Sustainability Reporting: Meeting the Needs of the Market
Richard Barker, PhD, of the International Sustainability Standards Board and Professor, University of Oxford's Saïd Business School, recounts the rise in sustainability reporting. In a world where planning for a low carbon, sustainable future creates greater enterprise value than persisting with business as usual, businesses need to effectively communicate their sustainability story.
Sustainability reporting is on the rise. The Securities and Exchange Commission (SEC) has issued its climate disclosure rule. California has introduced legislation to require public and private companies that do business in the state to disclose their greenhouse gas emissions and their climate-related financial risks. The International Sustainability Standards Board (ISSB) has issued its first global standards, IFRS S1 and IFRS S2, which have been endorsed by IOSCO, and which consolidate foundations laid by the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosure (TCFD) and others.
These developments have their roots in economics. Sustainability reporting is on the rise because the business case is becoming more widely understood. Change is being driven by markets.
A simple illustration makes the point. Think about the history of the auto industry, what comes to mind? Maybe Henry Ford, who started the production lines that still define the industry. Or maybe Alfred Sloan’s General Motors, and the mass customization that has characterized the industry ever since. Ford and GM have in common the internal combustion engine, the driving force that powered the 20th century and that continues into the 21st. The engine in tractors, haulage trucks, bankers’ saloon cars, and CEOs’ SUVs. The demand for ExxonMobil and Chevron. This is economic activity as we know it. Business as usual. Business as it’s always been done. Enter VinFast, which started making cars six years ago, electric cars. In Vietnam. In August last year, it launched an IPO on the New York Stock Exchange, initially achieving a market capitalization of $87bn, higher than the combined value of Ford and GM. By the standards of the traditional global elite in the auto industry – not just Ford and GM, but also Toyota and VW — VinFast is a startup, but then so too was Tesla in the not-too-distant past. It came from nowhere. It cruised past indomitable incumbents. It became by far the most valuable automaker in the world.
Whether VinFast or Tesla is the more remarkable story, I don’t know. What is unmistakable, however, is that both are stories of disruption. Investors have chased both stocks because they see a future that is different from the past. An 1849, a railroad boom, a dot.com rush. The world is being weaned off oil and gas. Investors are looking to find the money-makers in an electric, renewable economy. There is no climate change denial in the valuations of VinFast or Tesla. The opposite, maybe (and the evidence of a bubble in Vinfast’s opening valuation is clear). But denial, clearly not. Investors buying the stock are buying into an electric future. Their thesis is that the energy sources that built our economies are not those that will sustain it. Economic value will be created in different ways. Profits will be sustained with different business models. New and existing markets will be served in different ways.
There’s the twist. This is not sustainability as an end in itself. It is not glossy stories of corporate social responsibility. It is instead sustainability as a place to do business. Investors are looking to different market conditions that lie ahead, a place where sustainability creates value. Sustainability of profit. Business resilience. Capacity for growth. Flexibility and vision to escape business as usual, to look ahead and see a world that is changing. A business proposition that is worth maybe $87bn.
The point is this. If global warming remains unchecked, and if such things as extreme weather events and global supply chain disruptions further as the new norm, the economy will suffer. And if the economy suffers, conditions will not be favorable for economic activity and neither, therefore, for investors. The corporate reporting implication is obvious. Investors want to know how your business sees the future, how you are planning to meet it, and what value you expect to be able to create. Current financial reporting alone cannot offer this; in a disruptive world, investors cannot evaluate your prospects based upon existing conditions or past performance.
This is how to think about sustainability reporting. How will you make money in a sustainable economy of the future? What’s the business case? What’s your plan? Why should investors buy your stock?
Note what this is not. It’s not compliance. It’s not a PR exercise, promoting green anecdotes as a smoke screen on business as usual. Fundamentally, it’s not even anything new. It’s timeless principles of economic thinking, value creation, and corporate reporting, applied in a setting where the future will look different from the past, and where planning for a low carbon, sustainable future creates greater enterprise value than persisting with business as usual. It’s reporting to investors who value makers of electric cars more highly than those making the cars of yesterday.
That train has left the station. Pretty much all major US corporations are doing sustainability reporting in some form. For example, there are currently 1,297 public companies in the United States using SASB’s industry-based reporting standards. These include (to sample from those at the start of the alphabet): Abbvie, Accenture, Adobe, Allstate, Alphabet, Amazon, American Airlines, Apple, AT&T and Avis Budget. In doing so, you are in good company.
This reporting covers all sectors because all have a sustainability story that needs to be told. Leading manufacturers and constructors are investing in energy efficiency and circular business models. Fund managers and banks are de-risking investment and loan portfolios by setting demanding targets on emissions. Aviation is focused on sustainable fuel, the oil and gas industry on energy security during a period of transition to a low carbon future. And so, the list goes on. This reporting is driven in part by investor demand but also because doing business responsibly gives you a license to operate, and transparent reporting validates that license.
So, how should you be thinking about sustainability reporting? How can it be most valuable to your investors, and therefore also to your business? I address these questions in a recent article in MIT Sloan Management Review, Get Ready for More Transparent Sustainability Reporting. That article offers an 8-part guide, as follows:
- Don’t stop what you’re already doing — Your company might (for example) disclose its carbon emissions or plans to transition to renewable energy. Build on this, there is no need to start over.
- Don’t let perfect be the enemy of good — Investors want to understand what your sustainability-related risks and opportunities are and how you are managing them. They don’t need perfect information; disclose what you can.
- Align with financial reporting — Investors want to know how sustainability issues, such as carbon emissions or waste management, affect your financial prospects, whether revenue from new opportunities or capital expenditure to ensure business resilience. The more that disclosure connects to current and prospective financial statements, the better.
- Focus on climate — Climate is the dominant sustainability issue. If you are not already on top of climate-related reporting, you will need to be. And if you do climate reporting well, you will have the structures and systems needed for other components of sustainability reporting.
- Tighten systems and controls throughout your value chain — Higher quality sustainability reporting is a source of competitive advantage because investors are more willing to invest at a lower cost of capital, if they trust your data.
- Align with the ISSB global baseline — Sustainability reporting calls for data throughout global value chains. The ISSB’s global baseline aligns with stock market requirements to disclose material information to investors while also being an efficient foundation for other emerging requirements, such as in California and Europe.
- Contribute to the development of industry norms — Investors understand that sustainability issues vary by industry. The ISSB is therefore committed to its industry-based SASB standards. Companies can innovate in developing best-practice reporting in their sectors, helping shape future standards.
- Ensure an authentic connection with value creation — If sustainability reporting feels like a costly exercise in compliance, you are missing an opportunity. Your focus should be on aligning disclosure to investors with information that is valuable to you in leading the business. You will have investors’ full support only if you communicate effectively to them how you plan to create value in a changing world.
Above all, think about the economics. Sustainability reporting is on the rise because the business case is sinking in. Focus on meeting the information needs of the market.
This article expresses the personal views of the author, not the official positions of the ISSB.
About the Author:
Richard Barker, PhD
International Sustainability Standards Board
Professor, University of Oxford's Saïd Business School
PHOTO: TJBauman, LLC
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