Sustainability reporting comes of ageSeptember 1, 2011
In the face of mounting pressure to be transparent, a growing number of companies are choosing to report on sustainability. Data-rich reports can help firms improve stakeholder trust and increase operational efficiency.
By Rodrigo Amaral
As more and more companies seek to embed a sustainable approach to their business, there is a growing need for a mechanism to tell stakeholders about their performance.
And, as demands for sustainability reporting become more vocal, these documents are evolving from an expression of a firm’s good intentions to a more structured, detailed report that can inform investment decisions.
In addition to providing information about their performance on core sustainability measures, such as carbon emissions, companies are also under pressure to increase the transparency of their tax reporting.
This can be an important part of using reporting to build better relationships with external stakeholders.
Governments push for transparency
The pressure for transparency has come from several fronts. National governments have put forward legislation that outlines the non-financial data that companies must report.
In France, for example, a new law has expanded the reach of sustainability reporting requirements to many non-listed firms, and it will become mandatory for around 2,600 companies.
In South Africa, companies listed on the JSE Securities Exchange must comply with the King Report on Corporate Governance for South Africa (King III), which recommends that companies should produce an integrated report rather than a separate annual financial report and sustainability report.
If companies do not produce an integrated report, they must explain why they have chosen not to do so.
Investors grow more vocal in their demands for sustainability reporting
According to Eurosif, a think tank, the volume of socially responsible investments reached €5 trillion in Europe by the end of 2009, after increasing by 87% in two years despite the global financial crisis.
Mainstream investors are increasingly looking for reliable information that can be independently verified and used as a comparison with other companies in similar circumstances.
A recently published survey found that one out of every seven written questions from shareholders of companies on the CAC40, France’s main stock index, during general assemblies in 2010 related to sustainability issues.
The previous year, the ratio was 1 out of 100. In response to this demand from investors, rating agencies are becoming more interested in sustainability issues.
A number of specialist companies, such as Vigeo, Eiris and SAM, have emerged to provide sustainability ratings.
These organizations provide independent assessments of environmental, social and governance performance that investors can then factor into their asset allocation and investment decisions.
A final, but important, driver is peer pressure
As more companies formalize their approach to sustainability reporting and receive praise from external stakeholders for their efforts, other companies recognize that they need to catch up.
“Government regulation and stock exchange requirements have played a part, but peer pressure has been a key driver of sustainable reporting,” says Nancy Kamp-Roelands, Director of Ernst & Young’s CSR Knowledge Center.
This pressure from external stakeholders is feeding through into a more robust approach to tackling sustainability reporting in the corporate world.
But despite this growing pressure, there are significant barriers preventing the transition to more effective sustainability reporting.
The first is a lack of comparability. With sustainability reporting still mostly voluntary, and with different jurisdictions promoting different guidelines, it remains very difficult for investors to compare like-for-like performance across companies.
“If we want to make proper choices in the global economy, there has to be transparency and comparability, otherwise markets will not be working properly,” says Juan Costa Climent, Global Leader for Climate Change and Sustainability Services at Ernst & Young.
This is not the place to spotlight good deeds
A second problem is that some companies still think that sustainability reporting exists to talk about good deeds.
“Companies are keen to report the great things they do in specific areas, but these are usually marginal to their business strategies,” says Anne-Catherine Husson-Traoré, the Director-General of Novethic, a French-based think tank.
“Communication on sustainable issues is certainly more developed today, but it does not necessarily address the concerns of ethical investors.”
Furthermore, while sustainability reporting is becoming more commonplace, it is far from universal.
A survey of large European companies conducted by Instituto de Empresas, a Spanish business school, found that only one-third provide stakeholders with dedicated sustainability documents, while 48% merely mention the subject in their annual financial reports.
Companies are also selective about the subjects that they choose to disclose in their reporting. The environment and workplace conditions are among the most commonly reported issues.
Ethics and local economic development receive less attention, while human rights are rarely mentioned in their publications.
The challenge of compiling and presenting information about sustainability is an important barrier to more effective reporting. The sheer amount of information to be gathered is a first hurdle that companies need to overcome.
Sustainability encompasses a wide range of subjects, including the environment, labor conditions, community relations and global human rights campaigns. Such is the breadth of information required that few companies can genuinely claim to be fully transparent in every one of those areas.
“Companies will face reporting dilemmas and have to make decisions based on them,” says Kamp-Roelands. “They cannot fulfill the concerns of all kinds of stakeholders.”
Such choices entail a risk that the company will be accused of trying to withhold sensitive information from the public.
Often companies will only report on areas that are closely aligned with their business, or on metrics where they fare particularly well. But this can be a dangerous strategy to adopt.
A failure to tackle controversial or delicate issues can reinforce a perception that a company’s sustainability report is more about marketing than a genuine desire for transparency.
Despite these challenges, progress is being made to ensure that sustainability reporting is more consistent and widespread.
Since 1997, the Global Reporting Initiative (GRI) has promoted a set of sustainability reporting standards based on a series of core metrics designed to be applicable to all businesses.
Currently, more than 1,800 companies adhere to the GRI’s reporting framework.
Global standards for integrated reporting
An important recent development is the launch of the International Integrated Reporting Committee, a coalition of businesses, regulators, accountancy firms, securities exchanges and non-governmental organizations.
The aim of the IIRC is to create a globally accepted integrated reporting framework that brings together financial, environmental, social and governance information in a concise, consistent and comparable format.
“Global standards for integrated reporting, such as those being developed by the IIRC, will greatly help stakeholders to understand the true value creation of a company and enable them to make direct comparisons of performance,” says Climent.
The IIRC plans to release a discussion paper for public consultation in mid-2011, which will outline principles for preparing an integrated reporting.
It will then present a framework for integrated reporting to the G20 later in the year. Although it will be challenging to secure universal support for the framework at an international level, the high profile of the initiative will provide a significant boost to help it succeed.
“What is powerful about the IIRC is that it is a multi-stakeholder initiative that is supported by both regulators and accountancy standards boards,” says Climent.
As initiatives like these spread, companies will also become more aware of the benefits that the reporting exercise brings.
“Many companies begin to report to comply with regulations, but as they learn more about the impact of their activities, they implement changes that increase the efficiency of their operations,” says Kamp-Roelands.
“Looking for ways to consume less energy, for example, is good for the environment, but also good for the finances of the firm.”