Standardising Sustainability Reporting: Key Opportunities and Challenges

Sustainability reporting has dramatically shifted in the past few years. No longer considered simply a ‘green issue’, sustainability has moved beyond basic corporate social reporting toward a more quantitative-driven narrative anchored in sound data. This has brought with it an increased focus on regulated and standardised guidelines Karien Erasmus, Senior Manager of Sustainability at BDO South Africa.

Although the Paris Agreement was signed in 2015, it wasn’t until 2020 that climate risk really came to the fore from a financial perspective. So why did it take so long for financial institutions, rating agencies, and analysts to start picking up on climate change? The simple answer is Covid-19. The pandemic made the world realise how critical it was to adequately plan for a broad range of impacts which are not always apparent, slowly building up to the proverbial boiling point. In the same vein we don’t recognise the interrelationships between issues – for example the lack of service delivery which worsened the COVID-19 pandemic in South Africa, or the build of social and livelihood pressures which brought economic unrest last year

As a result, sustainability has moved from being a buzzword, to being a business imperative. A much broader range of stakeholders – customers, vendors and employees are now far more interested in what companies are doing from a sustainability perspective. This means that sustainability reports that used to come out once a year, with only a few interested readers, are now a fundamental part of a company’s reputation and financial stability.

The investor landscape has also changed, with major firms like BlackRock and Coronation moving away from investing in companies with significant fossil-fuel based assets. There is also a greater emphasis being placed on supply chains and how companies are putting together their transition plans.

The Impact on Sustainability Reporting

Clients, stakeholders and regulators also demanding greater transparency related to sustainability. Sustainability reports are being held to higher standards, and in turn heavily criticised for flawed methodologies that lead to inaccurate data and accusations of greenwashing. Reports that do stand up to scrutiny need to be able to deliver reliable, measurable information about a company’s performance and impact.

Take the European Union’s Corporate Sustainability Reporting Directive require entities to provide mandatory sustainability disclosures applicable to more companies in more detail.  These disclosure requirements have been written and standardised in such a way that demands detailed information including a company’s supply chain. If a supplier is unable to provide sufficient data on, say, their scope three carbon emissions according to these guidelines, they will be unable forma part of supply chains into the EU. This could severely affect supply chain operations, especially in emerging economies where those reporting standards and data metrics have not yet been integrated into the business.

Overall, there is a greater emphasis being placed on companies’ accountability. This requires improved communication and integrity of reported information. The proposed measures by International Sustainability Standards Board (ISSB) also speaks to the need for better integration of the various sustainability issues and risks within governance structures and organisational strategies.

Meeting the New Sustainability Demands

To meet the new sustainability demands, there is a greater need to set measurable targets underpinned by sound methodologies. In South Africa, for instance, the JSE has released a new set of sustainability reporting guidelines in line with those proposed by the ISSB. The  JSE guidelines, though, have placed a greater emphasis on the just energy transition with regards to how it will impact employees and supply chain, ensuring any plans take into account living wages and the social and developmental context.

The new guidelines also emphasise the need for double materiality. Traditional sustainability reporting was anchored in materiality, which took the form of a practical checklist of what a company needed to be doing right. In turn, double materiality takes that same idea, but goes further to include the broader impact on society, and how this impact filters into organisational governance, risk and strategy.

From Qualitative to Quantitative Reporting

Currently, climate is the central focus of reporting, due to its prominence as the demanding issue of the moment. Going forward however, there is going to be a greater move toward comparability, and standardisation of frameworks and datasets.

In the future companies will be expected to provide sustainability information in a more structured way. Data will become increasingly important in this regard, as a means for companies to better report on their activities. In order to meet this demand, companies will need to understand what information they need, how to collect it, and what are the systems required to ensure the integrity of that information.

It is important then that we consider these demands from the point of view of the emerging economy sector. In order to continue to contribute to the global economy, it will be essential that we think about how we compare and position our socio-economic context focus in relation to that of global reporting trends and themes.