CHAPTER 1

Introduction

In order to know whether or not the corporate social responsibility (CSR) initiative and its related commitments are actually improving the company’s performance, it is necessary to have in place procedures for reporting and verification, each of which are important tools for measuring change and communicating those changes to the company’s stakeholders. Hohnen and Potts described reporting as “communicating with stakeholders about a firm’s economic, environmental and social management and performance” and verification, which is often referred to as “assurance,” as a form of measurement that involves on-site inspections and review of management systems to determine levels of conformity to particular criteria set out in codes and standards to which the company may have agreed to adhere.¹ Verification procedures should be tailored to the company’s organizational culture and the specific elements of the company’s CSR strategy and commitments; however, it is common for companies to rely on internal audits, industry (i.e., peer), and stakeholder reviews and professional third-party audits. Verification procedures should be established before a specific CSR initiative is undertaken and should be included in the business case for the initiative.²

While certain CSR and corporate sustainability disclosures have now become minimum legal requirements in some jurisdictions, in general such disclosures are still voluntary and directors have some leeway with respect to the scope of the disclosure made by their companies and howthey are presented to investors and other stakeholders. Some companies continue to limit their disclosures to those are specifically required by regulators; however, most companies have realized that they need to pay attention to the issues raised by institutional investors and other key stakeholders and make sure that they are covered in the disclosure program. At the other extreme, there are companies that have embraced sustainability as integral to their brands and have elected to demonstrate their commitment by preparing and disseminating additional disclosures that illustrate how they have woven sustainability into their long-term strategies and day-to-day operational activities. These companies understand that not only are investors paying more attention but that more and more people everywhere are considering environmental, social, and governance (ESG) performance when deciding whether to buy a company’s products and/or work for a particular company and that it is therefore essential to lay out their specific CSR and corporate sustainability goals and the metrics used to track performance and provide regular reports to all of the company’s stakeholders on how well they are doing against those goals.³

The scope of the company’s reporting and verification efforts will depend on various factors including the size of the company, the stage of development and focus of its CSR commitments, legal requirements, the financial and human resources available for investment in those activities and the degree to which companies want and are able to integrate sustainability indicators into their traditional reporting of financial results. Ceres, a nonprofit organization advocating for sustainability leadership (www.ceres.org), has developed and disseminated its Ceres Roadmap as a resource to help companies reengineer themselves to confront and overcome environmental and social challenges and as a guide toward corporate sustainability leadership.⁴ In the area of disclosure and reporting, Ceres stated that the overall vision was that companies would report regularly on their sustainability strategy and performance, and that disclosure would include credible, standardized, independently verified metrics encompassing all material stakeholder concerns, and details of goals and plans for future action. Specific expectations regarding disclosure were as follows:

Cleveland et al. recommended that companies should align the manner in which sustainability issues are reported or communicated to stakeholders and others with the type and purpose of the report or communication. When reporting is mandatory, the applicable disclosure standards and guidelines promulgated by regulatory bodies such as the Securities and Exchange Commission (SEC) should be followed; however, when reporting is voluntary companies and their professional advisors must consider the standards and expectations of the audience, practices by other companies engaged in comparable business activities and the legal risks of disclosing “too much.” Companies are generally admonished to disclose information that is “material” with respect to aspects of their business including environmental and social issues and risks, but Cleveland et al. pointed out that this is not necessarily a firm guide given the existence of differing concepts of materiality relevant to sustainability-related reporting that they summarized as follows⁵:

Regardless of the particular standard applied to a specific sustainability-related report companies must ensure that disclosures are accurate and complete and this means creating an effective sustainability reporting and communication management system with disclosure controls and procedures, internal education and training, external review of proposed disclosures by legal counsel, and other professional advisors and continuous assessment to improve the reporting process.

In determining materiality and what should be covered in the sustainability report and how, consideration needs to be given to the input received from the company’s external stakeholders. It has been observed that identifying poor quality and the costs associated with poor quality is a vital part of “triple bottom line” reporting and in order to do this companies must engage with each of their important stakeholders to understand the essence of the company’s relationships with those stakeholders and what the stakeholders are looking for as indicators of value, integrity, and quality.⁷ This means that companies need to take a hard and honest look at their impact on the communities in which they operate and quality of their relationships with employees, the products and services they offer to customers, their actions in the neighborhoods where their facilities are located, and footprint of their operations on the environment.

Jackson et al. counseled that companies should solicit comments and suggestions from individuals who were not involved in the original collection and assessment of the data used to compile the report and should ensure that all information that is proposed to be included in the report is rigorously checked for accuracy. Independent editing should be used to identify and remove details that are not vital to the report and any jargon that might confuse readers and the message that the report is supposed to convey. While the process of collecting data for a sustainability report is complex, the end product itself must be straightforward and understandable by all of the stakeholders, including stockholders, employees, community members, and business partners.⁸

When establishing plans for reporting and verification it is useful to obtain and review copies of reports that have been done and published by comparable companies. Reports of larger companies are generally available on their corporate websites and extensive archives of past CSR-focused reports can be accessed through various online platforms such as CorporateRegister.com, a widely recognized global online directory of corporate responsibility reports. It is also important to have a good working understanding of well-known reporting and verification initiatives such as the GRI Standards; the AccountAbility AA1000 series; the United Nations Global Compact; and the International Auditing and Assurance Standards Board ISAE 3000 standard. Country-specific information is also available through professional organizations such as the Canadian Chartered Professional Accountants, which has published an extensive report on sustainability reporting in Canada.

Reporting standards are also emerging for specific topics within the broader universe of CSR and stakeholder engagement. For example, while companies can use several of the disclosure categories in the GRI to describe their activities relating to community involvement, investment, and impact, they can also turn to a framework for reporting on corporate community investment promoted by the London Benchmarking Group (LBG) (http://www.lbg-online.net/), which is managed by Corporate Citizenship, a global corporate responsibility consultancy based in London with offices in Singapore and New York.⁹ The LBG framework has been touted as an effective tool for quantifying and organizing information about corporate community investment and, most importantly, assessing and reporting on the impact of their relationships with communities and how to manage it. Other tools for reporting on community impact have included return on investment (ROI) frameworks; the social, ecological, and environmental footprints; the Ethos Indicators developed by the Ethos Institute and work done by partnerships between NGOs and multilaterals that have attempted to conceptualize impact related to broader sustainability dimensions.¹⁰

The scope and sophistication of CSR reporting has come a long way since the idea first came up in the mid-1990s, when only a handful of companies reported on social responsibility issues and activities in addition to their regular financial reports. Today almost all of the largest global companies produce reports on their environmental policies and activities, often providing interested parties with a whole range of documents that can be accessed in a separate yet highly visible section of the company website. Other international standards, such as the UN Global Compact, explicitly incorporate reporting as a fundamental requirement for demonstrating a commitment to sustainability. Specifically, companies participating in the Compact are required to make an annual “Communication on Progress” that outlines the actions they have taken with respect to integrating the Compact’s ten principles and to make the communication publicly available to stakeholders through annual financial, sustainability, or other prominent public reports in print or on the company’s website. The Compact recommends that companies follow the GRI Standards when preparing their reports.

Sustainability reporting is tightly connected with efforts to achieve global sustainability goals and targets such as the Sustainable Development Goals (SDGs) in the 2030 Agenda for Sustainable Development and the aspirations in other international agreements such as the Paris Agreement on climate change action because without reporting it is impossible to measure progress that has been made and what still needs to be done. In fact, the SDGs include a specific goal (Goal 12.6) to encourage companies to integrate sustainability information into their reporting cycles,¹¹ and research has been undertaken by the Global Reporting Initiative to identify concrete connections between sustainability reporting and SDG 1 (end poverty in all forms everywhere).¹² Other international standards, such as the UN Global Compact, explicitly incorporate reporting as a fundamental requirement for demonstrating a commitment to sustainability.

Finnish Textile and Fashion (FTF), the central organization for textile, clothing, and fashion companies in Finland, noted that developing corporate responsibility is often seen as an internal quality assurance process, which the company wants to communicate to the outside world only when everything is taking good shape.¹³ However, FTF pointed out that every step toward better performance is important and communicates where the company is heading and that for this reason companies needed to be prepared to begin communications with stakeholders regarding their corporate responsibility activities at the very earliest stages. This means that attention should be paid to reporting and communications when the first development plans are being prepared and the first targets and indicators are being established. Reporting and communicating on corporate responsibility at this point is a good way for companies to demonstrate their commitment to transparency, even though much of the work has yet to be completed or planned. Early reporting and communications should include information on deficiencies and problems that have been identified and the steps that the company proposes to take toward remediation including consultation with stakeholders impacted by a particular issue.

Purposes and Benefits of Sustainability Reporting

While many businesses engaged in sustainability initiatives because “it is the right thing to do,” in most cases a sustainability-related action is significantly driven, at least initially, by some regulatory dictate. However, while regulators have been engaged in promulgating laws and regulations pertaining to the environmental aspects of the operational activities of companies for decades, they have been relatively slow to act with respect to mandatory sustainability reporting. As a result, sustainability reporting has emerged along a path of voluntary commitment, something that generally does not occur in the business world unless and until there is a solid positive link between the activity and economic growth. Moreover, sustainability reporting did not make sense unless companies had something material to report on, which met that sustainable activities needed to be integrated into business models. Absent a strategic commitment to sustainability, sustainability reporting risks being dismissed as a cynical marketing ploy (“greenwashing”) rather than a sincere effort to sustain economic, environmental, and social growth.¹⁴

Assuming that companies had adopted sustainability-related related practices with respect to their operational activities and/or incorporated sustainability into their strategic decisions regarding products, services, and investments, they have come to realize that there are significant benefits and rewards from genuine sustainability reporting. A literature survey conducted by Mink found evidence to support the proposition that consumers recognize organizations that are truly sustainable and reward those organizations with their business.¹⁵ Other reasons for sustainability reporting that have been cited by the world’s largest companies include ethical and economic considerations, brand value, innovation and learning, employee motivation, organizational integrity and reputation, stakeholder inclusiveness and materiality, gaining competitive advantage, and cost savings through decreased resource consumption. Organizations seeking to fend off the negative effects of unethical behavior often turn to sustainability reporting as a means for demonstrating a remedial commitment to transparency.

One basic reason for sustainability reporting and verification is to make sure that the CSR initiative is properly managed and that persons involved understand they will be accountable for their actions. Other good reasons for reporting and verification include giving interested parties the information they need in order to make decisions about purchasing the company’s products and/or investing in the company (the level of funding from investors focusing their interest on ethical businesses is continuously increasing) or otherwise supporting the company’s community activities; collecting information that can be used to make changes and improvements to the company’s CSR strategy and commitments; improving internal operations; managing and reducing risks; and strengthening relationships with stakeholders. Libit and Freier argued that CSR reporting provides companies with an opportunity to communicate their CSR efforts to the company’s stakeholders, discuss certain successes and challenges with respect to the company on a wide array of CSR issues, demonstrate transparency, which can ultimately help to improve the company’s reputation with certain stakeholders, provide existing and potential investors with CSR information to assist in analyzing investment decisions, and improve the effectiveness of ongoing shareholder relations campaigns such that activist shareholders are deterred from submitting CSR-related shareholder proposals or pursuing or threatening litigation.¹⁶ However, in order to achieve the greatest benefits from reporting and verification, companies need to carry out those activities in a rigorous and professional manner using tools and standards that are widely recognized and accepted among those interested in the results.

A European Union publication encouraged companies to produce sustainability reports as a method for demonstrating transparency with regard to CSR that would ultimately build trust among customers, employees, and the local community, and help to strengthen the credibility of companies. The publication emphasized that this was important because trust binds existing customers and helps to win new ones in B2C (business to consumer) and B2B (business to business) transactions; trust increases the positive acceptance of the company by the local community and creates a good basis on which conflicts can be resolved constructively and successfully; and trust helps companies to attract the best brains and to keep employees. In addition, transparency has an internal effect and can help to identify business risks and optimize processes. The publication also noted that in the financial markets, a company’s social and environmental performances play an increasing role in establishing stock value.¹⁷

According to Ernst and Young, sustainability reporting has emerged as a common practice of twenty-first- century business, moving well beyond a few unusually green or community-oriented companies to acceptance among companies worldwide (e.g., almost all of the Global 250 issue sustainability reports) as a best practice. Organizations have learned that focusing on sustainability as part of their information collection and reporting processes helps them manage their social and environmental impacts and improve operating efficiency and natural resource stewardship. In addition, sustainability reporting is recognized as a vital component of shareholder, employee, and stakeholder relations and fosters investor confidence, trust, employee loyalty, and enhanced corporate reputation. Analysts often consider a company’s sustainability disclosures in their assessment of management quality and efficiency, and reporting may provide firms better access to capital. Sustainability reporting is also an opportunity for companies to demonstrate that they are integrating a long-term perspective into their strategies and decision making, something that has become increasingly important to investors.¹⁸

Libit and Freier argued that CSR reporting provides companies with an opportunity to communicate their CSR efforts to the company’s stakeholders, discuss certain successes and challenges with respect to the company on a wide array of CSR issues, demonstrate transparency, which can ultimately help to improve the company’s reputation with certain stakeholders, provide existing and potential investors with CSR information to assist in analyzing investment decisions and improve the effectiveness of ongoing shareholder relations campaigns such that activist shareholders are deterred from submitting CSR-related shareholder proposals or pursuing or threatening litigation.¹⁹ However, in order to achieve the greatest benefits from reporting and verification companies need to carry out those activities in a rigorous and professional manner using tools and standards that are widely recognized and accepted among those interested in the results.

Sustainability-related disclosures and reporting are also an important aspect of a company’s overall drive to attain and maintain legitimacy and preserve its social license to operation. A study of Chinese firms conducted by Dai et al. found that companies that had issued high-quality CSR reports were perceived as having greater legitimacy (operationalized by government endorsement and media endorsement) by the Chinese government and media, which in turn led to better financial performance. ²⁰ Bachmann and Ingenhoff also found evidence to support the proposition that communicated CSR through disclosure activities had a positive effect on corporate legitimacy; however, they noted that the impact would likely be mitigated to some extent by stakeholder skepticism and distrust with regard to CSR disclosures.²¹

A 2013 article published in The Guardian reported on interviews conducted with a several of the world’s sustainability reporting experts that were intended to collect their thoughts on the purpose of reporting in the then-current business environment.²² One view was that the purpose of sustainability reporting was to answer the question of whether present practice can persist (i.e., continue to build more value than it destroys) and help companies find ways to become less unstainable. As such, it was essential that sustainability reporting actually measure progress toward achieving, and ultimately surpassing, sustainability by using real-world yardsticks such as the planetary boundaries. Another perspective was that sustainability reporting was the bedrock of serious CSR management systems and strategies and that reporting companies needed to be honest in their reporting and include negatives as well as positives in order for reporting to be carried out with integrity and become a driver of improved performance. Sustainability reporting was also recognized and praised as playing a vital role in reframing the meaning of value into something that is rooted in multiple capitals that encompass human, social, natural alongside financial. Another important purpose of sustainability reporting cited by the experts was achieving a better understanding of the environmental and social problems confronting society in order to facilitate engagement with them and conversations among stakeholders on the best approaches to achieving sustainability.

Sustainability Reporting Research

Mink’s survey of sustainability reporting research in 2012 led him to identify three main categories.²³ The first was country-level assessments, which focused on the quality of sustainability reporting within a particular country or among several countries, usually carried out by assessing the degree of sustainability report disclosure with respect to a particular reporting framework such as the GRI. A major international survey of corporate responsibility reporting conducted by and covering 22 countries found that every country reported to a varying degree of compliance and quality.²⁴ The second category was sector-level assessments, which had similar intentions to country-level assessment but were focused on a different unit of analysis. As was the case with the first category, fragmented reporting practices were the norm even when organizations claimed to be using the same reporting framework. The third category of research included efforts to assess particular reporting frameworks, generally with the goal of exposing shortcomings as a rationale for proposing a different framework. Mink also noted that researchers had touched on topics outside of the three main categories, such as determining the intrinsic and extrinsic motivations that influence organizations to voluntarily report sustainability efforts.²⁵ Mink’s own research on the characteristics that predispose organizations to produce more compliant sustainability reports also fell outside the three main categories and was driven in part by a desire to find a solution to the fragmentation in reporting practices uncovered in the other surveys in order to facilitate increases in sustainability report compliance that would contribute to brand value creation and produce meaningful results with respect to economic, environmental, and social sustainability.²⁶

KPMG, the GRI, the United Nations Environment Programme (UNEP), and the Centre for Corporate Governance in Africa have partnered to compile and publish Carrots and Sticks as a comprehensive compendium of the global evolution of sustainability reporting/disclosure policy and regulation. The first report was published in 2006 and followed by second and third editions in 2010 and 2013, respectively. The latest edition of Carrots & Sticks, which was produced in 2016, was based on a review of the reporting landscapes in 71 countries and territories, including the top 60 economies by GDP and most Organisation for Economic Co-operation and Development (OECD) countries (note that the first edition in 2006 covered just 19 countries).²⁷ Of those countries, the researchers were ultimately able to identify some kind of sustainability reporting instrument (defined as any instrument, mandatory or voluntary, which requires or encourages organizations to report on their sustainability performance) in 64 countries, and the total number of instruments in force across all of those countries was almost 400. The report was structured to explore the following key questions:

The researchers acknowledged that sustainability reporting instruments can be categorized in several different ways. For example, instruments can be based on sustainability reporting requirements or expectations issued by governing bodies such as governments, financial regulators, or stock exchanges, and those regulations may be mandatory or voluntary and, in some cases, may be on a “comply or explain” basis. Self-regulation is also important and includes reporting requirements or expectations issued by organizations (e.g., industry organizations) to apply to their own communities or memberships. In addition, consideration must be given to requirements, guidance, or recommendations for public reporting on single topics, such as greenhouse gas emissions, or a specific sector, such as mining. Finally, companies often choose to base their sustainability reporting on voluntary guidelines and standards and implement one of the major sustainability assurance standards to lend credibility to their reporting efforts. The reporting itself occurs in a number of different ways including in annual financial or sustainability reports, on websites, in documents submitted to a stock exchange for listing purposes and in data published in response to questionnaires and specific regulations.²⁸

Some of the key findings in the 2016 report included the following²⁹:

In their conclusions to the report the researchers acknowledged the significant progress that had been made over the 10 years since the project began with respect to the geographic, sectorial, and topical scope of sustainability reporting; however, they cautioned that it was essential for the bodies that issue reporting instruments to focus on coordination and harmonization, which would require increased levels of collaboration and joint commitments between these bodies. Companies should also expect to contend with complex and difficult issues of prioritization and materiality with respect to the sustainability reporting activities, particularly since the expectations of stakeholders relating to transparency are expanding to include a broader range of sustainability issues such as taxation and human rights.³⁴

Organizational Structure and Sustainability Reporting

Mink conducted qualitative research to determine the organizational characteristics that contribute to developing sustainability reports that were compliant with the most rigorous requirements of the GRI.³⁵Results from a survey of 107 organizations that had received an A + GRI application level in 2010³⁶ suggested that there is a relationship between an organization’s genuine commitment to sustainability by their leadership and a sustainability report’s compliance level. Mink also reported that the research implied a relationship between the sustainability expectations of stakeholders and the sustainability report compliance level and that the combination of leadership commitment and stakeholder expectations promoting a sustainability-minded culture within the organization that facilitated the production of sustainability reports. In other words, leadership determination to satisfy stakeholder expectations drove the creation of organizational culture and processes that served as the foundation for high-quality sustainability reporting. The compliant companies were also noteworthy for their ability to overcome resource constraints to complete the reporting process and to recognize the value of the market incentives generated by the development of a sustainability report. Mink noted that it did not appear that the participating organizations necessarily strived for a particular GRI compliance level, but that their sustainability report compliance level ultimately emerged from the development of a genuine sustainability culture and the associated sustainability commitment.³⁷

Management Philosophy

One of the most interesting and useful conclusions reached by Mink based on his research was that the leadership of an organization (i.e., the managers, general manager, vice president, president/CEO, and the board of directors), as evidenced by demonstration of a genuine awareness and commitment for sustainability reporting, dictated the success of such reporting within that organization.³⁸ The A + compliant organizations participating in the survey vested primary responsibility for sustainability reporting at the manager or greater hierarchical position and charged that person and position with initiating sustainability reporting, being the strongest advocate for continuing sustainability reporting and providing final approval for the publication of sustainability reports. In so doing, according to Mink, the foundation was laid for creating and strengthening a sustainability culture, thus providing unique opportunities to institute sustainability reporting expectations, establish significant weight for reporting initiatives, and encourage greater reporting compliance.

The majority of the respondents to the survey (71 percent) pointed to more than one individual for assuming this responsibility and included responses such as: “Sustainability Manager, Communications manager, representatives from key business units”; “Corporate Environmental Affairs Manager, Sustainability Reporting Manager, and Group Environment Manager”; “CSO and CR reporting mananger [sic].” Among the groups of individuals that were provided as being responsible for designing and implementing the sustainability report, there were common themes of specific titles mentioned, the most prominent of which included Sustainability Manager, Communication Manager, Chief Sustainability Officer, Sustainability Reporting Manager/Social Reporting Director, CFO, and Investor Relations Manager. Mink noted that the main impression to be taken from the responses was that respondents overwhelmingly decided to place responsibility for sustainability reporting in the hands of someone who held the title of a manager or above in the organization’s hierarchy.³⁹

Stakeholder Engagement and Improved Operational Sustainability

Management philosophy and its related influence on the company’s organizational culture were driven by an important motivator: the desire to incorporate the expectations of stakeholders regarding sustainability activities and reporting thereon. Mink found that 62 percent of participating organizations declared that stakeholder engagement and inclusiveness was the top motivator for voluntary development of a sustainability report. As such, representatives of the organization, starting with the leadership, invested time and effort in consulting with stakeholders to identify sustainability report content and develop reports that were not only compliant with the GRI framework but also useful to stakeholder consumers of the information. Stakeholder inclusiveness has long been one of the fundamental principles of the GRI framework. Survey participants identified other motivators for sustainability reporting, the second most important of which was the value that reporting offered as a management tool to improve sustainability within their organization. Specifically, the respondents indicated that their sustainability reports aided in improving data quality, diagnosing the status of sustainability within the organization, and ensuring improvement on stakeholder sustainability concerns.⁴⁰

Stakeholder engagement also played an important role in ensuring that a response was given on each core indicator in the then-current GRI reporting framework with due regard to GRI’s materiality principle. In fact, stakeholder engagement/involvement was the most common approach in determining materiality within the surveyed organizations. The second most common method used by the respondents was external assurance, which was not surprising given that all of the respondents were A + GRI applicants and thus were required to rely on external assurance in order to be eligible for receiving an A + application level. Other methods used by the responding organizations included checklist comparisons (e.g., GRI sector supplement checklists, internal checklists, and indicator questionnaire checklists), discussions with key subject experts, alignment of organizational strategy with the GRI indicators, benchmarking the trend of best practices, materiality reviews, discussions among members of an internal sustainability board, and surveying company managers about key sustainability issues.⁴¹

Resource Availability

The organizations participating in the survey reporting a wide range of human and financial resources committed to the development of their sustainability reporting processes; however, most of the organizations did not appear to have “adequate” resource availability, meaning that overcoming resource availability constraints was generally a real challenge to achieving the highest level of sustainability reporting compliance.⁴² However, organizations were still able to produce an A + sustainability report by relying on reporting motivations, organizational culture, and several other strategies to succeed. For example, organizations reported that they were able to build sustainability reporting into their other reporting requirements through report integration that focused on reducing information overlap and ensuring that data was readily available for usage in all of the company’s reports: financial, regulatory, and sustainability. This allowed companies to save valuable time, reduce the amount of resources required for effective overall reporting and focus their efforts on preparing reports that were highly compliant. Mink noted that experience in preparing sustainability reports was also a factor in the quality of the reports, as 77 percent of participating organizations had completed five or more GRI sustainability reports. Mink noted that the GRI’s creation of three levels of compliance was intended, at least in part, to allow organizations to adopt the reporting framework gradually and most toward higher levels of compliance (C to B to A) gradually as they mastered the basics.

Market Incentives

Competence in sustainability reporting was encouraged and supported by organizational realization and acceptance of various market incentives for improving the level of reporting compliance. Participants in Mink’s survey mentioned that their level of effort with respect to sustainability reporting was motivated by improving stakeholder engagement, increasing transparency, strengthening company values and integrity, and increasing brand value, all of which were market incentives that benefited not only the organizations financially and operationally but also society as a whole.⁴³

Challenges for Sustainability Reporting

The respondents to the survey of 107 organizations described earlier also indicated that the biggest challenge they faced in their sustainability reporting practices was data capture and information flow, a problem that became even more difficult to overcome when organizations grew in size and their scope of their operations became global.⁴⁴ The second most commonly mentioned challenge was resource constraints, including financial, human, and time. Other issues for the respondents included “defining materiality” due to a lack of set standards and regulations for establishing materiality, constantly changing information and topics of importance, and establishing the specific concerns of stakeholders; the lack of support and consensus (“especially from the CEO”) within the organization; risk-aversion (i.e., publishing areas of poor performance), employee and customer engagement, integrating financial data and sustainability performance, and integrating the sustainability report into daily operations.⁴⁵

A 2013 article published in The Guardian reported on interviews conducted with a several of the world’s sustainability reporting experts that were intended to collect their thoughts on various topics relating to sustainability reporting including shortcomings of then-current sustainability reporting practices and the steps that might be taken to address them.⁴⁶ One of the experts was particularly interested in the emergence of integrated reporting as a transition from the previous practice of preparing and distributing separate sustainability reports while retaining the traditional annual report focused almost exclusively on financial matters. He argued that companies should use integrated reporting as an opportunity to addressing stakeholders beyond those targeted by the integrated report (i.e., financial capital providers); provide details on the company’s competitive positioning in the emerging sustainability space; provide more detailed coverage of the company’s initiatives relating to social, human, and natural capital; and develop online reporting methods that were more comprehensive and closer to delivering real-time ESG data. Another expert viewed sustainability reporting as a means for companies to gather further knowledge about nonfinancial risks and opportunities and encouraged companies to disclose those in their reporting along with discussions that demonstrate the steps that are being taken to manage them. One intriguing viewpoint was that integrated reporting at the company level, while valuable, was not sufficient to building resilient and equitable economies and that efforts needed to be made to integrate reporting across supply chains, stock exchanges, and economies, with meaningful links to societal and biosphere health. Finally, several of the experts stressed the purpose of sustainability reporting as being conversation: stirring engagement and debate among people and institutions about what needs to be done to address sustainability challenges. In other words, reporting is not simply about what has happened in the past—a dry compendium of metrics on carefully selected environmental and social performance indicators—but also a catalyst for deliberation on further actions and a foundation for planning and executing those actions.

Another challenge for the future of sustainability reporting also comes with significant opportunities for companies that are adequately prepared to invest the time and resources required to harness the explosion of data relating to sustainability-related topics. It has been suggested that digital data on sustainability will be the main tool for companies make strategic decisions regarding their sustainability policies and procedures and companies will be able to take advantage of almost real-time data created by businesses and governments that is shared across open platforms. As a result, sustainability disclosures are expected to change significantly in the years to come including a formal shift from annual reporting to the frequent exchange of sustainability data, a move toward the macro challenges faced by society, placement of the supply chain into the spotlight, and a new role for stakeholders who will be empowered by the information to engage in real-time interactions through various channels.⁴⁷

While some obligations to report nonfinancial information are sometimes imposed by law and regulation, and thus not something that a company can avoid, in most companies embark on sustainability reporting as a voluntary undertaking after engaging in serious internal debate about whether such reporting is feasible and the impacts it is likely to have on the company’s operations and profile in the eyes of stakeholders. Companies need to understand that once sustainability reporting has started, it cannot be deferred or halted with loss of image. In other words, preparation of a sustainability report is not a one-off event, but the beginning of an ongoing obligation that must be permanently integrated into the way in which the company operates and communicates internally and externally.⁴⁸ In addition, sustainability reporting must be done in alignment with proactive environmental and social initiatives by the company so that the company has a good “story to tell” to stakeholders regarding improvements in its environmental footprint and contributions to social causes. If the company’s social commitment is declining and/or its economic impacts are getting worse, sustainability reporting, if done properly with balanced attention to both the good and bad, will bring significant problems into the public light. Finally, while there is still no universally accepted framework for sustainability reporting, best practices are emerging and it is clear that companies are expected to invest sufficient resources in reporting to product reports that are meaningful to stakeholders and satisfy principles of quality such as those included in the GRI framework: accuracy, balance, clar ty, comparability, reliability, and timeliness.

Role of Audit and Disclosure and Reporting Committees

Every company that becomes subject to the periodic disclosure requirements of the, as amended (such companies are generally referred to as a “reporting company” and/or “public company”) will be expected to prepare annual reports; quarterly reports; current reports and annual reports to shareholders. Companies that have become subject to the disclosure rules must also comply with the Exchange Act’s disclosure requirements relating to a wide range of other corporate governance activities including solicitation of proxies, tender offers, and “going private” transactions. In addition, directors, officers, and principal shareholders of reporting companies are subject to disclosure requirements relating to their ownership interests and changes in those interests. The disclosure requirements associated with public company status can become quite burdensome to the company; however, the ability to access the public capital markets carries with it the responsibility to adhere to the guidelines of the SEC and the stock exchanges with respect to disclosure and protection of shareholder rights.⁴⁹

The SEC has granted public company audit committees substantial authority and responsibility with respect to compliance with the disclosure and reporting process. Accordingly, the audit committee should always be a central player in the preparation and review of reports and other disclosure documents, as well as the certifications that must be given by the senior managers (i.e., the CEO and CFO). In most instances, boards do not create separate disclosure and reporting committees and provide for all disclosure and reporting matters to be overseen by the audit committee alone. In those situations, the audit committee itself may create a subcommittee that focuses on disclosure controls and preparation of required and voluntary reports. For the sake of separating out disclosure and reporting from all the other issues that an audit committee must handle, the following discussion pertains to any board-level body specializing in disclosure and reporting (referred to generally as the “disclosure and reporting committee”), be it a subcommittee of the audit committee or a standalone board committee.⁵⁰

As part of their efforts to demonstrate compliance with corporate governance principles to their investors, disclosure and reporting committees should adopt and publish various policies and procedures relating to their disclosure processes and internal controls. For example, a policy statement on disclosure processes and procedures may describe the disclosure process used by the company, including the creation of an internal disclosure committee and appointment of a disclosure controls monitor, and a detailed description taken to ensure that disclosure documents are complete and accurate. A statement of policies and procedures regarding internal controls and risk management may be used to describe the principal activities of the company’s internal controls or audit function including risk assessment, development of control strategies, implementation of monitoring procedures, and communication of information to senior management, the disclosure and reporting committee, and the entire board of directors.

Role of Lawyers in Reporting

While sustainability reporting has its roots in voluntary disclosure as opposed to fulfilling specific legal and regulatory requirements, all types of reporting raise potential legal risks that will require counseling from attorneys familiar with traditional disclosure concepts such as “materiality” and “reasonable investor” and with the emerging marketplace for sustainability-related nonfinancial information and the frameworks for disclosure of such information that have been rapidly evolving. Park noted that attorneys can help companies assess the materiality of nonfinancial information relating to sustainability and evaluate the risks of disclosing, or not disclosing, such information, and provided a list of some of the issues relating to disclosure of nonfinancial sustainability-related information that attorneys may be asked to opine upon by their clients⁵¹:

CSR Reporting for New and Small Businesses

Smaller businesses generally do not have the resources to engage a professional auditor or prepare elaborate reports on their CSR activities; however, this does not mean that small businesses should avoid attempting to implement some basic and relatively simple steps for reporting the results of their sustainability efforts. The GRI has argued that transparent reporting and communicating about sustainability initiatives and programs creates valuable internal and external benefits for new and small businesses.⁵² Among the internal benefits that were noted were the following:

Important external benefits to new and small businesses from sustainability reporting and communication include building goodwill and reducing reputational risk; improving product image and branding; signaling quality and good management that leads to new sources of capital and reduced costs of financing; building or restoring trust among stakeholders through increased and improved stakeholder engagement; and increased customer satisfaction and loyalty, leading to more opportunities to collaborate with business partners as members of their trusted supply chain network.

Hohnen and Potts suggested that small companies could take several modest steps to report and verify their CSR initiatives^53:

¹ Hohnen, P., and J. Potts. ed. 2007. Corporate Social Responsibility: An Implementation Guide for Business. Winnipeg CAN: International Institute for Sustainable Development.

² Companies using the Future-Fit business goals recommended by the Future-Fit Business Network can adopt the “fitness criteria” associated with each of the goals. See the discussion of the Future-Fit business goals in Future-Fit Business Framework, Part 1: Concepts, Principals and Goals (Future-Fit Foundation, Release 1, May 2016), 25, FutureFitBusiness.org.

³ Expansive disclosure of this type increases the risk of litigation and/or adverse market reaction in the event that the company fails to meet its stated CSR and corporate sustainability goals, even if the disclosures are accompanied by appropriate disclaimers and are not included in regulatory filings that typically are covered by anti-fraud standards. Disclosure of actual or potential links between CSR and corporate sustainability goals and compensation must also be handled carefully, similar to links between short-term financial goals and compensation.

⁴ Ceres. “The Ceres Roadmap for Sustainability”

⁵ Cleveland, N., D. Lynn, and S. Pike. January 2015. “Sustainability Reporting: The Lawyer’s Response.” Business Law Today.

⁶ Id. (citing TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976)). Cleveland et al. explained that disclosures under the U.S. federal securities laws are a mixed question of law and fact and noted that it is the view of the SEC that the issuer is in the best position to know what is likely to be material to investors and that courts have opined that corporations are not required to disclose a fact merely because a reasonable investor would very much like to know that fact. Citing Richman v. Goldman Sachs Group, Inc., et al.., 10 Civ 3461 (June 21, 2012, United States District Court for the Southern District of New York). Id.

⁷ Jackson, A., K. Boswell, and D. Davis. November 2011. “Sustainability and Triple Bottom Line Reporting—What is it All About?” International Journal of Business, Humanities and Technology 1, no. 3, p. 58.

⁸ Id. (citing Isaksson, R. 2005. “Economic Sustainability and the Cost of Poor Quality.” Corporate Social Responsibility and Environmental Management 12, p. 197) (citing also Painter-Morland, M. 2008. “Triple Bottom-Line Reporting as Social Grammar: Integrating Corporate Social Responsibility and Corporate Codes of Conduct.” Business Ethics: A European Review 15, no. 4, p. 352.)

⁹ 2014. From Inputs to Impact: Measuring Corporate Community Contributions through the LBG Framework—A Guidance Manual. London: Corporate Citizenship.

¹⁰ 2008. Reporting on Community Impacts: A survey conducted by the Global Reporting Initiative, the University of Hong Kong and CSR Asia. Amsterdam: Stichting Global Reporting Initiative.

¹¹ The United Nations Environment Programme (“UNEP”) and the Centre for Corporate Governance in Africa. 2016. “Carrots and Sticks: Global Trends in Sustainability Reporting Regulation and Policy (KPMG International, the Global Research Initiative (“GRI”).” Available at: www.carrotsandsticks.net

¹² See Global Reporting Initiative. June 7, 2017. “Can Corporate Reporting Help End Poverty?” (encouraging companies to move beyond philanthropy and community engagement, toward strategies with large-scale impacts.)

¹³ 2016. Finnish Textile and Fashion Corporate Responsibility Manual, 55. Helsinki: Finnish Textile and Fashion.

¹⁴ International Survey of Corporate Responsibility Reporting. 2008. KPMG: Amsterdam, Netherlands.

¹⁵ Mink, K. 2012. The Effects of Organizational Structure on Sustainability Report Compliance. Purdue University College of Technology Masters’ Thesis. Available: http://docs.lib.purdue.edu/techmasters/62,11.

¹⁶ Libit, B., and T. Freier. 2013. The Corporate Social Responsibility Report and Effective Stakeholder Engagement. Chapman and Cutler LLP. Available at https://corpgov.law.harvard.edu/2013/12/28/the-corporate-social-responsibility-report-and-effective-stakeholder-engagement/

¹⁷ European Union CSR for All Project. April 2014. Handbook on Corporate Social Responsibility (CSR) for Employers’ Organizations, pp. 39–40.

¹⁸https://ey.com/us/en/services/specialty-services/climate-change-and-sustainability-services/value-of-sustainability-reporting

¹⁹ Libit, B., and T. Freier. 2013. The Corporate Social Responsibility Report and Effective Stakeholder Engagement. Chapman and Cutler LLP, Available at https://corpgov.law.harvard.edu/2013/12/28/the-corporate-social-responsibility-report-and-effective-stakeholder-engagement/

²⁰ Dai, N., F. Du, S. Young and G. Tang. Spring 2018. “Seeking Legitimacy through CSR Reporting: Evidence from China,” Journal of Management Accounting Research 30, no. 1, p. 1.

²¹ Bachmann, P., and D. Ingenhoff. September 2016. “Legitimacy through CSR Disclosures? The Advantage Outweighs the Disadvantages.” Public Relations Review 42, no. 3, p. 386.

²² Confino, J. May 23, 2013. “What’s the Purpose of Sustainability Reporting?” The Guardian https://theguardian.com/sustainable-business/blog/what-is-purposeof-sustainability-reporting

²³ Mink, K. 2012. The Effects of Organizational Structure on Sustainability Report Compliance. Purdue University College of Technology Masters’ Thesis, 14–18. Available at http://docs.lib.purdue.edu/techmasters/62

²⁴ International Survey of Corporate Responsibility Reporting. 2008. KPMG: Amsterdam, Netherlands.

²⁵ Farneti, F., and J. Guthrie. 2007. “Sustainability Reporting by Australian Public Sector Organizations: Why They Report?” Proceedings of the Financial Reporting and Business Communication Research Unit 11th Annual Conference Financial Reporting and Business Communication Unit, Cardiff, Wales. (finding that providing information to internal stakeholders was the primary reason for developing sustainability reports and that the effort was spearheaded by one influential individual within the organization).

²⁶ Mink, K. 2012. The Effects of Organizational Structure on Sustainability Report Compliance. Purdue University College of Technology Masters’ Thesis, 19–20. Available: http://docs.lib.purdue.edu/techmasters/62

²⁷ The United Nations Environment Programme (“UNEP”) and the Centre for Corporate Governance in Africa. 2016. Carrots and Sticks: Global Trends in Sustainability Reporting Regulation and Policy. KPMG International, the Global Research Initiative (“GRI”). Available at www.carrotsandsticks.net.

²⁸ Id. at 8.

²⁹ Id. at 9.

³⁰ Id. at 11.

³¹ Id. at 16.

³² Id.

³³ Id. at 18.

³⁴ Id. at 22.

³⁵ Mink, K. 2012. The Effects of Organizational Structure on Sustainability Report Compliance. Purdue University College of Technology Masters’ Thesis. Available:http://docs.lib.purdue.edu/techmasters/62

³⁶ The third generation of the GRI guidelines (“G3”) was in effect in 2010 and provided for incremental guideline application in recognition of the varying levels of sustainability maturation among organizations seeking to implement the GRI framework. Mink explained: “The G3 Guidelines differentiate between levels of application by assigning corresponding letters ranging from A to C. Level A application represents the highest level of compliance to G3 Guidelines, followed by level B and level C. By completing external assurance, organizations can further increase the level of application, which is represented by appending a plus sign (+). For example, if an organization was fully compliant with the G3 Guidelines and solicited external assurance, the organization would receive an application level of an A+.” Id. at 13. The three levels of compliance were removed in subsequent generations of the GRI framework.

³⁷ Id. at 57.

^{38 Id. at 49.}

³⁹ Id. at 42.

⁴⁰ Id. at 37–38 and 49.

⁴¹ Id. at 44–45.

⁴² Id. at 50–51.

⁴³ Id. at 51.

⁴⁴ Id. at 35–36.

⁴⁵ Id. at 36.

⁴⁶ Confino, J. May 23, 2013. “What’s the Purpose of Sustainability Reporting?” The Guardian, https://theguardian.com/sustainable-business/blog/what-is-purpose-ofsustainability-Reporting

⁴⁷ Hespenheide, E. September 2016. A New Era of Corporate Disclosure. Ernst and Young.

⁴⁸ Handbook on Corporate Social Responsibility (CSR) for Employers’ Organizations(European Union CSR for All Project, April 2014), 44.

⁴⁹ Filing a registration statement under the Securities Act of 1933, as amended, subjects most such registrants to the periodic reporting requirements of the Exchange Act, which are subsequently discussed, due to the application of Section 15(d) of the Exchange Act. However, those registrants that are not also registered under the Exchange Act are not subject to disclosure requirements governing various corporate governance activities including solicitation of proxies, tender offers, and going private transactions and, in addition, officers, directors, and principal shareholders are not subject to reporting of their ownership interests or changes in those interests. These disclosure requirements would, however, become applicable when the company is required to register its securities under the Exchange Act (or does so voluntarily). If a company equals or exceeds certain minimum requirements with respect to total assets and/or number of shareholders as of the end of any fiscal year, or its security is to be traded on a national securities exchange, then registration under the Exchange Act will be required.

⁵⁰ For discussion of the duties and responsibilities of the audit and disclosure and reporting committees, see “Audit Committee” and “Disclosure and Reporting Committee” in “Governance: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).

⁵¹ D. Park, “Investor Interest in Nonfinancial Information: What Lawyers Need to Know,” Business Law Today January 2015.

⁵² Small Business Big Impact: SME Sustainability Reporting from Vision to Action (Amsterdam and Geneva: Stichting Global Reporting Initiative and the International Organization of Employers, 2016), 3. The publication is available for download at www.globalreporting.org.

⁵³ P. Hohnen (Author) and J. Potts (Editor), Corporate Social Responsibility: An Implementation Guide for Business (Winnipeg CAN: International Institute for Sustainable Development, 2007), 72.