SOURCE: Thomson Reuters Sustainability
Imagine a business world where the very largest companies refused or declined to disclose any information about their dealings apart from their financials. A business world where companies’ approach to transparency and accountability was to do the absolute bare minimum.
While this depiction of corporate transparency may belong in the corporate dark ages, sustainability reporting – the reporting of economic, environmental, social and governance performance – has come a very long way in a very short time. Twenty years ago there was no Global Reporting Initiative (GRI) and no companies published GRI sustainability reports. A decade ago sustainability reporting was still in its infancy, with just a handful of trailblazers. Even five years ago when I met with leaders of some of the largest corporations in the world, knowledge of the benefits of sustainability reporting could be diplomatically described as scant at best.
Today knowledge, understanding and interest amongst business and investors is markedly different. Go to any World Economic Forum event or look at issues on the agenda of stock exchanges and regulators and it is clear that sustainability is definitely no longer a fringe pursuit. 95% of the largest 250 companies in the world now produce a Sustainability Report, four out of five of which choosing to use GRI guidelines. Moreover, research from theGovernance & Accountability Institute revealed that the number of S&P 500 and Fortune 500 companies managing and reporting performance on environmental, social and governance (ESG) issues more than doubled from 2010 to 2011.
Sustainability Reporting has well and truly gone mainstream. In total over 4000 organizations worldwide produce sustainability reports. And “worldwide” is the operative word. Disclosing sustainability information is already a listing requirement in countries as diverse as Brazil, South Africa and China, and this is only set to become more and more common elsewhere in the future.
But what explains this “reporting revolution” and how will sustainability reporting change the work of businesses and investor behaviour in the future? There is of course a communications dimension to this. With so much of market capitalization hinging on brand reputation, any improvement in levels of trust and customer loyalty through transparency is a no-brainer. Just as the very process of producing a financial report leads to a greater understanding of the financial footing of an enterprise, the process of compiling a thorough sustainability report is also very revealing.
Investor decision-making is all about risk and opportunity, and the identification and mitigation of risk and demonstration of value is at the heart of sustainability reporting. Risks to the environment, risks to people, risks to society. A sustainability report measures, monitors and helps to manage those risks – particularly for those such as institutional investors, which have longer-term investment horizons. The process of reporting compels businesses to look at their value chains and disclose material information and risks. Herein lies the greatest advantage to investors: while standard financial reports are often no more than a superficial, 2-dimensional snapshot of a company’s present and future, sustainability reporting goes much further, providing businesses and investors with a comprehensive 3-dimensional picture of how sustainable a company’s business model really is.
This is also a positive development at a market level. Any high school economics student can recount that perfect competition is, amongst other things, dependent on perfect information of price, product and production line. Here the invisible hand of the market is very visible indeed. Investors’ demand for sustainability information has led to its inclusion in data displayed on electronic trading platforms. So what if a business decides against full disclosure? Well their company name will be in the n/a category. Not applicable. Not accountable. Subtext: not a business to invest in. No wonder evidence such as that by Harvard Business School last year shows that sustainability leaders are more likely to have a better stock performance due to superior governance structures and more constructive engagement with their stakeholders.
There is some confusion in some quarters between “sustainability reporting” and “integrated reporting.” This is understandable as the terms are not wholly intuitive – sustainability reporting is all about integration, for example integrating the effects of climate change into business strategy. Moreover, GRI was one of the founders of the International Integrated Reporting Council(IIRC), which will in time create a framework for the integration of financial, sustainability and other information. Ultimately, however, just as there can be no integrated reporting without financial reporting, there can be no integrated reporting without sustainability reporting.
GRI’s global conference 22-24 May will bring together everyone from investors to governments to NGOs, with speakers such as Sandy Frucher, Vice Chairman of NASDAQ, Ms. Wang, Chief Economist of the China Development Bank, Peter Norman, Swedish Minister for Financial Markets and Achim Steiner, Executive Director of the United Nations Environment Programme (UNEP) and Under-Secretary-General of the United Nations. Top of the agenda will be future of reporting – both sustainable and integrated. GRI’s aim is simple: more reporters and better reporting. That means a critical mass of organizations publishing sustainability reports, and for those reports to be more robust and relevant. To this end GRI will be launching the fourth generation of our guidelines, G4. Two years in the development, it has an enhanced focus on materiality and will be easy to use for both reporters and users alike.
Ernst Ligteringen is the Chief Executive of GRI. GRI is a non-profit organization that promotes economic, environmental and social sustainability. GRI provides all companies and organizations with a comprehensive sustainability reporting framework that is widely used around the world.
KEYWORDS: sustainability, Law, Executive, Ernst Ligteringen