Sustainability Reporting Will Create Long-Term Business and Investor Value
Johanna Tähtinen | May 1, 2018
The average US public company today has a life span of 30 years. Annually, one in ten fails and the average five-year mortality risk is 32%. The average age of an S&P 500 company is under 20 years, down from 60 years in the 1950s.
What’s going on here?
There are many reasons for shorter company life-spans, but clearly long-term strategic thinking is in need of revitalization, especially in today’s political and environmental contexts.
Companies across the world are facing regulatory changes, externality taxes, growing demand for transparency, and high stakeholder expectations on corporate responsibility.
Unfortunately, the way our current financial and accounting systems value corporate success does not always showcase the fuller picture of a company’s ability to create value over time – meaning environmental, social and governance (ESG) gains go unnoticed and are often under-pursued.
When companies only consider monetary information in finance and decision-making, they create significant blind spots on risks and opportunities – both for the investor and for society at large.
Business can no longer afford to ignore these potential risks.
The 2018 World Economic Forum Global Risks Report shows that nearly half of all major business risks are environmental. This represents a significant change from 2010 when almost all top risks where economic or social. A new report by the Universal Ecological Fund estimates that climate-related costs have totaled at least $240 billion a year over the past ten years in the United States.
Sustainability challenges are an everyday business reality.
By prioritizing financial performance as the only important element of value creation, we ignore the larger impacts business may have (Porter, M. and Kramer, M. 2011, Creating Shared Value).
According to Financial Analysts Journal, “earnings no longer reliably reflect changes in corporate value and are thus an inadequate driver of investment analysis.” In other words, much of a company’s value is not actually captured in its balance sheet. This fact can distort investment opportunities and risks.
We cannot manage what we do not explore nor seek to understand. It’s time to start understanding the full value and full impact of corporate efforts.
That’s why corporate reporting is becoming a vital tool in positively impacting the world.
There are many good developments in corporate sustainability, including stronger reporting on integrated ESG and financial issues. Better reporting on these issues translates into more nuanced thinking about the relationship between nonfinancial and financial information in a company’s performance profile.
According to a recent study in the U.S., 51% of American companies disclose risks related to climate change within their 10-K filings—up from 42% in 2014. Further, 32% conduct materiality assessments—up from 7% in 2014. This is palpable progress.
However, the overwhelming number of methodologies that companies use to measure and report on ESG and sustainability can be paralyzing for companies and market participants alike.
There are currently over 1,000 requirements for reporting sustainability information alone, according to the Reporting Exchange, a global resource for corporate sustainability reporting developed by World Business Council for Sustainable Development (WBCSD) in partnership with the Climate Disclosure Standards Board and Ecodesk. This represents a ten-fold increase since the Rio Earth Summit in 1992.
While this progress is welcome, it has led to a confusing and fragmented landscape for businesses, investors and regulators. Because companies aren’t producing valuable and comparable sustainability reports, investors have trouble using ESG information to make capital allocation decisions. As a further result, sustainable companies aren’t being rewarded as they should be.
To bridge the gap, business must work to streamline and standardize sustainability reporting to send the right signals on corporate performance, encourage sustainable behavior, and to reward the companies who are strongest on economic, social and environmental fronts.
We need to reduce complexity.
Unlike financial reporting, where standards have developed over hundreds of years and are structured and rules-based, nonfinancial reporting has been uncoordinated and lacking in alignment between reporting guidelines and requirements.
As such, companies have been able to report on nonfinancial performance by any number of standards, frameworks or methodologies. This has made it tough for businesses to keep up – and has made things even more difficult for the most sustainable companies to demonstrate how they’re creating value for the financial system, environment, and society as a whole.
Additionally, there are also at least 182 different voluntary reporting frameworks that ask companies to disclose performance using different approaches and methodologies. As a result, companies may be disclosing for disclosure’s sake rather than using information that’s particularly meaningful, relevant or useful.
The world of corporate reporting has become so complex that companies haven’t been able to signal their true long-term competitiveness to the financial system.
Companies don’t necessarily need to feel compelled to follow the crowd in choosing where, how and what they disclose, they should focus their reporting on the information that is relevant and material to them.
The good news is that there are new tools available to help.
The Reporting Exchange is a unique resource. For the first time ever, over 1,750 reporting requirements and resources are now organized and available within one standard online framework.
WBCSD and COSO have also released a supplemental draft guidance on Enterprise Risk Management, designed to help organizations worldwide respond to the increasing prevalence and severity of ESG-related risks, ranging from extreme weather events to product safety recalls.
With these tools, business leaders can zero in on key reporting requirements and use available resources to help embed sustainability into corporate and risk management approaches. This will go a long way towards improving sustainability reporting disclosure and getting important sustainability signals to market participants.
Building a more sustainable and resilient business model.
Business and accounting play a vital role in ensuring that the important material information gets measured, valued and reported to build a company’s resilience. As if this were not a herculean task in itself, the exponential growth of ESG reporting provisions can make it even more confusing.
This is why the Reporting Exchange provides much-needed clarity to corporate report writers on what, where and how to report on sustainability issues and supports clearer, more concise and better-informed reporting of sustainability information.
Better quality reporting practices can help safeguard against risk, identify opportunities, and ultimately help build a more sustainable business model.