Sustainable Finance

A United Front: The Standardization of Sustainability Reporting

Global Initiatives | Jan 12, 2021

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Source: Pixabay

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. 

As business models are increasingly tested through exposure to a turbulent planet with shifting social and environmental issues, more emphasis is placed on the way businesses are adapting to and addressing these problems. In this new normal of the COVID-19 pandemic, the need for businesses to meet this demand for transparency regarding their vulnerabilities and uncertainties has become even more pressing in order to maintain consumer and investor confidence. 

One salient pillar is sustainability. 

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.

Differences in reporting frameworks (Source: David Maywald)

Divided, we fall

The range of existing benchmarks, standards and frameworks has resulted in a patchwork that needs to be standardized. A need for more structure is often acknowledged as key to standardisation. However, reaching a consensus on individual indicators and metrics that are required for reporting has been a difficult (and next to impossible) task. This concern has also been applicable to specific definitions, logistics, and methodologies with regards to data collection and reporting format. 

This might just be the future of investing

Convergence towards a singular, comprehensive, and ubiquitous internationally recognized reporting framework will promote: 

  1. Coherence in data, through rationalization and audits 
  2. Consistency of evaluation indexes and disclosure presentation methods to minimize discrepancies
  3. 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 all sectors 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.

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