4.5 Conclusion

“Today consumers and investors want to make society fairer without reducing its entrepreneurial vim.” (Kristi Mitchem, Institutional Investor, 2016 citing the Economist in 2012)1 This is not easy. As we will see in chapter 5, looking at the successful sustainability business cases in Brazil, with B3, former BM&FBOVESPA, in the US with the Dow Jones Sustainability Index, but also in other parts of the world such as in South Africa, with the Johannesburg Stock Exchange, we see the influence of positive regulatory change, with the support of the Government. Companies are more likely to report specific information if such disclosure is made mandatory by a stock exchange or regulator (UNCTAD, 2011; Ioannou and Serafeim, 2012).

Mandatory reporting is likely to generate more disclosure in general, however, well-designed voluntary frameworks can turn to be very helpful particularly for jurisdictions introducing a sustainability reporting initiative for the first time.2 Voluntary tools may help building the educational process of disclosure. The European Commission’s directive on non-financial disclosure is a key development in corporate reporting and it has stimulated sustainability reporting beyond the EU, on a global level, with at least 180 different initiatives reported by GRI in 45 different countries and regions. However, the European Commission’s directive has not been the single responsible for the change of corporate reporting, as technology (global communication advancements) and the growing interest of Governments (reflecting the public call for increased capital market’ transparency), corporate sector and investors (particularly the pension funds and stock exchanges), although still fragmented, have been all been driving forces. This interest has been demonstrated through the international sustainable development agenda, commitments at the December 2015 UN climate change meetings in Paris (COP21) (acknowledging the critical role the investment community) and through the 17 Sustainable Development Goals ratified by the UN in September 2015, recognizing the increased responsibility of the corporate sector to contribute to sustainable development. The European Commission’s “report or explain” approach is a first stage to prepare for further regulation. The report or explain approach is likely able to give companies the freedom to innovate, find the solutions to the world’s most pressing challenges. Companies are expected to be gradually engaged and will have an adaptation period to improve their ESG performance. This initial voluntary period may allow companies to develop capacity. Once capacity is in place mandatory reporting can take place to ensure a harmonized approach. The European Commission could then develop and require a next generation of stricter ESG standards. Companies, encouraged by legislation, report or explain approach, listing requirements and voluntary frameworks, are expected to report on the positive financial impacts of their ESG impacts and initiatives. In turn, this disclosure may contribute to mobilize large asset owners’ interest and capital, such as pension funds, and mainstream sustainability reporting and foster responsible investing practices. Regulation of sustainability reporting is a starting point but in practice their effectiveness (usefulness) depends on the successful adoption by the corporate sector, and on the use of the information disclosed by the investors. The sustainability reporting regulatory objectives need to be supported by a similar governance structure and auditing system to financial reporting and eventually, as it happened with financial reporting, additional regulation will be necessary.3 This will not happen from one day to another but maybe from the millennials to Generation S.4 This seems to be where capital markets are heading (Georg Kell, 2015 and Dr. Bob Eccles, 2015).5

Integrated reporting is growing globally. Integrated thinking and the concept of value creation has gained traction and more supporters than the IIRC itself. Critics have pointed that the IIRC has taken up too many interests and it has not yet gained the market and Governmental confidence to establish itself as the integrated reporting standard-setter body. Integrated reporting is seen has a sound initiative, appeared in a good timing, given the 2008 financial crisis, however, it is considered a step ahead by the European Commission. This may however, be about to change with the EU Action Plan on Sustainable Finance of 2018, in which integrated thinking is incentivized and language miscommunication is minimized through the recommendation of developing an EU taxonomy. Reporting organizations, despite the examples set by the participants in the IIRC pilot program, are still confused about what integrated reporting is and what is expected from the integrated reporting framework. Several clarifying papers were published following the launch of the integrated reporting framework in 2013, the IIRC has signed important Memoranda of Understanding with institutional supporters has the International Finance Corporation and the International Accounting Standards Board but also GRI and CDP (formerly, the Carbon Disclosure Project), explaining the complementarity of all the frameworks, and that the integrated reporting framework is not meant to replace any of the existing frameworks. The idea of value creation over the short, medium and long term, through integrating thinking by analyzing the interdependencies of the six capitals makes good sense and it is the future of corporate reporting. However, the conditions are not yet there. The success of integrated reporting is dependent on the support of, among others, the European Commission, the International Organization of Securities Commissions, the SEC, investors’ community, the accounting profession and the corporate sector. The support of these organizations will only happen when there is a legitimate body with a strong Governance structure behind the framework.

Looking at the state of the art of sustainability reporting and integrated reporting in four countries, Brazil, Sweden, the Netherlands and the US, it is evident that most large and listed companies in these countries already report on the ESG risks of their businesses. In 2015, around 5000 companies published sustainability reports, which includes 85% of the world’s largest companies.6 The Netherlands and Sweden are among the countries leading sustainability reporting, their companies show more mature internal sustainability processes and systems, external assurance, use the GRI reporting framework, use multiple channels to reach their audiences and are moving towards integrated reporting.7 Amongst the most relevant developments of sustainability reporting in the European Union, is the 2014 non-financial reporting Directive, requiring disclosure of non-financial information and diversity information by certain large undertakings and groups. Since companies started publishing their reports in 2018, the full effectiveness of the directive it is not yet known.8 There were a few delays in transposing the Directive and although it may be suggested that increased awareness from the Directive has perhaps triggered higher reporting, the exact effects and benefits are yet hard to determine.9 According to the European Commission, the Directive’s requirements were expected to affect nearly 6000 companies. In particular, in the Netherlands, the most relevant developments were (1) since 2004, the Transparency Benchmark which measures corporate ESG transparency amongst the largest 500 companies in the Netherlands.1011 (2) Euronext Amsterdam ranked in first on the Corporate Knights World’s Stock Exchanges ranking 2016.1213 The 39 large companies part of the stock exchange ranked above 50% in the disclosure of four out of the seven ESG metrics analyzed;14 and (3) Royal NIVRA, the Dutch body providing guidance for accountants, issued an assurance standard for sustainability reports in 2007, the 3410N – “Assurance engagements relating to sustainability reports”. In Sweden, since 2007, the Swedish Government’ issued the “Government’s guidelines for external reporting”, requiring 55 state-owned companies to publish a sustainability report on a ‘comply or explain’ basis according to the GRI guidelines.15

The US and Brazil are part of what KPMG qualified as countries “scratching the surface” in the quality of sustainability reports and maturity of reporting processes.16 Since 2011 there have been some developments in sustainability reporting in the US. The most relevant developments of sustainability reporting in the US are (1) the SEC’s proposal to amend the current disclosure requirements in the US, extending the disclosure requirements to non-financial information, given the growth of investors and shareholders’ interest and demand for non- financial information in the US.17 If the SEC adopts this proposal, the US will move from a voluntary approach to a mandatory approach to sustainability reporting. On a global scale, having the largest economy on board tackling climate change and extending its sustainability reporting requirements to all US listed companies, means that trend of growth in the uptake of sustainability reporting has finally become the reality; (2) SASB, a private sector non-profit organization created in July 2011, has, as of March 2016, issued provisional sustainability accounting standards for 79 industries.18 The US listed companies may use SASB standards to disclose sustainability information in their annual report to be included in the SEC’s Form 10-K filing;192021

Amongst the most relevant developments of sustainability reporting in Brazil, is (1) the positive impact of the Brazilian stock exchange B3, former BM&F BOVESPA, on the uptake of sustainability reporting in Brazil amongst listed companies. The B3, former BM&F BOVESPA, is in the 12th position in the 2016 sustainable stock exchange ranking.22 In the ranking large Brazilian companies registered high disclosure of environmental metrics energy, greenhouse gas, water and waste.23 According to this ranking, the NASDAQ reached the 25th position (2014: 39th and 2015: 32nd) and the New York Stock Exchange is at the 26th position (2014: 34th and 2015: 29th).24 These two exchanges show a relatively slow but continuous rise over the period 2010–2014;25 (2) the progressive legislation of the Brazilian Central Bank, since April 2014, requiring the largest financial institutions to issue a socio-environmental report and for all the financial institutions to develop a socio-environmental responsibility policy, to adopt an action plan and make public their stand on these issues; and (3) the Brazilian securities regulator (CVM)’s voluntary Rule 552/2014, according to which listed companies are required since January 2016 to describe risk factors that may influence an investment decision, in particular, if they disclose environmental and social risks, methodology used, if these information is assured by a third party and to provide a link to that information.26