Sustainability reporting: immediate choices for the future
Originally published in The Guardian Sustainable Business Blog.
Two recent developments in the Rio+20 context will help prompt welcome – and overdue – attention to the crucial role that corporate reporting can play in promoting progress towards sustainable development.
The first of these was a call for “a global policy framework requiring all listed and large private companies to consider sustainability issues and to integrate sustainability information within the reporting cycle.” Contained in the Rio+20 negotiating text known as the “Zero Draft”, the call echoes language that emerged from both the 1992 Rio de Janeiro and 2002 Johannesburg sustainability summits encouraging voluntary environmental and sustainability reporting by companies.
The second was the altogether more muscular recommendation of the UN Secretary General’s High Level Panel on Global Sustainability that business groups should work with governments and international agencies to develop “a framework for sustainable development reporting.” The report, entitled “Resilient People, Resilient Planet – A Future Worth Choosing”, released today, also recommends that “mandatory reporting by corporations with market capitalisations larger than $100 million” should be considered.
What will happen to these recommendations in negotiations over the coming months is anyone’s guess.
They are, however, precisely the right questions for governments and stakeholders to be discussing now, as I argue in a new Chatham House paper on the future of sustainability reporting.
The first generation of sustainability reporting – SR 1.0 as the paper calls it – has proven both the feasibility and value of reporting on a company’s economic, environmental and social (or sustainability) performance. According to a recent KPMG survey, the vast majority of companies on the Fortune Global 250 list now voluntarily issue some form of sustainability report in addition to their financial report. The number, moreover, has grown every year over the last decade, making sustainability reporting for these companies a routine practice, with most of them using the Global Reporting Initiative (GRI) framework.
Respondents to a stakeholder survey late last year by Chatham House assessed the benefits of sustainability reporting to include improved data transparency (eg on how a company is tackling challenges such as climate change), improved organisational governance (eg because it is measuring more aspects of performance) and better ability to listen and respond to stakeholder viewpoints. Corporate users have also reported more internal “connected thinking”, enhanced capacity to track progress and increased employee engagement. In short, sustainability data is helping shape strategy and improve performance.
SR 1.0, however, cannot continue in its present form. A next generation model – SR 2.0 – needs to be developed that will address the weaknesses that have been identified with the current approaches. These problems include:
• Only a small percentage of the world’s multinational companies are reporting on their sustainability policies, practices and impacts. If governments really want to harness the power of the private sector, and track progress, then universal reporting – at least by all large companies – is required.
• Current reporting varies greatly in quantity and quality, making it sometimes hard for readers (whether regulators, investors or other stakeholders) to accurately assess the materiality and value of the data disclosed. Incomplete assurance and lack of evidence of positive sustainability impacts are also among critiques made.
• Sustainability reporting will not be able to achieve its potential without intervention by governments. The limits as to what a purely voluntary exercise can deliver have been reached. Without further official impetus, sustainability reporting is likely to continue its incremental growth in a world that needs exponential change.
• Sustainable development cannot be reached without the full engagement of the business sector. There must be transparency on the impacts of current behaviour and business should focus its unmatched entrepreneurial, technological and financial power on delivering solutions to the world’s problems.
• Capital markets only operate efficiently if they can accurately price risk and management quality. Sustainability information is increasingly material to the future health of most corporations and to that of the economies and societies they work in. If we continue to rely solely on financial reporting, we risk triggering both an economic and ecological meltdown.
• The revolution of sustainability reporting has been the result of one of the most productive partnerships between business and civil society since 1992. With limited government inputs, widely used frameworks such as the GRI have been developed and refined in negotiations between often thousands of reporters and their stakeholders from around the world.
‘Report or explain’ approach
The paper argues that the time has now come for governments to get behind – and significantly ramp up – the good work that businesses, accounting firms, NGOs and others have done over the last decade. This can best be done by agreeing at Rio+20 to adopt a report or explain approach to sustainability reporting.
This would mean that all governments would agree to put in place a system – whether through national regulations, policy measures or stock exchange listing requirements – that would require all large companies to join their reporting peers in disclosing their sustainability performance, or explain publicly why they don’t. Progressive Denmark has already successfully pioneered such as system.
This approach would have three benefits. Firstly, it would avoid the need for lengthy (and unpredictable) international negotiations on a suitable framework. There simply isn’t another decade to waste and every reason to use all the experience that already exists. Secondly, by leaving the choice of frameworks and indicators to individual reporters, it retains the necessary flexibility to cover the needs of different companies in different places. Thirdly, it would place the burden of assurance where it belongs, with everyone. By making sustainability reporting the new normal, regulators, competitors, investors – indeed anyone reading a report – can raise informed questions and suggest improvements. Only by making sustainability everybody’s business will we make the business of sustainability work for everyone.