Personal Finance

Sustainability reporting not a feel-good affair

finance

Concept of sustainability development by alternative energy. FILE PHOTO | NMG

Summary

  • Sustainability reporting either excites business leaders or incites them to roll their eyes.
  • Sustainability reporting is intended to provide transparency on the impacts, both positive and negative, that a business has on the environment and society.
  • Global guidance on sustainability reporting advocates businesses to build a broad picture of actual and potential positive and negative impacts related to ESG.

Companies are under increasing pressure from investors, shareholders, lenders and other stakeholders to account for their environmental, social and governance (ESG) performance.

As a result, many companies have taken up sustainability reporting as a means to report publicly on their ESG impacts, and contributions — positive or negative — towards the goal of sustainable development.

Other companies have responded to the pressure to gain stakeholders’ approval and outdo their competitors by cherry-picking and reporting on only those indicators that are easy to analyse or that imply positive or neutral impacts while leaving out material indicators causing negative impacts to the environment and society.

It can, therefore, be argued that sustainability reporting either excites business leaders or incites them to roll their eyes. Some view it as an opportunity to benchmark and improve sustainability performance, while others see it as a waste of resources, with no positive bottom-line impacts.

Sometimes businesses may participate in the reporting because they feel ‘everyone else is doing it, so why aren’t we?’ or because reporting makes them look good to their clients and investors. This latter motivation would result in sub-standard reporting, exaggeration of claims and companies making references to areas of sustainability concern without giving any specific measures of performance that investors could compare to peer companies.

It is to be understood that sustainability reporting is intended to provide transparency on the impacts, both positive and negative, that a business has on the environment and society, and to help businesses set goals, assess success and implement progress to make them more sustainable.

Therefore, a one-sided reporting of only the indicators that make a business look good or reporting because others are doing it raises serious concerns as to the usefulness of reporting and undermines the whole point, which is to provide an accurate, comparable picture of how businesses are doing across the sustainability spectrum.

To achieve real change, sustainability reporting should be preceded by a deliberate and conscious decision by companies to make sustainability an integral part of their business strategy. This involves a direction from the board to have in place a process to identify, assess and manage ESG related risks and embed them in the company’s risk management frameworks.

While regulators are encouraging and in some cases mandating sustainability reporting, regulators and companies should be aware that sustainability reporting is not an end to itself but rather a means to improve environmental and social outcomes.

Therefore, a narrow focus on sustainability reporting as a feel-good measure is an obstacle to progress, distracting from the real need for change in mindsets and corporate behaviour.

Global guidance on sustainability reporting advocates businesses to build a broad picture of actual and potential positive and negative impacts related to ESG.

While there would be a tendency to report more on positive impacts, this would not give the full picture.

Businesses cannot offset their negative impacts, particularly concerning social and ethical issues, with positive contributions.

There is no doubt that attention to material environmental, social and governance issues and reporting on the same can deliver better social, environmental and financial outcomes for companies.

Stakeholders have also come to view disclosures on these issues as a minimum requirement of a company’s sustainability commitment.

Companies should, therefore, avoid the temptation to cherry-pick only those indicators that are easily achievable and of a positive impact.

Reporting negative environmental and social impacts, with clear mitigations, gives stakeholders’ confidence that a company understands its impact fully and is willing to manage and reduce it.

I believe that as soon as business leaders understand the benefit of running sustainable businesses while doing good to nature and society, then being open about their impacts on the planet will be a natural occurrence.