1 Unit
CPD technical article
Graham Holt outlines the developments in sustainability reporting requirements and practices that are currently under way
This article was first published in the October 2015 international edition of Accounting and Business magazine.
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Entities are investing more time and resources on the issues surrounding sustainability. A key part of the global advance towards sustainability involves the need to account and report on the implementation and application of the entities’ sustainability practices.
Sustainable development goals have historically been identified as economic development, social development and environmental protection. Sustainable development consists of balancing local and global efforts to meet basic human needs without destroying or degrading the natural environment.
Despite the increased popularity of the use of the term, the possibility that societies will achieve environmental sustainability has been, and continues to be, questioned. The purpose of the article is to outline developments in sustainability reporting requirements and practices.
Information from the sustainability reporting process is being used by diverse groups of stakeholders who are finding increased value from sustainability reporting information. Decisions are made by businesses and governments, which are seldom based purely on financial information alone. Rather, they are based on an assessment of risk and opportunity using information on a wide variety of immediate and future issues.
Increased transparency
The process behind sustainability reporting ensures that organisations consider their impact on sustainability issues, and allows a degree of transparency about the risks and opportunities they face. Increased transparency can lead to better decision-making. There is now a greater demand for sustainability information, as demonstrated by the emergence of new reporting initiatives.
An example of these is the United Nations Global Compact (UNGC). This is a voluntary initiative based on CEO commitments to implement universal sustainability principles and to take steps to support UN goals. At the time of writing there were more than 8,000 companies and a total of more than 13,000 entities signed up to the initiative. BP, as an example, reports against the principles of UNGC on human rights, labour, environment and anti-corruption. These principles centre on operating responsibly in alignment with universal principles and taking actions that support the society around them.
UNGC wishes sustainability to be pushed deep into the corporate DNA, with companies showing commitment at the highest level, reporting annually on their efforts and engaging locally where they have a presence.
The Global Reporting Initiative (GRI) is an international not-for-profit organisation, which produces Sustainability Reporting Guidelines, currently in their fourth generation. The GRI’s Sustainability Reporting Framework provides guidance for organisations to voluntarily report on their environmental, social and governance (ESG) performance.
In support of those preparing corporate sustainability reports, the GRI offers reporting principles, standard disclosures and an implementation manual. Its guidelines are developed through a dialogue with stakeholders from around the world, including representatives from business, civil society, financial markets, labour and government.
GRI has championed sustainability reporting for many years and provides the world’s most widely used standards on sustainability reporting and disclosure. Of the world’s largest 250 corporations, 93% now report on their sustainability performance and 82% of these use GRI’s standards in their reporting. GRI is built upon a multi-stakeholder principle, which ensures the participation and expertise of diverse stakeholders in the development of its standards.
Twenty-seven countries use GRI in their sustainability policies and in addition it has longstanding collaborations with over 20 international organisations such as the UNGC, Organisation for Economic Cooperation and Development and the UN Working Group on Business and Human Rights.
Its focus has always been on the reporting process and the value of the information that comes from it. GRI has published a first-analysis paper resulting from its Reporting 2025 Project that is designed to promote an international discussion about the purpose of sustainability reporting and disclosures looking ahead to 2025. As part of the project, leaders in various fields were interviewed on subjects ranging from data technology to society and business development scenarios. The insights gained, which are not too unexpected, include the fact that companies will be held accountable more than ever before, that business decision-makers will take sustainability issues more and more into account, and that ethical values, reputation and risk management will guide decision-makers.
Setting standards
There are developments worldwide in terms of sustainability reporting. The US Sustainability Accounting Standards Board (SASB) has issued provisional standards for various industries. The series of eight industry-related standards focus on material sustainability matters that corporations are already required to disclose in their form 10-K or 20-F filings with the US Securities and Exchange Commission.
The Singapore Stock Exchange is making final plans to make sustainability reporting mandatory. It is currently undergoing a one-year study to determine what guidelines should be adopted for these reports, which disclose a company’s economic, environmental and social impacts. The Taiwan Stock Exchange recently announced that specified listed companies would have to comply with mandatory CSR reporting according to GRI G4 guidelines. In 2014, Japan’s Financial Services Agency published the first draft of a stewardship code, called the Principles for Responsible Institutional Investors. The code exists on a voluntary ‘comply-or-explain’ basis and aims to encourage long-term sustainable returns based on seven principles to guide investors on their stewardship responsibilities.
Also in 2014, the European Parliament passed a vote to require mandatory disclosure of non-financial and diversity information by certain large companies and groups on a comply-or-explain basis. Companies must disclose information on policies, risks and outcomes as regards environmental matters, social and employee aspects, respect for human rights, anticorruption and bribery issues, and diversity in their board of directors.
Finally, in the UK, the Public Services (Social Value) Act 2012 places a duty on public bodies to consider social, economic and environmental wellbeing of stakeholders ahead of a procurement. This was followed, in August 2013, with new regulations for the strategic report and directors’ report. The regulations resulted in an amendment to existing company law requirements and became effective on 1 October 2013.
The main change was the introduction of a requirement for certain entities to prepare a strategic report as part of their annual report. The strategic report is intended to replace the existing ‘business review’ section of annual reports and requires companies to provide a complete picture of their business activity, including social effects, calling into question what is material in business reporting.
Quoted companies in the UK also need to include specific information on the company’s strategy, business model, human rights and gender diversity in the strategic report, as well as information on greenhouse gas emissions in their directors’ report.
Integrated approach
Another consideration is the International Integrated Reporting Council (IIRC) framework. This is a principles-based framework aimed at encouraging businesses to explain and disclose better how they create value. The framework focuses on six sets of resources and relationships (capitals): financial; manufactured; intellectual; human; social and relationship; and natural. The framework defines an integrated report as a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.
The framework provides a conceptual basis for thinking about how a business creates value and identifies the risks it faces, not only in the short but medium and long term, and about how it articulates its strategy and business model for long-term sustainable value creation.
However, despite the benefits and investor appetite, many companies are adopting a ‘wait-and-see’ approach to integrated reporting.
The Climate Disclosure Standards Board (CDSB) is an international consortium of business and environmental NGOs. It is attempting to advance and align the global corporate reporting model to equate natural capital with financial capital, and has developed a framework for reporting environmental information.
The CDSB and the IIRC have signed a joint statement of collaboration. Both organisations believe that climate change and the protection of natural capital are core issues for business and that relevant disclosures about both can provide valuable insight into corporate performance as part of an organisation’s mainstream reporting.
Further, the IIRC has created the Corporate Reporting Dialogue (CRD), which brings together organisations that have significant international influence on the corporate reporting landscape. It has published a landscape map that provides a snapshot of a comparison of their frameworks, standards and related requirements. Participants are the CDSB, the US Financial Accounting Standards Board, the GRI, the International Accounting Standards Board, the IIRC, the International Public Sector Accounting Standards Board, the International Organization for Standardization and the SASB.
The participants aim to work together to respond to market calls for better alignment and reduced burden in corporate reporting by promoting proactive engagement between the key organisations.
Finally, the International Auditing and Assurance Standards Board has released revised International Standards on Auditing to better deal with disclosures in financial statement audits, together with a publication on assurance on integrated reporting to deal with such issues as the nature of assurance and how different mechanisms contribute to credibility and trust.
There are no worldwide agreed standards on sustainability reporting. There are many initiatives and entities can comply with a range of ‘standards’. It seems reminiscent of where International Accounting Standards found themselves many years ago.
Graham Holt is director of professional studies at the accounting, finance and economics department at Manchester Metropolitan Business School
1 Unit
CPD technical article
"The process allows organisations a degree of transparency about the risks and opportunities they face"