Sustainability Reporting: Transparency in profitability

In the fight against Climate Change, businesses – especially large corporations – are considered extremely important. Pertinent to international treaties including the Paris Agreement, national and regional governments may set net-zero goals, but it is impossible to achieve the goals without the cooperation of the finance and business sectors. With the rising tide of sustainable development and net-zero goals, investors and customers expect more responsibility from these businesses regarding their environmental and social footprint.

After the publication of Rachel Carson’s “Silent Spring” in 1962, the world – for the first time – shifted its focus to the socio-environmental impacts of large-scale production. Gradually, the negative relationship between economic growth and environmental impact became evident. The concept of “sustainable development”, which balances both economic growth and minimum socio-environmental impact, started gaining momentum. Businesses were instrumental in the successful adoption of this principle in reality, and the concept of sustainability emerged in businesses. Just like transparency in financial reporting, stakeholders expected that the socio-environmental impact of the business operations would be reported transparently.

“Sustainability Reporting” by businesses refers to financial or non-financial reporting of the social and environmental impacts of their operations in a single report, often published periodically. This report generally documents the impacts of their operations, along with the business risks associated with them, and opportunities arising from them.

These reports are generally key to the stakeholders to understand the sustainability goals and objectives of the company, the strategy and action plan adopted to reach them, and their current progress in the plan. They are supposed to be simple, easy to read and understand, transparent, and verifiable with a true and fair point of view of how things are. Most importantly, it should be audited by third-party organizations, though this is not mandatory. Some companies report their socio-environmental impact in their annual financial reports, while some publish a separate “Sustainability Report” or a “Corporate Social Responsibility (CSR) Report”. Such reports are generally accessible via companies’ websites for everyone in the public domain.

This type of (mostly) non-financial reporting helps companies build trust and reputation among their investors by showing transparency and responsibility towards the environment and society. It is a positive way for a company to connect with its stakeholders. Additionally, such a path can also help the companies financially, as their sustainability research leads to more efficient operations, cost optimization, early identification of risks, and formulation of management strategies for them.

Sustainability reporting has three key pillars: Environmental, Social and Governance (ESG).

The first pillar – Environmental pillar – deals with environmental impacts and risks of the operations of the company in question. This pillar includes themes such as (1) carbon emissions & GHG accounting, (2) pollution & waste management, (3) water, energy & other resources’ management, (4) impact on climate change, biodiversity & land use, and (5) overall environmental impact of the operations. Second, the Social pillar encompasses the relationship management with stakeholders, with themes including (1) health & safety, (2) diversity & inclusivity, (3) opportunities & benefits for employees, and (4) communities associated with the business. The final pillar, Governance, deals with top management of the company – like the board of directors – about their (board) diversity, responsibility, transparency, ethics, and their relationship with other employees. These three pillars ensure the inclusion of all the relevant themes in sustainability reporting.

While sustainability reporting was not mandated by legislation until recently, multiple reporting standards and frameworks have been developed by various international organizations in consultation with experts and relevant stakeholders. The most popular and widely accepted among them is the “Global Reporting Initiative (GRI)”. Used by more than 7,500 companies, it has topic-wise sector-specific standards for all types of businesses.

In 2023, the European Union released the Corporate Sustainability Reporting Directive (CSRD), drawing inspiration from GRI. Under this directive, large publicly listed companies in the EU will be mandated to publish sustainability reports according to European Sustainability Reporting Standards (ESRS), starting from the fiscal year 2024. The International Sustainability Standards Board (ISSB) established recently is also expected to develop its own universally accepted standards in the coming years.

Prior to the adoption of CSRD and the legal mandate for sustainability reporting, it was largely voluntary. Apart from GRI, there were also multiple frameworks and standards developed by other organizations for the same. Thus, companies generally used the standards which were better suited to their agendas. This prevented comparability among different companies’ reports. Besides, a lack of legislation and universally accepted standards forced the companies to develop their own goals, strategies, and standards, which are generally based on their capabilities and progress, rather than on a standard benchmark. Apart from affecting comparability, it also made the reporting confusing and misleading for the stakeholders.

Notably, despite the promising nature of the concepts of sustainability reporting and ESG, they have not been able to deliver any significant results in terms of sustainable development in the last two decades. While there may be some amount of efficiency and optimization achieved through this practice, it is insignificant compared to the growth in environmental degradation by commercial production. This insufficiency may be attributed to the lack of universal standards and pertinent legislation. The absence of a transparent audit in most of the cases of the reporting has also contributed to its limited success. According to researchers, what the world of corporate sustainability needs, is a more rigorous and aggressive legislative approach rather than the current passive one of voluntary sustainability and ESG reporting. One can only hope that the introduction of CSRD and ISSB standards will pave the way to significantly lessen the impact of the business world on our planet!

Written by: Saee Ghule
Edited by: Haorui Luo

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References:

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