Dec 09, 2014

Toward Credible Sustainability Reporting

At the turn of last century, John Wanamaker, the prolific US department store merchant, was lamenting his ever growing marketing budget. He concluded that “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” Over 100 years later, corporate sustainability communication suffers the same problem: it is prolific and inconsistently reliable. BHP Billiton’s Cerrejόn opencast coal mine in Colombia was criticized in the media for numerous issues including waterway pollution. However, their reporting did not provide detail of their impacts, instead only stated that “the Company has continued to work with Cerrejόn coal mine, Colombia, on the management of community relations issues at the mine.” This divergence in credibility undermines the usefulness of sustainability reporting to investors, communities, customers and governments. The credibility gap in sustainability reporting can be attributed to three key drivers:

  1. Corporate communication of environmental and social issues was developed in marketing departments. It is worrying that 90% of the significant negative sustainability events were not disclosed in a review of 23 A and A+ rated GRI standard sustainability reports. The integrity of wider business strategy communication is threatened by ignoring these issues.
  2. The mechanisms that reassure us of a corporate report’s reliability are not suited to sustainability. A dichotomy of reporting styles, requirements and metrics hinders auditors from creating an environment suitable for testing. Variation in metrics weakens the strength of sustainability ratings. Studies revealed developed reporting could also indicate a firm is releasing more toxins into the environment and failing to meet environmental regulation standards.
  3. There are numerous guidelines but no universally mandatory standards describing how to describe these topics. Firms listed on the Johannesburg Stock Exchange must use Integrated Reporting standards, whilst those on the NYSE Euronext can choose to use voluntary reporting guidelines if they wish.

The past year has seen considerable momentum by industry to make sustainability reporting relevant to a wider business audience. The Sustainability Accounting Standards Board (SASB) clearly defined which issues are material to different industries by issuing detailed guidance on what metrics are expected from strong sustainability reporting. As part of "Sustainable Economy Week" at Yale, a series of industry speakers addressed these issues. In the next section, I offer five paths businesses could pursue to create sustainability reporting that is not wasted.

Investor Needs - Chad Spitler, Managing Director, Corporate Governance & Responsible Investment with Blackrock

At Blackrock Investing, sustainability acts as a barometer for strong corporate governance. The lack of a cogent sustainability strategy indicates weak long-term business planning. Even though this information is an important part of investment community’s toolkit, they are struggling to correlate specific sustainability metrics with financial performance. This is because it is hard to compare risks across firms when non-financial reporting is so varied. For the firm, non-disclosure opens them to the risk of detrimental media attention and investors assuming they are not in control of their processes.

Transparency is needed. Daniel Esty, Professor of Environmental Law and Policy at Yale, presented a vision for ‘Bridging the Sustainability Gap’ with investor relevant metrics. Drawing on a July article in the Harvard Business Review co-written with David Lubin, Esty described how sustainability driven growth, productivity and risks analysis is needed. The performance of gold mining stock is already being influenced positively by transparency. A recent study by Heinsz et al (2014) in the Strategic Management Journal showed that stakeholder support for operations on the ground increases the valuation of a mine’s assets.

Business Capability- Rodney Irwin, Managing Director, Redefining Value with WBCSD

Reporting Matters’ was issued by the World Business Council for Sustainable Development in November 2013. This industry guidance on how to create effective reporting asks business to orient their communication to stakeholder needs. A year on from its launch in Istanbul, Rodney Irwin explained that non-financial reporting needs to talk more about building resilience rather than just managing risks. This is most evident in the power sector where changing climates require energy generation firms that can withstand increased natural disaster and the potential of stranded fossil fuel assets.

Ambitious Targets - Andrew Winston, Founder of Winston Eco-Strategies and Author of The Big Pivot

In his recent book ‘The Big Pivot’ Andrew Winston advocates for a shift in the way business operates in order to tackle the challenges of the 21st century head on. Sustainability reporting needs to flip its lens and identify how they are addressing global mega-trends. To bring the scale of commitments into sharp focus, the Pivot Goals database of corporate sustainability commitments was created. Browsing through these goals leaves you with a staggering sense of how varied commitments are. Tesco uses an organizational target of becoming a zero carbon business by 2050 whereas Unilever uses a product target of halving the GHG impact of their products across their lifecycle. Tesco only refers to carbon but Unilever talks about all GHGs. Andrew Winston believes these goals are science-based because the size of their commitment takes into account the changes necessary in our economy. However, a set of tightly defined reporting metrics are necessary before the two targets can be compared. It is hoped that incremental performance in combination with aspirational targets will push and pull firms to achieve the transformational change in business that is necessary to deliver a sustainable economy.

International Commitment - James Cameron, Chairman of Climate Change Capital

The US and China announced an historic commitment to reduce carbon emissions. The US by 26% to 28% below 2005 levels by 2025 and China aims to reach peak emissions by 2030. James Cameron believes businesses have an even greater opportunity to achieve significant reductions.  Unlike governments, business has considerably more control over how they operate and if they emit carbon dioxide. The legal obligation for commitments is manifest in procurement contracts where firms could specify that their suppliers make specified changes to reduce emissions. IKEA recently pledged to use renewable energy for all of their power.

Peter Knight, President of Generation Investment Management US, believes that the movement to a low carbon economy will be the most transformative event of the 21st Century. These four perspectives hint at how the right style of sustainability reporting can help make this happen. 

 

Photo credit: flickr/andrea balzano