Less Fragmentation; More Cohesion.

21 December, 2012

As with many nascent markets, sustainability reporting and disclosure is only a toddler. It has taken many steps and is gaining momentum, but is still somewhat clumsy as it determines how all the players fit together to run in the right direction. In this context, materiality around sustainability issues is a shifting notion, in contrast to the relatively static definition of financial materiality.

Businesses around the world are increasingly expected to communicate their impact on society and the environment, and on the strategies and policies they have in place to continuously improve their sustainability performance. But shifting trends – from increased usage of social media and seemingly contradictory movements toward Integrated Reporting <IR> versus specialized reporting on issues such as water and climate – have created new levels of complexity for companies trying to clear through the clutter.

To add to these factors, the dramatic shift by investors to increasingly integrate environmental, social and governance (ESG) factors into the investment process and the significant growth of engagement in the Principles for Responsible Investment (PRI) – which now claims over 1,000 signatories managing $35 trillion in assets – make it clear that investor analysis of these issues will only continue to rise in importance.

To illustrate the point, since annual Communications on Progress (COP) were first required of all corporate Global Compact participants, the number of these reports has skyrocketed – from 167 in 2004 to 3,553 in 2011. The GRI has experienced similar trends.

Notwithstanding the complexities of the current communications framework, the interest in ESG reporting and its often confusing link to financials that we see bubbling up around the world is a good problem to have. Just recently, Global Compact LEAD, our platform for advanced corporate sustainability practices, convened a symposium for companies and the major global reporting initiatives – IIRC included – to forge a path forward for streamlining sustainability reporting.

Symposium discussions revealed that many believe that, in the age of information and transparency, companies will never report less or disclose less than they do now. Indeed, the market is shifting from the goal of one consolidated report to different formats for reporting, in which each company can decide which pieces of information are relevant for its unique purposes. Companies may still seek to limit their ever-growing portfolios of corporate reports, but they must first answer two critical questions:  why do you report, and for whom? As these questions are not easily answered and the variation among reporting frameworks does not appear to be going away soon, it was cautioned not to overharmonize too quickly but to seek out areas of complementarity.

In all of this, the regulatory future of ESG issues remains uncertain. Participants expressed that until the corporate reporting ecosystem becomes less fragmented and there is more cohesion between companies and reporting institutions, it will be difficult to win over skeptics in the regulatory and investment communities. However, positioning sustainability as quality management and good governance may help to engage regulators, whether or not they introduce new legislation.

The Global Compact, for its part, is committed to ongoing collaboration with the major reporting institutions globally. We will continue to digest feedback from participants in order to inform our own COP Policy for companies ranging from the beginner to advanced levels. And we will aim to provide LEAD companies with the opportunity to feed into the Integrated Reporting <IR> framework – so that all voices are heard in shaping the future reporting ecosystem.

Launched in 2000, the United Nations Global Compact is both a policy platform and a practical framework for companies that are committed to sustainability and responsible business practices. As a multi-stakeholder leadership initiative, it seeks to align business operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption, and to catalyze actions in support of broader UN goals. With 7,000 corporate signatories in 135 countries, it is the world’s largest voluntary corporate sustainability initiative.