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Cities & Urbanisation, Inclusive Growth, Sustainable Finance

The Convoluted World of Sustainability Reporting

Global Initiatives | Oct 26, 2020

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Photo by Ben O’bro on Unsplash

Written by Dennis Tan and edited by Global Initiatives

Last month, the World Economic Forum (WEF) released a white paper to rally companies to move towards a common set of environmental, social, and governance (ESG) metrics in order to produce consistent sustainability reports. A set of 21 sustainability metrics was released at the forum’s Sustainable Development Impact Summit, covering four areas: Governance, People, Planet, and Prosperity. 

Punit Renjen, the Global Chief Executive of Deloitte, underscored the significance of this move in his comments to the Financial Times: “Right now, it is an alphabet soup of metrics. It is important for us to have a common set of standards and if there is widespread adoption it will lead to change in behaviour.” 

So… What is sustainability reporting?

Sustainability reporting is not new. In fact, a century before the United Nations World Commission on Environment and Development defined the term ‘sustainable development’, some companies like US Steel and BHP were already reporting on aspects such as community development and worker safety

Over the years, sustainability reporting has evolved from a focus on social and environmental responsibility to triple bottom line reporting on the impacts of a company’s actions on people, planet, and profit. 

Today, nearly 6,000 companies across 26 countries are producing sustainability reports. The number is increasing annually

Climate reporting is taking the lead with a whopping 21 percent more companies globally reporting their greenhouse gas emissions – a key driver of global warming – in 2019 as compared to the year before, according to a report by The Conference Board.

Sustainability disclosures by country, sector, and company size. (Source: The Conference Board)

In Singapore, SGX has required all listed companies to disclose ESG data in mandatory sustainability reports since 2016. Many companies have come on board since then, with the number increasing by more than 10 percent in two years.

Problems in sustainability reporting

A review of the sustainability reports produced by companies on SGX however, reveals the problems in sustainability reporting today. There are two main issues:

1. The “alphabet soup” of standards and frameworks

Common standards setting and reporting initiatives with different reporting methods and focuses. (Source: CPA Journal)

Imagine being an investor with hundreds or thousands of positions to analyse, but you can’t readily compare them because frameworks and metrics differ across the board! 

With a myriad of completing frameworks for assessment, it makes it difficult for investors to compare sustainability performance across companies. This makes it practically useless to major investors with large portfolios.

Without standardising how sustainability information is reported, it becomes difficult for companies to generate information of value to investors, and for that information to translate to increased investments. The lack of standardized units of measure and inconsistency in the way sustainability information is provided only serves to worsen the headache that investors face when comparing company portfolios.

2. The lack of investor confidence in the robustness of reports

Source: McKinsey Sustainability Reporting Survey

“Many companies do not have the systems in place to collect quality data for [sustainability] reporting”, a head of responsible investing for one of the largest pension funds globally told McKinsey & Company. This leaves room for inaccuracies and biased reporting, undermining investor confidence in the reliability of sustainability reports.

Corporate sustainability disclosures are also often self-reported without independent auditing, raising doubts about their robustness. Almost all investors surveyed by McKinsey agreed that they should be audited, with two-thirds stating that sustainability audits should be subject to the same thoroughness as financial audits.

The push for a more coherent standard

According to the same report, the greatest priority for refining sustainability reporting was to align the numerous reporting frameworks and standards.

Two-thirds of investors and executives aligned themselves with the view that there should only be one standard, with almost two-thirds of the remaining respondents agreeing that there should be a reduction in the number of frameworks and standards. This would address the most important challenges to sustainability reporting – “inconsistency, incomparability, or lack of alignment in standards”.

By aligning to a single standard, it becomes easier for companies to disclose data that is consistent and financially material. By providing information that is actually useful for investing, 63 percent of investors said that it makes it more enticing for greater capital to be channeled into sustainable-investment strategies. 

This would also allow companies with strong sustainability performances to stand out, and in turn motivate companies lagging to boost their sustainability efforts.

There are, of course, some issues with having a single standard that need to be addressed. 

Small companies may become disadvantaged due to the financial cost of assessing mandatory metrics to fulfil the criteria for issuing a proper sustainability report, and some investors also lamented that such a standard would reduce their freedom to produce exclusive research or products. 

The future – A global standard for sustainability reporting

The Global Sustainable Investment Alliance reported that over seven years, the number of global assets managed according to sustainable-investment strategies doubled, rising from 13.3 trillion USD in 2012 to 30.7 trillion USD in 2018.  

While increasing trends in sustainability reporting are due in part to compliance and regulatory pressures by governments, it is, more importantly, a key ingredient for successful partnerships and investment if you wish to expand and evolve your business.

Source: Visual Capitalist

“The political landscape is polarized, sea levels are rising, and climate fires are burning… world leaders must work with all sectors of society to repair and reinvigorate our systems of cooperation,” Børge Brende, president of the WEF, expressed at the WEF’s 50th annual meeting earlier this year

With the WEF and the Big Four companies releasing their joint reporting framework for sustainability performance in a push for a global standard for sustainability reporting, it presents an opportunity for the private sector to work towards playing an even larger role in building a more sustainable world. 

This is the future – are you keeping up with it?

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