Corporations around the globe are faced with increased stakeholder demands for transparency with respect to corporate performance in managing the social, economic, and environmental impacts of their activities. More and more corporations have responded by providing formal "sustainability reports" available to their stakeholders, including the broader public, that detail their sustainability-related initiatives and performance.
In doing so, corporations have discovered that sustainability reporting can provide a variety of both internal and external benefits, such as:
- Operational Improvements and Cost Savings – Continuous monitoring and measurement of sustainability performance can identify opportunities to use more innovative and resource-efficient operational processes, and reap associated cost savings.
- Brand Development – Sustainability reporting can build brand recognition and reputation, and differentiate brands, products, or services from competitors.
- Regulatory Compliance – Sustainability reporting can both assist with ongoing regulatory compliance and help the company prepare for new regulations (e.g., greenhouse gas emission standards).
- Human Capital – Reporting builds communication with employees and potential future hires. When making career decisions, individuals increasingly evaluate organizations to find a good fit between their individual values and the organization's actions as a responsible employer.
- Financing – Reporting provides institutional investors with the specific information necessary to make informed investment decisions. This is critical, as investors increasingly consider sustainability issues when assessing the long-term value of an organization.
There are no definite regulatory requirements with respect to sustainability reporting and, for the time being, organizations are creating custom reports in line with internal objectives. This, however, can create many challenges for report readers, as there is a lack of consistency in contents, scope, and methodology. A popular framework for reporting developed to counter this effect is the voluntary guidelines developed by the Global Reporting Initiative (GRI).
The GRI guidelines do not contain a specific reporting format, but rather provide specific reporting principles and guidance that define the content of reports, and help to ensure the quality of reported information, including standard disclosures and sector supplements. While the guidelines are intended for use in all organizations, they should be applied within the context and adapted to the needs of the reporting organization.
To achieve maximum effect, the information included in a sustainability report should be perceived by stakeholders to be accurate and complete. "Greenwash"—where stakeholders perceive the claims of the sustainability report to be misleading or overstated—is to be avoided. Thus, sustainability reporting should provide a balanced and objective representation of the company's sustainability performance, including both positive and negative performance results.
A growing number of organizations are recognizing that they can increase the confidence of stakeholders in the accuracy and completeness of the information contained in their sustainability reports through independent assurance with respect to the credibility, reliability, and relevance of that information. Such assurance can:
- Provide greater confidence to stakeholders about the quality of the organization's sustainability reporting
- Act as a tool for mitigating against the risk of the release of potentially misleading or inaccurate information
- Add independent credibility to the performance data and other information disclosed in the report.
Current trends indicate that organizations use formal assurance, third party commentary (often called expert or stakeholder commentary), or some combination of the two to build trust with stakeholders. The most common drivers for assurance include improving the quality of information, building credibility, and improving reporting processes.
While third party commentary may take many forms, the most commonly used formal standards for assurance engagements are the International Standard on Assurance Engagements (ISAE 3000) and the corporate responsibility standard AA1000AS issued by AccountAbility.
SRI is based on combining investors' financial objectives with a broader spectrum of environmental, social, governance, and ethical considerations. The concept stems from the growing belief among investors that environmental, social, governance, and ethical issues have a long-term impact on the performance and value of an organization by reducing risk.
Numerous corporate and public pension funds, institutional investors, and insurance companies have created responsible investment policies, which include strict criteria for social, environmental, governance, and ethical screening.
Some of the particular forces driving SRI are:
- A push towards transparency for climate change-related risk management
- Alignment of societal values with investment decisions
- Increasing awareness of Environment, Social, Governance (ESG) performance as a key contributor to both long-term value and viability
- Pressure from the media, NGOs, and multilateral organizations and initiatives such as the Global Compact, the
- Principles for Responsible Investment Initiative, and the Carbon Disclosure Project.
These forces, coupled with the prestige associated with inclusion in sustainable indices (e.g., the Dow Jones Sustainability Index, FTSE4Good), are encouraging as a driver for organizations interested in integrating sustainability within core operations and management.
An organization's capacity to inform stakeholders of relevant sustainability information depends highly upon the functionality of the established framework for performance measurement. A tailored framework can assist an organization to evaluate the overall effectiveness of sustainability initiatives by identifying cause and effect relationships based on actions and outcomes.
A performance measurement framework is typically:
- Created to support the organizational mission, vision, and values, and requires the participation and commitment of the entire organization
- Designed using objectives and indicators that are representative of the organizations key challenges, ambitions, and core strengths
- Designed to improve reporting and facilitate monitoring for simplified identification of areas for improvement and status of progress
- Support an organization's efforts to demonstrate accountability to their stakeholders.
At present, globally accepted accounting standards for sustainability are not clearly defined. The challenge presented by accounting for sustainability has caused the development of many working groups on the issue, but there is no definitive standard as yet.
Pressure to find a solution grows as stakeholder demands, government pressure, and regulations increase. A solution to this issue will assist in providing comparable information to decision makers (management accounting) and should contribute to the reporting efforts of the organization (sustainability reporting). It will also impact the organization's approach to financial reporting with the inclusion of social, environmental, and reputation/ethical issues.
Some of the activities commonly associated with accounting for sustainability include:
- Inclusion of non-financial information in financial reports
- Sustainability asset and liability valuation (e.g., ecosystem pricing)
- Accounting for carbon emissions data
- Tracking of other key data for performance measurement.