Sustainability reporting has come a long way, but so far, most have been voluntary. Despite the growing number of companies providing sustainability reports, we continue to experience environmental degradation. Can mandating sustainability reporting change this? Dianthus Saputra Estey, Finalist in the 2024 CoBS Student CSR Article Competition at Monash Business School, explores

The history of sustainability reporting

“One spring, a strange blight crept over the area, and everything began to change. Some evil spell had settled on the community; mysterious maladies swept the flocks of chicken, and the cattle and sheep sickened and die.”

Rachel Carson’s article, Silent Spring, was published in the New Yorker in 1962. Her vivid description of the stark changes at a once idyllic American town, was the first awakening call to mind the impacts of our actions on our environment and livelihoods.

In a series of three articles, Carson described the negative effects of chemical agriculture on living things. In describing the historical development of sustainability reporting, Gokten et al. (2020) described Carson’s work as the beginning of a systemic approach to sustainability: “Rachel Carson’s work created awareness, and for the first time, it led to a social-environmental movement that limits companies’ economic activities due to their negative environmental impacts”.

However, it was not until the late 1980s that companies in the chemical sector started providing environmental reporting. It took another decade before the United Nations Framework Convention on Climate Change (UNFCCC), which aims to prevent dangerous human interference on the climate system, was adopted in 1992 and another two years for it to come into force. Out of 198 countries, only 165 signed the UNFCCC in 1994.

The long adoption of the sustainability concept was mainly due to the need to change the whole business paradigm. As one can imagine, the prospect of having to change the way business is done is met with a less than enthusiastic attitude. In fact, according to Gray and Milne (2002), pre-1990s, “companies were passionately opposed to pretty much any discussion of environmental and social issues in a business or reporting context”.

In 1995, John Elkington, introduced “The Triple Bottom Line” as an alternative framework to balance a company’s social, environmental and economic impact. The availability of this tool and the growing demand from its stakeholders, helped push more companies to start changing their business paradigm and reported this shift in their environmental reports.

In 1997, the Global Reporting Initiative was founded as the first global framework to measure, manage and communicate their economic, environmental and social impacts. Even when sustainability reporting is not compulsory, the number of companies providing their corporate responsibility reports continue to grow. Since 2011, around 95% of the world’s largest 250 companies are reporting their annual corporate responsibility reports and in 2017, 75% of the next largest 4,900 companies are also publishing their reports (UNEP, 2019).

More Sustainability Reporting = More environmental sustainability?

If the trajectory of sustainability reporting is going north, which means more companies are doing their share for the sustainability of the environment, shouldn’t our environmental indicators also look better?

Unfortunately, data from the two sets of the State of the Global Climate Report from 2022 and 2023 shows an opposite trend. While the increase in CO2 emission from 2020-2021 was the same as between 2019-2020, it was still higher than the annual growth rate over the last decade. In 2023, the combined 3 main greenhouse gases – carbon dioxide, methane and nitrous oxide – continued to rise in 2023 (World Meteorological Organization 2022; 2023).

Kenneth P. Pucker was the Chief Operating Officer of Timberland, a U.S. based footwear and apparel company, for seven years. During his time at Timberland, he worked to implement the three pillars of Timberland’s philosophy: respect for human rights, environmental stewardship and community service. This commitment was translated into the use of renewable energy to power its factories, printing ‘Green Index’ scores on its shoeboxes, package labelling that informed consumers about the products’ environmental and social impact, and of course, a corporate social responsibility report from as early as 2001. “We believed that measurement and transparency would increase competition within the industry to find sustainable solutions while engendering healthy pressure from investors and consumers”, Pucker said (2021).

However, Pucker’s first-hand experience with the measurement and reporting movement made him realise that while it forces the company to focus more on environmental social governance, “Reporting is not a proxy for progress. Measurement is often nonstandard, incomplete, imprecise, and misleading”.

According to Pucker, one of the main problems of sustainability reporting is the lack of mandates and auditing, “Most companies have complete discretion over what standard-setting body to follow and what information to include in their sustainability reports. In addition, although 90% of the world’s largest companies now produce CSR (Corporate Social Responsibility) reports, only a minority of them are validated by third parties”.

The discussion of whether sustainability reporting shall be made mandatory has already been discussed by the Parliament of Australia as early as in 2006. While the discussion recognised the projected positive impacts of mandatory sustainable disclosures, the prohibitive cost of preparing the reports was identified as a major impediment in its uptake (Parliament of Australia, 2006).

So, it’s costly. Will it be worth it?

A 2011 study on the consequences of mandatory corporate sustainability reporting (Ioannou & Serafeim, 2011) examined the effect of mandatory sustainability reporting and integrated reporting on several measures of socially responsible management practices. The study concluded that while mandatory corporate sustainability reporting can add to the company’s indirect costs and

limits the company’s attention to only fulfilling the mandatory requirements, it will also lead to an increase in the social responsibility of business leaders, prioritisation of sustainable development, more employee training on sustainable practices, decrease in bribery and an overall improvement of managerial credibility within society. In short, the study findings show mandatory corporate sustainability reporting will increase transparency and positively impact corporate behaviour.

In 2023, the European Union decided to bite the bullet and adopted the European Sustainability Reporting Standards (ESRS) as a mandatory standard for all EU companies. As expected, the initial impact assessment of this initiative shows the potential preparers of the report, i.e., companies, tend to gravitate towards the status quo while the users, i.e., consumers, investors, and the civil society generally supported the initiative to have stricter reporting, assurance requirements and a broader scope (European Commission, 2021).

In calculating the implementation cost, the impact assessment shows a total estimated costs of EUR 1.2 million in one-off costs and EUR 3.6 million in annual recurring costs for the development of the mandatory report. While seemingly high, the uncoordinated demands from users, the ongoing absence of consensus on what information to report and persistent difficulties in obtaining non- financial information from suppliers, clients and investee companies which arises from voluntary reporting is estimated to be much more costly.

So, is it worth it? EU Commissioner for Financial Services, Financial Stability and Capital Markets Union, Mairead McGuiness believes so, “They [ESRS] strike the right balance between limiting the burden on reporting companies while at the same time enabling companies to show the efforts they are making to meet the green deal agenda, and accordingly have access to sustainable finance.”

Mandatory sustainability reporting will put an end to the practice of cherry-picking reporting and allow companies to focus on making real managerial shifts and measurable positive impacts to the environment. As awareness level continues to rise, so will stakeholders’ demand. In the long run, the cost of preparing a comprehensive, measurable, and standardised repot will be cheaper than having to entertain various demands from the different stakeholders. And really, how much is too much for saving our one and only home?

References:

• Carson, R. (1962) ‘Silent Spring-I’ The New Yorker. https://www.newyorker.com/magazine/1962/06/16/silent-spring-part-1
• European Commission (2021) ‘Executive Summary of the Impact Assessment accompanying the Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting’. EUR-Lex. https://eur-lex.europa.eu/legal- content/EN/TXT/?uri=CELEX:52021SC0151
• Gray, R. and Milne, M. (2002) ‘Sustainability reporting: who’s kidding whom?’ Chartered Accountants Journal of New Zealand, 81(6), pp.66-70.
• Gokten, S., Ozerhan,Y., Gokten,P.O. (2020) ‘The historical development of sustainability reporting: a periodic approach’ Zeszyty Teoretyczne Rachunkowości 107(163):99-118. 10.5604/01.3001.0014.2466

Useful links:

• Read this article and other student and faculty contributions in Global Voice magazine #30
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