Three Hot Debates in Sustainability Reporting Today

MONDAY FEBRUARY 5, 2018

By

DUNSTAN ALLISON-HOPE, Vice President, BSR

CHARLOTTE BANCILHON, Director, BSR

JONATHAN MORRIS, Associate Director, BSR

#Future of Reporting, #Materiality, #Reporting and Communications,

In 2017, we spoke with more than 50 sustainability leaders from our member companies and other leading organizations to shape our thinking about the future of sustainable business.

These interviews informed our new report, Redefining Sustainable Business: Management for a Rapidly Changing World, which provides a blueprint for company strategy, governance, and management fit for our sustainable development challenge. Included in this blueprint is our point of view about how companies can report sustainability information in ways that enable improved sustainability performance and catalyze action beyond a company’s own boundaries.

Also during 2017, we had the opportunity to learn from the work of our Future of Reporting collaborative initiative. These discussions informed our Practitioner’s View of Sustainability Reporting, which shares insights about the future of sustainability reporting from those who are closest to it.

However, we were struck by three questions throughout these conversations where opinions were often sharply divided.

Does sustainability reporting distract attention from sustainability strategy?

One interviewee complained to us that, “Sustainability teams need to be story-makers, not storytellers, yet too often reporting reduces bandwidth for half the year and prevents us from doing our jobs.” Indeed, it often becomes too easy for the sustainability team to prioritize responding to external requests and producing an annual report at the expense of shaping the strategic direction of the company.

However, others argued that the discipline of publishing information in the public domain creates a powerful incentive for performance improvement, helps socialize sustainability across the organization, and helps focus strategy on the issues of greatest importance to company success. As one interviewee put it, “Reporting has an effect to solidify program management. There is a difference between high quality and low quality, and this pushes higher quality outputs.”

We believe that strategy and reporting are both essential and should not be viewed in competition. Both outcomes shouldn’t necessarily be pursued by the same team, though—just as the company strategy function doesn’t write the annual report, so the company sustainability function shouldn’t necessarily write the sustainability report.

Should we move toward more real-time sustainability reporting and disclosure?

Advocates of real-time reporting argue that it would bring the twin benefits of engaging a wider range of people in the sustainability agenda and enabling more timely decision-making on important sustainability issues. Opponents judge that sustainability is the ultimate long-term challenge; it is inconsistent to argue that short-term decision-making by investors is damaging to sustainability, while at the same time advocating for more real-time performance information and updates on sustainability.

We believe that the discipline of the annual reporting cycle is essential to maintain, as it allows analysts to make year-on-year comparisons and identify forward-looking trends. However, we think that companies should also communicate about sustainability using the full suite of today’s social media tools to engage relevant audiences. It makes sense for companies to look at new formats where real-time sustainability data can inform decision-making by external stakeholders—for example, sustainability information about products could be made available in real time to consumers—but this is not the same as sustainability reporting.

Should companies stop using the term “materiality” outside the investor relations context?

Some argue that using the term “materiality” outside of the investor relations context creates confusion for report users, who may be unclear about what definition of material is being used, and whether certain issues are of material concern to investors or not. One interviewee commented, “People get tired of hearing that all sustainability issues are material to the business.” Outside the investor relations context, companies could use other terms, such as “relevance.”

On the other hand, the concept of materiality is the threshold at which issues become sufficiently important that they should be reported to a target audience. In financial reporting, materiality is the threshold for influencing financial decisions made by investors; in sustainability reporting, materiality is the threshold for influencing a wider set of decisions, made on a wider range issues, by a wider range of stakeholders.

The financial reporting discipline does not have a monopoly on the term “material,” and applying such a proven concept in the sustainability reporting discipline substantially increases its value for report readers. Provided the company is clear about the definition of materiality being used and the process applied to define material issues, then using the term “materiality” should not, in theory, create problems.

Yet the fact remains that, in practice, the dual use of the term is confusing. Ultimately, the substance of the materiality principle in sustainability reporting matters more than the term that is used, and we believe that companies can use other terms—such as relevance or prioritization—in the context of sustainability reporting targeted at non-investor audiences.

Our Future of Reporting collaborative initiative is a group of companies that share reporting best practices with each other and use these insights to inform the future of sustainability reporting. If you are interested in participating in the group during 2018, please contact us.