By Shari Helaine Littan, CPA-JD
As our world becomes more resource-constrained, investors, employees, and other stakeholders are demanding information about how companies operate in terms of environmental and social impact.
The business world — historically more concerned with financial reporting — is increasingly realizing that measurement and tracking of non-financial resources helps identify risks and opportunities that can greatly affect a company’s ability to create and preserve long-term value. Whether it’s driven by corporate values, transparency requirements or long-term shareholder vision, more and more global organizations are beginning to elevate sustainability reporting toward a level equal to their standard financial reporting processes.
What is sustainability reporting?
By definition, sustainability reporting includes qualitative information and metrics on items such as water use, energy use, carbon emissions, waste, talent and diversity, health and safety incidents, and supply chain performance.
Since the 2000s, sustainability reporting has progressively gone mainstream among large companies. Today, most large organizations prepare and issue, at minimum, a sustainability report on an annual basis. According to the KPMG Global Survey of Corporate Responsibility Reporting (2015), approximately three quarters (73 percent) of the top 100 companies in major economies worldwide and 92 percent of the world’s 250 largest companies (G250) produce sustainability or corporate responsibility reports.
With the benefits of this type of reporting becoming more and more clear, sustainability reporting standards and frameworks have emerged, prompting guidelines to move toward standardization and regulation.
A shift toward integrated reporting
In recent years, there’s also been a shift to find ways to converge sustainability reporting and traditional financial reporting, a combined approach commonly referred to as integrated reporting.
According to a recent survey of sustainability reporting professionals (SRPs) by Thomson Reuters and BSD Consulting, the interest in sustainability reporting from traditional financial investors has grown over the last two years. Respondents note that more participants in the conventional financial services community have begun to ask questions related to long-term business sustainability issues. Their inquiries are revealing a slow but steadily growing perception that business sustainability metrics can reflect on the quality of corporate governance.
Given this trend, some SRPs are connecting to a greater degree with their respective organization’s traditional financial accounting and risk management teams. Active engagement with these traditional financial departments throughout the year, however, is still less common, even among the most mature reporters.
Tools and techniques to measure and monetize the value of gathering this data are still developing, which creates practical difficulties to greater integration. Reporters often lack the sophisticated tools that traditional accounting teams take for granted. Lacking these informational tools, gathering and analyzing data to communicate properly with the traditional reporting unit is often challenging.
Perhaps the most significant hurdle for SRPs revolves around the large scope of relevant data to be gathered. With sustainability reporting, the issuing entity must consider whether to include both suppliers and customers or an even extended value chain to measure the effects of its operations, products, and services. For some organizations, such as those in processing and manufacturing, having this data available to pass along to customers affects their ability to compete in the global markets and therefore drives the reporting agenda.
For consistency, some companies establish precisely the same reporting entity (sometimes referred to as “organizational boundary”) for their financial reports and sustainability reports. Sustainability reporting frameworks, however, often indicate a larger boundary than the traditional legal concepts of ownership, control, and influence.
For example, internationally accepted standards for the measurement of total greenhouse gas (GHG) emissions recognize financial reporting boundaries, but they also consider operational boundaries so that a reporting entity may include emissions that originate not only from its own operations (direct emissions) but also from its external suppliers of electricity and other goods (indirect emissions).
The GRI guidelines require a reporting entity to describe its material impacts wherever they occur in the value chain. As a result, reporters must capture business sustainability data regarding not only the direct impact of their operations and products, but also the indirect impacts, which includes outside entities in the supply chain.
The future of sustainability reporting
If we look ahead to the future, SRPs are individually and collectively moving toward the use of “big data” in sustainability reporting. According to the survey, SRPs state that peer data is a valuable tool for setting targets, analyzing performance, and monetizing progress. Further, many reporters envision a way of reducing report volume by using online disclosure.
SRPs also note shortcomings they see in the ability of sustainability reporting to reach the same level of rigidity and standardization found in financial reporting. Although SRPs must deliver and interpret quantitative data, they also provide more strategic, forward-looking information. They noted an appreciation for the ability to explain the most relevant data to stakeholders through strategic storytelling and to describe how the organization’s progress coincides with its sustainability strategy and objectives.
Overall, many SRPs foresee a longer-term movement toward integration that shows the connection between sustainability metrics and financial performance. Many respondents foresee this connection becoming stronger as more data demonstrates, with greater precision, the connection between a company’s business case and its sustainability factors. And in a world where resources are increasingly constrained and the importance of social responsibility grows, there is no doubt this connection will become ever more clear.
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Shari Helaine Littan, CPA-JD, is a full-time editor and author for GAAP Reporter, available on Thomson Reuters Checkpoint, which helps professionals understand and stay current on US financial reporting guidelines. In 2015, she completed the Postgraduate Certificate in Sustainable Business, with commendation, from the Cambridge Institute for Sustainability Leadership. Her interest area is the convergence and integration of various sustainability reporting frameworks with traditional financial accounting. Ms. Littan holds a JD from Boston University School of Law and a BS, magna cum laude, from the School of Management at Binghamton University. Prior to joining Thomson Reuters, Ms. Littan was a practicing lawyer in securities and corporate litigation with a focus on matters that address corporate reporting. Her early career includes practice with Big 4 accounting firms.