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June 11, 2010
Second Carrots and Sticks Report Surveys Current Status of Sustainability Reporting
    by Robert Kropp

The Global Reporting Initiative collaborates with the United Nations Environment Programme and KPMG to provide recommendations for improved reporting on a global scale.


In 2006, when the United Nations Environment Programme (UNEP) and KPMG issued a report entitled Carrots and Sticks for Starters, corporate sustainability reporting was less widespread than it is now, leading the report’s authors to call for “a publicly recognized set of performance indicators, of which the Global Reporting Initiative (GRI) provides a global reference framework.”

Since 2006, of course, such events as the global financial crisis and the recent Gulf of Mexico oil spill disaster have focused greater attention on corporate accountability, of which a standard reporting framework is recognized as an essential part. Happily, since the publication of the 2006 report, many companies and other reporting organizations have adopted the GRI’s
G3 Guidelines as their standard for sustainability reporting. In part because of the trend toward reporting according to G3 guidelines, what constitutes effective sustainability reporting has found more widespread agreement among companies, governments, and other key stakeholders.

In fact, according to a follow-up to the 2006 report, entitled
Carrots and Sticks: Promoting Transparency and Sustainability, “Research by KPMG in 2008 indicated that 79% of Global 250 companies disclose ESG data and 77% of those use GRI to do so.” In 2005, only 52% of Global 250 companies disclosed ESG data.

The new report, published by the GRI in partnership with the UNEP and KPMG, surveys the current landscape of sustainability reporting, noting the dominant trends that have taken hold since 2006 and providing recommendations for a basis of sustainability reporting in which what Isabella Pagotto, Manager of Governmental Relations & International Organizations for the GRI, described for SocialFunds.com as “a proliferation of regulations, as well as a trend toward greater coherence” in the international arena.

“One of the trends identified in the report is that governments are becoming more and more important,” Pagotto told SocialFunds.com. “More governments are making sustainability reporting mandatory.”

According to the report, 142 regulatory instruments addressing sustainability reporting exist in the 30 countries covered in it. The countries include most OECD countries, as well as new emerging market countries. Brazil, India and South Africa, which were covered in the 2006 report, are covered in the new report as well. While 65% of the standards are classified as mandatory, the rest are considered voluntary.

“There is an emerging emphasis on a combination of mandatory and voluntary approaches to reporting,” Pagotto said. “Ten years ago, the discussion was exclusive. Should reporting be mandatory or voluntary? But the discussion has shifted from a pro/com debate to a more mature debate. The options are no longer exclusive.”

“Assuming a complementary relationship between mandatory and voluntary approaches,” the report states, “The challenge for governments then becomes to determine the appropriate minimum level of mandatory requirements. For the reporting entities the question remains as to how much they would be prepared to do beyond their compliance with mandatory requirements.”

Voluntary guidelines for reporting are often provided by governments to assist companies, and are often accompanied by such incentives as public awards to encourage compliance.

A significant emerging trend, one which is described in the report as “still in its infancy,” is that of integrated reporting, in which sustainability criteria are combined with financial information in a single report. According to KPMG, “It seems time for a transformation in corporate reporting: from a focus on financial information to a concept where all types of relevant information for assessing and evaluating a company’s quality, performance, value and impact are reported in a comprehensive way.”

At present, only 3% of the companies in the Global 250 use integrated reporting. The International Committee for Integrated Reporting (ICIR) was recently formed in an effort to establish guidelines for the practice.

Some governments and other regulatory bodies are not standing by and waiting for widespread agreement on standards for integrated reporting. In 2009, for instance, Denmark began requiring that its largest companies report on sustainability information in annual financial reports.

This month, the
Johannesburg Stock Exchange (JSE) began requiring its more than 450 companies to produce integrated reports, and announced its collaboration with four other South African organizations in forming the Integrated Reporting Committee (IRC) to issue guidelines on good practice in integrated reporting.

In fact, as the report points out, “Stock exchanges are increasingly raising environmental, social, and governance (ESG) awareness and standards among listed companies. In particular, stock exchanges in emerging markets have taken initiatives requiring more transparency and better disclosure on ESG-related performance.”

In October 2009, the
World Federation of Exchanges (WFE) issued a report entitled Exchanges and Sustainable Investment, in which the trade association of 53 publicly regulated stock, futures, and options exchanges surveyed its members, asking, among other issues, "How can exchanges help to shape the way that regulatory conditions and reforms facilitate ESG transparency and sustainable investment flows?"

The authors of “Carrots and Sticks: Promoting Transparency and Sustainability” provided a number of recommendations for interested parties. Government regulators should become more actively involved in sustainability reporting, by providing simplified but more demanding mandatory requirements while encouraging voluntary reporting through incentives.

All stakeholders should interact in order to “take the debate forward,” according to the report, and serious consideration should be given to the option of integrated reporting.

In addition, as Pagotto of the GRI pointed out, “There is a need for more in-depth research.” The report itself acknowledges “a need for more in-depth analysis of legislation and the role of governments in sustainability reporting in the different regions of the world.”

 

 
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