Sustainability reporting adds value to corporates

Businesses around the world are recognising the value of demonstrating transparency and accountability beyond the traditional domain of financial performance. This trend is in response to increasing public expectations on sustainability in corporates’ behaviour.

The world is facing a severe challenge of climate change greatly induced by endless consumption of global resources and development activities. Today, every one living on the planet has a responsibility individually and collectively to conserve natural resources for the future generation to meet their need – this is the broad underlined concept of sustainability.

Sustainability also strives in satisfying multi stakeholders’ demands on issues such as ethical labour practices, training, education and diversity of work force and corporate philanthropic initiatives that sustain corporates’ social relations. Corporate governance is the other aspect of corporate sustainability which ensures efficient and productive utilisation of resources. Consideration of these aspects in enterprises is also known as ‘triple bottom-line management’.

In the context of today’s business world, there is a wealth of research to suggest that sustainability is a perquisite that needs to be deeply embedded in the fabric of modern business. Profit alone isn’t sufficient in generating long-term value to shareholders; it has to be supplemented by addressing environmental, social and economic concerns to sustain. Recognition of these aspects of sustainability therefore becomes increasingly crucial in the process of corporates’ strategic decision making.

Sustainability reporting

Providing performance measurement, quantifying and evaluating risks and opportunities of triple bottom line have evolved and gained wider acceptance as sustainability accounting and reporting in the last decade. Sustainability reporting is a form of internal monitoring, management and external communication, which enables organisations of all sizes to meet growing information needs of various stakeholders, both internal and external.

The World Business Council for Sustainable Development (WBCSD) defines sustainability reporting as “public reports by companies to provide internal and external stakeholders with a picture of corporates’ position on activities on economic, environmental and social dimensions”.

Multi-stakeholder accountability

Shareholders are not the only audience to whom a corporate is accountable. In any business enterprise shareholders’ funds represent comparatively a smaller percentage of balance sheet value. The biggest contribution comes from other stakeholders who are urging to have information on their interest and as to how and what the company is doing. These parties are the custodians of the environment, society and the economy who could pay a significant influence, directly or indirectly over the balance sheet value, operational stability and soundness of a company.

For example, in the banking industry in Sri Lanka, out of the total asset base of Rs. 5,102 billon as at 31 December 2012, shareholders’ funds account for only Rs. 436 billion, representing 9% of the industry investment. The balance has come from other stakeholders – lenders, depositors, customers, employees, suppliers, utility providers, government, etc. – representing 91% of industry value. These parties are urging to have information of the banks’ operation and as to how companies manage and engage with their interests.

Other than the above parties who have financial interest in the affairs of a bank, there are several other groups who are keen to have information on non-financially significant aspects of banks’ operations. Potential and anticipated customers, lenders, investors, regulators, researchers, NGOS, universities, and policymakers are such other groups who are vigilant to know as to how the operation of a bank influences their social, economic and environmental interest.

Therefore, corporate sustainability disclosure is the best means of enabling stakeholders to hold companies accountable and supportive for inclusive development of society, industry, and country.

Reduce risk and enriches brand value

Sustainability reporting enriches corporate value much beyond the balance sheet. Information available on sustainability reports allow stakeholders to drill down to details of particular interest to them, coupling public confidence and trust.

Ample researches have proved that over 50 per cent of a company’s value is off the balance sheet. If an investor tries to figure out whether a company is worth investing in, he should understand the balance 50 per cent to assess the value of the company.

A company’s value is the present value of the earnings it will potentially generate in the future. It’s a function of the magnitude of those earnings and the risk associated with them. Therefore, sustainability is strongly related to value: the more a company proves to the financial markets and other audiences that it is a sustainable business, the lower the risk associated with that company and the lower the rate used to discount future earnings.

According to a report released by the Global Reporting Initiative (GRI), 90 per cent of those who have read company sustainability reports admit that their opinions of a company change after viewing the report and 85 per cent said that they had a more positive perception of a company after reading its report.

As a tool of management and communication

Sustainability reporting has external as well as internal benefits for a company. Externally it demonstrates transparency and builds trust. Internally the process of sustainability accounting and reporting can help company to stimulate internal processes, communication, alignment of vision, build management systems, promote staff competencies, and develop behavioural changes.

Sustainability accounting approaches such as eco efficiency, full cost accounting, Life Cycle Analysis (LCA), and industrial ecology are new to the business world. Eco-efficiency offers a theoretical framework for understanding potential material environmental impacts involved with providing services or products.

The process of sustainability reporting captures dimensions of an organisational behaviour that have traditionally not been measured or reported in a systematic way. Companies setting out to produce a corporate sustainability reports analyse how business objectives such as profit and competitiveness are consistent with sustainability principles, which offer a valuable insight into drivers of organisational performance. The reports therefore are a strong tool of communicating that organisations are engaged, have a vision and internal support to achieve that vision, and are listening to stakeholders.

Corporate sustainability disclosure is the best means of enabling stakeholders to hold companies accountable and supportive for inclusive development of society, industry, and country

Cost effective and competitive

The measurement and tracking procedures are put in place to gather data, enable analysis of energy, water, waste, purchases, HR practices and operational bottlenecks. The sustainability accounting process evaluates performance with internally recognised Key Performance Indicators (KPIs) of costs and benefits to the corporation’s finances, the communities where it operates, impacts on economy and environment.

It provides analysed information regularly to senior decision makers to shape company strategy with sustainability policy. This process improves performance while reducing waste and inefficiency in production processes generating competitive advantages to the company and its customers.

Same time, being transparent with financially and non-financially vital information of a company’s operation always enhances competitiveness among the organisations which rewards the sustainability of related industry and the economy at large.

Good for employees

The process of sustainability reporting leverage further embeds corporate responsibility across the organisation. The development of a corporate responsibility report takes a significant amount of time, effort, and resources. Leaders in corporate responsibility are effectively leveraging the generous efforts of producing reports and information to assist in informing and shaping their corporate responsibility strategies throughout the organisation.

There is a wealth of evidence to prove that employees engage in sustainable practices very willingly and very freely, and that it is highly motivational. HR policies embedded with sustainability principles harness ethical and social commitments of employees, thus fostering their loyalty, reducing training costs, and increasing production efficiency, all of which add to company value

Managed change towards sustainable development

Accounting for sustainability and preparation of reports present key environmental, social and economic information alongside conventional financial information to give a more rounded and balanced picture of the organisation’s overall performance, enable environmental and social performance to be better connected with strategy and financial performance, and thereby embed into day-to-day operations and decision making. Sustainability reporting is therefore a vital step for managing change towards a sustainable global economy – one that combines long term profitability with social justice and environment protection.

Reporting framework

Sustainability reports should contain information that matters to stakeholders so that they can better engage with the company and make informed decisions. GRI guideline is the most internationally-accepted sustainability reporting framework launched by Global Reporting Initiative (GRI) a multi-stakeholder international organisation that has been developed with over 12 years of global, multi-stakeholder dialogues to guide companies on what to report.

GRI guidelines offer a set of principles and performance indicators to report on sustainability performance, which can be used in combination of other disclosure tools such as United Nation Global Compact Principles, to design internal commitments and management approaches.

As the saying goes, “today’s best practice is the standard of tomorrow”. Hopefully, today’s successful sustainability strategies will soon become standard, promoting long-term benefits for businesses and generations.

(The writer – B.Sc Special Graduate, holder of Master of Business Administration – UK, fellow member of the Institute of Chartered Accountants of Sri Lanka, Institute of Certified Management Accountant of Sri Lanka and a GRI certified Sustainability Practitioner – is AGM (Finance and Planning) of HDFC Bank of Sri Lanka.)