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Target 12.6: Sustainable practices in companies

Encourage companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle.

The Sustainable Development Goal agenda has placed a new focus on corporate performance, behaviour and risk management, creating new demands for information on corporate reporting. Target 12.6 explicitly acknowledges the critical role that corporate sustainability reporting12.1 must play. Done properly, corporate reporting can enrich and enhance the Sustainable Development Goal monitoring framework by providing governments, enterprises, society and other stakeholders with the means to assess the economic, environmental and social impact of companies on sustainable development. Consequently, the Inter-Agency Expert Group on Sustainable Development Goal Indicators (IAEG-SDG) selected the “Number of companies publishing sustainability reports” as the indicator to measure progress towards this target.

There is no universal agreement on what sustainability reporting means.

Reporting activities that contribute to sustainability will be increasingly important to companies, as it will allow them to make customers aware of their contribution to sustainable development. Investors may also have specific interests in such reporting to assess how companies are addressing financial and reputational risks associated with sustainability challenges. But further work is needed to integrate environmental, social and governance (ESG) reporting into existing company financial and non-financial reporting models; facilitate harmonization of sustainability reporting requirements and practices; and assure the comparability and reliability of information and data provided by companies on non-financial issues. While there currently exists a myriad of international or supraregional reporting initiatives12.2, there is no universal agreement on what a sustainability reportA report published by a company or organization about the economic, environmental and social impacts caused by its everyday activities.
more is or what such a report might include12.3 in order to be defined as one. According to recent research by UNCTAD, out of the Forbes world 100 largest listed companies, 99 corporations produce some sort of ESG reporting, 51 refer to the United Nations Global Compact, 62 to the Carbon Disclosure Protocol, 10 to ISO 26000, 48 to other ISO certificates, and 72 to the Global Reporting Initiative (both G3 and G4) (UNCTAD, 2016). KPMG et al. (2016) recently published a report, “Carrot & Sticks”, that identifies almost 400 sustainability reporting instruments across 64 countries. Consequently, further work is required to develop a set of core corporate sustainability indicators and align these with overall Sustainable Development Goal monitoring.

Some challenges ahead

Sustainability reporting lacks a single international institution to coordinate and harmonize its activities. The challenges associated with the absence of consistent financial reporting arrangements over the last decade illustrate why such an institution is desirable, or at the very least why it is necessary to identify areas of consistency between the different reporting frameworks to promote global consistency and convergence (International Federation of Accountants, 2013). The wide range of indicators, frameworks and guidelines issued by multiple organizations creates not only a significant duplication of effort but also a lack of clarity and a wide variety in the quality of information. The result is that corporate reports, which are often difficult to understand and compare, vary widely in terms of comprehensiveness and quality.

Agenda 2030 poses additional challenges for the harmonization, comparability and integration of related indicators. It is not yet clear what approach will be used to ensure the usefulness of corporate reports in assessing the private sector contribution towards attaining the Sustainable Development Goals. The majority of sustainability reporting requirements and initiatives are focused on listed and large private companies because they have the largest sustainability impact. But arguably a mechanism is also required for small and medium-sized enterprises; a cost-benefit analysisCost-benefit analysis is a systematic approach to estimating the strengths and weaknesses of alternatives that satisfy transactions, activities or functional requirements for a business.
more is required to determine a suitable reporting requirement.

Figure 12.2. Accounting Development Tool - Belgium Download data

Sources: UNCTAD ,2016, DIAE/ISAR/Accounting development tool.

Developing a harmonization approach to reporting on ESG information faces a number of challenges, such as those of methodology12.4; materiality12.5; burden12.6; consistency 12.7; data quality 12.8; mandatory or voluntary approaches12.9; and compliance12.10. UNCTAD promotes harmonized transparent corporate accounting and assists developing transition economies to align their corporate reporting requirements with international standards and best practices through the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR). Sustainable reporting was incorporated into the agenda in 1993 following the United Nations Conference on Environment and Development, also known as the Rio Earth Summit. In particular, UNCTAD has developed a number of products in the area of environmental, social, governance disclosure and sustainability reporting: Integrating Environmental and Financial Performance at the Enterprise Level (UNCTAD, 2000); Guidance Manual - Accounting and Financial Reporting for Environmental Costs and Liabilities (UNCTAD, 2002); A Manual for the Preparers and Users of Eco-efficiency Indicators (UNCTAD, 2004); Guidance on Good Practices in Corporate Governance Disclosure (UNCTAD, 2006); Guidance on Corporate Responsibility Indicators in Annual Reports (UNCTAD, 2008); Best Practice Guidance for Policymakers and Stock Exchanges on Sustainability Reporting Initiatives (UNCTAD, 2014a).

According to UNCTAD, 99 of the world’s 100 biggest public companies compile some sort of ESG report.

UNCTAD has also developed the Accounting Development Tool, a quantitative tool that helps countries assess their corporate reporting infrastructure using international standards and best practices as a benchmark. The Accounting Development Tool includes a separate chapter focusing on ESG reporting (see the example given in figure 12.2).

At the thirty-second session of ISAR (November 2015) member States asked UNCTAD to conduct further work in the area of sustainability reporting by identifying good practices of corporate reporting on the Sustainable Development Goals and facilitating the harmonization of sustainability reporting. To respond to the new demands posed by the Sustainable Development Goal 2030 Agenda, UNCTAD, jointly with the United Nations Environment Programme and the Group of Friends of Paragraph 4712.11, is evaluating existing reporting frameworks to identify key principles and core Goal indicators to help companies reflect their impact on their implementation, and provide a basis to monitor and assess the progress towards the Goals at a national level.

Notes and references

Notes

12.1: Sustainability reporting allows organizations to consider their impacts on a wide range of sustainability issues, enabling them to be more transparent about the risks and opportunities they face and to take informed strategic decisions.
12.2: UNCTAD corporate social responsibility indicators; eco-efficiency indicators (environmental accounting and reporting); corporate governance disclosure; the United Nations Environment Programme report Advancing Environmental Disclosure in Sustainability Reporting; the United Nations Global Compact; the European Union Directive on Non-financial Reporting (2014/95/EU); the Organization for Economic Cooperation and Development Guidelines for Multinational Enterprises and Principles on Corporate Governance; the Global Reporting Initiative Sustainability Reporting Framework; the International Integrated Reporting Council Integrated Reporting Framework; the International Accounting Standards Board Framework for preparation and presentation of financial statements.
12.3: These might include, for example, regulatory, institutional and human resource capacity-building, enhanced public-private sector partnerships and cooperation and coordination in this area.
12.4: Defining a common set of comparable indicators remains a challenge. Finding such indicators that are comparable, universal and material is not straightforward across a variety of geographies, sectors and firm-specific operations. Alignment with the Sustainable Development Goal agenda adds to the complexity.
12.5: Information is material if its omission or misstatement could influence users’ decisions (UNCTAD, 2008). The principle of materiality is critical in determining which information should be included in a sustainability report. Materiality must be considered across the whole value chain, as company decisions also generate positive and negative impacts upstream (for example, sourcing of raw materials) and downstream (for example, the use and disposal of products and services). There is always a risk that companies undertaking materiality assessments may only disclose those indicators that show a positive impact. The Sustainable Development Goal reporting brings a new dimension that requires a broader spectrum of stakeholders to be considered, including government and society.
12.6: Harmonization of reporting should be based on existing frameworks to avoid placing an excessive burden on enterprises. The costs and benefits for enterprises as well as other stakeholders should be considered when developing new indicators and how to communicate them.
12.7: There must be consistency between financial and non-financial reporting to ensure the comparability and meaningfulness of related data and indicators.
12.8: Data quality regarding sustainability issues remains a concern and challenge for all stakeholders. This is especially relevant in the case of multinationals that have operations in different jurisdictions. The International Organization of Supreme Audit Institutions highlights that assurance of sustainability reports is still developing and is as yet mostly voluntary. To date, assurance statements vary greatly in terms of content and type of assurance provided. The majority of companies restrict themselves to assurance on specific information or datasets, and few cover the full corporate sustainability report.
12.9: Some investors believe that reporting in certain areas should be mandatory, obliging companies to report on both good and poor performance, thus providing more accurate information for investment decision-making. In making such a decision there are a number of factors to consider, including the level of development of relevant legislation and regulation; standards of reporting and the institutional setting for their monitoring and enforcement; capacity of the accountancy profession and other participants in the reporting chain; and different cultural, political, legal and other aspects of the business environment. For example, France has adopted mandatory sustainability reporting for public and large companies. The Grenelle II Act (2010) requires mandatory annual sustainability reporting (environmental, social and societal impacts of business activities and on companies’ commitments to sustainable development) for France-based public and large companies. These reports must be independently verified by a third party (http://www.diplomatie.gouv.fr/en/IMG/pdf/Mandatory_reporting_built_on_consensus_in_France.pdf).
12.10: An efficient compliance system, including enforcement mechanisms to ensure that requirements are adequately implemented, will also be required. There is evidence of the positive impact of enforcement on corporate transparency and the quality of reporting in the financial reporting area. (UNCTAD, 2014a) has published a note on good practices for monitoring and enforcement, and compliance mechanisms, including on sustainability issues. The UNCTAD Accounting Development Tool also provides a useful reference to support countries in their efforts to strengthen their accounting and reporting infrastructures (https://unctad.org/en/Pages/DIAE/ISAR/Accounting-Development-Tool.aspx).
12.11: The Group of Friends of Paragraph 47 is a government-led initiative, formed in 2012 following the United Nations Conference on Sustainable Development, whose objective is to foster a culture of sustainability reporting. The Group’s current members are Argentina, Austria, Brazil, Chile, Colombia, Denmark, France, Norway, South Africa and Switzerland (http://www.unep.org/resourceefficiency/Portals/24147/Business-Ressource%20Efficency/GoFP47_TwoPagerComms_FINAL.Jan14.pdf).

References

Global Reporting Initiative (2015). G4 Sustainability Reporting Guidelines. Reporting Principles and Standard Disclosures. Amsterdam. Available at https://www.globalreporting.org/resourcelibrary/GRIG4-Part1-Reporting-Principles-and-Standard-Disclosures.pdf.
Grenelle II Act (2010). Loi No. 2010-788 du 12 juillet 2010 portant engagement national pour l'environnement. Chapitre VI Gouvernance: (1) Dispositions relatives aux entreprises et à la consommation. Article L225-102-1.
International Federation of Accountants (2013). Enhancing organizational reporting. Policy Position 8. October. Available at https://www.ifac.org/system/files/publications/files/PPP-8-Enhancing-Organizational-Reporting-Main-Paper.pdf.
KMPG, Global Reporting Initiative, United Nations Environment Programme and Centre for Corporate Governance in Africa (2016). Carrot & Sticks - Global Trends in Sustainability Reporting Regulation and Policy. Available at https://assets.kpmg.com/content/dam/kpmg/pdf/2016/05/carrots-and-sticks-may-2016.pdf.
UNCTAD (2000). Integrating Environmental and Financial Performance at the Enterprise Level: A Methodology for Standardizing Eco-efficiency Indicators. United Nations publication. New York and Geneva.
UNCTAD (2002). Guidance Manual - Accounting and Financial Reporting for Environmental Costs and Liabilities. Third edition. UNCTAD/ITE/EDS/4. Geneva. Available at https://unctad.org/en/Docs/iteeds4_en.pdf.
UNCTAD (2004). A Manual for the Preparers and Users of Eco-efficiency Indicators. Version 1.1. United Nations publication. Sales No. E.04.II.D.13. New York and Geneva. Available at https://unctad.org/en/docs/iteipc20037_en.pdf.
UNCTAD (2006). Guidance on Good Practices in Corporate Governance Disclosure. United Nations publication. Sales No. E.06.II.D.12. New York and Geneva. Available at https://unctad.org/en/docs/iteteb20063_en.pdf.
UNCTAD (2008). Guidance on Corporate Responsibility Indicators in Annual Reports. United Nations publication. Sales No. 08.II.D.8. Geneva and New York. Available at https://unctad.org/en/docs/iteteb20076_en.pdf.
UNCTAD (2014a). Best Practice Guidance for Policymakers and Stock Exchanges on Sustainability Reporting Initiatives. United Nations publication. New York and Geneva. Available at https://unctad.org/en/PublicationsLibrary/diaeed2013d6_en.pdf.
UNCTAD (2016). Enhancing the role of reporting in attaining the Sustainable Development Goals: Integration of the environmental, social and governance information into corporate reports. Issue note for the thirty-third session of ISAR. Geneva. 3-6 October. Forthcoming.