Lessons in Sustainability: Accounting and Control

Follow the money. This simple phrase suggests that when you really want to know how something works, you need to look at the accounting. Examining where the money comes from and where it goes gives great insight into how a company operates. Yet what does this mean in the sustainability era, as consumer demand grows for responsible products and practices? Organisations need to bring externalities like social and environmental impact onto their books and accounting is becoming fit for purpose. In the sustainability economy, intelligent leaders can leverage this shift to gain an advantage in changing markets.

The year 2024 marked a major milestone in an area that only a few people are looking at – sustainability accounting. As of 1 January, companies and organizations that follow the International Financial Reporting Standards should now disclose sustainability information in corporate filings. This standardization gives insights into corporate governance, controls, and strategies to manage sustainability-related risks and opportunities. It allows smart leaders to understand performance relative to risk and measure progress towards climate and sustainability goals.

Over the last five years, the Hoffmann Institute has worked with professors in the Accounting and Control academic area to bring sustainability into INSEAD research and learning as a foundation for a more sustainable global economy. 

This final edition of Lessons in Sustainability looks at how the Accounting and Control area incorporates sustainability in academics as part of a series that explores sustainability across the nine INSEAD academic areas. 

Trust Through Transparency

Accounting is a core business function in the global economy. It is the process of recording financial transactions and reporting to oversight agencies, tax collectors, regulators and investors. The INSEAD Accounting and Control academic area examines a wide range of financial functions, including valuation, reporting and management accounting. It also dives into financial statement analysis, strategic cost management and earnings quality analysis – all areas that are evolving in the sustainability shift. 

Today, sustainability in accounting often centres on ESG. Short for ‘environmental, social and governance’, ESG looks at impacts from operations and responsibility in policy to determine the sustainability of a company’s operations or investment potential. New financial reporting standards can bring clarity to this process and consistency to decisions on ESG by managers, investors and consumers. 

As ESG features in more business models and balance sheets, a solid understanding of accounting can ensure decisions are made with sound business principles in focus. Sustainability reporting can be a value differentiator in today’s market and transparency builds trust with investors and customers. When stakeholders and shareholders follow the money, sustainability accounting can position the business at the forefront of corporate responsibility.

The Accounting and Control academic area faculty are innovative, cross-disciplinary, and focused on research, including the intersection of ESG, sustainability and accounting. Our professors educate a new generation of leaders in the classroom and engage today’s business leaders at seminars, webinars and alumni events. 

From Case to Classroom

The Hoffmann Institute connected with professors to understand how professors in the area bring sustainability into research and learning. Professors in the Accounting and Control area use sustainability in core curriculum courses and in electives. 

The MBA and MIM core Financial Accounting course discusses sustainability in context of assets such as carbon credits and asset retirement, liabilities, such as provision for environmental cleanup, and their potential effect on profits. This course is taught by Professors Daniel Bens, Peter Joos and Elsa Juliani. The MBA Management Accounting core course taught by Professors Hami Amiraslani, Gavin Cassar and Thomas Keusch explore the role of sustainability and ESG in business decisions, looking at:

• Social and environmental considerations in firms’ assessments of business opportunities in the cost-volume-profit framework
• Relevance of environmental factors in alternative capital budgeting choices
• Environmental and social KPIs as a driver of sustainability objectives
• Economic consequences of governance failures and the shortcomings of risk management systems

Several elective courses for MBA and MIM students incorporate sustainability elements. Professor Joos teaches a session in the Financial Statement Analysis elective dedicated to ESG and sustainability, with a finance practitioner joining to discuss sustainability in the valuation and investment process. In the MBA corporate governance elective, Professors Cassar and Thomas explores stakeholder-centric governance vs shareholder-centric governance, a key element of ESG. 

Professors Amiraslani and Joos teamed up to launch the MBA and MIM elective on Sustainability Measurement and Reporting. The course covers topics such as corporate purpose, the rise of stakeholder capitalism, and the link between purpose, sustainability, and financial performance. It also looks at measuring and reporting on environmental and social externalities through design and implementation of impact-weighted accounting systems and green governance and the valuation relevance of sustainability for capital market participants. Professor Amiraslani developed the internal case study Walking the Talk: Evaluating Environmental and Social Performance in BRT Signatory Firms for this course.

These topics are featured in elective sessions on sustainability measurement and reporting taught in different executive education courses, including the Advanced Management Programme and the International Directors Programme. Professor Amiraslani also engaged current business leaders by publishing a paper on ‘Trust, social capital, and the bond market benefits of ESG performance’ in the Review of Accounting Studies journal and on the INSEAD Knowledge platform. 

Many research papers on the topic of ESG are currently generated in the Area of Accounting and Control. For example, Professor Amiraslani has a working paper on the topic of “Climate Disclosure Regulation and Investor Wealth”. Professors Amiraslani and Keusch cooperate on research entitled “The Relation Between Board Risk Oversight and Environmental and Social Practices and Outcomes”. Professors Bens and Joos have a working paper, together with their PhD student, entitled “The Association between Mandated Environmental Liability Recognition and Voluntary ESG Disclosure Quality”. Professor Keusch has a working paper entitled “CEO Incentives and Environmental Pollution: Evidence from Relative Performance Evaluation”. 

Our INSEAD Accounting and Control professors are leading the way forward in this era of sustainability and ESG. They research topics to bring sustainability onto the financial statements and explore those research outputs in classroom discussions and other engagement.

A Look Ahead

Accounting is a cornerstone of the global economy. It is one of the core principles that finance and investing are built on, an accurate representation of a company’s priorities, practices and performance. Today, more and more companies are integrating ESG into their reporting and business models. New standards for accounting will bring coherence and confidence to this shift. Strong leaders are needed to deliver positive results across ESG metrics and in the company’s bottom line.  

INSEAD professors of Accounting and Control equip leaders with an understanding of how sustainability and ESG are integrated and represented in reporting. With this knowledge, INSEAD graduates can follow the money and capitalize on the sustainability shift. 

The Hoffmann Global Institute for Business and Society Lessons in Sustainability series highlights lessons learned from integrating sustainability into all nine INSEAD academic areas. This is the final instalment of our Lessons in Sustainability, and we want to thank all the area chairs and professors who contributed.