Sustainability Reporting

Sustainability Reporting is the process of publicly disclosing a company's economic, environmental, social, and governance (ESG) performance and impacts. This practice provides stakeholders, including investors, customers, employees, and the broader community, with information about how a business entity manages and addresses sustainability-related issues.

In other words, such non-financial reporting emphasizes a responsible practice of identifying and communicating the impact of the firm's actions (both positive and negative) on the economy, environment, and society as a whole. The primary purpose of such disclosure is to transparently exhibit the constant efforts and contribution of the company toward sustainable growth.

• Sustainability reporting refers to the disclosure process of an organization's environmental, social, and economic performance. It allows stakeholders to evaluate the company's impact on society and the environment.
• Some common frameworks include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), the European Union's Corporate Sustainability Reporting Directive (CSRD), and the Carbon Disclosure Project (CDP). 
• While sustainability reporting covers a broad spectrum, ESG reporting hones in on specific non-financial factors, integrated reporting aims to amalgamate financial and non-financial dimensions to offer a holistic overview of a company's performance.

Sustainability reporting is an initiative of the companies to become responsible towards the environmental, social, governance, and economic well-being while adopting greener ways for production and other business operations. As society has become more aware of sustainable business practices, many companies have transformed their approach, prioritizing their corporate social responsibility goals.

Hence, through such initiatives, organizations aim to showcase their dedication to responsible and sustainable business practices. This fosters transparency and cultivates stakeholder trust. Moreover, sustainability reporting often functions as per international standards and frameworks, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB).

Notably, such reports are usually available in the form of charts, infographics, graphs, numbers, and photographs to provide a clear picture. However, they mainly cover the following key components:

• Environmental Performance: Such a report details a company's environmental impact. This includes factors like energy consumption, greenhouse gas emissions, water usage, and waste management.
• Social Responsibility: It comprises information about the company's social initiatives, including efforts to enhance employee well-being, promote diversity and inclusion, engage with communities, and uphold human rights practices.
• Governance: This report provides insights into the company's governance structures, ethical business practices, and initiatives to ensure transparency and accountability in decision-making.
• Economic Performance: It states the financial aspects of sustainability, including sustainable business practices, responsible supply chain management, and the economic impact on local communities.

Various reporting frameworks facilitate the transparent disclosure of a company's sustainability efforts. However, organizations often consider their objectives, stakeholders, and industry standards before selecting a particular framework. These include:

#1 - Global Reporting Initiative (GRI)

It is a globally adopted comprehensive framework covering the economic, environmental, and social aspects of sustainability reporting. GRI provides guidelines and indicators to help companies use a diverse set of metrics for their sustainable performance reporting. Moreover, it can be used by small, medium, and large organizations functional in different sectors.

#2 - Sustainability Accounting Standards Board (SASB)

SASB targets financially relevant sustainability issues within specific industries. It sets standards for disclosing and communicating specific information to the stakeholders or investors. The five sustainability dimensions of the board include the environment, social capital, leadership and governance, human capital, and business model and innovation.

#3 - Task Force on Climate-related Financial Disclosures (TCFD)

TCFD concentrates on clear disclosure of climate-related risks and opportunities in financial terms by public companies or other entities. It recommends reporting on governance, strategy, risk management, and metrics related to climate impacts.

#4 - European Union's Corporate Sustainability Reporting Directive (CSRD)

EU CSRD is a European sustainability reporting standard that represents a significant enhancement of the Non-Financial Reporting Directive (NFRD). The primary goal is to establish a standardized approach to sustainability reporting among EU companies. Its objective is to achieve uniformity in reporting practices for financial disclosures. Embracing digital reporting, the CSRD advocates for transparency by adopting a standardized EU-wide Electronic Reporting System (ESRS).

#5 - Carbon Disclosure Project (CDP)

The CDP standards are primarily centered on climate, supply chain, forest, and water-related aspects. CDP functions as a platform to facilitate companies in communicating their environmental impact. It compiles and publishes the responses on its website, fostering transparency and enabling stakeholders and the public to access and assess these reports.

Let us explore a few examples to understand how the companies disclose their sustainability efforts:

Example #1

Suppose AB Enterprises Annual Sustainability Report states the following:

Executive Summary: AB Enterprises is dedicated to promoting sustainability across its operations. It wants a positive impact on the environment, society, and its stakeholders. This annual report highlights their progress in key areas of sustainability during the fiscal year 2023.

#1 - Environmental Initiatives

• There was a 30% reduction in carbon emissions by adopting renewable energy sources, such as solar and wind power.
• They have implemented a comprehensive waste reduction strategy. This has resulted in a 20% decrease in overall waste generation. 90% of waste is diverted from landfills through recycling and composting initiatives.

#2 - Social Responsibility

• They launched wellness programs and flexible work arrangements. This has led to a 15% increase in employee satisfaction and a notable decline in absenteeism.
• The company collaborated with local communities through educational initiatives and philanthropy. This has contributed to the development of sustainable practices and supporting local causes.

#3 - Corporate Governance

• Increased board diversity, with 40% representation of women and underrepresented groups, fostering a more inclusive decision-making process.
• Strengthened supplier partnerships emphasizing ethical sourcing, ensuring compliance with fair labor practices and environmental standards throughout the supply chain.

Future Outlook: AB Enterprises remains committed to advancing sustainability, with a focus on innovation and continuous improvement. Our future initiatives include:

• Further reductions in carbon emissions.
• The integration of circular economy principles.
• The pursuit of new partnerships to drive positive change.

Example #2

In the fiscal year 2022, IKEA reduced its value chain's climate footprint by 12% compared to the baseline year FY16, progressing towards achieving climate positivity by FY30 without relying on carbon offsetting. Significant advancements were made in increasing the use of renewable energy in both retail and production, contributing to an overall reduction in IKEA's total climate footprint. IKEA is on a path to becoming a circular business by 2030, committing to designing all products with circular capabilities, using only renewable or recycled materials, and offering solutions to prolong product life.

By FY25, IKEA aims for 50% of the main meals offered in its restaurants to be plant-based, aligning with the broader goal of inspiring and enabling over 1 billion people to lead a better everyday life within planetary boundaries by 2030. IKEA's 2030 ambition includes regenerating resources by using responsibly sourced renewable or recycled materials. In FY22, around 15% of the total wood usage was recycled, working towards the target of one-third recycled wood by FY30. 

IKEA contributes to a fair and equal society by upholding and promoting human rights across its value chain. This commitment extends to supporting decent work, as evidenced by implementing a new code of conduct for digital platform workers in its supply chain. The report emphasizes IKEA's commitment to transparency in its sustainability journey, acknowledging the ongoing development of methodologies to measure progress and recognizing the global challenges faced during FY22.

Maintaining a balance is essential for organizations seeking to communicate their sustainability initiatives effectively. However, such disclosures often have various pros and cons for the companies, stakeholders, and the society, as discussed below:

Advantages

• Enhanced Transparency, Accountability, and Credibility: Sustainability reporting standards clearly show an organization's commitment to sustainable practices, building trust among stakeholders and society.
• Effective Risk Management: Identification and management of environmental, social, and governance risks help in minimizing the potential losses or adversities to the business.
• Attracts Investors: Everyone likes to invest in a company that is socially and environmentally responsible. Thus, investors often look out for investment opportunities in such businesses.
• Competitive Edge: It represents the dedication of companies towards sustainability, boosting their brand reputation and providing a competitive advantage in the market.
• Stakeholder Engagement and Communication: Such reporting initiatives encourage engagement and communication with the stakeholders, including investors, customers, and employees, aligning with the growing emphasis on Corporate Sustainability Reporting (CSR) practices.
• Builds Brand Reputation: With constant and responsible CSR behavior, companies can develop a strong brand reputation in the long run.
• Helps Secure Top Talents: Even the employees prefer to work for companies that are renowned for their sustainability efforts. 

Disadvantages

• Resource Intensive: Developing comprehensive reports demands significant time, effort, and resources, posing a challenge for small and medium-sized organizations with limited workforce and capital.
• Compliance with Different Standards: The absence of one standardized reporting framework increases the burden on organizations since multinational companies need to follow distinct guidelines while reporting as per different frameworks.
• Greenwashing Risks: Some organizations may engage in greenwashing, portraying an overly optimistic image of their sustainability efforts, leading to credibility issues.
• Complex Metrics: It is challenging to set metrics for ESG factors, particularly for social impact, making the reporting process highly intricate and subjective.
• Financial Impact Not Evident: The companies are unable to furnish any direct evidence of their financial growth or rewards due to their sustainability practices.
• Requires Training: The inefficiency, unawareness, or improper learning of the management responsible for collecting sustainability data may affect the reporting accuracy. Hence, they need proper training in ESG practices.

Sustainability reporting, ESG reporting, and integrated reporting are distinct frameworks designed to furnish stakeholders with information pertaining to a company's non-financial performance specifically. Let us understand the differences between the three:

This article has been a guide to what is Sustainability Reporting. We explain its examples, frameworks, advantages, disadvantages, and comparison with ESG reporting. You may also find some useful articles here:

• Financial Sustainability
• Financial Reporting
• Green Accounting