4.1.2 Which elements could be part of sustainability reporting?

In an optimal scenario, corporate reporting has well-defined objectives regarding both financial and ESG materiality, disclosure’ tools, monitoring and enforcement.2 Besides, in this same optimal scenario, corporate reporting is facilitated by an effective legal framework, together with a strong supporting institutional and financial market infrastructure. Moreover, a sound regulatory and supervisory system for corporate reporting is in place to support these objectives. Stable and transparent capital markets have the potential to bring the best of its intervenients and trigger the efficient management of risks. Unfortunately, we do not have an optimal capital market and an optimal context to assist with the setting-up of an optimal corporate reporting framework. Unlike optimal reporting organizations, regular reporting organizations have to control their self-discipline and skepticism when implementing a long-term sustainability reporting business strategy.

However, an integrated corporate reporting framework, (better explained below in section 2), seems to have the potential to strengthen financial markets and facilitate long-term investments. Ideally, disclosed data should be accurate, timely provided and reliable to trigger the interest and use of investors. The corporate reporting framework should not impose unnecessary burden on reporting organizations, that is why guidance and an educational ESG disclosure period may increase capacity and practice before a mandatory framework is in place. In view of recent events, it is natural to begin rethinking by considering the lessons of financial reporting (as discussed in chapter 2) and evaluate the possible benefits of a mandatory corporate reporting framework. The lessons derived from the financial reporting practice have direct implications for the role and regulation of sustainability reporting, being integrated or not. In chapter 2 we learnt that the slow standard-setting process can be accelerated through legislation. The study of the development of financial reporting standards showed us the importance of transparency for the well- functioning of financial markets. In a transparent market oversight and centralized uniform standards contributed to increasing trust in financial markets. We also learnt that the mainstreaming of financial reporting standards increased transparency in capital markets. A mandatory set of principles for sustainability reporting, similarly to the financial reporting regulation, it may also lead to increased transparency. We also have seen in chapter 2 that the principles-based approach of IFRS works, therefore we may also expect that a similar principles-based approach for sustainability reporting would work. The principles-based approach would probably allow for an easier adaptation to markets changes.3 Only then, the ultimate goal of regulation (and consequent supervisory role) is ready to be achieved, which is ensuring the protection of the rights and interests of the users of the information disclosed (information beneficiaries, among others, the investors, Governments and society).

Another point analyzed in chapter 2 was the International Accounting Standards Board’s Governance model and its remarkable capacity of maintaining its technical expertise from national and international political interference, namely from the EU, the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board and national Governments.45 The International Accounting Standards Board’s Governance model allows it to be an independent standard setter, yet accountable to the public interest, through the work of its Trustees and the Due Process Oversight Committee, and to the monitoring board, to which the trustees are accountable (maintaining a link between the latter and the public authorities). As we have concluded in chapter 2 the key is to find the right balance between International Accounting Standards Board’s legitimacy and efficiency, through maintaining its independency, oversight and public accountability.6 This is a valuable lesson from the financial reporting framework that is worth exploring when developing a mandatory framework for sustainability reporting.

To develop sustainability reporting stakeholder engagement is key for redefining a long-term strategy and setting long-term goals (Prof. Mervin King, 2015).7 Besides, one of the keys to accountability is understanding stakeholders and integrating their perspective into everyday decision-making processes, therefore, the creation of a new function, the Corporate Stakeholder Relationship Officer, would contribute to tighten the relationship between stakeholders and the reporting organization (Prof. Mervin King, 2015).8 Prof. King suggests the inclusion of a new item, the “stakeholder relationships” in every board meeting to assure companies become duly informed about their stakeholders ‘needs, interest and expectations.

Prof. King’s suggestion for creating a new function and inclusion of new agenda items follows on the yet rudimentary sustainability reporting system under development, where practice shows the way. Practice has showed that one other point for improvement is the education of sustainability experts.9 Training is needed to increase knowledge and skills.10The CFA institute conducted a survey amongst investment professionals and reported that 75% of the surveyed consider ESG factors in their analysis for risk management.11 Regarding training, 53% said the majority of the employees at their firms had received training through varied sources such as research papers and conferences, others said to have learned on the job, and a smaller proportion reported having taken a structured course, either in person (31%) or online (13%).12

The corporate sector might sometimes be reluctant to academic training has it may be a challenge to translate academic sustainability reporting insights into the world of practicing corporate reporting. However, training is crucial to improve anticipation of ESG risks, efficiency and consistency to the practice of sustainability reporting.13

There is a need for a common language, including generally accepted definitions of sustainability and materiality, to facilitate comparability (Peter Bakker, 2014).14 The EU and national Governments could play a role in the development of a globally accepted set of principles for sustainability reporting. Policy makers such as the EU and national Governments may endorse a particular sustainability reporting tool and incentivize the use of a common sustainability reporting language. Particularly useful for the development of responsible investment and for the investment community, in 2018, the Technical Expert Group (TEG) on Sustainable Finance started to work on proposals for an EU taxonomy for sustainable economic activities, including an EU green bond label, low-carbon indices and climate-related disclosure.15 The EU taxonomy is a EU-wide system for determining whether an economic activity is environmentally sustainable. This is may contribute to minimize language gaps in the field of responsible investment. Sustainability reporting has been developing through initiatives from the EU, national governments and also organizations such as the GRI, IIRC, UN Global Compact and the Sustainability Accounting Standards Board. Looking at these developments we may expect further progress of sustainability reporting in the future. The development of common metrics for the different sectors, if treated with similar rigor to financial measures of success, would allow a more precise comparison of performance and identification of industry leaders (UNGC & Accenture study, 2014).16

A sustainability framework has to be able to translate the ESG risks into a language that all businesses understand and can relate to. The solution lays on building the bridge between the corporate sector and Governments. The corporate sector takes the lead as they have the necessary capabilities as the financial means and technology to innovate. Innovation is at the heart of sustainability and is the key for business development. Governments will write the policies to facilitate the implementation of the innovative solutions created by businesses on a local level but with global impact (Peter Bakker, 2014).1718Legislation usually is created with, at least the intention, of facilitating and accommodating the needs of practice.

Literature has suggested Governments to use environmental taxes to finance the implementation of sustainability reporting and to discourage negative environmental impacts, and once in place, the sustainability reporting system could link the application of taxes to sustainability performance.19 Others, have suggested the establishment of economic incentives (for companies) and carbon pricing (Peter Bakker, 2014).20 The “cost of inaction is bigger than the cost of action (Peter Bakker, 2014).”21