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Challenges In Sustainability Reporting

As per Global Reporting Initiative (GRI), “A sustainability report is a report published by a company or organization about the economic, environmental and social impacts caused by its everyday activities. A sustainability report also presents the organization’s values and governance model, and demonstrates the link between its strategy and its commitment to a sustainable global economy.”

Sustainability Reporting or Non-Financial Reporting is the process of communicating the social, environmental and governance effects of a company’s operations to the stakeholders at large. Many companies have realized the importance of factoring in environmental, social and governance parameters in the business strategy of the company. It is also felt that companies that disclose their sustainability efforts are rewarded by the market.

In recent times, Sustainability Reporting has gained a lot of attention. A number of factors, such as changes in environment, changes to climate, focus on employees during Covid-19 pandemic induced lockdowns, to name a few factors, led to companies going beyond financial parameters to look at these factors. Companies are increasingly reporting on ESG parameters, often voluntarily. These include disclosures relating to environmental factors such as waste generation, water utilisation, and energy utilisation, social factors such as the wellbeing of employees and workers, efforts relating to diversity and inclusion, and governance factors such as Board, its committees and efforts towards stakeholders, such as vendors, suppliers, contractors and society. Companies are appreciating the need to be accountable for the impact that their operations have on environment and society.

Benefits of Sustainability Reporting include

  • Helps in management of risks- Most companies face ESG related risks. By having a structured reporting system, companies are able to identify, and manage risks. It may also result in competitive advantage to companies.
  • Improves financial performance – Many recent studies show a correlation between sustainability and financial performance. It is also believed that markets reward companies that are better in regard to ESG reporting.
  • Improves stakeholder relationship and communication – Companies are able to factor in concerns, if any, of different stakeholders in decision making, and are able to communicate the efforts undertaken for them.
  • Improves reputation – Various stakeholders favourably view companies that do well on ESG parameter.
  • Attracts talent – A number of professionals prefer to work with companies that give importance to ESG.
  • Attracts investors – A number of investors prefer to invest money in companies that are ranked high on ESG parameters.

In India, a few companies publish Sustainability Reports or ESG Reports. Some of the sectors in which companies publish such reports include construction and building materials, metals and mining, oil and gas, and chemicals. As per the Companies Act 2013, in the Directors’ report (in Annual Report), each company is required to mention its efforts regarding conservation of energy. In addition thereto, SEBI has mandated the publishing of Business Responsibility Report (BRR) for top 1000 listed companies. Business Responsibility and Sustainability Report (BRSR), which is a step towards reporting on the efforts on ESG, has more quantifiable parameters than BRR.

Challenges of Sustainability Reporting include

  • Broad definition of Sustainability – There is no one definition of sustainability. This results in the ambit of sustainability becoming very large, and it could be overwhelming for companies to collate such a lot of information and present it in the form of a report.
  • Multiple reporting standards and frameworks – Globally there are various reporting standards and frameworks for Sustainability Reporting, such as Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB). Each of these provide their own guidelines for Sustainability Reporting. This can result in challenges in reporting, basis each of these frameworks. In September 2020, the aforesaid five major reporting standards stated their intention to integrate their reporting requirements. This may help in times to come.
  • Time-consuming exercise – Given the extensive data that is required, Sustainable Reporting could be time consuming, especially for smaller companies.
  • Lack of understanding within management – The personnel responsible for collecting such data need to be educated and trained efficiently. Problems can arise if there is lack of proper coordination between different departments within a company. The credibility and reputation of the company depends on the accuracy of the data published.
  • No clear proof of financial return on investment – Although studies have shown that stakeholders reward companies with sustainable practices, there is mixed empirical evidence, partly because data continues to be a challenge.

Role of Board

The Board of a company can play a very important role with regard to Sustainability Reporting. The tone at the top, about the importance attached to sustainability, would decide the efforts that a company makes towards it. A number of companies have Board level committees dealing with ESG and Sustainability. In some companies, a part of the variable pay of the senior management personnel is dependent on the sustainability efforts of the company.

BRSR embraces concepts relating to ESG. It is a step towards ensuring that investors have access to standardized disclosures on ESG parameters.

Shikha Shah