CHAPTER 2

The Concept of Sustainability Reporting

Main purpose: To comprehend sustainability reporting as a key partner with sustainability performance.

Objectives: After reading this chapter, you should be able to do the following:

• • Interpret how key events related to sustainability performance motivated sustainability reporting.
• • Explain and provide examples of how sustainability reporting is an essential component in the decision-making process of the organization and its stakeholders.
• • Recognize important events in the evolution of sustainability reporting.
• • Identify similarities and differences in key reporting guidelines.

A big motivator for preparing a report is that improved reporting improves your performance. Sustainability reports are not there to simply communicate a message of the past to our stakeholders; they should also signal where we are headed in our future; they should drive performance improvement internally.

—Anonymous Energy Reporting Company

Reporting Progress on Sustainability

In Chapter 1 we reviewed the concept of conventional capitalism and how it must be adjusted to include recognition of the environmental and social dimensions. Our planet has limited carrying capacity (e.g., the number of human beings that it can support at one time and continue to regenerate); therefore, as our population grows, its inhabitants consume greater quantities of resources, leaving fewer for future generations. Entities of all types, especially businesses, are adjusting their practices to create value in the short-, medium-, and long-term period by finding solutions to society’s problems. In the process of finding solutions, entities are providing opportunities for everyone to share in the wealth through a better quality of life.

Thus, we are learning how to balance economic, environmental, and social values for a more resilient, long-lasting world. Embedded within the sustainability concept is the idea that a sustainable company should be the type of organization that its stakeholders want it to be, not the type of organization that only the owners or managers want it to be. Consequently, engaging stakeholders to understand their needs and desires is essential if an organization is to be sustainable.

Undertaking environmental and social activities is the prelude to reporting about them in a sustainability report. Reporting on the progress toward improved sustainability is beneficial not only for the organization’s own continuous improvement but also for stakeholders to learn of its activities. Therefore, organizations create reports that provide qualitative and quantitative information about their sustainability activities. Table 2.1 gives some examples of the questions that arise in the process of internal and external stakeholders’ decision making.

The sustainability report, in part, acts as an accountability document. It is one source of information for determining if the organization’s activities are legitimate and whether its implicit social license to operate should be renewed. Without sustainability reporting a corporation’s stakeholders are left without knowing a company’s sustainability direction, what it intends to achieve, which activities have been implemented, and which challenges it yet faces. Similar to financial reporting, after a company engages in financial and economic activities for a period of time (usually a quarter or a year), it reports on its progress to its financial capital providers through its financial statements and annual report. Likewise, a company should also report how it used social and environmental resources to those influenced by or with a stake in these activities.

Financial performance reporting, based on rigorous principles, has a long history which began in 1929 spurred by the collapse of the financial markets during the Great Depression. In comparison, sustainability reporting has a short history. Although there are some early examples, most reporting on environmental and social activities has only been around since the late 1980s. Similar to the Great Depression that motivated and improved financial reporting, several environmental disasters during the 1980s motivated sustainability reporting.

As new financial instruments and business transactions appear, financial reporting principles change to accommodate a new business context. As the financial community gains more experience with these innovations, the reporting on them improves. Sustainability reporting is also improving as more knowledge is gained about how reporting can be more useful and relevant to decision making.

Evolution of Sustainability Reporting

As the concept of sustainability evolved (Chapter 1), sustainability reporting evolved as well. Although it is useful to conceptualize an abstract, high-level model of sustainability, organizations need additional guidance and detail to provide a relevant and useful report on their sustainability performance. Because reporting should be connected to a plan, various institutions first developed policies or guidelines that defined acceptable business behavior. Many companies also participated in the development of these plans as they were interested in operating at a higher standard as well.

Around the same time that the World Commission on Environment and Development (WCED) produced the Brundtland Report, in 1981, the Organization for Economic Co-operation and Development (OECD) provided direction in the form of Guidelines for Multinational Enterprises (OECD 2011). The OECD guidelines and similar policies became the foundations on which companies developed their performance reports (policies are discussed in Chapter 3).

In the early 1980s as disasters occurred primarily in resource-extractive industries (such as chemical, petroleum, mining, and forestry) and manufacturing, the media were instrumental in communicating the details to the public worldwide. Therefore, companies responded by using a few pages in a separate section of their annual financial reports to convey selected aspects of their social and environmental activities (mostly in narrative form).

The debate of the economy versus the environment became heated during the 1980s, and each camp had its champions. Economically, many countries, especially developing countries, were suffering from stagnant or depressed economies while at the same time incurring huge debt burdens. Then, several disasters brought corporate practices to the forefront, which changed the focus of the debate and motivated transparency through sustainability reporting.

Bhopal India 1984 Gas Leak

• • Disaster: A gas leak in 1984 at a Union Carbide plant in Bhopal, India killed approximately 3,800 people and permanently or partially disabled several thousand more.
• • Response: Although the Bhopal disaster was not the only incident leading to action by the chemical industry, Responsible Care was launched in Canada in 1985 providing a set of guiding principles and a set of reporting standards.
• • Today: The program has been adopted by major chemical companies in 67 countries (ICCA n.d.)

Exxon Valdez 1989 Oil Spill

• • Disaster: An oil spill by an Exxon tanker near Valdez, Alaska contaminated the surrounding waters, harming both wildlife and economic conditions for the fishing and tourism industries. Incurring considerable cost to clean up the spill, Exxon’s stock price dropped, and its ability to raise capital decreased. The petroleum industry experienced greater cost of regulation and restrictions on drilling, revealing the interconnection between poor environmental practices and financial health and calling into question the industry’s legitimacy/social license.
• • Response: The Coalition for Environmentally Responsible Economies (CERES) released the Valdez Principles (later renamed the CERES Principles), a 10-point code of conduct for companies.
• • Today: About 60 companies have signed to follow the principles (Ceres n.d.).

At the time these events occurred, most companies were not ready to undertake comprehensive sustainability reporting. They did not know where to start or what to report. When they did receive signals from their stakeholders as to what they should report, their information systems were sorely lacking and did not contain the data to provide stakeholders with what they wanted. Even recently, one company tells about its challenges of reporting on water use.

Sustainability Reporting Guidelines: Broad Based

Organizations began to realize communicating with their stakeholders helped to make better decisions and better reports. They slowly built their information systems to accommodate their stakeholders’ needs. In the early 1990s stand-alone reports (separate from annual financial reports) were starting to emerge, with a strong emphasis on the environmental dimension, as it is easier to provide quantifiable indicators on environmental aspects, such as polluted air, disturbed land, and water used or contaminated. The social dimension received little emphasis, except for safety performance and charitable donations. Demands to perform in a more responsible manner came from owners of corporations through shareholder resolutions, as well as the general public.

Some of the companies, institutions, and organizations that were leaders in sustainability reporting felt standards or generally accepted guidelines would be helpful to guide their reporting, similar to GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) for financial disclosure. Guidelines and standards that played an important role are identified in the next sections.

PERI (Public Environmental Reporting Initiative)

• • Initiative. Although not well known, PERI guidelines were developed in 1993 and one of the first reporting guidelines. They were the product of a group of multinational organizations who volunteered their time to develop guidance useful in preparing their own reports and for other organizations wishing to begin reporting.
• • Supporters. A few of the companies supporting more standardized reporting were Amoco, Dow, DuPont, IBM, Northern Telecom, Polaroid, and United Technologies. The PERI guidelines have been replaced by the Global Reporting Initiative (GRI), Integrated Reporting (IR), and other initiatives.

GRI

• • Initiative. Starting in 1997, GRI developed reporting guidelines that were revised four times over the years, referred to as G2, G3, G4, and then Standards. In July 2018, organizations began using the Standards. Even though predominant users of the standards are corporations, many different types of entities follow the GRI Standards to some extent. GRI also offers Sector Disclosures with additional details for certain industries.
• • Supporters. CERES (formed after the Valdez spill in Alaska), the Tellus Institute, and the United Nations Environment Programme (UNEP) joined forces to form the GRI. A multi-stakeholder group, representing a diverse collection of viewpoints, helps to develop and review the guidelines/standards periodically. They are quickly becoming the best known, worldwide standards among sustainability reporters and users (Figure 2.1).

Figure 2.1 The GRI standards

Source: GRI

Sustainability Reporting Guidelines:
Specific Disclosures

More recently, a proliferation of sustainability reporting requirements from various institutions has emerged. The requirements range from broad (all aspects of sustainability) to one aspect of the environment or social (carbon, forest, water, conflict minerals, pay ratios, and more)

MDGs and SDGs. When the MDGs (2000) and the SDGs (2015) became available, leading reporting companies included their progress in accomplishing them. These goals fit nicely under the original three dimensions of sustainability (economic, environmental, and social), and the GRI Standards provide guidance on how to report on these goals as well.

IR. In 2010, the idea of integrated reporting (IR) brought sustainability reporting back to the annual report. The International Integrated Reporting Council’s (IIRC) vision is “to align capital allocation and corporate behavior to wider goals of financial stability and sustainable development.” It is focused on communicating short-, medium-, and long-term value. The IIRC identifies six capitals that need to be maintained to create value: financial, built or manufactured, natural, human, relationship or social, and intellectual. The IIRC is unique as it provides a sixth capital called intellectual. Most sources refer to five capitals. The idea behind integrated reporting is that all functional areas will integrate their thinking to achieve financial as well as sustainability goals through the maintenance of the capitals (Figure 2.2).

Figure 2.2 Integrated reporting = integrated thinking

Source: Based on IIRC, 2013

SASB. In 2011 the Sustainability Accounting Standards Board (SASB) was established to develop industry-specific standards to disclose sustainability metrics in SEC-related filings in the United States. Rather than allowing the company to determine material topics (those most important to stakeholders and the company) as suggested under GRI Standards, SASB determines material topics for each industry and which indicators should be used. SASB focuses on sustainability issues that are the most financially important to investors. Table 2.2 compares characteristics of GRI and SASB.

Unlike the GRI and the SASB which provide specific indicators and disclosures for sustainability reporting, IR instead provides a framework for bringing together all essential information necessary for decision making together in one report and does not suggest specific indicators (covered in Chapter 6).

Because climate change has become such an important concern regarding the resiliency of our planet and the financial risk associated with climate change to business operations, several organizations have suggested specific disclosures regarding climate. Three of the most well-known organizations are the CDP, the CDSB, and the TCFD.

CDP. In 2002 CDP (formerly known as the Carbon Disclosure Project) was formed to collect detailed information on carbon emissions by companies, cities, states, and regions. Carbon reporting is voluntary, but more than 7,000 companies and 620 cities worldwide provide information to the CDP, which is requested by investor institutions. It has now expanded to collecting disclosure on water and forests (CDP n.d.).

CDSB. In 2007 the Climate Disclosure Standards Board (CDSB) was formed as an international organization comprised of business and environmental NGOs that provide companies with a framework for environmental reporting. CDSB is working to adapt financial accounting standards to accounting for natural capital with its primary user as the investor (CDSB n.d.).

TCFD. In 2016 the Task Force on Climate-related Financial Disclosures (TCFD) was formed as an industry-led organization and recommends financial disclosures related to the climate that are useful for lenders, insurers, and investors with a strong focus on risk (TCFD n.d.).

Working Together: Corporate Reporting Dialogue

It is easy to feel overwhelmed by the number of policies, reporting guidelines/standards, climate-related disclosures, and the numerous other reporting requirements popping up from different organizations. If you feel overwhelmed, you can empathize with companies who try to satisfy all the requests for environmental and social information. The question then arises: Are these standard-setting organizations competing or cooperating? Are they separately creating standards that are duplicating efforts? Recently, these organizations started working together through the Corporate Reporting Dialogue. Table 2.3 compares the organizations on purpose, preparer, and user of the report.

Initially (1990s), a variety of secondary stakeholders pressured companies for accountability and were the loudest critics. At that time, most members of the financial community (financial institutions, financial analysts, stock markets, and investors) did not see sustainability reporting as useful or relevant to them. Part of the concern by the financial community was the credibility of the information and the lack of knowledge of how to use it. In the early 2000s, to provide more credibility to sustainability reports, companies were experimenting with assurance statements. As they improved their information systems and gained more experience in reporting, data became more accurate. However, verification is not widespread at this time (discussed in Chapter 7). (See Figure 2.3.)

Figure 2.3 Evolution of sustainability reporting

As more evidence revealed that attention to sustainability is an important business concern and can affect financial progress both negatively and positively, the financial community has shown more interest. Now, many leading companies assess the risks and opportunities associated with satisfactory and unsatisfactory environmental and social performance to understand the relationship to financial performance, but there is still much to learn. As a result of the financial community’s awareness of the relationship between environmental/social and financial performance, many financially related institutions are now setting standards for sustainability reporting as well.

Rater Organizations. In the early 1980s Fortune magazine provided the results of its annual survey of corporate reputation within an article in its magazine. One of the characteristics on which companies were rated by their peers was “responsibility to the community/environment.” Subsequently, as investor interest in sustainability continued to increase, in 1999 in a separate initiative the Dow Jones Sustainability Index (DJSI) was launched through a partnership between the investment company SAM and the Dow Jones. The original DJSI included only the top 10 percent of companies in each sector based on their ratings on environmental, social, and governance (ESG) dimensions. To select companies for the Index, SAM provides a very detailed survey that companies complete if they wish to be considered for the Index. Cross-checking is done to ensure the answers to the survey are valid representations of the companies’ activities (DJSI n.d.).

Investment firms especially want to know if there is a business case for sustainability but need a method to distinguish leaders from laggards. With sustainability demands on the rise, an entire rating industry has emerged. Rater organizations score companies on different aspects of their ESG (the governance dimension is substituted for the economic dimension). Sustainability reports are a major source of information to develop rating scores. Academic and professional research often investigates if companies following a sustainable path still provide an acceptable shareholder value or if there is a trade-off. In 2005, the United Nations worked with a group of institutional investors to develop the Principles of Responsible Investing (PRI) to align investor and societal objectives. Now asset managers, institutional investors, stock exchanges, and others are all interested in companies’ ESG scores to attempt to follow PRI (PRI n.d.).

Key Takeaways

• • Even though a company could have excellent sustainability performance, if the company does not report its performance, stakeholders will be hindered in their decision making, and the company misses an opportunity to learn about its own performance.
• • When key events harm the financial community or new financial instruments/transactions are created, financial reporting standards are revised. Sustainability reporting is similar. Important sustainability disasters motivated change in performance and reporting.
• • Two key events were the Bhopal gas leak and the Exxon Valdez oil spill. Both events spurred a change in performance through policies/guidelines and related reporting requirements on adherence to the policies/guidelines.
• • The mid-2000s brought a proliferation of sustainability reporting guidelines. Some guidelines are broad based, covering all aspects of sustainability and all organizations. Other guidelines are on a specific aspect, such as carbon, forest, or water, or a specific industry, such as resource extractive.
• • The GRI has provided the most well-known, broad-based set of sustainability reporting standards and sector guidelines used today for stand-alone reports. The Standards are complementary to IR, which suggests a framework for maintenance of the value-creating capitals.
• • SASB has determined which indicators belong in financial reports filed with securities commissions and which are material for each sector.
• • Other organizations, such as CDP, CDSB, and TCFD, have focused more narrowly on environmental aspects of sustainability.
• • The Corporate Reporting Dialogue has brought standard-setting organizations together to ensure harmonization. A mapping tool on its website provides clarity on purpose, scope, and content of each of the participants in the Corporate Reporting Dialogue.
• • Rater organizations have sprung up to fulfill a need to compare companies on sustainability. The integrity of the ratings relies on quality and transparency of methods and availability of information.

Corporate sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks . . . to harness the market’s potential for sustainable products and services while at the same time successfully reducing and avoiding sustainability costs and risks.

—Dow Jones Sustainability Index