Why sustainability reporting complexity needs to be killed

As the season for corporate sustainability reporting kicks off for most companies, several months of data collection, number crunching and storytelling begins.

The company’s sustainability performance and its ability to convey a compelling message will determine how it ranks as a sustainable business and thus attracts talent, investments or increase sales.

how did we arrive at this point? Is it bringing the benefits expected? What’s the future?

Just keep on reading…

What is sustainability reporting?

Financial reports give shareholders and other stakeholders information about the company’s activities and financial performance. They are mandatory and failure to report will result in penalties, fines, and even the legal dissolution of your business.

Besides, companies voluntarily share other non-financial information to explain the value they create for their stakeholders beyond profits.

With this information, companies are more transparent about the risks and opportunities they face.

An example of sustainability reporting is the Corporate Sustainability Report (CSR). CSR originally aimed to improve the company’s reputation but currently also respond to investor requests.

Global Reporting Initiative (GRI) is the go-to place for sustainability reporting.

According to GRI, a sustainability report is a report published by a company about the economic, environmental and social impacts caused by its everyday activities.

A sustainability report also presents the organization’s values and governance model and demonstrates the link between its strategy and its commitment to a sustainable global economy.

Larry Fink, BlackRock’s CEO, highlights the value of ESG. He mentions that without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.

Why sustainability reporting is good?

There are 5 reasons that explain why companies create sustainability reports:

1. What’s get measured gets improved, and sustainability reporting is about measuring the value created by the company beyond profits.
2. It is a great risk management tool. The value of sustainability reporting is that it ensures that companies consider their current and future impacts on sustainability issues. Therefore, companies effectively reduce their risks.
3. Allows being transparent about the risks and opportunities they face to shareholders, suppliers, consumers, employees and other stakeholders. This communication improves the company image attracting investors and talent. According to the 2019 Porter Novelli Study, 90% of Gen Z believes companies need to act on social and environmental issues.
4. It helps to explain the company culture building trust inside and outside of the organization. In order to avoid greenwashing the sustainability reporting needs to include concrete examples and numbers verified externally.
5. Gain a Competitive Advantage. Companies in the direct-to-consumer sectors use sustainability reporting to differentiate by being transparent about materials sourced and manufacturing practices. According to a study done by NYU Stern Center for Sustainable Development, products marketed as sustainable grew 5.6 times faster than those that were not. Therefore, companies designing sustainable products can decide to use their sustainability report to share information from the life cycle assessment (LCA) of their products. For example Tesla, in their Impact report 2019 share and benchmark the environmental impact of its vehicles vs their internal combustion competitors.

“Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders”

Larry Fink – BlackRock’s CEO

How we made sustainability reporting complicated

In this scenario, companies have been faced with the increasing task of creating annual sustainability reports. Besides they submit information aligned with different voluntary frameworks like:

• CDP, DJSI, SDGs, MSCI, Sustainalytics, UN Global Compact (UNGC), Global Reporting Initiative (GRI),
• Climate Disclosure Standards Board (CDSB), Sustainability Accounting Standards Board (SASB),  
• International Integrated Reporting Council (IIRC) 
• and up to 182 frameworks according to WBCSD.

Moreover, companies responsibility goes beyond their direct activities in their factories, offices, fleet and other direct assets. Corporates consider human rights, environmental pollution, conflict minerals or deforestation issues in the supply chain as their direct responsibility. Therefore, companies reduce risks and communicate these risks in their sustainability report.

Fig: Frameworks divided by Purpose, Audience and Area by conference Board

Besides, the Paris Agreement push for a two-degree world gave birth to the Task Force on Climate-related Financial Disclosure (TCFD).

TCFD aims to make disclosures more complete, consistent, and comparable. Besides, it gives investors, lenders, and insurers more visibility of how exposed organisations are to climate-related risks and opportunities. On the flip side, it adds more complexity to the sustainability reporting process. (here is my article about TCFD)

Sustainability Reporting Software

Modern sustainability software reduces the efforts to collect and present information.

There are some amazing trends in sustainability reporting software incorporated specifically in current or upcoming versions of Enablon, Thinkstep’s Sphera, Salesforce and UL EHS Sustainability software.

They will allow automated data capture, cloud software as a service (SaaS), connection with the Enterprise Resource Planning or even AI data analysis so looking forward to hearing from them.

Nevertheless, due to the many frameworks available, still, experts require to dedicate time to excel data crunching. I wonder if one day we could have a 1-click multiple index reporting (that would be awesome !!).

Sustainability Reporting Complexity Cost

All this complexity has increased exponentially the headcount, time and resources (consultants, workforce upskilling…) dedicated.

Most of the effort is focused on collecting data, analyzing, developing the sustainability report and submitting information to the different frameworks.

Besides, it is necessary to put extra care that there is coherence in both the message and the data reported through all these channels.

WBCSD 2020 report shows companies spend on average 4 months to prepare the sustainability reports and 50% of the reports averaged 95 pages. No major changes in the last 4 years.

Companies’ expectations are that financial analysts and other stakeholders will use this sustainability information for their decision-making.

Sustainability Reporting viewed from the investor side

The value of global assets applying environmental, social and governance (ESG investing) data to drive investment decisions has almost doubled over four years to $40.5 trillion in assets 2020.

BlackRock, The world’s largest asset manager, declared this year to become more aggressive with its corporate engagement strategy going forward. It considers voting against board members and management when their companies are not meeting the asset manager’s sustainability goals.

With all this capital at play, there is a logical trend to reduce the risk by using quality data from the companies these funds are investing.

If the information reported is already complex to those of us who prepare it, I could imagine the maze navigated by investors trying to read every sustainability report.

Furthermore, I can also picture the difficulties faced by fund managers when feeding their ESG investment models with information reported through CDP, DJSI, MSCI or Sustainalytics.

Investors use services to collect this information like Morningstar sustainability.

These services base their recommendations on ESG assessments from Sustainalytics or the ESG Dashboard from Bloomberg which displays information about CDP score, DJSI or ISS.

The positive side of sustainability frameworks

Not everything is negative. Sustainability frameworks are a true driving force in moving forward the sustainability agenda. It helps companies to be credible in their sustainability efforts.

Besides is a good tool to increase their awareness about major sustainability trends and to benchmark against its peers.

For example, CDP requests reporting the percentage of renewable energy that is sourced and used in the organization.

By requesting this information, CDP is signalling the companies where they should focus their carbon emission reduction efforts in order to be considered sustainability leaders.

With this approach, CDP is helping to generate demand for renewable energy and reduce dependency on fossil fuels.

Current trends

In financial reporting, IFRS and GAAP became the standard.

Similarly, there is a natural push for alignment and consolidation of sustainability reporting frameworks and indexes. This consolidation would reduce the reporting burden and allow easier stakeholder evaluation.

The International Financial Reporting Standards (IFRS) Foundation is leading the most important initiative to improve non-financial disclosures. The IFRS presented in November 2021 during COP26 the creation of the International Sustainability Standards Board (ISSB) to drive international consistency of sustainability-related disclosures. The ISSB published two prototype climate and general disclosure requirements described by some as the biggest change In corporate reporting since the 1929 stock market crash.

Besides, in September 2020, the 5 major corporate reporting bodies CDP, CDSB, GRI, IIRC and SASB announced their commitment to work towards unifying criteria for Corporate Sustainability Reporting.

The question should not be about which framework will become the standard. Rather the question is how corporations incorporate this information into their decision-making process and disclose it to their stakeholders to understand how the company creates value.

Regarding the sustainability report, it is a great tool for communicating values inside and outside of the organization. Nevertheless, stakeholders seeking to understand companies’ situation may find it hard from a standalone sustainability report.

Most companies are moving into integrated reports.

Integrated reports represent effectively in a single report the company’s performance in terms of both financial and other value creation information.

Above all, integrated reports aim to represent how the company delivers value to the triple bottom line profits, people and planet.

According to WBCSD, in 2018 a third of the reports analyzed were integrated, 22% more than in 2014.

Additionally, companies dedicated 3.1 months on average for integrated reports vs 4.6 for standalone reports.

This fact demonstrates how integrated reports are better aligned with the financial reporting calendar.

Conclusions

1. Corporate sustainability reporting plays a fundamental role in driving transparency and sharing the company’s values and culture.
2. The many sustainability frameworks make sustainability reporting a daunting task that sucks companies resources and that investors and stakeholders struggle to interpret. Quality reporting, not quantity.
3. There are signs of simplification. Simplification should allow sustainability reporting to disappear and to make sustainability become just another part of the company value creation.
4. This simplification would free resources that companies will use to combat Climate emergency, water crisis, deforestation and other sustainability topics which require immediate action.

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