What is your company doing to protect human rights? How do you manage long-term climate change risks? How do you avoid corruption? We are now accustomed to companies disclosing their environmental and social impact, but the trend is towards ever-more rigorous information on how they manage non-financial risks and opportunities.
Stakeholders (investors, employees, customers, market regulators, suppliers, civil society, etc.) are exercising increasing oversight and demanding more disclosures from companies. Search queries on the Bloomberg platform with regard to social, environmental and governance (ESG) issues have increased eight-fold in the last five years. Jaime Silos, head of Corporate Development at Forética, notes that providing information of this type increases companies' profitability, with an estimated 3.25% return.
The debate as to whether or not it is appropriate to regulate the disclosure of sustainability information is shifting the playing field towards greater regulation and transparency, as evidenced most recently by Directive 2014/95/EU as regards disclosure of non-financial and diversity information.
European Directive on disclosure of non-financial and diversity information
Sustainability reporting was initially voluntary; according to figures from KPMG, the global reporting rate is now 73%. Under the new Directive 2014/95/EU, starting in January 2017, companies are required to disclose non-financial information such as CO₂ emissions and how they handle human rights, labour rights, gender equality, fight corruption, etc.
Each country must implement the Directive in its own legislation, and it may impose stricter requirements if it wishes. The Directive applies to companies with balance sheets of over 20 million euro, revenues over 40 million euro (Greece has adopted a lower threshold), over 500 employees (250 in Sweden and Denmark) and those considered to be of public interest. It's important to note that the new regulations do not provide penalties for non-compliance, though they will foreseeably provide improvements since non-financial disclosures are a distinguishing feature.
International standards on non-financial disclosure
Standards are important since they favour information comparability, competition, transparency and, in the final instance, sustainability performance by companies. In recent years, the proliferation of standards has forced companies to choose between them. Below we describe the main standards:
GRI: the most widely-used guide for drafting sustainability reports; G4 is the latest version. The GRI method starts by examining a company's key features with the goal of providing information to all stakeholders.
SASB: used mainly in the US, this standard is addressed at investors of all types with the goal of providing the information required by the Securities & Exchange Commission (SEC).
IIRC: provides financial and non-financial information with the goal of facilitating comprehension of a company's overall strategy, both present and future.
The future of reporting
It's necessary to re-think the level of detail and the length of the reports, the frequency of non-financial disclosures, how they should be presented (online and/or paper), etc. Below are some comments on sustainability reports and non-financial disclosures:
Should reports be shorter or longer? Sustainability reports can be very long, and stakeholders demand an increasing level of transparency and detail. It is essential to report only on material aspects; the challenge is not deciding how long the report should be; rather, it is deciding on the content.
Real-time reporting? It is worth asking what is the point of, for example, reporting real-time data on CO₂ emissions in the same way as the company's share price. Does this provide added value? Might it undermine the long view that sustainability reporting pursues?
Online and/or paper? Online is undoubtedly the ideal format for stakeholders, and it also makes it possible to break down the information in response to specific stakeholder queries. More and more companies offer the option of customising the sustainability report to extract just the indicators the user is interested in.
The current trend is for information to be required immediately and continuously, but this poses a risk to the quality of the disclosures. Regardless of the format and standard used for sustainability disclosure, companies must work to define their business purpose, their goals, and the actions they will undertake to contribute to sustainable development.