There have been a lot of recent, positive developments in the world of corporate sustainability reporting. But can these efforts possibly keep pace with the interconnected and existential threats of the climate emergency, racial injustice and inequality, social unrest, and Covid-19?
The amount of carbon in the atmosphere is growing despite the economic slowdown from the pandemic, and progress toward achieving the goals of the Paris Agreement hasn’t been fast enough. There’s been regression in achieving the UN’s Sustainable Development Goals—and 39% of business leaders report that their ambitions aren’t enough to achieve them.
As the world faces growing crises and challenges to the existing order, there has been more dialogue about the private sector’s role in addressing them. The European Union is launching its proposal for its Corporate Sustainability Reporting Directive. In the US, the SEC is reviewing the possibility of climate disclosures; and the IFRS Foundation is developing an International Sustainability Standards Board. Work also has been done to clarify and harmonize what already exists, including joint position statements from the major voluntary sustainability reporting standards, the merger between the Sustainability Accounting Standards Board and the International Integrated Reporting Council, and the collective work of the Impact Management Project.
All of these sustainability reporting developments share a common recognition: that higher quality, more efficient, and more widespread sustainability reporting standards for businesses are necessary.
The downside? All of this emphasis on reporting might divert attention from other, perhaps more difficult but also more impactful changes that need to be made.
Sustainability reporting is important, but it’s also incremental, instrumental, and enabling—it’s not the end goal itself and not nearly enough to address the world’s challenges.
The logic of sustainability reporting is pretty simple: With more and better information accessible to a variety of stakeholders, it is possible to make a company more accountable, which in turn will drive different decisions and improvements on their part. While this prediction is likely true, it also has limitations, the first being the assumption that it is even within the power of companies to make different decisions that will lead to the necessary improvements.
Let’s take an analogy: Warning labels were mandated on cigarettes decades ago with a similar idea in mind. They likely reduced the number of new smokers, and maybe provided a regular reminder of smoking’s harmful effects to influence some to quit. But for many, the label wouldn’t change a thing. Why? They probably knew the harm of smoking without the label anyway, and ultimately, they aren’t completely in control of their own decisions; cigarettes are addicting.
Like cigarette smokers, businesses (and investors) are in their own way not in complete control of their decisions. The global economic system is based on an existing web of systemic and entrenched norms of shareholder primacy and short-termism that are cultural, market-based, and legal. Clearly there is some flexibility in what could be considered in their decisions within this framework—as evidenced by the fact that businesses engage in sustainability efforts at all—but the purpose of business itself is fundamentally a limiting factor, and one that doesn’t necessarily optimize long-term value creation even if that is what it’s designed to do.
Simply reporting on things beyond financials doesn’t fundamentally change the fact that companies are acting based on what drives financial performance. Anything else is superfluous. Yes, it’s possible to argue that on a long enough time frame all sustainability issues are financially material, but as Keynes said, on a long enough time frame we are all dead.
The purpose of sustainability reporting does not align with the purpose of our economic system, and reporting won’t solve the fact that the purpose itself needs to shift.
There’s a second, more complicated challenge in creating reporting standards that are not only necessary but sufficient for addressing the world’s sustainability problems. Unlike warning labels, sustainability reporting is exponentially more complex and opaque. But reporting depends not only on the freedom to take action; it also assumes individuals can understand it enough to actually use it.
In this sense, shifting the metaphor, sustainability reporting is more like a nutrition label. When I take a look at nutrition labels, I can get at best a general idea of a product’s nutritional profile. How should I consider the combinations of sugar, fat, preservatives, and other content? And how should I actually use the numbers reported as a “% of daily value”? Am I supposed to calculate that based on what I plan to eat that day? Am I supposed to awkwardly stand in the aisle squinting at two products side by side to compare?
Since I’m not a nutritionist, I feel a little less guilty admitting my struggles with this. But I am a sustainability professional, and I have the same challenge with sustainability reports. They provide lots of information and data, but not the means to evaluate and take action on that data, either for me as an independent stakeholder, or for individuals in the organization itself.
Sustainability reporting contains data that is highly complex, interconnected, and technical, and as such there will always be a privileged group who have the time and know-how to evaluate and use such information, which limits its use and creates different interpretations of the data provided.
Providing raw nutritional data may create transparency, and may help keep your average consumer (me) away from unhealthy food purchases and diets. But it doesn’t help me understand my overall health in any meaningful way, and it doesn’t make me healthy. I still need to develop knowledge about my diet’s implications for my health, and then actually choose to eat healthfully. The same is true with sustainability. Raw data isn’t enough; it needs to be paired with the underlying ability and will to change, along with a path of action to do so.
None of this means that efforts around improving the quality and number of sustainability reporting should be de-prioritized or limited. This is a case of “yes and,” as well as “how.”
- Rethinking the fundamental purpose of corporations and our economic system to align it with the spirit of sustainability reporting and the world we want to achieve;
- Recognizing the importance not just of sustainability reporting but also performance evaluation and creating meaningful pathways to inform improvements and ambitions; and
- Strengthening the connection between sustainability reporting and evaluation and action to ensure that reporting initiatives are themselves collaboratively supporting the transformation toward an inclusive, equitable, and regenerative economic system.
While a lot of focus right now is on reporting, work is also being done to change the purpose of companies and facilitate the evaluation of them as it relates to sustainability issues. New corporate forms, like the benefit corporation, exist in the United States and around the world to ensure more comprehensive stakeholder consideration in corporate decision making (some are even calling to make this not just an option but a foundation for corporate entities).
There also are sustainability certifications and other standards in place like B Corp certification (administered by B Lab), Fair Trade International, UN Guiding Principles on Business and Human Rights, Science Based Targets Initiative, Global Living Wage Coalition, and World Benchmarking Alliance. While these seals of approval aren’t perfect, they’ve done great work establishing standards that all businesses should aspire to achieve, beyond what they should report.