Sustainability reporting has now become a mandatory practice across companies in many countries. How does it work and why is it an effective lever for positive action in terms of people, planet, and profit?  Farrah Hartanto, Enterprise Credit Analyst at Bank Danamon Indonesia and Runner Up in the 2024 CoBS CSR Article Competition at Warwick Business School, explores.  

Sustainability Reporting: An Orchestra of People, Planet, and Profit by Farrah Hartanto.

The EU has mandated all large and public listed companies to publish non-financial reports using the European Sustainability Reporting Standards (ESRS), starting from their 2024 financial year. Meanwhile in 2022, there were 2,231 companies globally that have used the Standards developed by Sustainability Accounting Standards Board (SASB), an independent organization that is maintained under International Sustainability Standards Board (ISSB).

Why sustainability reporting matters

The Global Risk Perception Survey conducted by the World Economic Forum in 2023 concludes that the global outlook will be unsettled and turbulent, attributing it to issues of extreme weather, misinformation & disinformation, political polarization as few of the highlights. In response to this growing concern, citizens have put their focus on businesses in addition to government as agents of change, as they believe in the capability of resources that businesses possess to address important issues and prevent it from further deterioration.

This is the case of a reciprocal relationship, as surveyed by Capgemini (Statista, 2024) and confirming that 70% of its respondents are willing to pay premium for sustainable products. Further, a majority of consumers in the EU, UK, and US are becoming more frequent in checking a brand’s sustainability practices (Statista, 2022). Businesses should not only focus on their effort to achieve sustainability, but also educate their consumers about their practices to allow them to capture greater market share and profit.            

The benefit of promoting sustainability should not be contested. The practice, together with reporting, would force businesses to become prudent by rethinking their business models and operations. The mappings of input, process, and output will become not just detailed, but also recorded, and each has to be considered for further implications towards areas catered for by a sustainable development map – namely environmental, social & humanitarian, and governance (ESG).

Businesses should not be terrified in front of the seemingly complex practice – rather, they should embrace this as an opportunity to rethink their strategy take the lead over their competitors. Morgan Stanley (2023) has reported that its investors are now focusing on companies who can generate both competitive financial returns and sustainability, indicated by 14.8% year-over-year growth of its asset under management going towards sustainable funds. This proves the importance of sustainability reporting in building businesses’ credibility, not just for capital fundraising but also for continuity of the business itself.

How do standards help stakeholders?

Sustainability reporting was once a voluntary disclosure of non-financial reporting. The decision to make such reporting become mandatory is based on the principle that a business has responsibility to create value towards its stakeholders, environment, and society in which it operates in (Dilling, 2010). As such, the report must serve the purpose of providing transparency and accountability on the organization’s sustainability mission. Limiting global temperature increase to below 1.5 degree Celsius by reducing CO₂ emission is not an option, rather an absolute must. Standards in sustainability reporting would ensure that businesses are directing their efforts towards the common goal of improving ESG, leaving minimum space for misinterpretation and eventually promoting harmonization.

Sustainability reporting standards inherently serve various business stakeholders, namely politics and policy influencers, society, and business (EY, 2023). These stakeholders impact each other in terms of shaping the outcome of a sustainability mission. For instance, society influencers, through discourse such as campaigns or petitions, would express their interests of clearer sustainability regulations to policymakers, which later would impact businesses and their stakeholders. Therefore, standards are created to appeal towards the interests of these three groups. Both ESRS and SASB are known to have involved companies, public society, academics, investors, trade unions, and standard-setters in their development; thus ensuring its standard is holistic and all-embracing.

ESRS & SASB: The difference

ESRS was developed in 2021 and ensures that its Standards are in alignment with the International Sustainability Standards Board (ISSB), which maintains SASB and the Global Reporting Initiative (GRI). ESRS mandates all large and public listed companies in the EU to report material that are considered as important from the impact of its operations towards people and environment, as well as how it creates financial risks and opportunities for the company.  This concept is known as double materiality, which is distinct to ESRS. Moreover, companies whose reports are based on ESRS would also require limited assurance by company’s auditor or independent assurance services provider.

SASB was published in 2018 and is known for its focus on the investor as its audiences, because the US securities law does not mandate multi-stakeholder disclosures. It lays emphasis on the impact of how a company’s sustainability mission and activities create financial risk and opportunities for the company, and the company can decide which information is material to investors. Companies that want to address a broader range of stakeholders would need to incorporate other standards in its reporting, such as those from the GRI or ESRS. Therefore, it can be concluded that both ESRS and SASB have a complementary relationship.

Is there a better standard?

We remember the classic philosophy where businesses exist with the purpose of creating value for its stakeholders. Reports should fulfil their comprehensive purpose of providing relevant, material information on environmental, social, and economic issues, evaluating company and stakeholder concerns, documenting stakeholder contributions, and prioritizing these issues to inform sustainability strategies and reporting (Jones et. al, 2015). To put it simply, the better report is one that can provide a more robust view and assessment of a company’s sustainability agenda towards its long-term business continuity, by also considering the continuity of human resources and the ecosystem in which it operates.

Using this criterion, ESRS can be considered superior for several reasons. From a pragmatic perspective, the mandatory nature of reporting forces businesses to disclose their efforts on sustainability at the cost of facing legal consequences. Companies in the EU are subject to a fine of 5% of their global net turnover for non-compliance with the legally mandated standard for conducting supply chain due diligence (Foley, 2024). Consequently, businesses will have no choice but to comply. Despite the prevailing arguments which highlight the cost of preparing such a report due to the extensive amount of data collection and required assurance, forcing these businesses to mandatory reporting is justified on the grounds of maturing their efforts of promoting sustainability, as well as to ensure the longevity of the business itself.

The released ESRS Standards have greater breadth than those of the SASB. In addition to two cross-cutting standards, ESRS provides disclosure standards for ten topics within environment, social, and governance topics – a total of twelve standards which guide companies through universal KPIs for certain topics, such as climate and biodiversity. Comparatively, ISSB has released two industry-specific standards effective as of 1^st January 2024 for SASB Standards adopters, focusing mainly on environmental topics with targets that are predetermined by each company.  In both cases, companies are not obliged to report information that is not material. However, ESRS’s voluntary disclosure requires companies to provide an explanation of why a particular topic is deemed immaterial.

Consequently, reports that are based on ESRS Standards will have greater transparency and accountability from the broader disclosure. Greater information would also allow engagements from multiple stakeholders in shaping the company’s continuous effort to sustainability. Lastly, given the rise of greenwashing and anti-ESG movements that arose from public distrust of companies, ESRS plays a pivotal role in engaging greater society to restore that trust as it requires companies to seek limited assurance – sending a strong signal to stakeholders of their commitment to sustainability.

What does success look like?

Companies that adopt ESRS do not have an upper hand over those that adopt SASB, but companies that transcend mere compliance to promote a sustainable planet and human rights practices stand out significantly. It is essential for the stakeholders in sustainability reporting to view these reports not merely as mandatory disclosures but as indicators of value alignment between themselves and the companies in question. This means using the company’s sustainability report as a knowledge base for their future actions – be it starting a responsible consumption movement or investing more money in companies who share the same long-term vision of sustainability. In essence, the report should become the trigger for future discourse on environmental protection and conservation, social rights endorsement, and good governance practice.

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Useful links:

• Link up with Farrah Hartanto on LinkedIn
• Read a related article: Are Global Reporting Initiative Standards Relevant for the Global South?
• Read this and other student articles in Global Voice magazine #30
• Visit the student CSR competition winner and finalist page
• Discover Warwick Business School and apply for one the undergrad, graduate or executive programs.

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