Beyond Compliance: The Evolution of Corporate Sustainability Reporting

Modern corporate reporting resembles an incomplete picture with all its missing parts spread over the table, waiting to be put together. Even though disclosure rules and audit standards continue to direct strict and relatively consistent financial reporting standards, hopes for large-scale corporate reporting have grown more complex and open-ended. According to stats:

In just 5 years, the standards and regulations of ESG reporting have almost doubled. At present times, global ESG reporting provisions have reached a number of 600.

Why is corporate sustainability reporting critical?

Corporate sustainability reporting is indispensable to catch a realistic view of a company’s culture, financial health, risk profile and long-term outlook. Currently, the institutional investors and issuers thoroughly investigate the “extra-financial” or “non-financial” corporate reporting.

However, there are still many companies taking financial reporting as a compliance exercise; nobody can deny the limitless options that a company could pick to showcase its progress story.

Factors Shaping the Corporate Reporting

Here are a few factors that play a vital role in moulding the present and future of corporate reporting.

▪ There is no doubt about the significant impact of environmental, social & governance policies on a company’s financial performance. This is the prime reason that information on ESG and sustainability is expected to be increasingly sought after by investors in the coming years.

▪ As global index funds back investors, they have adhered to stewardship principles. They have observed their duty as financial advisors requiring their focus on the long-term efficiency of the target companies.

▪ Consequently, they are becoming more concerned about corporate culture, human capital management, corporate purpose and reputation of the company to decide on proxy voting and investment.

▪ In addition to shareholders, the corporate reporting audience is now characterized by stakeholders. Employees, customers, suppliers, and the communities impacted by the company’s domestic and international business are examples of stakeholders. Presently, corporate reporting is reaching a broader and more diverse audience than ever before, thanks to the emergence of new technologies and social media and a shift in shareholder demography.

▪ To assist issuers and investors, an extensive set of ESG measures have already been set by organizations setting global standards, including GRI (Global Reporting Initiative) and SASB. These ESG metrics assist in maintaining audit standards and provide a source of comparison between industry and companies’ peers.

▪ ESG/sustainability disclosure is becoming increasingly important to regulators around the world. The shareholder’s rights dimension is also strengthened by the European Commission, as based on voluntary comply-or-explain stewardship rules, the European Commission has increased pressure on companies to provide high-quality explanations. Additionally, the EC has also issued the requirements regarding the issuance of non-financial information reporting.

▪ Non-financial performance is disclosed in detail by French corporations. On October 1, 2018, a group of intellectuals and shareholders sharing $5 trillion in AUM filed a proposal to the Securities and Exchange Commission (SEC) in the US, asking for regulations on ESG disclosure.

Influential sources behind sustainability reporting movement

Over time, a small but vocal group of activists and socially responsible investors became the driving force behind the development of the sustainability reporting movement, which began in civil society.

The patterns of the sustainability debate have been through various stages of evolution over the past few years, with mainstream investors observing the impact of sustainability problems on the value and return of the company, which cause long-term risk to the overall company’s performance.

That’s why mainstream investors now demand consistent, comparable, and reliable data about the sustainability performance of a company.

This shift encourages securities regulators and corporate boards to take sustainability issues more seriously. So, there would have been no ISSB if mainstream investors had not insisted on sustainability information.[1]

Rapidly Growing Markets

For various reasons, emerging markets are committed to raising the bar for ESG reporting. The straightforward reason lies behind the global manufacturing location of the top 500 companies residing within the boundaries of emerging markets.[2]

Thus, improved transparency, disclosure, and risk management is critical requirement to retain present and future foreign investors with a constantly improving ESG focus. A greater focus on ESG issues will help attract and retain international investment, specifically a massive chunk out of the USD30 trillion of funds globally available for sustainable investing.[3]

According to the present research, the economic and institutional factors expect China to be the most influential emerging economy player in the coming years.[4]

New Development: The Role of ISSB

The International Sustainability Standards Board (ISSB), developed for the capital market’s sustainability disclosures, launched a consultation on March 31, 2022, on its 2 proposed standards, including:

• Requirements for general sustainability-related disclosure
• Requirements for climate-related disclosure

To advance the global baseline’s incorporation into jurisdictional requirements, the ISSB is collaborating with other international organizations and jurisdictions. The consultation session of 120-day for providing feedback on the ISSB proposal will end on July 29, 2022. All the feedback will be reviewed in the latter half of 2022, followed by the issuance of new standards by the end of 2022.

Final Thoughts

Corporate reporting that includes material ESG and sustainability issues will be more customized, detailed, and company-specific in the future. These standards will focus on market conditions, business fundamentals, and strategic goals rather than relying on “one size fits all” regulations. Fit-for-purpose disclosures will make it easier for the company to tell its own story with the help of a transparent communication system.

[1] Assets under management devoted to investing under ESG principles have increased from USD0.86 trillion in 2019 to more than USD1.3 trillion in 2020, according to the Institute of International Finance. Granted, it is plausible that a portion of this rising amount comprises repurposed assets under the guise of ESG, and global liquidity as a whole has risen sharply. Nevertheless, in the last two years, the number of signatories to the UN-supported Principles for Responsible Investing (PRI) agreement has doubled to approximately 3,000 of the world’s asset owners, investment managers, and services providers, who collectively manage USD103 trillion in financial assets.

[2] “Global 500,” Fortune, 2019.

[3] Emily Chasan, “Global Sustainable Investments Rise 34 Percent to $30.7 Trillion,” Bloomberg, 1 April 2019

[4] Bloomberg’s ESG disclosure score is a proprietary score that measures the amount of ESG data a company discloses publicly, not the company’s ESG performance. It ranges from 0.1 to 100. The availability of each ESG data point contributing to the overall disclosure score is weighted based on its materiality and relevance to the company’s sector.