"Companies with their eye on their 'triple-bottom-line' outperform their less fastidious peers on the stock market" -- The Economist
Long back (early 1990-2000) when companies started publishing their corporate social responsibility reports, for readers there was no way to compare and benchmark them. The Global Reporting Initiative (2003) put out the first guidance for sustainability reporting looking at environmental, social and governance aspects from which readers could assess the environmental, social and corporate governance (ESG) performance of companies, but in retrospect. Today, GRI has matured and so have the reporting companies.
To understand what is beyond sustainability reporting, we need to understand that it is a ‘process’ and the report is an ‘outcome’. The reporting process consists of five phases, which if done well, hold the promise of helping companies improve their performance.
Lack of coherence
The first wave of sustainability reporting - companies several years into sustainability reporting and various other forms of corporate reporting such as annual reports, investor information, brochures and websites – and there seems to be a lack of coherence in what companies wish to disclose. What needs to be understood is that the world isn’t necessarily a better place despite the copious amounts of corporate efforts and good work!
So, how do we assess the progress of companies if most conscious companies seem to be doing so much?
What is the truth and what is lacking? The current reporting mechanisms miss out on assessing how much externalities are impacting the business (for example, air pollution, the impact of the company on the society, or social impact with respect to employee wages and impact of lack of inclusivity on the revenue of the company). Most reporting is retrospective and is not forward looking; additionally, financial and non-financial information are separated. Despite GRI adoption growing at 39 percent CAGR from 2005 to 2010 and 17 percent CAGR from 2010 to 2015, the number of sustainability and CSR reports following GRI standards declined by 1.5 percent for the first time from 2015 to 2016 (Verdantix report 2017). There appears to be a fatigue of sorts in the corporate reporting arena.
Integrated reporting is about how the business model generates value for its stakeholders. What are the key short-medium and long-term focus/goals of the organisation in context of value that the company generates for all its stakeholders. One may argue that integrated reporting is therefore the solution going forward. However, what needs to be seen is how comfortable companies are with respect to disclosure interconnectedness of financial information. It is heartening to note that companies are moving forward from merely reporting historical performance to increasingly looking at disclosing their forward-looking strategies while announcing aggressive commitments. While integrated reporting appears to fulfil the gaps, most companies struggle to work across functions to understand how ESG risks has a financial impact on the company. Therein lies the key to the future of reporting.
Primarily here are the trends for 2020 which will enable organisations to move beyond the ambit of sustainability reporting:
Newest trends An increasing number of companies have deployed IT solutions for ESG performance. These enable companies to slice and dice the information and use it to drive internal decision making and action. Rise of web-based reporting with LIVE data at monthly or quarterly intervals – one year is a long time to wait to understand a company’s performance. In this age of rapid information delivery and consumption, it’s only a matter of time to make the data LIVE – this will be enabled by smart metering and data integration. Deeper understanding of ESG risks – be it financial implications of climate change as demanded by TCFD (Task Force on Climate-related Financial Disclosures) or investor-driven social risks on labour and anti-slavery, companies are facing a wide variety of pressures to understand how ESG risks are hurting them. Going forward, we will see more companies report their ESG risks in-depth with understanding on how these could impact the company’s financial performance. Integrated approach to various external disclosures – Various disclosure/ranking mechanisms as DJSI/CDP, or reporting frameworks - SDG, GRI, IIRC make it difficult for companies to define a specific approach to ESG performance. The future will see harmonisation as well as interlinkages for ease of ESG reporting.
The future of reporting is ‘I-I’ (integrated and information technology driven). Intrusive technology enables great transparency and drives action. Companies that do not adapt to this new truth will lose trust, so tighten your seatbelts for sustainability reporting 2.0!
Sunita Purushottam is Head of Sustainability at Mahindra Lifespaces.