What's the big deal about sustainability reporting?

Reporting about performance is a way of demonstrating transparency and building trust. This may be the reason why more and more companies are reporting on their sustainability performance.

Even in the United States, where in certain political circles there is still a raging debate on whether climate change is real, in 2012 “53% of the S&P 500 Index companies are currently disclosing environmental, social and governance (ESG) information” (Governance & Accountability Institute, 2012).

In the UK, the Companies Act 2006 asks public listed companies to report on Green House Gas (GHG) emissions in their Director’s Report, and in South Africa all public listed companies are required to submit an annual integrated report under the Comply or Explain principle.

So both governments and companies, are moving more and more into the arena of sustainability reporting but the main question still persists: who reads these reports and for what purpose? Are investors really interested in whether companies act sustainably or just on their total shareholder return?

The dilemma

What we hear from our member companies is that investors are not interested in sustainability performance and investors tell us that sustainability reports more often do not offer the necessary or relevant information to help them make investment decisions. In my opinion, investors have a point!

Sustainability reporting frameworks multiply by the day and offer different methods of how to address and report on different issues. The variety of frameworks gives a lot of flexibility to companies on how and when to report but at the same time makes things complicated when choosing the best/most current/most relevant framework. The high number also makes it very time consuming for analysts to look for relevant and, more importantly, comparable information.

On the other hand we have Paul Polman, CEO of Unilever, who took a risk not only by setting the ambition of “doubling size of the business while reducing its overall environmental footprint and increasing its positive social impact”, but also by moving away from quarterly financial reporting. The latest he did to stress the importance of long-term sustainable investment and the change in the way Unilever is doing business. But, is it really a risk to think that way? In my opinion thinking beyond the 90-day cycle and even longer term (i.e. 10, 20, 30 years) is the only way businesses will be able to future proof themselves from future shortages of resources and keep their licence to operate.

Sustainability reporting is a way of addressing the above dilemma. So on that line, I’m offering a short review of what I considered the most relevant (or popular) frameworks right now.

The Global Reporting Initiative

The big favourite in Europe is the Global Reporting Initiative (GRI) Framework. The GRI recently launched its new G4 reporting guidelines, placing more emphasis on materiality and how companies decide on what to report on rather than ticking boxes off a big (and ever growing) list of indicators. This could mean that from now on we will see more concise and relevant reports, focusing on issues where companies have the most ability to positively (or negatively) make an impact. This in turn could mean a loss in comparability since as different companies have different material issues, they will report different metrics. The lack of comparability could be tricky for investors when looking at two different companies, however it will more useful when assessing a company’s full risk profile.

To read more on the relationship between materiality, comparability and transparency have look at Dwayne’s blog for a more thorough analysis of the G4.

Environmental Profits & Loss Account

In another attempt to improve comparability, Puma recently published, separate from its regular sustainability report, an Environmental Profits & Loss Account. This was done as an effort to place a monetary value to Puma’s environmental impact through its whole supply change so as to be able to compare Puma’s performance across different impact areas (i.e. CO2 emissions, water consumption, raw materials, etc.).

In my opinion, the biggest impact of this report was for Puma to realise how little information it has on its supply chain, given that 88 per cent of the data used in the report had to be modelled. Also the methodology used to calculate the monetary value of different impacts is very complicated and full of assumptions. Puma did commit to many improvements in supply chain management as a result from this report. However, neither the methodology seems to have been picked up by other businesses, nor has Puma published its second report promised for the beginning of this year. 

The International Integrated Reporting Council (IIRC)

Another framework competing for the highlights of sustainability reporting is Integrated Reporting.  This framework claims it is “principally aimed at providers of financial capitals”, which could mean they are the addressing the disconnect between capital investment and sustainability performance. A huge win for this framework is the fact that the Johannesburg Stock Exchange made it mandatory for public companies to use this framework for their annual reporting.

From the perspective of value creation, the Integrated Reporting Framework seems to be competing with the materiality focus of the GRI. It is not clear what the synergies are, and both frameworks seem to be competing for a space in organisational reporting more than complementing each other. This will mean that companies will chose one or the other to the detriment of comparability and levels of transparency.

The Sustainability Accounting Standards Board

Last but, by no means, least, the US seems to be catching up in this subject as well, with The Sustainability Accounting Standards Board (SASB) trying to bring consistency in sustainability reporting for public companies in the US. They are working with corporations to produce a sector-specific matrix of material issues companies should report on.

This is great news for companies that are already considering sustainability in a more strategic way. The aim is for companies to have a better guidance of what sustainability related risks to report jointly or included on their annual 10-K and 20-F forms. These are annual reports national and foreign companies operating in the US need to submit to the U.S. Securities and Exchange Commission. In them businesses give a comprehensive summary of the main risks and performance to investors as the main audience.

Thinking about how companies are looking at sustainability and financial risks together, in 2012, Coca-Cola reported water and plastic as major risks in its 10-K form, two issues previously only consider in non-financial reporting. The only issue is that SASB seems to be competing in the non-financial reporting space with the GRI and the IIRC. There does seem to be a logical synergy between SASB materiality matrix and the new materiality focus of the G4. Maybe this will mean that companies will not have to do much work to report on both frameworks depending on their European or American audience. We will have to wait and see.

Conclusions

Just to recap, this is not a comprehensive list of frameworks and I left out many others that are as relevant as the GRI or Integrated Reporting. Feel free to expand the list in the comment box below!

There is no straight answer to the question I posed at the beginning for this post. There are many options for companies to decide how to approach sustainability reporting, all are very similar and very different at the same time. What is undeniable is that there is an appetite from companies and investors in how future sustainability trends will affect business, and how companies will make money (and how much money!).

A more collaborative approach is needed at various levels. Between businesses and investors in order to better define what is material and comparable, and between framework makers to avoid duplication of efforts and make sustainability reporting even more relevant.

BITC is currently conducting a survey that will attempt to address some of the issues discuss in this post. The aim is to find out if businesses' stakeholders value sustainability and which stakeholders drive short-term thinking when considering sustainability risks and opportunities. So enough of my opinion  - now it's your turn to tell us what you think by taking part in the survey.

I am hoping to get lots of information from our member companies to shed some light on some of the issues expressed above, so expect a sequel soon!

Elena Espinoza is a Senior Consultant, BITC Advisory Services