The market for environmental, social and governance (ESG) information is growing. Investors and other stakeholders are increasingly looking at the business world through a wide-angle lens. They realize that long-term sustainable financial success requires looking beyond the current quarter to the longer term.
Stakeholders understand, for example, that managing waste, energy and water use and greenhouse gas emissions, providing safe working conditions and incorporating diversity into decision-making are smart business practices. Exceeding minimum environmental and safety standards can pay off with improved performance over the long term and an enhanced reputation for good management.
Organizations are responding to stakeholder demand for this information by investing significant thought, time and money reporting about ESG issues in voluntary sustainability reports.
Problem solved, right?
Not quite. The increased focus on sustainability reporting is beginning to morph into a debate about quantity versus quality. Despite the amount of information being provided, many users claim that these reports fail to provide concise, integrated and reliable pictures of organizations.
In a study of its members in 2015, the World Business Council for Sustainable Development found that stand-alone sustainability reports averaged 93 pages in length. Investors are consistently challenged to find the most material information.
It’s not just about length. A 2014 study by PricewaterhouseCoopers discovered that the vast majority of investors surveyed were disappointed with the sustainability-related information being provided. They weren’t satisfied with how risks and opportunities were identified and quantified in financial terms. They wanted to be able to compare metrics and information on companies within the same industry, but the information provided wasn’t comparable.
Connectivity of information is also an issue. Companies are failing to “connect the dots” and disclose how sustainability factors into their organization’s value creation model, business strategy, performance and future prospects.
Some companies feeling pressure to deliver on quarterly earnings may be too distracted by the short-term focus to properly assess and communicate mid- to longer-term trends, opportunities and risks. According to a 2015 KPMG survey of sustainability reporting, only about 34 per cent of the world’s largest companies clearly communicate their strategic responses to key trends and risks affecting their businesses.
External independent assurance of sustainability information also varies. Can stakeholders trust the information provided in sustainability reports?
The Global Reporting Initiative (GRI), whose reporting guidelines many companies use, encourages organizations to obtain external assessments of sustainability disclosure processes and reporting. It is interesting to note that in 2013 only 16 per cent of U.S. companies published externally assured GRI sustainability reports compared to 45 per cent of companies on a global scale.
A number of steps can be taken to enhance sustainability reporting in this country.
It starts with leadership at the top. A company’s board and C-suite must factor relevant and material ESG issues into strategic planning, risk management and evaluation of performance. This approach will facilitate a more holistic and integrated approach to reporting. Companies whose board and C-suite approach sustainability reporting with the same rigour as financial statement information will ultimately produce higher quality reports.
Reporting should also directly address material issues. According to a recent study by RR Donnelley and SimpleLogic, Canadian investors are also looking for a consistent discussion of material issues in sustainability reports and mainstream financial filings. (Under Canadian securities regulations, public companies must disclose information that would be material to investor decision-making, which includes disclosure of material ESG matters.)
The next step is ensuring that information reported is accurate and reliable. This includes investing in appropriate systems, controls and processes, and may also involve the use of internal audit resources, independent third party assurance and/or stakeholder advisory committees.
Readers of sustainability reports have some responsibilities too. For those reports that are accompanied by third party assurance statements, what is the scope of the work done? Does the assurance report cover the entire sustainability report or only selected numbers within the report? Is there any independent assessment of the systems, controls and processes that produce the information reported, and what are the credentials of the members of the advisory group or assurance provider?
Regardless of the challenges, investors are showing more interest in ESG issues. In Ontario, for example, pension funds must report how, if at all, they take these issues into account in their investment decision-making.
If the many positive benefits of good sustainability reporting aren’t convincing, consider the reputational or potential legal ramifications down the road of providing information that proves to be inaccurate or unreliable.
Sustainability reporting is already legislated in Europe and mandated on select stock exchanges around the globe. Would mandatory reporting with attendant rules and penalties expedite the journey to higher quality sustainability reporting, or will continuing with voluntary reporting lead to better information for stakeholders?
Interestingly, the 2016 edition of the Carrots & Sticks report produced jointly by KPMG, GRI, United Nations Environment Programme and The Centre for Corporate Governance in Africa identified almost 400 mandatory and voluntary sustainability reporting instruments in 64 countries.
Time will tell whether a carrot or stick approach will ultimately prove more effective in Canada.
Julie Desjardins is the director of reporting and capital markets research, guidance and support for the Chartered Professional Accountants of Canada (CPA Canada). Rosemary McGuire is a principal at CPA Canada in the research, guidance and support group.