Trends in Sustainability Reporting: As Sustainability Becomes an Increasingly Common Subject of Corporate Reporting, Financial Managers Should Be Aware of Emerging Trends

Article excerpt

The word "sustainability" means different things to different people. In some cases, sustainability refers to "hard" realities of contemporary business, such as an organization's economic performance or risk-management practices. In other cases, sustainability refers to "soft" matters, such as corporate social responsibility or gender issues in the workplace. In still other cases, sustainability refers to how an organization affects-and is affected by-its physical environment.

As organizations throughout the world engage in more activities related to the many aspects of sustainability, they are increasingly publishing reports on those activities and their outcomes. In this month's column, I'll identify four key trends that reflect substantial changes in what and how organizations are reporting with regard to sustainability. I'll also identify some significant implications of those trends for financial managers.

Background

According to an October 2010 research report by Ernst & Young, more than two-thirds of the Fortune Global 500 companies now produce some form of sustainability or "corporate responsibility" report (www.ey.com/climate change). Some of those reports are mandatory. For example, a standard recently issued by the U.S.-based National Association of Insurance Commissioners (NAIC) requires insurance companies to disclose the financial risks they face because of climate change.

But most sustainability reports are published on a voluntary basis. As Fast Company blogger Patti Prairie notes, an "overwhelming majority of Fortune 500 companies now voluntarily measure, manage, and publicly disclose their carbon emissions ..." (www.fastcompany.com/1714526/the-four-keys-to-corporate-sustainability-in-2011) In the vernacular of sustainability, "carbon" refers to carbon dioxide, a green-house gas that has been linked to global warming.

Regardless of whether an organization chooses to or is required to report on sustainability, such reporting has many practical benefits. Specifically, sustainability reporting can enhance managers' awareness of emerging business risks (e.g., reputational risk) and opportunities (e.g., tax credits for investing in "green" technologies). That increased awareness can, in turn, lead to improvements in risk management, cost management, and return on investment.

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Though many individual and organizational stakeholders influence the sustainability-reporting practices of business entities, the most influential stakeholders are present and potential investors. Investors are, in turn, decreasingly influenced by an entity's financial performance alone and increasingly influenced by their perception that sustainability is critical to an entity's financial performance and to fulfilling the implicit contract between the entity and society.

Four Trends

The first trend that we can observe in sustainability reporting is escalation. In short, both the quantity and quality of the sustainability information that organizations report are increasing. Quantitatively, more organizations are reporting sustainability information, and more sustainability information is being reported by each organization. Qualitatively, reported sustainability information is becoming more substantive, longer term in nature, and more focused on the external impact of organizations' sustainability practices rather than on the practices themselves.

The second trend in sustainability reporting is integration, which has two dimensions. First, diverse kinds of information that have traditionally been reported separately are increasingly being reported in an integrated manner. Second, corporate reporting increasingly reflects the integration of sustainability considerations into managerial decision making. For example, the Johannesburg (South Africa) Stock Exchange recently enacted a compulsory "comply or explain" rule for listed companies to produce an integrated report that shows how sustainability issues impact corporate strategy and value creation. …