Inside the brain of sustainability reporting
Company environmental, social responsibility and governance data are increasingly showing up in annual financial reports. For good reasons.
Sustainability reporting has gone through several waves of evolution over the past decade.
These waves have flowed from simple website posting of information to the creation of Corporate Social Responsibility/Sustainability reports to reporting across the value chain (from suppliers to customers). Over the years, I have described these transitions at conferences.
Now, we are seeing a fourth wave arrive in integrated reporting: the consolidation of sustainability information and data into normal company reporting activities such as annual reports.
This is occurring for a variety of reasons, from making it easier for stakeholders to find key information to sending a signal to the investment community that sustainability is a core component of company operations.
With this trend, companies seeking to become leaders in reporting must ask themselves three key questions:
- Are we covering the full spectrum of environmental, social, governance (ESG) and financial (F) metrics?
- Are we meeting and exceeding our stakeholders’ expectations for reporting?
- To what level is our ESGF reporting representative of truly integrating sustainability into our company’s strategy?
These are questions of breadth and depth of reporting, and no one company is doing it at exactly the same level, quality or approach as the next. So how can we know who is doing it the “best” if everyone is doing it differently, and what does “best” mean anyway?
Where reports lie on the 'focus' spectrum
I decided to devise a system to help me decipher the types of reports out there. This system is based on the breadth of issues covered (ESGF), what type and location of reports are being produced and where the Global Fortune 500 fall within these categories.
Here is the system:
All data references come from PivotGoals.com, a free database site provided by Winston Eco-Strategies, which includes 3,500 ESG goals set by the world’s largest companies. Data is as of March. The author is project manager of PivotGoals.com.
Most focused: Integrated into annual reports (19% of Global Fortune 500)
Those at the most focused level (19 percent of the Global Fortune 500) cover ESG and F metrics. Moreover, only 1 percent have secured the third-party Integrated Reporting (IR) Standard. This puts these companies in a leadership position. Being a part of the Integrated Reporting Network provides access to knowledge and experiences different from other reporting leaders. Check out GDF Suez, Diageo and Coca-Cola’s integrated reports as prime examples.
These companies with the highest level of focus, such as Japan Post Holdings and L’Oreal, still cover ESGF, but the data is integrated into their annual report, signaling to shareholders that sustainability is core to their business. From 2013 to 2014, about 17 percent of the Dow Jones Sustainability Index (DJSI) sector winners did integrated reporting. One company adhered to integrated reporting and three companies integrated their ESG reporting into their annual report.
More focus: Multi-dimensional ESG reports (32%)
This group typically does standalone sustainability reports covering ESG metrics, including BMW, and are following the Global Reporting Initiative (GRI) G4 Standards, a well-established and respected reporting benchmark. Companies with “more focus” such as Toyota are producing a sustainability report on some level, but not necessarily following any recognized standards.
About a third of GF500 companies fall within this category, because they likely find it simpler to compile all of their ESG data into one report and deal about the financial reporting separately. Sixty-two percent of DJSI sector winners do multi-dimensional ESG reports, showing that the standalone sustainability report is still the most common option even amongst the leaders.
Some focus: Single dimension environmental and/or CSR reports (38%)
A good chunk of companies take the approach of either producing multiple, smaller reports on specific topics (Aeon) or hosting sustainability data only on their website (United Technologies). Twenty-one percent of DJSI sector winners report at this single dimension level of one or more reports.
No focus: No reports and/or just a website (11%)
If a company isn’t reporting, it gets no benefits from the disclosure process. But what it might get is flak from its stakeholders for not reporting — this could manifest in the form of receiving a shareholder resolution to produce a sustainability report, negative media coverage or activist campaigns against it for not being adequately transparent. No DJSI sector winner only reports via website.
What are the takeaways?
Those opting for Integrated Reporting Standards are on the cutting edge for sustainability reporting. If you aren’t there yet, work your way up to and learn from those leading the charge. Part of what makes IR so attractive to stakeholders is this idea of “data centrality,” which offers consolidated data to stakeholders in one easy-to-access and easy-to-analyze location. Moreover, an integrated report indicates a much more integrated strategy to get sustainability embedded into the core of the business.
If you are within the group of common reporters doing standalone sustainability reports (ESG), take note that those companies receiving the highest “focus” designation in my grading system are those whose reporting adheres to the leading third party standards for that level of reporting. In fact, this type of standalone sustainability report is the standard among DSJI leaders, but the integrated annual report is moving its way into the norm.
And if you’re just beginning to explore the idea of reporting, know that any transparency is good transparency in the sustainability space. You’ve just got to get your feet wet, jump on the wave and start reporting at the level your company is capable of today.