ACCT20071 Foundations in Accounting: ESG, Financials & Innovation

This report examines the relationship between Environmental, Social, and Governance (ESG) performance and financial performance, referencing the assertion that innovation is crucial for simultaneously improving both. It analyzes Rio Tinto's sustainability reports from 2015 and 2018, evaluating their environmental and social disclosures. The report discusses the performance frontier concept, highlighting the trade-offs between financial and ESG performance, and emphasizes sustainable innovation's role in achieving parity. Key environmental disclosures, such as energy usage, emissions, water management, and biodiversity efforts, are detailed. Social disclosures, including occupational health and safety measures and community contributions, are also analyzed, providing a comprehensive overview of Rio Tinto's sustainability initiatives and their impact on both financial and ESG performance.

Running head: FOUNDATION IN ACCOUNTING
Foundation in Accounting
Name of the Student
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Author Note

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Executive Summary
The purpose of this study is to evaluate the relationship between ESG performance and financial
performance. The performance frontier helps in determining the relationship between ESG
performance and financial performance. It summarizes the relevant material ESG issues that it
needs to consider and calls for the need for sustainable innovation to improve both financial
performance and ESG performance. This study also discloses various environmental and social
disclosures of Rio Tinto, a mining company in Australia. These disclosures have been taken from
the sustainability reports of the company from the years 2015 and 2018.

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Table of Contents
Introduction......................................................................................................................................3
Discussions......................................................................................................................................4
Innovation and performance........................................................................................................4
Pushing the frontier......................................................................................................................6
Own perspective..............................................................................................................................8
About Rio Tinto...............................................................................................................................8
Sustainability report for 2015..........................................................................................................8
Environmental disclosures...........................................................................................................8
Social disclosure..........................................................................................................................9
Sustainability report for 2018........................................................................................................10
Environmental disclosure..........................................................................................................10
Social disclosure........................................................................................................................11
Conclusion.....................................................................................................................................12
References......................................................................................................................................13

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Introduction
Most companies nowadays have sustainability programs and are making major
significant progress towards achieving goals of sustainability. Sustainable innovation is a type of
innovation that enhances profits, provides a better view of social outcomes and has less
environmental consequences. Sustainable innovation leads to practices involving changing staff,
restructuring energy use in addition to innovating operations in marketing, sales and brand
marketing. It has fostered a more stronger case for change than regular innovation practices.It
offers changes in aspects that include changing consumer behaviors, using renewable
technologies etc. Sustainable innovation requires greater collaboration among individuals,
divisions and organizations in order to facilitate change in business practices that will ultimately
lead to a greater benefit in terms of cost reduction and having the license to grow and evolve. In
this study, the tradeoff between financial performance and ESG performance is compared. While
improving one type of performance causes a deterioration in other type of performance and vice
versa.
Discussions
Innovation and performance
Nowadays most multi million dollar companies considers financial perspective and
disregards environmental implications altogether. They put controls in place only after the
mishap has already occurred. These misguided decisions are made as a result of negative
externalities impacting pollution, abusive labor actions etc that are borne by the society which in
turn benefits the shareholders. However activities like voluntary reducing emissions or
promoting education among youths that actually help the society create costs of the firm.

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The relationship between ESG performance and financial performance can be illustrated
with the help of a diagram below. Financial performance is represented by revenues, profit
margins and other financial metrics. The financial performance is illustrated on the X axis The
ESG performance on the other hand is characterized by lower carbon emissions, fair labor
practices. This is shown on the Y axis.The slope of the curve shows the relationship among ESG
performance and financial performance. The steeper the downward part of the slope , the greater
the adverse impact that a firm’s ESG performance will have on financial performance. The
steeper the upward slope, the greater will be the positive impact that the ESG performance has
over financial performance. This line is called the performance frontier.
Figure 1- Performance frontier
Source-( Eccles, Robert and Serafeim)
Pushing the frontier
Major innovations in product, processes and business models can improve both financial
performance and ESG performance. Such innovations are very risky in nature.These also involve

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very large amounts of investment and have a long payback period. There are four extensive
initiatives that can develop a sustainable strategy that includes:
Identify material ESG issues-
The ESG issus include ranges from emissions, energy and water use to management of
waste and employee safety procedures. Whether an issue significantly affects the ability of the
company to generate a shareholder value for the long term, it depends on three factors.The three
factors include the firm , the industry in which the firm works and the strategy it employs.
Quantify the relationship between financial and ESG performance.
As soon as the material ESG issues are recognized, the financial improvement in
performance needs to be assessed. Such performance has many dimensions. The most important
factors that needs to be considered in this aspect are reduction of cost, revenue growth and gross
margin. The sustainability program includes many ESG initiatives from improving employee
health, to minimizing carbon emissions.
A variety of factors obscure the estimations between the relationship among ESG and
financial performance. There is also a limitation in the fact that it is not easy to precisely measure
ESG performance as a quantifiable measure.
Innovate products, processes and business models
Once the company decides to focus on what ESG issues it needs to consider, the next step
is to determine how the firm can compare its peers with them. If the performance of the firm in
an area, for instance say energy use or labour practices are found to be lacking compared to the
industry standards ,restoring the performance to that level must be a top priority for the firm.

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Improvements like diminishing manufacturing waste, involving innovations of a little or
moderate nature can increase efficiency and as a consequence, financial performance .
Communicating the company’s innovation to stakeholders
A company cannot make the prediction about the fact that shareholders and other
stakeholders will comprehend the impact of innovations will have on the company.They also
cannot predict whether the innovations will improve the company and its financial performance
and how these two relate. Major innovations need huge investments whose benefits would not
be able to accrue for many years in the future.
Own perspective
Thus the link between financial and ESG performance is inversely related. While
improving financial performance, it significantly affects ESG performance and vice versa.
Sustainable innovation is the way that can bring about a parity in ESG performance and vice
versa.Major innovations in terms of products, processes and business models can help
performance levels in both financial and ESG.
About Rio Tinto
Rio Tinto is a global mining company that is headquartered in the UK and is an
amalgamation of Rio Tinto plc, a listed London company and Rio Tinto Ltd, which is listed in
the Australian Securities Exchange. It is basically represented in Australia and North America.
However it has operations all over the world.it is a mining based company
Sustainability report for 2015
The company had its fair share of challenges in the year 2015. , mainly due to the
sluggish market demand for their products. However the company had responded well to this

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challenge and came out with a positive attitude. The commitment of this company extends
beyond mining. They wanted to make a meaningful contribution in the community they operate
in.
Environmental disclosures
The various environmental disclosures made by the company include:
Energy usage- it introduced a program called Energy Leadership Programme that aims to
identify potential areas in order to reduce the consumption of energy and reduce the emission of
greenhouse gases.
Other emissions- The company has made significant efforts in phasing out all ozone depleting
substances. Air quality emissions have been reduced, mainly due to low demand of product
which gradually led to low plant capacities.
Water- The company has made significant effort in incessantly improving both water recycling
and efficiency. They employed a Water Management Plan and Water Supply strategy, which
monitors water usage and improve water management practices.
Biodiversity- The company has a desire to achieve a positive effect on biodiversity by
minimizing impacts and contributing to conservation of biodiversity. Rio Tinto tries to make sur
that the region gets benefitted by their presence.
Social disclosure
The various social disclosure in this year include:
Occupational Health and Safety- In 2014, they had set the record for achieving one million man
hours injury free, twice in one year. In 2015, they exceeded the benchmark by achieving one

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million man hours injury free. This enabled them in achieving the best safety year, a feat thy are
most proud of.
Health-The company clinic provides an exceptional health service to approximately 4000
employees and contractors. Such services include the likes of employee specific medicals based
on the individual risk profile of the employees.it also has 20 active wellness educators that
promote health education to its employees. It also has a chronic care programme for managing
chronic treatments and ailments.
Sustainability report for 2018
The company stressed about the need for operating their business responsibly keeping in
mind about the safety and health of employees, the community and also maintain the risks and
responsibilities of the business both locally and globally.
Environmental disclosure
Low carbon emissions-The company acknowledges the increasing carbon footprint of the
mineral and metal products it deals in.It takes a substantial amount of energy to mine and process
minerals. The company is targeting a considerable decarbonisation of the business by 2050.
Water-Their water resource management programme centers on risks related to sites and impact
like security of water supply and managing water quality.By 2017 year end, 77 percent of the
managed operations were on the right track in meeting water requirement targets by 2018.the
company also made water targets beyond 2018.
Biodiversity-The company strives to work towards minimizing biodiversity loss while at te same
time it wants to improve its biodiversity management practices. It uses the integrated biodiversity
management tool which identifies whether its operations could come into conflict with

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ecologically sensitive areas.Their approach includes rehabilitation and restoration practices aime
at compensating negative impacts.
Social disclosure
The social disclosures include:
Occupational Health and Safety-The company previously had a proud feat of not having any
mining related accidents. However last year, one worker in Utah tragically lost his life in a
mining accident. As a result of this, the company redoubled their efforts in maintaining safety.
Mental health in the workplace- The company also provides beyond physical safety that includes
mental health and wellbeing. The company wants to create a positive and supportive
environment that extends to managing a balance between work life and personal life ,
maintaining workload, and fatigue management.
Conclusion
Through this study, it is imperative that ESG and financial performance do not go hand in
hand. If one increases, the other one will decrease. However sustainable innovation in products ,
processes and business models can sustain both financial and ESG performance at the same time.
A detailed explanation regarding the performance frontier, identifying material ESG issues has
been analysed. There is also a further discussion about the mining company Rio Tinto and the
various environmental and social disclosures it has made in reference to the sustainability report
for the years 2015 and 2018.The company has made great strides in terms of promoting health
and safety, providing adequate water management, maintaining biodiversity practices in relation
to the communities it operates. It has great CSR policies in place that reflects a positive
sustainable image of the company.

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