This is an original article written by Estella Zhong.
A United Front: The Standardization of Sustainability Reporting
Investors and consumers alike are calling for a global standard of sustainability reporting. In a study by McKinsey and Company, an overwhelming majority of participating investors and executives agreed that the number of sustainability reporting standards should be reduced, with more than half holding the opinion that there should only be a single standard.
A key dialogue in this century, sustainability is no longer a “nice to have” or a competitive advantage, but a basic entry point for all businesses. As stakeholders, investors and consumers are calling for more stringent sustainability guidelines, sustainability reporting appears to be a commonly used framework to evaluate environmental and social impacts by businesses.
Reporting strategies such as Environmental Impact Assessments (EIAs) and Strategic Environmental Assessments (SEAs) are now mandated prior to any new operational projects to provide an idea of the uncertainties and potential risks involved. Overall disclosures post-activities are also demanded to ensure that actual impacts, based upon metrics like the ESG (Environment, Social, Governance) standards, are enacted to promote transparency and accountability on the firm’s account.
Given the growing pervasiveness of sustainability reporting, more companies now willingly partake in such disclosures in response to growing stakeholder demand. However, while the willingness to participate is recognised and rewarded, there is still room for improvement in the sustainability reporting scene.
The Reporting Scene
Currently, a large number of frameworks, standards, and benchmarks have emerged from the woodwork to meet the propagating requirement for adequate business sustainability reporting. Some examples are the aforementioned EIAs, SEAs, and ESG standards. Multiple established national and international organizations also specialize in providing guidance on reporting – Global Reporting Initiatives (GRI) and the International Integrated Reporting Council (IIRC) being the more prominent ones.
However, because each of these organizations adheres to their own distinctive standards, the evaluations of sustainability performance will vary based on the frameworks provided.
Convergence towards a singular, comprehensive, and ubiquitous internationally recognized reporting framework will promote:
Coherence in data, through rationalization and audits
Consistency of evaluation indexes and disclosure presentation methods to minimize discrepancies
Comparability for companies to benchmark their performance against peers and across time periods
For investors, the decision to invest (or not) in a company is fundamentally dependent upon the information that is made available to them.
Coherence and clarity of data that can be extrapolated for reliable comparisons between corporations, sectors and industries is material to investment decisions. This is vital for investors that value applied business ethics and glean confidence from sustainability disclosures made by companies. In addition, a growing number of large institutional investors today are incorporating sustainable finance into their portfolios.
Therefore, with sustainability growing in importance to allsectors of society, finance society plays a crucial role in economic growth. As long term stewards of capital, investors are choosing to engage with companies that play an active role in the quest for environmental sustainability and other important societal goals. Businesses that fail to adhere to the sustainability agenda will risk facing negative screening and exclusion.
Fortunately, as sustainable financing morphs into a more integrated, universal approach; so has sustainability reporting standards. We can improve the quality and consistency of reporting with a new universal standard.