Chapter 1

Chapter 1: Sustainability and Sustainability Reporting

Upon completion of this chapter, you should be able to
1. Describe sustainability and sustainability development.
2. Describe sustainability reporting.
3. Explain the purpose of sustainability reporting.
4. Describe the nature of sustainability information and distinguish
sustainability reporting from financial reporting.
5. Understand the development of sustainability reporting.
6. List and understand the market makers driving the practice of sustainability
reporting.
7. List and understand the intended users of sustainability reporting.
8. List and understand the internal and external benefits of sustainability
reporting.

Globally, many leading organizations have moved beyond Corporate Social

Responsibility (CSR). Within a period of fifty (50) years, organizations'
understanding of sustainability has evolved from no knowledge to the
development of new management models that integrate sustainability. In fact,
stakeholders are increasingly interested in understanding the approaches of
organizations in managing their Environmental, Social, and Governance (ESG)
risks and opportunities. Increasing impacts from sustainability-related risks (e.g.,
scarcity of resources, changing social expectations, and new legislative
requirements in sustainability-related areas) are driving organizations to embed
sustainability considerations in response to these risks and their challenges.
Further, early movers are likely to gain a competitive advantage through
developing innovative solutions as they respond to these risks. Therefore, a
holistic approach to business management, incorporating ESG alongside
financial ones, will serve as a sound business model that supports business
continuity and competitiveness over the long term.

Moreover, transparent, public reporting of an organization's approach and

performance toward relevant ESG issues has emerged as one of the common
practices of large companies globally across all sectors. Reports communicating
ESG content address the convergence of real business risks, government and
market regulation, and increased stakeholder interest. Investors want to know
how a company is managing the risks affecting its business such as climate
change, human rights, and resource scarcity. Stock exchanges and governments
have realized the importance of these disclosures to investors, with dozens now
mandating that companies report, or explain why they do not. Corporate
customers request similar information as part of their own commitments and
evaluation of supply chain risks. Increasingly, and especially with the millennial
workforce, employees often seek out companies with purpose and that
demonstrate commitments to environmental protection and human well-being.
For companies seeking to be recognized as leaders in corporate responsibility,
public reporting serves as the primary medium for comparison.

Sustainability reporting also has been shown to add great benefit to companies in
providing the frameworks to categorize and evaluate the various ESG topics, and
to identify gaps in their platforms and areas for improvement. The common
language summarizes information accessible to internal audiences, and
reporting's tenet of identifying and measuring quantifiable indicators has helped
bring the subject of sustainable development to the boardrooms and other
managerial discussions of mainstream business.

Sustainability reporting was mainly confined to large, publicly traded companies

receiving requests from shareholders and fellow large-company customers.
However, as the concept and success of reporting becomes more well-known
and reporting becomes more commonplace, it is beginning to spread beyond the
largest, publicly traded companies, into smaller companies and even small and
medium-sized enterprises (SMEs), as well as privately held entities. Reporting
will vary depending on the type of organization, its sector, its size, its location,
and its intended audiences. Overall, however, sustainability reporting as a
concept also implies a journey of sustainable development, whereby
organizations can and eventually will follow the best-practice path.

DEFINING SUSTAINABILITY AND SUSTAINABLE DEVELOPMENT

The notion of sustainability is rooted in the wider concept of sustainable

development. There have been numerous attempts to define what is meant by
sustainability and sustainable development. However, the most widely used
definition was first developed in 1987 by the World Commission on Environment
and Development - also known as the Brundtland Commission - in an UN-
sponsored study entitled Our Common Future, which is used by many
governments and organizations:
"Sustainable development is development that meets the needs of the
present without compromising the ability of future generations to meet their
own needs."
It contains within it two key concepts:
 · the concept of 'needs', in particular the essential needs of the
world's
poor, to which overriding priority should be given; and
· the idea of limitation imposed by the state of technology and social
organization on the environment's ability to meet present and future
needs.

This report also implored the present generation to take immediate action to
avert the risk of irreversible ecological damage. Although the definition of
sustainable development is broad, the report valuably points out that:
"Sustainable development is not a fixed state of harmony, but rather a
process of change in which the exploitation of resources, the direction of
investments, the orientation of technological development, and institutional
change are made consistent with future as well as present needs."
Sustainable development in these terms can be seen as a global aspiration. The
use of the Brundtland definition by many organizations in their management and
reporting on sustainable development and SR signals a widespread consensus
on the central role organizations have in ensuring future generations can meet
their own needs. It evidences an acceptance that sustainable development
requires the political will of governments, organizations, and communities.

This definition also requires organizations to consider the wider and longer-term
consequences of decisions. This is the route to achieving long-term sustainable
value for investors and stakeholders and involves considering the impact of
economic activities - things bought, investments made, waste, and pollution
generated - on the natural and human resources on which they depend, to avoid
irreparable damage to the productive capacity of these resources. Practically,
this requires organizations to consider the consequences of economic decisions
on the natural environment, on economic development, and on the social
conditions in which people live and work.

The World Business Council for Sustainable Development's three-pillar model of

economic growth, ecological balance, and social progress is also a useful
reference point for understanding sustainability. This reinforces the message that
long-term maximization of shareholder value for public companies will
undoubtedly be intertwined with their environmental, social, and economic
performance, where:
·Social performance reflects an organization's impact on people and social
issues, which include (a) health, skills, and motivation on the people side,
and (b) human relationships and partnerships on the social side.
 ·Environmental performance relates to the natural resources consumed in
delivering products and services.
·Economic performance continues to include financial performance but
will increasingly reflect an organization's wider impact on the economy.
This allows organizations and stakeholders to recognize that profitability,
growth, and job creation lead to compensation and benefits for families,
and tax generation for governments.

The term ESG, is also used extensively, particularly by the investment

community, reflects the view that managing environmental and social topics is a
governance issue for organizations, a proxy for the quality of their management
teams, and a process to assess whether they are positioned for long-term
success. The combination of these three terms also provides a more tangible
and easily understood set of concepts that do not carry any other connotations
currently held for the term "sustainability" or "corporate responsibility". The terms
environmental, social, and governance can be explained as follows:

Environmental Social Governance

The E, or environmental, The S, or social, component The G, or governance,

component of ESG of ESG includes information component of ESG
information encompasses about the company's values incorporates information
how a company is exposed to and business relationships. about a company's corporate
and manages risks and For example, social topics governance. This could
opportunities related to include labor and supply- include information on the
climate, natural resource chain standards, employee structure and diversity of the
scarcity, pollution, waste, and health and safety, product board of directors; executive
other environmental factors. quality and safety, privacy compensation; critical event
and data security, and responsiveness; corporate
diversity and inclusion resiliency; and policies on
policies and efforts. lobbying, political
contributions, and bribery and
corruption.
The E, or environmental, The S, or social, component The G, or governance,
component of ESG of ESG includes information component of ESG
information encompasses about the company's values incorporates information
how a company is exposed to and business relationships. about a company's corporate
and manages risks and For example, social topics governance. This could
opportunities related to include labor and supply- include information on the
climate, natural resource chain standards, employee structure and diversity of the
scarcity, pollution, waste, and health and safety, product board of directors; executive
other environmental factors. quality and safety, privacy compensation; critical event
and data security, and responsiveness; corporate
diversity and inclusion resiliency; and policies on
policies and efforts. lobbying, political
 contributions, and bribery and
corruption.
SUSTAINABILITY REPORTING
Sustainability reporting is a term commonly used to describe a range of practices where
organizations provide information on sustainability matters, in accordance with globally
accepted standards. Such disclosures enable organizations to measure, understand
and communicate their ESG performance and then set goals, and manage change
more effectively. Often, they go hand in hand with the setting of performance targets
related to ESG impacts. Sustainability reporting can relate to the reporting to
stakeholders of an organization's strategies, priorities, policies and practices concerning
sustainability issues, the sustainability performance of an organization and how
sustainability impacts the operations. Sustainability reporting can also, among other
things, discuss how an organization is dependent upon and manages the environment,
society and governance, the risks and opportunities associated with these
dependencies, as well as an organization's sustainability related responsibilities and
accountabilities.

Sustainability reporting has become a widespread feature across societies, and it is now
a standard practice in many large organizations, particularly in the business world.
Sustainability reporting practices are diverse as sustainability reporting remains largely
a voluntary practice. Organizations can choose whether they publish a sustainability
report, how they prepare it, what information they include, as well as the form and
medium they publish the information. Expectedly, sustainability reporting differs
substantially from traditional financial reporting which is based on strictly and largely
mandatory frameworks and enforcement mechanism for non-compliance.

The sustainability reporting landscape has also gone through substantial changes and
continues to evolve. What started several decades ago with some pioneering
companies preparing Inexperienced attempts at environmental reports has over the
years developed into a standard practice. Sustainability reporting attracts interest
across stakeholder groups, ranging from NGOs to investment bankers. As sustainability
reporting has become more widespread and grown in prominence, an increasing
number of regulatory initiatives have emerged in different countries and regions. These
initiatives place various expectations on organizations and the reports they published. In
addition, the reporting landscape is strongly shaped by several reporting frameworks
prepared by non-state organizations seeking both to hep organizations prepare their
reports and to create a more standardized practice.
Different Names and Forms of Sustainability Reporting
Sustainability reporting is by far still the most common for all stakeholders but is
not the only name used for this type of reporting. Earlier, it was common for
organizations to publish environmental, social or EHS-reports (environment,
health and safety). There are also plenty of ESG reports, triple bottom line
reports, corporate citizenship reports, corporate responsibility reports,
accountability reports, responsible business report, creating shared value report,
environmental report, and corporate social responsibility reports out there. More
recently, the term "non-financial reporting" has become increasingly prominent
(although often broader in scope than sustainability issues), perhaps because it
provides a contrast to conventional financial reporting (i.e., the annual report).
These terms will be used interchangeably throughout the discussion.
Sustainability reports also come in various forms. The traditional standalone
sustainability report, published on an annual basis in addition to the financial
report, continues to remain a common form in many organizations. Others have
turned to producing integrated reports, in which various types of social,
environmental and broader economic information is presented alongside the
financial information in a single report. In additional to the reports published with
a regular cycle, many organizations are reporting sustainability information
though their website or on social media. Such reporting offers an organization the
possibility to reach different stakeholder groups than it would with a regular
report, as well as potentially facilitate interaction and dialogue with the
stakeholders.
Purpose of Sustainability Reporting
Sustainability reporting plays a role in accountability relationships as it is a
means by which organizations communicate with a range of stakeholders. While
an organization can produce reports on sustainability related performance for
internal purposes (such as those for internal decision-making purposes), the
focus remains to communicate to a much broader range of stakeholders. While
stakeholders to an organization's sustainability reporting are usually external to
the organization (e.g., investors, business partners, customers, suppliers, local
communities, civil society, legislators, regulators and policy makers) they can
also be stakeholders internal to the organization (e.g., employees)
However, while sustainability reporting has developed into a common practice,
the credibility of sustainability reports is not always considered to be very high.
As reporting is till to a large extent a voluntary practice, for which there is no
formal audit mechanism, stakeholders regularly express concerns that
sustainability reports could be used for "greenwashing". At the same time, in the
investment community there is an increasing awareness of how relevant an
organization's sustainability impacts and dependencies can be for risk levels and
long-term success. This serves as a driver compelling organization to focus on
the quality of the information they provide for their stakeholders.
NATURE OF SUSTAINABILITY INFORMATION
Sustainability information includes both financial and non-financial information.
Financial information has a direct link with the financial accounting system and is
expressed in monetary units. Non-financial information means that it is not
presented in monetary terms and is not based on an accounting standard. Non-
financial information can be both quantitative, such as tons (or units) of
greenhouse gas, or qualitative, such as governance processes, the reputation of
an organization or the organization's impact on the state of biodiversity.
Non-financial information is often more difficult to handle compared with financial
information because there are generally no accepted reporting principles, and the
data can take man different forms. It is often the case that this information is
qualitative and can be difficult measure and access. These difficulties should not
limit the use of non-financial information because this kind of information might
be very relevant to information users, whether citizen’s investors or society at
large.
For instance, an organization can measure, and present information related to
energy in financial terms referring to expenditure on energy. In non-financial
terms it could be about carbon dioxide emissions where the distinction between
energy gained from renewable and non-renewable sources also makes a
difference. Some of the environmental factors are quite easily converted into
financial terms. Other indicators, for example, attention to biodiversity and
ecosystem services, might have consequences that are less easy to calculate in
monetary terms. The same is often the case with social issues that could range
from employee satisfaction to the number of women or ethnic minorities in
management positions - issues that are difficult to express as, and often
unnecessary to turn into, financial figures. It doesn't, however, mean that they
would be less important.
Energy Waster Water Procurements
Financial Expenditure on Disposal costs Water bills Price of
transportation Purchases
heating
Non-Financial CO2 ton (per Waster in Water Share of eco-
person) tons/Number of consumption labeled amd
collections/receive (cubic meters) fair-trade
d wastes products
Consequently, for sustainability to be measurable and reportable, performance
indicators need to be chosen. For sustainability reporting to be meaningful, it
needs to be connected to the strategy of an organization. Therefore, the
indicators need to be relevant for the organization. There is a risk that the
indicators chosen will not be the best possible ones with reference to
sustainability. For example, the amount of recycled waste could be less important
than whether the organization was able to reduce the creation of waste in the first
place. In addition, it is important to remember that sustainability information is not
only about minimizing negative effects (e.g. greenhouse gas emissions) and
preventing negative issues (e.g., accidents having environmental or social
implications). It is also about enhancing positive impacts, such as using more
sustainable products or production methods, innovative new services, or
increasing the well-being of employees.
Some of the essential elements of sustainability reporting compared with
financial reporting are presented in Exhibit 1.2.

DEVELOPMENT OF SUSTAINABILITY REPORTING

Sustainability reporting can be put into a continuum of developments since the
1980s. In the late 1980s, the first voluntary environmental reports were
published. Companies with environmentally sensitive operations, especially large
polluters, started to develop sustainability reporting. This was done partly as a
response to pressure from non-governmental organizations that criticized the
power of multinational companies. This indicates the importance of sustainability
reporting as a tool in communicating with stakeholders and managing business
reputation. At the same time, the development of voluntary codes of
environmental conduct and eco-auditing led to the development of environmental
management systems (EMS) and the creation of standards, such as the
IS014000 standard series. The ISO 14001 standard, which provides
requirements for environmental management systems, was first launched in
1996. The European Union soon launched its own Eco-Management and Audit
Scheme, EMAS.

Since the mid-1990s, sustainability reporting has developed in various directions.

Companies with socially sensitive operations started to develop corporate social
responsibility (CSR) reporting, which had some roots in earlier philanthropic
movements. The European Union, for instance, currently defines SR simply as
"the responsibility of enterprises for their impacts on society. One of the drivers of
SR reporting was concerns about labor conditions in supply chains that were
becoming more complex while human rights and particularly the use of child
labor had become concerns for consumers. Sustainability reporting
developments have taken different forms, one of them being triple bottom line
(TBL) reporting, where the three dimensions are social, economic and
environmental, or people, planet and profit. At the same time, global
organizations supporting sustainability reporting were founded. One of them is
the Global Reporting Initiative (GRI), which has developed a voluntary
sustainability reporting framework. In addition, there are country-specific
initiatives, such as Connected Reporting, developed in the United Kingdom,
which aims to provide a new approach to corporate reporting and improve annual
reports and accounts.
The social emphasis of sustainability is visible in the UN's Global Compact, which
was launched at the turn of the millennium. It encourages businesses worldwide
to adopt sustainable and socially responsible policies and to report on their
implementation. It concentrates on the areas of human rights, labor,
environment, and anti-corruption. The OECD also has Guidelines for
Multinational Enterprises that are recommendations by to governments, aimed at
providing voluntary principles for responsible business conduct. One example of
changing concerns is that the 2000 update of these Guidelines added
recommendations on the elimination of child labor and forced labor, and new
chapters on combating corruption and consumer protection, whereas the 2011
update contained a new chapter on human rights. Also, the attention paid to
climate change issues is now more pronounced.
Another development was the launch of the ISO 26000 guidance for social
responsibility in 2004. It is voluntary guidance and is not used as a certification
standard unlike other ISO standards. According to the ISO 26000 guidance, the
objective of social responsibility is to contribute to sustainable development.
Social responsibility has the organization as its focus and concerns its
responsibilities to society and the environment. According to ISO 26000, the core
subjects of social responsibility are issues related to organizational governance,
human rights, labor practices, the environment, fair operating practices,
consumer issues, and community involvement and development. ISO 26000,
however, notes that as society's concerns change, its expectations of
organizations also change, and therefore the elements of social responsibility are
liable to change.
In addition to wider social and environmental reporting, the growing concern
about climate change has made carbon reporting more popular. One example is
the Carbon Disclosure Project, which has encouraged companies and cities
around the world to measure and disclose their greenhouse gas emissions,
climate change risks and water strategies.
The first reports labeled as "sustainability reports" were mostly single-issue
reports that focused on environmental performance. The reason for this was
partly the high priority given to environmental concerns and partly the difficulty in
grasping the multidimensional concept of sustainability. Since the turn of the
millennium, the number of more holistic sustainability reports has increased while
the share of environmental reports has decreased. Even so, in many cases
sustainability reporting practices have focused largely on environmental issues
and eco-efficiency. So far, sustainability reporting has taken many different
forms. There are stand-alone reports that can be published annually or
biannually. Alternatively, sustainability reporting can happen via a suite of reports
that are also published online. Although currently it is most common for
organizations to publish environmental or social information in separate reports,
there are also approaches that combine them with the annual financial report.
This is reflected in the most recent and forceful development in the reporting
field, the initiative of the International Integrated Reporting Council (IRC), which
is promoting the development and use of an integrated reporting framework. On
the one hand, various developments indicate that there is a demand for
sustainability reporting. This need has been expressed through many
stakeholders who are developing sustainability reporting frameworks. On the
other hand, the variety of concepts, frameworks and actors has caused some
confusion about concepts and even competition between developers of reporting
frameworks.