Sustainability investors demand standardized reporting
Sustainability reports have been crucial in stimulating the growth of sustainable investing. However, current reporting practices are now being questioned and scrutinized by corporate investors. But what exactly are the investors questioning? A result from a survey shows that investors cannot readily use the companies’ sustainability disclosures to make informed investment decisions, and they are unable to draw comparisons among companies.
Now, investors stress a greater need for transparent, comparable, and standardized sustainability reports to help them allocate capital and engage with companies effectively. This call for change by investors trickles down to executives and board members who now need to step up their game in providing sustainability transparency.
The current sustainability reporting standards based on the foundation developed in the 1990s by civil-society groups, governments, and other constituencies, called on companies to account for their impact on nature and the communities where they operate. In 2000, a milestone passed by Global Reporting Initiative (GRI), published its first sustainability reporting guidelines. After the financial crisis, additional frameworks and standards developed to help companies and their investors to have a greater understanding of ESG and nonfinancial factors' risks and benefits.
A survey by McKinsey&Company in 2019, states that executives and investors strongly support reducing the number of standards for sustainability reporting. But, what is the logic behind reducing the number of standards? Executives believe this will aid their efforts in managing sustainability impacts and, at the same time, respond to sustainability-related trends, such as climate change scarcity.
The main shortcomings of current sustainability-reporting practices are inconsistency, incomparability, and lack of alignment in standards.
Investors expect a standard uniformity followed by companies to disclose consistent and financially material data to enable investors to save time on research and analysis and make a better investment decision.
Research indicates that companies that manage sustainability issues well achieve superior financial results. Now, investors are making investment and engagement decisions that encourage sustainability disclosures to meet the following three criteria:
- Financial Materiality: The shift towards providing value-based, i.e., how sustainability adds value to investments to place the company in the light of a purpose-driven brand is essential. To achieve this, companies should provide more sustainability disclosures that are material to financial performance.
- Consistency: The existence of several reporting frameworks and guidelines and freedom to choose from many makes it harder to compare sustainability disclosures as neatly as financial disclosures. It potentially results in severe inconsistencies among sustainability disclosures that do not provide a clear picture to customers or investors.
- Reliability: Many companies have no systems in place that collect data for SUSTAINABILITY reporting. Few companies undergo third-party audits, which makes it even more unreliable about corporate sustainability disclosures.
Refining the practice of sustainability reporting
Aside from attracting more capital, there are other proven benefits to executing and being transparent with a strong sustainability agenda for companies. The benefits being:
- Companies can benchmark their performance with the competitors
- Companies can manage sustainability issues well, thereby achieve superior financial results
- Companies can increase their social credibility.
Now it’s the right time to bring a better change in your company’s sustainability reporting. Get in touch to hear how SustainLab will help you in your sustainability reporting endeavors.
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