The State of Sustainability Reporting

The 2012 Ceres conference highlighted the evolving practice of sustainability reporting and its relationship to financial reporting. With major corporate resources dedicated to financial controls and reporting, sustainability reporting is still a lesser focus. But, all signs point to changing expectations and a likely shift by companies over time. While there are competing visions for the future of reporting as a whole, here are some clear takeaways:

Sustainability must include financial aspects

Financial issues are inextricably linked to environmental, social and governance issues. Leading companies underscore the relevance of sustainability to the business through its contribution to financial performance. High-sustainability companies outperform low-sustainability companies over time, as research from Harvard Business School noted recently. Far from marginal, these sustainability issues are core operational items, so should be considered as a whole.

Understand who‘s listening

Companies need to decide who they are speaking to in their reports. Ann Simpson of CalPERS says there are three types of shareholders: traders, raiders and owners. Traders and raiders (hedge funds) are not concerned about sustainability as they are only interested in the stock price tomorrow or at best the next quarterly result. Owners, the long-term investors who are both retail and institutional, do care about sustainability issues because they are in it for the long haul. This group easily includes employees as well, whether or not they own shares. Reports tend to appeal to those with a long-term view.

Prove value to all stakeholders with metrics and context

Shareholders and analysts love numbers, but everyone needs to understand the key indicators for their sector, and the context around them. This is really wide open. The GRI is trying to establish a framework to make comparison possible, but at the moment it is a company by company decision. Define what is material for your company and stakeholders, what outcomes you can influence and what context is necessary. Numbers alone don’t tell the story — they never have in financial reporting, and they won’t in sustainability either. Companies need metrics and context.

Risks are real

Taking sustainability into consideration in an investment decision is simply being strategically aware. These “soft” issues are filled with risks that have material, financial impact: labor, environment, ethics, governance, resources, etc. These are operational principles translated into sustainability language. Walmart is a recent example: their stock took a major hit when news of the Mexico bribery case broke.

At the end of the day, how can the true value of a company be expressed if reporting does not include sustainability issues? There are many approaches — from integrating sustainability content into a financial report, creating separate reports or one fully integrated report — and we have seen the gamut. Without a standard, companies are starting the process by jumping in and defining it as they go. Some opt to use the GRI, while others decline that framework and report based on their own standards. At this point there is no right and wrong way. But those companies that are making an effort are definitely engaged in creating the future, and setting the course that others will have little choice but to follow.