Reporting for Reporting’s Sake? Sustainability Reporting in Australia
Wednesday, 20th May 2015 at 9:25 am
Australia’s top listed companies now overwhelmingly recognise the importance of reporting on material sustainability risks but reporting on such risks is one thing; effectively managing them is another, writes Paul Davies, Chief Operating Officer at sustainability consultancy Banarra.
The Australian Council of Superannuation Investors’ (ACSI) has recently released its latest Corporate Reporting in Australia: The Sustainability Reporting Journey – Disclosure of sustainability risks among S&P/ASX200 companies. It is an interesting read, but one needs to be careful about extrapolating its findings and drawing general conclusions about the state of corporate sustainability in Australia.
This is ACSI’s eighth report on the sustainability reporting practices of Australian listed companies. ACSI’s research assesses sustainability reporting among ASX200 companies, with the stated intent of improving reporting standards and practices. The results disclosed by ACSI do look encouraging, in that many companies appear to be making significant progress with disclosing their sustainability intent, efforts and outcomes. Overall, 97 per cent of ASX100 companies (and 87 per cent of ASX200 companies) are now reporting on sustainability to some level, with many of those companies lifting the quality of their reporting, and a larger number of companies meeting ACSI’s “Leading “ category of reporting .
ACSI does note, however, that a third of ASX200 companies remain less than committed to sustainability reporting, with minimal or basic disclosures that do little to help investors make informed decisions. Looking across the marketplace, ASCI noted that improvements in sustainability reporting were also evident in sectors such as transportation, energy, materials, and real estate. However other sectors have lost ground in their reporting, such as consumer services, healthcare and media.
Whilst ACSI has done a solid job in surveying and analysing the sustainability reporting endeavours of Australian listed companies, I wonder if certain underlying tenets about sustainability reporting and its value to both companies and the marketplace bear closer scrutiny. The validity of these tenets is important if we are to extrapolate the findings and draw conclusions from ACSI’s research.
ACSI states that its findings “demonstrate that, on balance, ASX200 companies now overwhelmingly recognise the importance of reporting on material sustainability risks”. Reporting on such risks is one thing; effectively managing them is another. While not detracting from the quality or intent of ACSI’s research, the findings do need to be considered in the wider context of objectively assessing companies’ capabilities around managing, mitigating and accounting for their material environmental, social and governance (ESG) risks.
Current sustainability reporting is often a mixture of good intentions, a genuine desire to be accountable and a commitment to improve, but which can be stymied by a need to conform to what others are doing, misdirected or unfocused effort, under-utilised outputs and a failure to position reporting within the company’s wider sustainability agenda. Sometimes it can inspire and drive change, but it can equally be a pacifier where companies say "we produce a report, so what more do you want?"
Are investors reading sustainability reports to make better or more informed investment decisions?
One of the popular perceived drivers for sustainability/ESG reporting and integrated reporting is that investors and financial advisors are (rightly) demanding more non-financial information about companies’ performance and value creation than the little they can glean from current corporate reports.
Whilst some recent research in Canada and the USA suggest that investors are taking more interest in corporate ESG information, research in Australia undertaken by the Financial Reporting Council has shown that retail investors’ primary information sources are not sustainability or integrated reports, but rather the daily press and companies’ own shareholder reports, and mainly for the financial data.
Sustainability reports and integrated reports are usually produced on an annual cycle, which is a relatively long time frame compared to the narrow window in which investment decisions are made. Being voluntary, many sustainability reports also suffer from a lack or comparability, or hard data on real ESG risks, and can contain an abundance of rhetoric that obfuscates the kind of information that investors and financial advisors are looking for.
There is still an opportunity for corporate reporters to better identify and understand the ESG-related information needs of stakeholders such as investors, and then better align the frequency, focus and accessibility of the data being reported. Sounds obvious, and this is the type of the work that Banarra is currently doing more of with a number of financial and property sector reporters, to create reports that are more relevant and aligned with defined stakeholder needs than being in strict alignment with reporting frameworks such as GRI and integrated reporting.
Is a sustainability report a reliable indicator of a company’s commitment and capability in managing ESG risks?
From first hand discussions, I know that many reporters are questioning the strategic intent, or business value-adding proposition, of their reporting. Some feel they are on a ‘treadmill of reporting’, where it has become more habitual than purposeful. They feel compelled to continue, or otherwise be seen by stakeholders as backing away from their sustainability commitment. They find that such reporting is labour-intensive, costly and challenging, and are looking to justify the value proposition of continuing as they are, or to at least understand what alternatives exist.
For many companies the first few years of reporting are the most valuable, as developing a report provides a great opportunity to assemble and organise sustainability data, and to identify key gaps in management and performance in ESG areas. But that is often as far as it evolves.
Sustainability reporting often remains siloed in one part of business, with no functional connection to strategy development, stakeholder relations, community investment, human resources, business planning and risk management. Assuming ASCI’s contention that “companies now overwhelmingly recognise the importance of reporting on material sustainability risks” is correct, how do this then translate into effectively managing ESG risks if reporting remains segregated from decision-making, policy development and other business process that help mitigate those risks.
There is a compelling logic that materiality processes that feed into sustainability reporting, should also feed into risk management, but the evidence suggests that this is still not the norm. This is despite recent (2014) changes to the ASX Corporate Governance Council principles where there is now a requirement for listed companies to disclose their sustainability risks.
There is also a logic that sustainability reports should be an accounting of the effectiveness of companies’ sustainability or business strategies, but again the reports I read, review and assure don’t make that link evident, or in fact are produced in complete isolation to the strategic function of the business.
Are sustainability reports draining limited resources from doing more important things that impact corporate sustainability?
In engaging with sustainability managers over many years around their roles and accountabilities, I’ve found that producing an annual sustainability report (along with other related reporting such as NGERS, DJSI, UNGP etc.) is often the centre-piece of their sustainability focus and efforts.
Reporting can, and often does, consume a large chunk of their limited ‘sustainability’ budgets, time and resources, and is sometimes driven by an executive-level, ‘knee-jerk’ response to shareholder enquiries, what peers are doing, internal expectations, board direction, or just plain ‘what else can we do to demonstrate our good corporate citizenship?’
This is not to suggest that sustainability reporting is irrelevant or unimportant but that, in the absence of a clear, considered and strategic value proposition, such reporting can disproportionately consume time and resources for an end product that looks good on company coffee tables but is questionable in terms of return on investment.
Where to from here?
There may well be some backing down on sustainability and integrated reporting by companies in the future, if such reporting cannot deliver a sufficiently compelling business case. What the impact of this will be on companies’ actual or perceived commitment to accountability and sustainability is difficult to say, but it could in fact signal some rationalisation and maturity in their sustainability focus, driven by a more effective and considered allocation of available resources.
So what is needed to make a sustainability report a valued and valuable asset, both for stakeholders and for the business? The key changes necessary are both to the reporting process (to create more internal value for the business) and to the report itself (to create more external value for, and thus higher demand from, stakeholders such as investors)
Revisit the process
Companies need to reassess and rethink their purpose in reporting, to extract full value from the reporting process. They need to stop seeing reporting as a stand-alone activity, but rather look to embed it within the business’ broader strategic and risk framework. At its simplest, a sustainability report is about accounting for how the business is identifying and responding to ESG issues that matter to the business and to its key stakeholders. Hence the need for robust stakeholder engagement and materiality processes, without which reporting becomes a shot in the dark.
The stakeholder engagement and materiality processes applied to shaping the content of the report are also rich sources of useful information for other business processes such as strategy, risk management and planning. Materiality actually has more in common with these processes than it does with reporting.
The process of materiality itself can be applied beyond reporting, wherever there is a need to collate and distil a diverse range of internal and external inputs to identify key business opportunities and risks. The additional external perspective which materiality provides on issues and performance (through including external stakeholder inputs in its process) complements internal planning and risk management processes. It can also assess how well management decision-making and business response processes are working, by tracking the relative importance of material issues over time.
Re-evaluate the report
The report itself should be as short and concise as possible and focus only on how the organisation is identifying and managing its key ESG risks and opportunities, and present only performance data that illustrate that management capability. Reports should also be clear about where (inside or outside the business) those ESG issues are having an impact and what strategies it has in place to manage those impacts.
The sustainability report also provides a vehicle to publicly commit to meaningful targets designed to lift the organisation’s performance around its material ESG issues. If companies are prepared to set and disclose clear and unambiguous targets in their public reports, it acts as a powerful tool to gain traction on addressing key ESG issues within the organisation. This encourages a stronger internal focus on delivery against those targets and thus increases the likelihood that businesses will actually improve in those areas.
By rethinking the role and value proposition of sustainability reporting, the report then becomes less of an unfocused marketing document and more an accounting for sustainability commitments, strategies, management and performance. This is what investors and other stakeholders are looking for – something that will lift the report out of the pack and make it valuable and meaningful to them. Such a report will then not only inform and complement other corporate information, but should also stimulate and support internal changes in the business that deliver better outcomes.
About the Author: Paul Davies is a Principal at Banarra and has worked on numerous reporting, materiality, stakeholder engagement, strategy, community standards and assurance assignments in the property, telecommunications, financial, mining, energy, legal and service sectors. Davies is a certified GRI trainer, a member of the GRI G4 working group on management approach disclosures and a member of the GRI G4 Practitioner's Network.