As companies face increasing pressure to address climate change, sustainability reporting is becoming increasingly important in a company’s process to evaluate its climate and environmental impact. Stakeholders, both internal and external, continue to navigate this space, which include exploring the potential regulatory activity surrounding sustainability reporting. As the landscape continues to change, what does the future of sustainability reporting look like?
Unpacking Sustainability Reporting: What Is It?
Sustainability reporting is a form of non-financial reporting, capturing aspects of a company beyond its financial activity. The report often includes information relevant to a company’s economic, environmental and social impact. It is synonymous with terms like Corporate Social Responsibility (CSR) reporting, Environmental, Social and Governance (ESG) reporting and impact reporting.
Unlike many other forms of reporting that are simply a presentation of collected data- like annual reports- sustainability reporting allows a company to evaluate its commitment to sustainable development and communicate its reflection and findings with its internal and external stakeholders. Therefore, this type of reporting aims to hold companies accountable for their role in climate change, engaging them to set goals and objectives to take climate action and become more sustainable. Progress is tracked through a series of metrics and this information is communicated with shareholders, allowing both the internal and external shareholders to evaluate the company’s progress in its pursuit of environmental change.
Many companies opt to follow sustainability reporting frameworks in their presentation of climate and environmental data; these frameworks organise and shape the data to create a meaningful presentation of information to both internal and external stakeholders. These standardised guidelines are provided by several benchmarking groups—the Carbon Disclosure Project (CDP), the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), to name a few. Beyond data presentation, sustainability reports typically include the detailing of a company’s efforts and commitment to its mission and values, along with goals and strategies (and metrics to track progress) to make the organisation become more efficient and sustainable. Other information may also include the company’s commitment to the UN SDGs.
The Current State of Sustainability Reporting
In the present, sustainability reporting remains a form of voluntary disclosure in many countries. Companies have taken it upon themselves to publish such information. This is because companies have recognised the importance of transparency- with their shareholders and the public. Sustainability reporting is a platform that allows for systematic communication within the company and beyond.
Over the years, sustainability reporting has become more widespread globally, both in terms of geography and the number of sectors of industry. A recent report, “The KPMG Survey of Sustainability Reporting 2020,” found that 80% of companies (mid- and large-cap firms) worldwide report on their sustainability progress. Trends reveal positive developments in sustainability reporting and assurance, and this is likely to accelerate in the future as more business stakeholders and the global community are becoming involved.
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How are Regulatory Bodies Shaping the Future of This Once-Voluntary Form of Reporting?
With the eyes of the global community focused on companies to take action in tackling climate change, regulatory bodies are recognising the crucial role they play in making this happen. At the forefront of this movement is the EU where the European Commission has recently introduced the “Sustainable Finance Disclosure Regulation” (or “SFDR”), requiring financial services institutions to disclose information related to climate and environmental considerations to the general public. The requirements to disclose such information provides transparency from companies with regards to their consideration of climate and environmental risks and their implementation of sustainability efforts in their processes. As such, “the SFDR should not simply be considered a series of green measures, but also a wider consideration of sustainability in governance and risk management, as noted by Leonie Kelly, Head of ESG and Impact Services at Ogier.
Other regulatory bodies are taking steps in the same direction. Earlier this year, the United States Securities and Exchange Commission (SEC) announced that there will be a greater focus on climate-related risks. Specifically, the SEC is looking to formally integrate climate and ESG considerations into its current regulatory framework. This will potentially render the voluntary disclosure of ESG information an integral part of business and corporate disclosures. In response to the SEC’s request for public input in the shaping of mandatory climate and environmental disclosure by companies, there is general support for such regulatory behaviour. For example, tech giant Apple revealed its support for regulatory action on the disclosure of climate and environmental risks and opportunities. Other companies that have followed suit include Salesforce and HP, and other organisations like Ceres have also shown support.
The G7, recently, also endorsed the launch of the Taskforce on Nature-Related Financial Disclosures (TCFD), a global market-led initiative pioneered by financial institutions and corporates, government officials and regulators, and think tanks and consortia. The main goal is to enable financial institutions and corporations to evaluate their environmental risks and opportunities to shift business engagement towards positive environmental outcomes.
The power and significance of sustainability reporting to highlight ESG risks and opportunities is ever-growing. Its ability to signal businesses and corporations to adopt more progressive climate and environmental action will drive positive change. As such, official oversight of sustainability reporting by official regulatory agencies is likely to come in the near future if not already.
Featured image by: IEEP