Sustainability reporting: An orchestra of people, planet, and profit

Sustainability reporting has now become a mandated practice across companies in many countries.

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).

Global Risk Perception Survey conducted by World Economic Forum in 2023 concludes that the global outlook will be unsettled and turbulent, attributing to issues of extreme weather, misinformation & disinformation, political polarization as few of the highlights.

Why sustainability reporting matters

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 survey by Capgemini confirms that 70 per cent of its respondents are willing to pay premium for sustainable products.

Further, majority of consumers in the EU, UK, and US are becoming more frequent in checking a brand’s sustainability practices.

Businesses should not only focus on its effort to realizing sustainability, but also education to its consumers about its practices to allow them capture greater market share and profit.

The benefit of promoting sustainability should not be contested for businesses. The practice, together with reporting, would force businesses to become prudent by rethinking its business model and operation scheme.

The mappings of input, process, and output will become not just detailed, but also recorded, and each had to be considered for further implications towards areas catered by sustainable development map, namely environmental, social & humanitarian, and governance (ESG).

Businesses should not be terrified ahead of the seemingly complex practice, rather it should embrace this as opportunity to rethink its strategy to win the competition.

Morgan Stanley has reported that its investors are now focusing their investment on companies who can generate both competitive financial returns and sustainability, indicated by 14.8 per cent 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 reporting standards help stakeholders?

Sustainability reporting was once a voluntary disclosure of non-financial reporting. The decision to make such reporting becomes mandatory is based on the principle that a business has responsibility to create value towards its stakeholders, environment, and society in which it operates.

As such, the report must serve the purpose of providing transparency and accountability about 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 harmonisation.

Sustainability reporting standards are inherently serving various business stakeholders, namely politics and policy influencers, society, and business.

These stakeholders impact each other in terms of shaping the outcome of 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 as holistic and catering.

The difference between ESRS & SASB

ESRS was developed in 2021 and ensures that its standards are in alignment with the International Sustainability Standards Board (ISSB), who 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 report 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 investor as its audiences, because the US securities law does not mandate multi-stakeholder disclosures.

It emphasises on the impact of how company’s sustainability mission and activities create financial risk and opportunities for the company, and company can decide which information is material to investors.

Companies that want to address 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 for sustainability reporting?

We remember the classic philosophy where businesses exist with the purpose of creating value for its stakeholders.

Reports should fulfil its 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.

 To put it simply, the better report is the 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 the ecosystem and human resource where it operates in.

Using this criterion, ESRS can be considered more superior for few reasons. From pragmatic perspective the mandatory nature of the reporting forces businesses to disclose their efforts on sustainability at the cost of facing legal consequences.

Companies in the EU are subjected to a fine of five per cent of their global net turnover for non-compliance with the legally mandated standard for conducting supply chain due diligence.

Consequently, businesses will have no choice but to comply. Despite the prevailing arguments which highlight the cost of preparing such 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.  

Released Standards of ESRS have greater breadth than those of 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 with effective date of 1st January, 2024 for SASB Standards adopter, focusing mainly on environment 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’s distrust on companies, ESRS plays pivotal role in engaging greater society to restore that trust as it requires companies to seek for limited assurance – sending strong signal to stakeholders of their commitment to sustainability.

What success looks like in sustainability reporting?

Companies that adopt ESRS do not have an upper hand over those that adopt SASB, but companies that transcend mere compliance to promote sustainable earth and human rights practices stand out significantly.

It is essential for stakeholders of 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 reporting as a basis knowledge 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.

This article was written by Farrah Hartanto, WBS runner up in the Council on Business and Society (CoBS) Article Writing Competition. It was originally published in Global Voice magazine. Luca is studying for a Full Time MBA at Warwick Business School.

The Council on Business and Society is a global partnership of 11 leading business schools spanning six continents with a shared focus on advancing a responsible, ethical, and sustainable approach to business.

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