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Why sustainability reporting complexity needs to be killed

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As the season for Corporate Social Responsibility reporting kicks-off for most corporations, 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…

Corporate Sustainability Reporting – The origins

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 voluntary share other non-financial information like the Corporate Sustainability Report (#CSR) that originally mainly aimed to improve the company’s reputation and currently also respond to investor requests.

Moreover, corporates consider human rights, environmental pollution, conflict minerals or deforestation issues in the supply chain as their responsibility and thus make sure that these risks are mitigated and communicated externally.

“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 it complicated

In this scenario, big companies have been facing with the increasing task of creating annual sustainability reports and submitting information aligned with different voluntary frameworks like #CDP, #DJSI, #SDGs, #MSCI, #Sustainalitics, 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.

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

Besidesthe Paris Agreement push for a two-degree world gave birth to the Task Force on Climate-related Financial Disclosure (TCFD) which aims to make disclosures more complete, consistent, and comparable and give investors, lenders, and insurers more visibility of how exposed organisations are to climate-related risks and opportunities adding more complexity to the process. (here my article about TCFD)

According to WBCSD’s Reporting Exchange programme, there are 182 frameworks

Modern sustainability software like EnablonThinkstep’s Sofi or UL EHS Sustainability’s reduces the efforts to collect and present the information. Nevertheless, due to the many frameworks available and their frequent updates, many spreadsheets are still used instead of an ideal 1-click multiple index reporting (that would be awesome !!)

All this complexity has increased exponentially the headcount, time and resources (consultants, workforce upskilling…) dedicated to collect data, analyze information, develop sustainability reports and submit information to the different frameworks while making sure that there is coherence in both the message and the data reported through all these channels. According to a WBCSD report, Companies spend on average 4 months between the end of the reporting period and the publication of the report and 50% reports averaged 50-100 pages but no mentions the effort dedicated.

WBSCD report - Pink 2014 - Blue 2018

Companies’ expectations are that financial analysts and other stakeholders will use this sustainability information for their decision-making. But if the information reported is already complex to those who of us who prepare it, I could image the maze navigated by investors trying to read each of the sustainability reports or incorporating into their investment strategy models fed with information reported through CDP, DJSI, MSCI or Sustainalitics.

Investors use services to collect this information like Morningstar sustainability, which bases its recommendations in ESG assessments from Sustainalytics or the ESG Dashboard from #Bloomberg which displays information about CDP score, DJSI or ISS.

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Bloomberg ESG Dashboard – data service

Not everything is negative, these indexes are indeed a driving force in moving forward the sustainability agenda by helping companies to be credible in their sustainability efforts, to teach them 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 and this information is signalling the company where it should focus the carbon emission reduction efforts if it wants to be considered a leading organization. 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, and similarly, there is a natural push for alignment and consolidation of sustainability reporting frameworks and indexes to reduce reporting burden and allow easier stakeholder evaluation. We see already how there is some aligning happening. The question should not be about which framework will become the standard but how corporations incorporate this information into their decision-making process and disclose it to its 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. In this context, some companies have been moving into integrated reports, which despite it may not fit all companies, represents effectively in a single report the company’s performance in terms of both financial and other value relevant information.

According to WBCSD, in 2018 a third of the reports analyzed were integrated, 22% more than in 2014 and companies dedicated 3.1 months on average for integrated reports vs 4.6 for standalone reports, demonstrating how integrated reports are better aligned with financial reporting calendar.

2017 MARKS & SPENCER integrated report award winner by the IIRC

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 other stakeholders struggle to interpret. Quality reporting, not quantity.
  3. There are signs of simplification which ultimately should allow sustainability reporting to disappear and more broadly for sustainability to become just another part of the company value creation.
  4. This simplification will free resources that companies will use to combat Climate emergency, water crisis, deforestation and other sustainability topics which require immediate action.

How do you see CSR reporting future? I’d love to hear your thoughts so please share them in the comments section below.

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