2.2.1 Stakeholder Theory

Stakeholder theory is a theoretical framework in business ethics and organizational

management that suggests a company should consider the interests of all its
stakeholder not just shareholders when making decisions. Edward Freeman (1984)
posits that businesses must consider the interests of all stakeholders, not just
shareholders. Sustainability reporting aligns with this by disclosing environmental,
social, and governance (ESG) information.

Freeman proposed the theory to challenge the dominant shareholder-centric view

of business. He argued that focusing solely on shareholders ignores the broader social
and ethical responsibilities of companies. The theory was meant to provide a more
ethical and sustainable framework for business decision-making. Applications
include: Corporate governance, Sustainability and ESG reporting
Strategic management.

Numerous scholars and practitioners have expanded on or referred to the theory,

including:

Michael Jensen, who discussed stakeholder value in corporate finance.

Donaldson and Preston (1995), who categorized the theory into descriptive,
instrumental, and normative aspects.

John Elkington, with the Triple Bottom Line, aligns with stakeholder theory.

Stakeholder Theory provides a strong theoretical foundation. It justifies why

companies should disclose information beyond financial performance to be
accountable to all affected parties, not just shareholders. It supports the idea that
ethical, transparent, and inclusive practices are essential for long-term success.

2.2.2 Legitimacy Theory

Legitimacy Theory is a theoretical framework in organizational and social theory that

explains how and why organizations seek to ensure their actions are perceived as
legitimate by stakeholders and society at large. It is often used in the context of
corporate social responsibility (CSR), sustainability reporting, and organizational
behavior. Legitimacy Theory posits that organizations aim to align their operations
with the norms, values, and expectations of society in order to maintain their
legitimacy. As Suchman (1995) explains, legitimacy is a generalized perception or
assumption that an organization's actions are desirable or appropriate within a socially
constructed system of norms and beliefs.

It was developed to explain how organizations maintain support and survival by

aligning with societal values and expectations. Applications include: Corporate Social
Responsibility (CSR), Sustainability and Environmental Reporting, Crisis
management and public relations, Non-profit and government accountability
Organizations use it to understand how to manage their image, gain stakeholder trust,
and respond to legitimacy threats (e.g., scandals, environmental harm).

Legitimacy Theory suggests that organizations must operate within the bounds of
society's norms and values to be seen as legitimate. If there is a mismatch (legitimacy
gap), the organization may face pressure or loss of support. To maintain or repair
legitimacy, firms often engage in symbolic actions such as sustainability disclosures
or CSR program.

Many scholars have built upon or referenced legitimacy theory, including:

Deegan, C. (2002) – Applied it to environmental and social disclosures, Gray, R.,
Owen, D., & Adams, extensively discussed its role in sustainability reporting,
Lindblom, C.K. (1994) – Discussed organizational strategies for legitimacy, Suchman,
M.C. (1995) – Provided the most detailed framework.

Legitimacy Theory helps explain why and how organizations disclose certain
information to maintain public trust and acceptance. It provides a theoretical lens to
analyze, why firms issue sustainability reports, how companies respond to
social/environmental criticism, the strategic nature of transparency in business.
2.2.3 Institutional Theory

Institutional Theory is a theoretical framework that explains how structures, rules,

norms, and routines become established as authoritative guidelines for social behavior
within institutions or organizations. It emphasizes that organizations conform to these
institutional pressures to gain legitimacy, stability, and resources. Institutional Theory
from governments, investors, and society push firms to adopt sustainability practices
and reflect them in their reporting (DiMaggio & Powell, 1983).

The theory was propounded to explain why organizations within the same field
tend to become increasingly similar over time, a process known as isomorphism. It
helps understand how external pressures such as regulations, cultural norms, or
stakeholder expectation influence organizational behaviors and structures. Its
application spans across sociology, organizational studies, and management,
especially to analyze organizational change and legitimacy.

Institutional Theory posits that organizations conform to institutional pressures

coercive (laws, regulations), mimetic (copying successful peers), and normative
(professional norms) to gain legitimacy, resources, and survival chances. This leads
organizations to adopt similar structures and practices, such as
sustainability reporting.

Many scholars have applied and expanded on this theory, including John W.
Meyer, Brian Rowan, Lynne G. Zucker, and more recent researchers analyzing
organizational fields, sustainability, and corporate governance.

Institutional Theory explains why firms adopt these practices not just out of
economic necessity but also due to pressures from governments, investors, and
society demanding accountability and responsible behavior.

2.3 Empirical Review

Previous related studies have found different results on the effect of

sustainability accounting and financial performance of firms.
2.3.1 Impact on Financial Reporting Quality

Numerous empirical studies indicate that sustainability consideration enhances the

quality and reliability of financial reports.

Christensen, Hail & Leuz (2021) found that mandatory sustainability reporting
improves reporting quality by enhancing transparency and reducing information
asymmetry.

Ioannou & Serafeim (2015) revealed that firms with robust sustainability practices
tend to publish more accurate and timely financial disclosures.

2.3.2 Influence on Corporate Valuation and Financial Performance

Sustainability disclosures are increasingly associated with improved firm valuation

and reduced risk.

Dhaliwal et al. (2011) observed that firms initiating sustainability reporting

experienced a reduction in the cost of equity capital.

Fatemi et al. (2018) confirmed a positive relationship between ESG performance and
firm value, especially when disclosures are transparent and externally validated.

2.3.3 Changes in Reporting Standards and Regulations

Standard-setting bodies are increasingly formalizing sustainability reporting

frameworks.

IFRS Foundation (2021) established the International Sustainability Standards Board

(ISSB) to unify global sustainability reporting practices.

The European Union Directive 2014/95/EU requires large companies to disclose non-
financial and diversity information.

2.3.4 Challenges in Integration

Despite progress, integrating sustainability into financial reporting is complex.

Hummel & Schlick (2016) found that inconsistent frameworks and voluntary
reporting allow for selective disclosure (greenwashing).

Bouten et al. (2011) noted that firms often omit negative sustainability impacts unless
mandated by regulation.