Today, investors use social and environmental performance KPIs as a proxy for assessing the quality of management and—increasingly—to measure risk. Now, the conversation is no longer about whether a company should report, but rather what they should consider when they do. How can companies gain the greatest possible value from their reporting efforts? Where should companies set performance goals? How and what should they measure? What frameworks should they use? How will report readers use the information?
The basics: Sustainability reporting offers benefits to the business
Research has found that companies that operate transparently differentiate themselves from competitors. A 2011 study found that by voluntarily reporting their superior ESG performance, companies can lower their cost of capital.[i] A 2012 study found that the disclosure of corporate citizenship information leads to more accurate analyst forecasts, while a 2015 study found that available corporate citizenship information is positively associated with positive analyst assessments.[ii],[iii] Our own surveys of the field have shown us that these benefits are understood by business leaders. According to the 2014 State of Corporate Citizenship study, the majority of executives believe that resources for reporting on social and environmental performance will increase in the near future.
The value proposition for sustainability reporting is clear: By increasing disclosure and communicating firm goals and performance, sustainability reporting supports trust in the brand, improves reputation, mitigates risk, and drives performance and innovation. The quality and quantity of reporting can also provide important bellwethers of performance. Analysis of recent disclosures by eRevalue shows, for example, that in the months leading up to the revelation that Volkswagen circumvented emissions measurement, the quality and quantity of environmental disclosure from the company had decreased noticeably.
The continued proliferation of reporting frameworks leaves corporate citizenship practitioners with a growing number of reporting options. While the number of frameworks has increased, so has the number of corporate citizenship reports—which increased globally from 800 in 2000 to close to 7,800 in 2014. GRI—creator of G4, a leading reporting framework—recently launched Reporting 2025, a project established to explore the future trends and evolving purpose of sustainability reporting and disclosures. The project’s sponsors include the Boston College Center for Corporate Citizenship, Enel, EY, and SAP. Recently, I went to Rome to participate in the Reporting 2025 Forum. The day-long forum brought together 70 attendees from 15 countries—including India, Switzerland, Brazil, Italy, Singapore, and the United States.
Reporting 2025: Where are we going, and what’s left to be done?
During the Reporting 2025 project, GRI partnered with business executives, civil society leaders, and various experts in different fields. Initial reports can be found here. The project’s third and final analysis paper is expected to be released in January 2016.
The event created lively discussions about the future of reporting and what factors would be necessary for success. Francesco Starace, chief executive officer and general manager at Enel, emphasized the importance of examining the future of reporting because there is a “global sustainability movement taking place” making sustainability reporting an imperative for business and society. Starace asserted that businesses “cannot bring sustainability to the next level without innovation,” a belief exemplified by Enel’s corporate citizenship commitments. In September 2015, Enel committed to carbon neutrality by 2050—taking steps to support Sustainable Development Goal 13: "Take urgent action to combat climate change and its impacts.”
Many participants echoed Starace’s call for innovation. According to Michael Meehan, GRI’s chief executive, with reporters in more than 90 countries, the amount of data available to make better business decisions is ever growing. He warned, however, that the information available will only drive innovation and value creation to those businesses willing to explore the data with an open mind.
Receptivity to new insights resulting from the masses of data collected through reporting was not the only future trend and call-to-action identified. Jermyn Brooks, chair of the business advisory board at Transparency International, argued there is little trust left in business and business leaders must strive for accountability to build consumer trust. Jvan Gaffuri, senior manager of sustainability services at RobeccoSAM, an international investment firm that specializes in sustainable investing, stressed how much businesses can lose by neglecting transparency. According to a 2015 study, the intangible asset value of the S&P 500 was 84 percent—up from 17 percent in 1975. Gaffuri’s comments reflect how vulnerable businesses can be to not just tangible losses, but also intangible ones, such as goodwill and brand reputation. As found in the Center for Corporate Citizenship and EY’s joint Value of Sustainability study—transparency with stakeholders and risk management represented the top two motivators for reporting.
In my own conversations, I stressed the importance of sustainability reporting as a way of communicating a firm’s commitments and performance. Effective sustainable companies will ultimately communicate and deliver on stated goals. Reports can help businesses focus on those commitments. Even in industries that are not natural-resource intensive, sustainability commitments add value. As intangible assets increase as a proportion of firm value, corporate citizenship commitments can influence business outcomes by putting firm values, assets, and competencies into action and reinforcing positive perceptions of the firm that can influence customer contracts, reputation, retained human capital and the know-how of employees, and brand equity. These issues and mechanisms of value-creation are complex. In order to effectively communicate their good works, companies will have to make their commitments and impacts simple and understandable. Complexity is the enemy of communication. By removing jargon and keeping reports focused on material issues, written in clear and vivid terms, businesses can convey their corporate citizenship strategy and story more effectively.
This is work that is not only important for the success of companies and investors, it is important for us all. Where do you see the future of reporting?
[i] Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review, 86 (1), 59-100.
[ii] Dhaliwal, D.S., Radhakrishnan, S., Tsang, A., & Yang, Y.G. (2012). Nonfinancial disclosure and analyst forecast accuracy: international evidence on corporate social responsibility disclosure. The Accounting Review, 87 (3), 723–759.
[iii] Luo, X., Raithel, S., Wang, H., & Zheng, Q. (2015). Corporate social performance, analyst stock recommendations, and firm future returns. Strategic Management Journal, 36 (1), 123-136.