The entire world’s attention turns to Dubai later this week as global leaders troop into the magnificent Expo City, UAE, for the 2023 Conference of the Parties of the United Nations Framework Convention on Climate Change (UNFCCC), more commonly referred to as COP28. The anticipation is that during the meeting, global leaders will, as is the norm, come up with global declarations geared towards protecting and conserving the environment.
In the face of this global showpiece, it is also imperative for corporates to introspect on their standing on climate change concerns. Fundamentally, while corporates have embraced the idea of sustainability reporting, which is indeed welcome, some have ended up overselling this noble standpoint resulting in a misalignment of contents in the reports and strategic corporate action towards climate change. Consequently, the very aim of sustainability reporting has continued to be eroded over time.
The vicious cycle
In the recent past, persons who have continually pushed the sustainability agenda have insisted that the prosperity of businesses is greatly interlinked with how a business handles its green agenda and its social responsibility standing. The sustainability brigade is driven by the conviction that with companies committing to measure and report on their sustainability performance, then:
- Performance on the ESG matrix would improve as what gets measured can therefore be managed.
- Better equity returns would emerge.
- Investors and customers are more enthused by entities with string sustainability performance indices, and,
- Pressing concerns around the social and environmental impact of corporate activities would be addressed with urgency.
From the outside, it looks like this approach is working and is effective. It typically looks like how business is done, and one could be proved rightfully so. The number of companies filing social corporate responsibility reports under the GRI (Global Reporting Initiative) standards—the most comprehensive ones available—has increased a hundredfold in the past two decades, and this is bound to soar higher with the introduction of IFRS S1 and S2. A closer look at empirical evidence gives an indicator that the impact of the measurement and reporting movement has probably been oversold. During the same period of increased sustainability reporting, carbon emissions have continued to soar, environmental damage has indeed accelerated, and social equity has, by far, increased.
Painstakingly, this promises to be a vicious cycle if not cited early enough and dealt with! It could simply result in a more sustainable model of capitalism.
Existential challenges to sustainability reporting
Attention to detail, more so in the sustainability agenda, will result in better social, environmental, and financial outcomes for companies. Not only are they likely to enjoy the rewards of lower capital costs by being better managers of risk, but with a focus on sustainability, they will also be able to improve their margins and enhance brand value. Even with that, corporate sustainability efforts, as a whole, have not made a considerable difference for society or the planet but have instead caused incidental and real problems for reporting as well.
Most companies have discretion on what standards to adhere to and what to include in their reports, hence the possibility of having either inaccurate or incomplete reporting. Further, with supply chains becoming increasingly multi-tiered, traceability has become difficult, stretching the ability of existing audit procedures to stem social and environmental abuses. Notably, even companies with a huge capital base and influence, like Walmart, need help to appreciate what is going on in an increasingly global and interconnected supply chain.
The complexity of sustainability concerns also poses a major challenge. While advancement in technology has provided tools for measuring and monitoring environmental impact, reporting on vital sustainability metrics still needs to be improved. An example would be the little-known or obscure yet essential metric of carbon emissions. A company needs to report on Scope 1- being emissions under its direct control, Scope 2- upstream and downstream emissions, and Scope 3- emissions by suppliers, distributors etc. According to the Carbon Disclosure Project (CDP), the world’s leading aggregator of corporate carbon emissions data, fewer than half of the companies that disclose such data track and report on scope 3 emissions.
Suffice it to say that with the current structures of reporting, reporting is not a proxy for progress. The schemes of measurement are often nonstandard, incomplete, imprecise, and, at times, misleading.
Changing the mindset in sustainability reporting
The preoccupation with growth has soured the promise of sustainability measurement and reporting. Audren Schendler, a leading author on climate issues, earlier opined that “Measurement and reporting have become ends to themselves, instead of a means to improve environmental or social outcomes. It’s as if a person committed to a diet and fanatically started counting calories but continued to eat the same number of Twinkies and cheeseburgers.”
It turns out that some of the reporting more so on disclosures and socially responsible investments are just often fanciful “greenwashing”. Worse yet, it could be argued that with an increased focus on reporting without ensuring alignment to actions, reporting itself could turn out to be an obstacle to progress—consuming bandwidth, exaggerating gains, and distracting from the very real need for changes in mindsets, regulation, and corporate behaviour.
Having pointed out that reporting as currently structured has turned out to be incomplete, imprecise, and often misleading, there is a pressing need for a shift in mindset.
Even if sustainability reporting is seriously flawed and does not meet its intended purposes, the demand for investing sustainably is still experiencing rapid growth; companies still want to make a positive social and environmental impact.
To achieve this, there is a need to ensure sound reporting, which can best be done by ensuring reports are honest and aligned with actual actions.
This reminder needs to come out clearly in COP28, even as we move towards the adoption of IFRS S1 and S2 beginning next year.