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Rethinking the role of sustainability reports

Businesspeople discussing a report
Kan Chana

Corporate sustainability has a reporting problem — it always has. Companies typically don’t enjoy creating them and investors, customers, employees and most other stakeholders don’t revel in reading them. Yet, with investors more interested in environmental, social and governance (ESG) issues than ever before, this long-standing problem has become an immediate liability for companies looking to maximize shared value.

Today, some 90 percent of companies in the S&P 500 produce corporate sustainability reports, and the practice has become so ingrained in corporate sustainability culture that few question its purpose or efficacy. Reporting has risen to prominence for good reason — there never has been a more critical time for companies to communicate their strategies and actions for corporate sustainability.

Many investors evaluate nonfinancial performance based on corporate disclosures, with most finding value in assurance of the strength of an organization’s planning for climate and other ESG risks. Meanwhile, consumers increasingly are demanding responsible products, and attention to sustainability issues has become an employee expectation.

But something isn’t right with the status quo of reporting.

"By trying to meet the demands of multiple stakeholders, sustainability reports have become bloated, overly complex and expensive to produce," said Nathan Sanfacon, an ESG expert at thinkPARALLAX, a sustainability strategy and communication agency. "This results in companies spending scarce resources on a report that doesn’t quite satisfy the needs of any stakeholder group."

To be more effective at engaging investors and other critical audiences on ESG, companies ought to shift towards communicating relevant data in a more agile and real-time format.

This is particularly problematic for large, publicly traded companies seeking to attract and retain institutional investors. "To be more effective at engaging investors and other critical audiences on ESG, companies ought to shift towards communicating relevant data in a more agile and real-time format," Sanfacon said.

Addressing this disconnect is at the core of the new thinkPARALLAX white paper, "The New Era of Reporting: How to Engage Investors on ESG," which examines the pitfalls of sustainability reporting in the past and present and offers a better way forward for corporate sustainability practitioners.

A short history of sustainability reporting

While reporting might seem a recent phenomenon, its origins go back nearly half a century — emerging first in Europe in the 1960s and later in the United States in the 1970s after the first Earth Day launched the modern environmental movement. Many of the earliest reports were strictly environmental and more about addressing public image problems than communicating anything that might resemble a proactive sustainability strategy.

What we might call the modern era of sustainability reporting began in 1997 when public outcry over the environmental damage of the Exxon Valdez oil spill compelled Ceres and the Tellus Institute to create the Global Reporting Initiative (GRI). The aim was to create the first accountability mechanism to ensure companies adhere to responsible environmental conduct principles, which was then broadened to include social, economic and governance issues, GRI says on its website.

"Prior to GRI, there was no framework to ensure that reporting was consistent or reflective of stakeholder needs," said Eric Hespenheide, chairman of GRI, in an email. "First through versions of the GRI Guidelines and since 2016, the GRI Standards, we have been furthering our mission to use the power of transparency, as envisaged by effective disclosure, to bring about change."

Since then, multiple other reporting frameworks have emerged to cater to the ever-growing list of corporate sustainability stakeholders, such as the investor-focused Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD).

"While sustainability reporting has come a long way, a lack of standardization means that there is a disconnect between what investors are looking for and what companies are communicating," Sanfacon said.

Giving investors what they want

Here’s a billion-dollar question: What do investors look for when evaluating companies on ESG? The simple answer: data; data; and more data.

"Investors tell us they’re looking for raw ESG data that is consistent, comparable and reliable — data that is focused on the subset of ESG issues most closely linked to a company’s ability to create long-term value," Katie Schmitz Eulitt, director of investor outreach at SASB, wrote in an email.

Schmitz Eulitt regularly engages with the investment community on disclosure quality, including with members of SASB’s 50-plus member Investor Advisory Group, who collectively manage more than $40 trillion in assets.

"When companies more explicitly connect the dots between how they manage sustainability-related risks and opportunities and their financial outcomes, it’s both an opportunity to enhance transparency and strengthen performance," Schmitz Eulitt added.

When companies more explicitly connect the dots between how they manage sustainability-related risks and opportunities and their financial outcomes, it’s both an opportunity to enhance transparency and strengthen performance.

But this is easier said than done because corporate leaders, investors and other stakeholders must work with two separate and disjointed reporting systems: one for financial and the other for ESG performance.

"Companies can be screened in or out using various criteria, but there is no way to integrate the data into earnings projections or valuation analysis," wrote Mark Kramer et al. in a recent piece in Institutional Investor. "The result is two separate narratives, one telling how profitable a company is, the other highlighting whether it is good for people and the planet."

The new era of reporting

Investors, of course, aren’t the end all, be all of corporate sustainability communication — companies also want to reach customers, consumers, regulators and employees, among others. But limited time and money often results in corporate sustainability practitioners attempting to use annual or bi-annual reports as a one-size-fits all solution.

More often than not, these reports are heavy on human-centric stories and light on quantitative information. While non-investor stakeholders tend to appreciate the human stories, they also typically aren’t taking the time to download and devour a portly PDF. Meanwhile, while investors are people too and can enjoy a good human story, they ultimately aren’t getting enough of the hard data they desire.

In the new whitepaper, thinkPARALLAX proposes addressing this problem by dividing sustainability communication into two drivers — demonstrating performance and building reputation — so that companies can better invest time and resources to better engage investors and other stakeholders.

Demonstrating performance involves conveying the effectiveness of a company’s sustainability strategy and management of material ESG issues, such as disclosing data around carbon emissions or diversity and inclusion through a digital reporting hub.

Building reputation focuses on showing that a company is acting responsibly, limiting its environmental impact and delivering societal benefits. This could take the form of communications activities such as social media campaigns, microsites, videos, speaking or op-eds, among others. 

"Companies most interested in engaging investors should focus more on demonstrating performance by communicating the hard ESG data they are looking for, as opposed to human interest stories," Sanfacon said. "But if non-investor stakeholders like consumers, employees or customers are a primary audience, the company should invest more in building reputation by bringing the data to life through inspiring stories."

While this won’t single-handedly solve corporate sustainability’s reporting problem, it’s a start. As companies shift away from massive PDF reports and toward more targeted, real-time investor communication, they’ll free up time and resources to better engage consumers, employees and other key stakeholders on corporate sustainability.

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