Will sustainability reporting ever grow up?

Two Steps Forward

Will sustainability reporting ever grow up?

A new report from Ernst & Young, released today, paints a less-than-rosy picture of the state of corporate sustainability reporting. It's not that companies aren't doing it, or doing it well. It's just that they're doing it with blunt instruments.

The free report (download – PDF) looks at six corporate sustainability trends, with a strong focus on accountability, no surprise given that the publisher is a Big Four accounting firm. The findings of the study were based primarily on a survey conducted late last year by GreenBiz Group of our roughly 3,000-member GreenBiz Intelligence Panel, consisting of executives and thought leaders in corporate environmental strategy and performance. The report analyzed the results from 272 respondents from 24 sectors who are employed by companies with annual revenue greater than $1 billion, mostly U.S.-based.

On March 19 at 1 pm Eastern Time, Ernst & Young will present a free 90-minute webcast focusing on the results of the survey, featuring a panel of experts. Register here.

One of the results I found most surprising, and distressing, had to do with how companies are compiling their sustainability reports. The good news is that  the number of corporate sustainability reports (called by a variety of names by different companies) continues to grow each year. Our 2012 State of Green Business report showed that during 2011, the number of S&P 500 companies has crept upwards every year; now 48% of S&P companies publish reports and, according to CorporateRegister.com, more than 5,500 such reports are published worldwide.

The bad news, as the Ernst & Young report shows, is that the growth of reporting is limited, if not undermined, by the tools companies are using to produce them. “Based on our survey responses, those tools remain rudimentary, even primitive, compared with those used for reporting on financial measures." When asked to name the tools used to compile their sustainability reports, companies cited spreadsheets, centralized databases, emails and phone calls as the principal tools, with about one in four (24%) using packaged software.

Respondents also reported being challenged to find the right data, assess its credibility, and determine which data were material for reporting purposes -- all suggesting that the state-of-the-art of reporting systems remains nascent.

This isn’t encouraging, particularly when one considers another of the report’s six findings: that the role of the chief financial officer in sustainability is on the rise.

In our survey, one in six (13%) respondents said their CFO was “very involved” with sustainability, while 52% said the CFO was “somewhat” involved. That 65% are now engaged in sustainability is a sea change, though not surprising. Respondents cited cost reductions (74%) and managing risks (61%) as two of the three key drivers of their company’s sustainability agenda — both of which are of keen interest to CFOs. (The third top driver for CFO engagement was monitoring shareholder resolutions.)

One key reason for growing CFO involvement is the increased scrutiny of company sustainability issues by equity analysts. This is a relatively new trend, facilitated in part by the growing presence of sustainability data readily available on analysts’ computer terminals from the traditional financial reporting services. Already, 38% of respondents believe equity analysts who cover their company consider sustainability performance in their evaluations, and 23% believe this will happen within five years.

How to reconcile these two things: that sustainability is of growing importance to CFOs, but the tools being used to gather sustainability information are Stone Age, technologically speaking?

Suffice to say, something’s gotta give.

Some of the other trends pointed out by Ernst & Young and GreenBiz also link to reporting and accountability. For example:

  • Climate change has become a strategic concern at many companies, despite a lack of US regulatory requirements to measure, manage or report emissions. Three-fourths of respondents have set greenhouse gas reduction goals; 60% report these publicly. Seventy-six percent publicly report their greenhouse gas emissions; another 16% said they plan to do so within five years.
  • Resource availability is rapidly becoming a de facto reporting requirement for some companies. A significant number of survey respondents said they are being asked by key constituencies about sustainable sourcing and procurement of raw materials, such or forest products (34% of respondents), business risks associated with scarcity of water (33%) and the use of rare earth minerals and metals (20%).
  • Ratings and rankings are growing in importance, with 55% of respondents saying that actively responding to sustainability ratings questionnaires is a primary means of communicating with investors about their sustainability performance and initiatives.

All of these point to the growing importance of sustainability reporting in companies — both internally, as a source of operational improvement and risk reduction, and externally, as a means of assuring employees, customers, shareholders, and others that the company not only is acting responsibly, but is addressing potential risks to its operations related to environmental concerns.

What will it take to advance the state of the art? It will take enlightened business leaders, to be sure, but also conservative ones who bring the same rigor and discipline to sustainability accounting and reporting that they already bring to their financial affairs.

As the Ernst & Young report makes clear, companies will find it increasingly harder to separate the two.