In the last two decades, sustainability reporting has gone from an exercise for the largest companies to a necessity to attract investors and meet local and international regulation. But the main benefit of sustainability reporting remains that companies best understand their impacts and can improve their bottom line along with the world around them.
The origin story
Founded in the wake of the Exxon Valdez oil spill in 1989, the Coalition on Environmentally Responsible Economies (Ceres) answered the call to shine a light on corporate behaviors by demanding companies report on their impacts. This helped launch the corporate transparency movement and led to the creation of a body tasked with setting the framework for disclosure, the Global Reporting Initiative (GRI) in 1997. Over the next twenty years, voluntary disclosure of sustainability information has gone from a niche to the mainstream.
A niche no longer
Like all movements, it started slowly. As you might imagine, companies were not initially lining up to report on their impacts to people and the planet. Fast forward to today…now more than 90 percent of the world’s largest companies report on their environmental, social and governance — or ESG — information. And the growth rate has been rapid — just a few years ago (2011), only 20 percent of S&P 500 listed companies reported this information — today it’s 85 percent. Clearly ESG reporting is now commonplace — at least among larger companies. And while this movement is still maturing, there is a lot of consistency in the information being reporting. As of 2017, 75 percent of the world’s largest companies rely on the GRI standards for these disclosures.
Why has this trend accelerated so quickly?
The first driving force for ESG disclosure was reputation. With the hindsight of many corporate scandals, company leaders learned that responsibility is essential to their brand, their employees and the communities in which they operate.
While reputation is still a powerful force, it is no longer the only or the main driver. Increasingly, investors are demanding high quality ESG information. Recent studies have shown that more than 80 percent of mainstream investors (as distinguished from socially responsible investors) now rely on ESG disclosures for decision making. And the total assets under some form of ESG management has ballooned to nearly USD$23 Trillion — which exceeds the total size of the US economy.
The need for standards
Taking stock of the acceleration of ESG reporting and emerging trend towards adoption by the financial markets, GRI acted. Back in 2014, the organization revised its governance model to become a true standards setter. Financial markets rely on credible, high-quality, comparable information and, with its new model, GRI was able to develop a more rigorous process resulting in more detailed and comparable disclosure standards to meet these needs.
And the changes have been successful.
Today, 90 percent of the Spanish IBEX 35 listed companies use GRI for their ESG disclosures. The number in the French CAC 40 is 80 percent, and it’s 78% of the US Dow 30. And now capital markets are getting in the game. As of this writing, 55 capital markets around the world either reference or require GRI Standards for their listed companies to disclose ESG information.
ESG disclosure is a niche no longer — this information is increasingly used by financial markets around the world. And just like with financial information, a single disclosure standard is essential for global markets to communicate in the same language. This is GRI’s vision.
While the disclosure standards themselves have matured and are now broadly adopted throughout the world, some challenges in the use of the standards remain:
- Quality: The quality, timeliness and veracity of this information can vary widely which reduces confidence and thus reliability for decision-making. And although many reports now use the GRI Standards, only about 40% of ESG disclosures are assured by a third party.
- Comparability: Investors like to compare the results of one company against others. While this is difficult with financial information, it is tenfold more difficult with ESG disclosures. Financial information only deals with money. GRI currently offers 33 topic-specific disclosure standards on topics as disparate as diversity and climate change. These are obviously hard to compare. In addition, as companies choose which issues are “material” to them, they will report on different topics than peer companies. Alignment on how best to compare corporate sustainability information remains elusive.
- Small business reporting: While roughly 50% of economic activity and 90% of all companies fall under the definition of small and medium enterprises (SMEs), very few of these companies report ESG information. This is starting to increase, but more work is needed to simplify the process to make it more accessible to SMEs, considering the level of resources they can devote to reporting.
The need for policy
Many of these challenges can be solved through regulation. GRI is currently tracking around 450 ESG disclosure mandates in more than 60 countries. While these numbers continue to increase, there must be more consistency in the requirements. Harmonized ESG disclosure will depend on harmonized regulations and standards across the world. GRI offers the global solution for ESG disclosure standards, but multinational institutions like the United Nations, G20, OECD, The World Bank and others must play a key role in driving the needed regulatory changes.
In the end, it’s not about the report
The ultimate purpose of ESG information is to improve outcomes — financial, social and environmental (the so-called triple bottom line). Whether you are an investor, environmental or labor activist, media or just an interested bystander, ESG information provides essential insights into a company’s operations.
While we have some challenges ahead before ESG information is fully integrated into the mainstream, the change is underway. And as this trend progresses, we will begin to align investment with sustainable business practices. If we get this right, we will leave an even better world for our children and grandchildren.Originally posted on 3BL Media news.
Image credit of London's financial district: Travel Junction/Flickr