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Emergence of Social Stock Exchanges and Other Market Drivers of Sustainability

Integrated-reportingTraditionally, investing and “doing good” have been considered two very different activities. Investing was about making money, while doing good was about giving money away charitably to foster some kind of positive change. However, the two concepts have started to merge and form what is now known as socially responsible investing. It offers a way to achieve both a financial and a social return on an investment and has become a popular idea over the last decade. Sustainable and responsible investment now accounts for more than $3 trillion of the roughly $25 trillion in the U.S. investment marketplace, according to the Forum for Sustainable and Responsible Investment.

Efforts are also under way on several continents to create investment exchanges devoted to socially responsible issuers. In London, organizations that list securities on the Social Stock Exchange will have to provide a social prospectus (in addition to the usual investment prospectus) that will describe the issuer’s social or environmental impact now and in the future. Interestingly, the SSE says the social prospectus will have to be audited by a “competent individual” from a list of social auditors and the issuer will have to regularly restate its social or environmental key performance indicators and provide progress reports.

In Singapore, the Impact Investment Exchange of Asia aims to direct funding to social enterprises involved in areas such as healthcare, education, affordable housing, clean technology and microfinance. In Brazil, the Bolsa de Valorous Socioambientais is structured like a stock exchange but it was created to draw attention and investment to organizations from donors who seek a purely social return. Proponents says these exchanges give organizations greater visibility than they might have if they listed on a conventional stock exchange and they make it easier for investors to find socially responsible options.

In addition to the creation of these social stock exchanges, there are a number of other market drivers for sustainability reporting and assurance. One is the emergence of supply chain vendor code of conduct requirements, under which companies must disclose environmental, social and governance information. In some cases, companies must have this information verified by a third party in order to supply through other large retail organizations. Another significant driver of sustainability reporting is consumer demand – customers are showing a decided preference for socially and environmentally responsible products, and companies that are offering them are commanding a premium. A number of certification programs have been developed to enable companies to demonstrate best practices in the areas that are important to their stakeholders. Finally, companies must comply with a number of federal and state regulatory and legislative requirements, such as the recent Securities and Exchange Commission release on conflict minerals and the California Transparency in Supply Chains Act which focuses on fair trade practices.

Social and environmental responsibility is clearly becoming a more important concern for companies and investors around the world, and it is no longer just an issue of doing the right thing – it is now a key element of driving business success for many companies. CPAs will have to remain aware of trends in this area.

The CPA profession has already become involved in the related field of integrated reporting, which “brings together material information about an organization’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which the entity operates. An integrated report provides a clear and concise representation of how an organization demonstrates stewardship and how it creates and sustains value” (International Integrated Reporting Council, 2011). Integrated reporting uses a holistic presentation of information to recognize that a broad range of elements determine a company’s value. An integrated report brings together the information captured in the financial statements with other information related to human, intellectual, natural and social capital to better communicate to investors and other stakeholders how the company creates and sustains value in the long term. In doing so, integrated reporting takes into account the wider consequences of the decisions that organizations make and how those decisions impact the long-term sustainability of the company.

The AICPA is a long-time supporter of the concepts underlying integrated reporting, a founder of the Enhanced Business Reporting Consortium and participant in the World Intellectual Capital Initiative. It has offered recommendations to the IIRC on efforts such as its discussion paper, Towards Integrated Reporting, and is in the process of leading efforts to draft a position paper on the topic of materiality on behalf of the IIRC. As organizations and investors reassess how, where and why investments and consumption decisions are made using new types of information,  CPAs clearly will play an important role in reporting and providing assurance on that information.

Amy Pawlicki, Director - Business Reporting, Assurance and Advisory Services and XBRL, American Institute of CPAs. Amy staffs the AICPA Assurance Services Executive Committee, is responsible for building awareness and understanding among the AICPA membership of the eXtensible Business Reporting Language and coordinates AICPA activities related to Integrated Reporting and Sustainability, including collaboration with other organizations around the world that are dedicated to improving the quality and transparency of business reporting.

This blog post incorporates information provided by Weiner, Edrich, Brown, Inc.

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