Sustainability reporting
Sustainability reporting refers to the disclosure, whether voluntary, solicited, or required, of non-financial performance information to outsiders of the organization. Sustainability reporting deals with qualitative and quantitative information concerning environmental, social, economic, and governance issues. These are the criteria often gathered under the acronym ESG.
The introduction of non-financial information in published reports is seen as a step forward in corporate communications and an effective way to increase corporate engagement and transparency.
Sustainability reports can help companies build consumer confidence and improve corporate reputations through transparent disclosure on social responsibility programs and risk management. Such communication aims to give stakeholders broader access to relevant information outside the financial sphere that also influences the company's performance.
In the EU, the mandatory practice of sustainability reporting for certain companies is regulated by the Non-Financial Reporting Directive, recently revised and renamed Corporate Sustainability Reporting Directive. Commercial frameworks have been developed for sustainability reporting and are issuing standards or similar initiatives to guide companies in this exercise.
There is a wide range of terminology used to qualify this same concept of sustainability reporting: ESG reporting, non-financial reporting, extra-financial reporting, social reporting, CSR reporting, and socio-economic and socio-environmental reporting.
History
Corporate sustainability reporting has a history linked to environmental reporting. Early examples have been traced to the seventeenth and late nineteenth centuries and environmental reporting became popular in the 1970s.Corporate sustainability reporting practice is rooted in the multidimensional concept of CSR and in the stakeholders model of corporate governance in Europe, which places emphasis on the importance of understanding the company as an entity with relationships with its stakeholders and the environment. According to Freeman's theory, the company's shareholders are not the only ones to be considered, but also its employees, customers, suppliers, local communities, governments: the society in the broadest sense.
With the emergence of this approach, the first response of many companies has been to expand the communication of their achievements in terms of social responsibility. Information disclosed by companies themselves are the first indicators that can be received by the public in order to verify whether the decisions taken meet the announced commitments, as well as its own interests.
The obligation of accountability is therefore often assimilated to reporting and is addressed, in the first place, to the company's stakeholders. This means that both shareholders and society in general are concerned, while also taking future generations into account.
Recently, there has been a growing interest in communications relating to the extra-financial aspects of organizations: CSR performance is now one of the factors considered in investment decisions. The practice of sustainability reporting has existed in a scattered way since the 1980s but has really expanded over the last twenty years.
This is notably due to the global awareness of the ecological crisis and the common interest in sustainable development, but also to the numerous corporate governance scandals of large companies over the last two decades or the 2008 financial crisis.
In addition to eroding stakeholder trust, these circumstances have increased their activism for broader transparency and ensuring better information from companies.
In this context, the need for sustainability reporting has gradually emerged. It was carried out by companies initially on a voluntary basis, with the aim of mitigating some of the skepticism of users of financial reports and restoring the trust of stakeholders by expressing a willingness to behave responsibly.
The publication of non-financial reports thus began in an ad hoc and rather anecdotal manner, confined to a few subjects deemed worthy of interest by the companies themselves. A copy effect, combined with latent pressure from stakeholders, subsequently contributed to the acceptance and renewal of this approach, which gradually became more structured. Today, 96% of the world’s 250 largest companies publish sustainability reports, with 78% aligning to the GRI Standards, signaling mainstream integration of sustainability reporting into corporate practices. Indeed, CSR and its concrete implementation are increasingly valued by public opinion.
This interest has led to the emergence of reference frameworks, guidelines, standards and regulations in this area. In addition to helping and guiding companies, this range of resources has also allowed for a certain standardization of both the information disclosed and the method of communication.
The objectives of developing guidelines are to provide companies with a concrete methodology and to make the published data understandable, credible and comparable for their users. Reporting guidelines are issued either by private non-governmental organizations, or more recently by governments on the basis of mandatory standards. Indeed, for some companies, this disclosure has been made mandatory. In line with these developments, some consulting firms have started ESG advisory services and help companies to draft their sustainability reports.
There are a variety of reasons that companies choose to produce these reports, but at their core they are intended to be "vessels of transparency and accountability". Often, they are also intended to improve internal processes, engage stakeholders and persuade investors.
Improved disclosure of non-financial information can have other benefits for reporting companies. In particular, the adoption of sustainability reporting has been found to have a positive impact on company performance and value. OECD suggests that companies showing sustainable performance on ESG criteria and communicating effectively about them seem to enjoy better financial performance. These companies generally benefit from a more diversified investor base, for example through their inclusion in actively managed investment portfolios or sustainability indices. In addition, companies that effectively communicate their non-financial engagements and have a high performance in this area are more likely to attract and retain talents thanks to their greater social credibility, as this stimulates employees' motivation and meets their values.
As a matter of law, in the United States, the materiality principle controls whether a publicly traded corporation must disclose certain information, that is: "a fact is material if there is a substantial likelihood that the fact would have been viewed by a reasonable investor as having significantly altered the ‘total mix’ of information available."
In this case, some authors have examined and applied several factors and concluded that ESG data qualifies as being material. It has also been suggested that other organizations that issue securities may also be well-advised to also engage in sustainability reporting.
The topic of sustainability reporting has become a recurring theme in recent years and the practice has been increasingly professionalized. However, the framework surrounding such reporting is in constant evolution and companies are increasingly challenged by the form, content and process of their sustainability reporting.
While this requirement presents multiple opportunities for firms, investors, consumers and all stakeholders, it also creates a number of challenges. Indeed, for sustainability statements to be relevant and useful, the information disclosed must not only be realistic and reliable, but also verifiable and comparable.
Increasingly, governments are introducing regulations to ensure that companies disclose NFR information. In Australia, companies must disclose information on their environmental performance under the Corporations Act 2001 and the National Greenhouse and Energy Reporting Act 2007. In China, companies must disclose social responsibility information while those listed on the Shanghai and Shenzhen Stock Exchanges must include their corporate social responsibility performance in their annual reports. In South Africa, companies listed on the Johannesburg Stock Exchange must publish an integrated report for all financial years ending on or after March 1, 2010. In North America, the Securities and Exchange Commission requires Canadian and US companies to disclose non-financial information in their annual reports. Finally, the European Union Directive 2014/95/EU introduced mandatory non-financial reporting practices for large European companies.
As governments and financial regulators continue to issue and update reporting requirements, companies are increasingly obligated to disclose their non-financial information. The increased focus on NFI reporting has been driven, in part, by the rise in ESG investing. ESG investing is a form of investing that focuses on companies with strong ESG practices.
The United Nations Conference on Trade and Development - International Standards of Accounting and Reporting founded the African Regional Partnership for Sustainability and SDG Reporting in 2022. The collaboration has 53 members as of March 2023, including national corporate social responsibility networks and/or ministries from 27 African nations.