The Growing Power of Sustainability Reporting

In the world of modern corporate communication, sustainability reporting (SR) has become as trendy as the latest catwalk looks, but unlike fashion trends, sustainability reports seem to be a lasting fixture. As the spotlight on climate change and environmental impact grows ever brighter, businesses globally are feeling the heat to upgrade their operations to more sustainable models. Sustainability reporting, not unlike a designer sketchbook, serves as a critical tool for companies to outline, share and hold themselves accountable for their progress towards creating a more sustainable future.

A brief history of sustainability reporting

The burgeoning concern about climate change and the environment has brought us to a historical juncture where companies are compelled to innovate and adopt sustainable practices. Much like the fashion industry itself, sustainability reporting has seen a significant transformation over time. Back in the 1970s, reporting was all about the numbers – financial data for shareholders.^[1] Eventually, sustainability reports broke away from the annual corporate reports, giving companies a separate runway to showcase their contributions towards a greener planet. This is why, starting in 2014, it became mandatory within the European Union for large companies and those publicly traded to prepare a “Non-Financial Disclosure” – also referred to as a Sustainability Report.

As innovation continues to advance, the implementation of new regulations pertaining to sustainability reporting also progresses. In 2023, the European Union revised and reinforced the regulations overseeing the provision of social and environmental data by businesses. This initiative benefits both investors and other stakeholders, granting them more accessible information, while also aiding organizations that can anticipate a reduction in their reporting expenses in the medium to long term.^[2]

Today, sustainability reporting is akin to a fashion house’s portfolio – a clear and accountable presentation of the company’s performance towards a sustainable future.^[3] Companies use these reports like a fashion show, strutting their commitment to environmental, social, and governance (ESG) matters, reflecting a shift towards a greener and more responsible approach to business. Transitioning further into the intricacies of corporate sustainability, three primary aspects underscore the importance of sustainability reporting: capitalization; legitimacy; and stakeholder engagement.

From Balance Sheets to Green Beats

Sustainability Reporting (SR) has surfaced as a pivotal instrument in cultivating, understanding and recognizing the value of corporations. Let’s take a look at how.

Power from the capital market

EY research shows that 78% of investors demand corporations to prioritize sustainability in their operations, even at the cost of reduced short-term profits.^[4] There is a disconnect, however, between investors’ demands and corporations’ willingness to act. The same research found only 55% of corporate finance leaders echoed investors’ sentiments, indicating a disconnect between these two key stakeholders.

Sustainability disclosures are becoming a crucial part of investors’ decision-making arsenal. The shift in investor sentiment towards these disclosures is palpable. Today, 99% of investors incorporate companies’ Environment, Social, and Governance (ESG) disclosures into their investment decisions, with an impressive 74% using a rigorous and structured approach. This marks a notable increase from 32% in 2018 who were using such an approach.^[5] Investors can consult various ESG ratings, like MSCI and Sustainalytics, during the evaluation process. These were incorporated into financial ratings as sustainability gained greater significance. The information accessible to stakeholders relies on a scientific assessment of companies. This underscores the importance of dedicating effort to crafting a well-organized and trustworthy report.

Legitimacy as a license to operate

Sustainability reporting is crucial for a brand’s credibility and legitimacy. Companies that openly report their efforts are perceived as in tune with societal norms and expectations. Stakeholders evaluate a corporation’s behavior through sustainability efforts, determining whether its form, processes, and outcomes are socially acceptable or unacceptable, potentially leading to sanctions. They play a crucial role in determining whether a corporation is legitimate to operate in a social context.^[6]

Engagement with stakeholders

Just as fashion enthusiasts eagerly anticipate new collections, a well-presented sustainability report draws stakeholder attention. Detailed accounts of sustainability initiatives can effectively engage stakeholders, building trust and loyalty, much like a successful fashion campaign. Research carried out in Spain certified that creating and delivering a stand-alone sustainability report instead of including the sustainability results into the mandatory annual report leads to higher stakeholder engagement.^[7]

Time to release the green ink

Sustainability reporting is crucial for revealing an organization’s economic, environmental, and social performance. The Global Reporting Initiative (GRI) has become the leading framework, offering guidelines that enhance report quality. Established in 1997, GRI gained recognition for its standards, now providing a consistent framework for reporting sustainability impacts. The GRI Standards emphasize essential reporting principles to ensure high-quality sustainability reporting. These principles guide organizations in presenting accurate, balanced, clear, comparable, complete, and timely information.^[8] The European Union has also formulated its own standards. Named the European Sustainability Reporting Standards (ESRS), these are set to become the primary regulations to adhere to in Europe starting in 2025. You have a range of standards to choose from for your report, including the Sustainability Accounting Standards Board Standard (SASB Standard) and the UN Global Compact (UNGC), but it’s important to select the most suitable one based on your business’s sector and country of operation. For the moment, let’s concentrate on the broader GRI guidelines which are more universally known and followed.

1. Accuracy: Organizations must report correct and detailed information to assess their impacts accurately. This includes consistency, transparency in data measurement, and clear explanations of estimation methods.

2. Balance: Information should be presented in an unbiased way, reflecting both negative and positive impacts. A clear distinction between facts and interpretations is crucial.

3. Clarity: Reports should be accessible and understandable, catering to diverse information users. Avoiding jargon and using graphics enhance clarity.

4. Comparability: Information should be consistently compiled, enabling year-on-year and peer comparisons. It involves standardized metrics and contextual explanations.

5. Completeness: Organizations must provide sufficient information for assessing their impacts during the reporting period, avoiding omissions.

6. Sustainability Context: Information should be reported within the wider context of sustainable development, considering societal expectations and goals like the UN Sustainable Development Goals (SDGs).

7. Timeliness: Reporting should be regular and timely, ensuring information users can integrate the report into decision-making.

8. Verifiability: Reported information should be verifiable through internal controls, documentation, and supporting evidence. Uncertainties should be clearly explained.

GRI framework enhances sustainability report quality, but challenges persist, such as lack of balance and timeliness. Organizations should apply principles for transparency, trust, and stakeholder engagement.

Where substance meets style

In today’s corporate landscape, the pressure on companies to make a positive impact on society is greater than ever before. Initiatives and measurable Key Performance Indicators (KPIs) have become the norm, and sustainability reporting emerges as the perfect avenue to showcase all the achievements and ongoing efforts toward meeting global ESG standards.

It takes more than just keeping the reporting principles in mind, however, to create an exceptional sustainability report that resonates with stakeholders. While content remains king, the form is equally crucial. How the information is communicated holds the key to capturing the attention and interest of readers. After all, weaving together numbers and narratives isn’t just reporting – it’s sowing the seeds of a greener reality.

In our upcoming webinar on October 05, we will delve into the art of crafting an engaging and unconventional sustainability report that not only informs but captivates its audience. We will explore innovative ways to present data, tell stories, and leave a lasting impression on stakeholders, fostering a deeper connection with your company’s sustainability journey. Join us as we unlock the power of effective communication in sustainability reporting.

Other Resources

Watch our Webinar “Sustainability Reporting Mastery: A Game Changer for your Business“

Listen to the Podcast Episodes:

• Turning Sustainability Reports into Marketing Success with Karun
• Navigating the Sustainability Maze with Aquafil

References

[1] “The pre-history of sustainability reporting.” Available at: https://www.emerald.com/insight/content/doi/10.1108/AAAJ-03-2017-2872/full/html#sec001

[2] “Corporate sustainability reporting.” Available at: Corporate sustainability reporting (europa.eu)

[3] “Assessing and Improving the Quality of Sustainability Reports.” Available at: https://link.springer.com/article/10.1007/s10551-017-3516-4

[4] “How can better sustainability reporting mobilize companies and capital?” Available at: https://www.ey.com/en_gl/climate-change-sustainability-services/how-can-better-sustainability-reporting-mobilize-companies-and-capital

[5] “How can better sustainability reporting mobilize companies and capital?” Available at: https://www.ey.com/en_gl/climate-change-sustainability-services/how-can-better-sustainability-reporting-mobilize-companies-and-capital

[6] “Toward a Theory of Social Judgment of Organizations.” Available at: https://www.jstor.org/stable/29765019

[7] “Sustainability Reporting and Stakeholder Engagement”. Available at: https://onlinelibrary.wiley.com/doi/abs/10.1002/bse.2251

[8] “Consolidated set of GRI standards.” Available at: https://www.globalreporting.org/how-to-use-the-gri-standards/gri-standards-english-language/

Author: Giuseppe Scandariato