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Home > Balance Sheets Viewpoints > Sustainability Reporting and Assurance—A Market-Driven Transformation

Balance Sheets Viewpoints

Sustainability Reporting and Assurance—A Market-Driven Transformation

by Brendan LeBlanc and Barruch Ben-Zekry

Going Beyond the Financial Statements

Companies today are looking for ways to measure and report more than just their financial statements. To increase profits and build transparency and accountability with their customers, employees, suppliers, boards, investors, and the public, companies are also looking to measure and report on their environmental, social, and governmental performance.

To understand sustainability reporting, we need to look back at its evolution. Sustainability reporting has its roots in corporate citizenship, sometimes called corporate social responsibility (CSR), a practice that is as old as trade and business. Businesses—in particular larger companies that have a larger impact on their communities—have long sought to ensure good corporate stewardship through creating philanthropic programs. Historically, businesses engaged in these types of practices to be good local community partners and to help to build, maintain, or repair their reputations. And, for many years, these activities were kept separate from what were the perceived costs of doing business—materials, property, cash, transportation—and, as such, the financial reporting mechanisms.

As the world has become more interconnected, the lens viewing the real costs of products and services has widened its scope. Companies of all sizes—but particularly multinational corporations—are seeking to better understand their externalized costs, meaning they are now considering the costs borne by the environment, community, employee treatment in their supply chains, and the respective risks. This paradigm shift has demonstrated a need for a change in the ways companies gather and report their “value creation story”. Since this change involves topics that traditionally are relegated to the world of CSR, those practices and processes have also needed to evolve. Socially responsible investors, active nongovernmental organizations (NGOs), and a few values-led companies have been clamoring for this kind of information for decades.

Enter Sustainability Reporting

The guidelines for sustainability reporting have largely come out of the Global Reporting Initiative (GRI). The GRI developed and, in 2000, launched a widely adopted and comprehensive sustainability reporting framework that enables measurement and reporting on the key areas of sustainability: economic, environmental, social, and governance performance. This framework allowed companies to have a common language and a way to present a large volume of information about the aforementioned topics in a succinct way.

The framework had another impact, though: it gave companies and their stakeholders a wide view into all aspects of business operations and, therefore, the true costs and drivers of profits. Suddenly, there were more reported-upon factors that impacted the value of an organization: people, natural resources, intellectual capital, market and regulatory context, competition, and security. Suddenly, too, there were more risks to consider. As a result, companies are responsible not only for making and delivering products and services, but also for managing every aspect of that product or service’s creation through every avenue of the supply chain down to, for example, a mineral’s extraction from the earth.

To keep up with this expansion, the GRI has routinely adapted and updated its framework. Currently, the organization is in the process of asking for comment on G4, the latest version of its sustainability reporting framework. Among the chief differences from GRI version G3.1, which is the framework that most use today, is the way in which supply chains are considered and treated. G4 focuses much more on the sustainability performance all the way through the supply chain, and that promises to be very useful for larger companies with extended global or regional supply chains.

When we look at what is driving sustainability reporting, what is particularly noteworthy is that it isn’t a process that is being mandated by regulation. Instead, this is a process that is largely driven by the increasing sophistication of company stakeholders, which include customers, employees, communities, NGOs, suppliers, and providers of financial capital. Stakeholders want relevant information. They want to understand how the company is identifying and managing risk in the widest dimension. A company following GRI will attempt to report on material items of importance to these multiple stakeholders.

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Further reading

Books:

  • Chouinard, Yvon. Let My People Go Surfing: The Education of a Reluctant Businessman. New York: Penguin Press, 2005.
  • Esty, Daniel C., and Simmons, P. J. The Green to Gold Business Playbook: How to Implement Sustainability Practices for Bottom-Line Results in Every Business Function. Hoboken, NJ: Wiley, 2011.
  • Friedman, Thomas L. Hot, Flat, and Crowded: Why We Need a Green Revolution—And How It Can Renew America. New York: Farrar, Straus and Giroux, 2008.
  • Kurlansky, Mark. Cod: A Biography of the Fish That Changed the World. New York: Walker & Co., 1997.
  • Werbach, Adam. Strategy for Sustainability: A Business Manifesto. Boston, MA: Harvard Business Press, 2009.

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