Mandatory Sustainability Reporting: The Necessary Fire to Ignite Change

We may still have a long way to go before sustainability reporting becomes mandatory.  Let’s take a look at the current landscape.1997: The Global Reporting Initiative (GRI), an international non-profit organization is formed, with the objective of promoting sustainability reporting and accountability among companies who wish to contribute to a sustainable future.  Key words, "companies who wish"…i.e., the GRI is voluntary.  Nonetheless, today, more than 4,000 organizations from 60 different countries use the Sustainability Reporting Framework engineered by the GRI.  This framework encourages corporations to use specific principles in reporting economic, environmental, and social performance.2010: The forming of the International Integrated Reporting Council (IIRC), a global alliance of regulators, investors, and corporations who share a mutual vision of integrated reporting as mainstream business practice.  Lead by Professor Mervyn King and Paul Druckman, the IIRC provides an “International Framework”, or guiding principles, to help govern the overall content of an integrated report.  The thesis behind integrated reporting is that all issues (both financial and non-financial) that affect a company’s long-term value creation, should be reported.  Makes sense.  If sustainable factors are relevant to the longevity of a company and the ability of a company to create value, why should they be reported separately?  The IIRC argues they shouldn’t.2011: Here in the U.S., under the leadership of Robert Eccles (Professor of Management at Harvard Business School) and Michael Bloomberg (Founder of Bloomberg, LP and 108th Mayor of NYC), the Sustainability Accounting Standards Board (SASB), has been developing sector-specific key performance indicators (KPI's) for material ESG issues.  What is material?  SASB adheres to the Supreme Court’s definition of material, “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.”  Importantly, the company makes the ultimate decision on what constitutes materiality.  The goal of the SASB is for publicly-listed companies to disclose material sustainability issues in their SEC filings, such as the Form 10-K and 20-F.  Quoted on the SASB website, “Sustainability accounting standards are intended as a complement to financial accounting standards, such that financial fundamentals and sustainability fundamentals can be evaluated side by side to provide a complete view of a corporation’s performance."In theory, voluntary reporting is a good concept, as it allows volunteering companies a competitive edge.  By disclosing information that is not required, a company can prove to its investors and consumers that it truly cares about issues relevant to all stakeholders.  The major impediment is that, in reality, only companies who adhere to high environmental, social, and governance standards will disclose what’s going on behind the scenes.  Similar to survivorship bias in hedge fund reporting, the market is left with a skewed view of the "sustainable landscape" as only the good is reported.If companies are forced to adhere to a higher level of transparency and disclose both the good and the bad, will consumers and investors change their buying decisions based on what they know?  Today, it seems that only a small ensemble of consumers and investors make purchasing and investing decisions based on ESG factors first. Perhaps it is not that the masses "don’t care" if companies and products negatively impact society and the environment, but rather, that most people simply do not have enough information to understand.