Sustainable development as our ‘north star’ in the harmonisation debate

by Carol A Adams

Main points:

  • provides a summary of what matters in the debate on the harmonisation of sustainability reporting;
  • sustainable development/ the SDGs are taken as the guiding ‘north star’.

Definition of sustainability reporting

“Sustainability reporting is an organization’s practice of reporting publicly on its most significant economic, environmental and social impacts, and hence its contributions – positive or negative – toward the goal of sustainable development.”[1]

Why companies prepare sustainability reports

The primary reasons companies give for preparing sustainability reports are: to demonstrate accountability to all key stakeholders (usually because their has been pressure to do so and often as a result of bad press or other pressure); and, identify material sustainable development risks, opportunities and impacts so that they can be managed.

The investor perspective

There is no one ‘investor perspective’.  Investors increasingly recognise that: a company’s approach to sustainable development is an indicator of management quality; a company’s impacts on sustainable development presents risks and opportunities that can affect enterprise value over time; and enterprise value is dependent on the value the organisation creates for society and the environment. It follows that reporting that starts from a narrow enterprise value perspective will be incomplete i.e., matters that affect enterprise value will not be identified.

Climate first / Interdependency of the SDGs

Climate change impacts on the achievement of most other SDGs, and in turn several SDGs impact on ability to address climate change.  While a climate disclosure standard might well be developed first, the messaging must be on this interdependence to be consistent with the UN position on the interdependency of the SDGs (agreed to by national governments).  If it is not, efforts to address climate change impacts might unintentionally have a negative impact on the achievement of other SDGs. Further, climate change is not the most pressing issue in some jurisdictions. (For example, in South Africa JSE top 20 board directors told me poverty and inequality were the most significant issue).

Double materiality

Research supports the need for a double materiality approach that prioritises impact of organisations on sustainable development and value creation for the organisation and society (rather than ‘financial materiality’). (See the definition of materiality in the SDGD Recommendations.) Many of the documents put out by various bodies over the last year support a double materiality approach (see summary in table 1 here), albeit using a narrower view of enterprise value as being financial value.

Multi-stakeholder approach

The definition of sustainability reporting above requires a multi-stakeholder approach to standard setting supported by a robust governance structure and led by an organisation that has credibility with all key stakeholders.

Enterprise value

Enterprise value should encompass matters relevant to the financial statements and broader indicators of value.  But unless this is explicit and linked to creating value for society, the status quo focus on short term profit will prevail.

Determining implications for enterprise value will be subjective and require resourcing.  This investment would be counter-productive if identification of sustainable development issues and impacts of an organisation was incomplete. Complete reporting from an enterprise value perspective, requires mandated reporting of sustainable development issues, risks and opportunities and mandated reporting of the impacts of an organisation on sustainable development, including how they are determined.

Reporting on, and managing, the risks and opportunities posed by relevant sustainable development issues is best done in a multiple capitals’ framework (i.e. beyond financial capital) as proposed by the Capitals Coalition (see note on ‘double materiality’ above).  This mitigates the tendency of organisations to succumb to short term profit first measures. This tendency is a challenge to the achievement of sustainable development.  A transformation in the focus of reporting requirements is needed to shift it. 

This starting point of the prototype climate related disclosure standard is enterprise value which is conceptually flawed (see previous point).  Before the full implications of climate change for enterprise value can be identified with confidence, an organisation’s impact on climate change must be identified and measured and a broad range of stakeholders must be consulted to identify climate change risks and opportunities.

Incorporating sustainable development risks in to IFRS and FASB standards where relevant, such as asset impairment, will assist in achieving sustainable development by shifting capital investment decisions.

Building blocks

The notion of building blocks referring to the use of existing reporting frameworks and standards needs to be considered with caution.  Some of the existing offerings are barely used.  Further, only one, the most used (GRI), is concerned with reporting on impacts of an organisation on sustainable development. And this must be the starting point for determining enterprise value (see above).

Complexity v simplicity

There is scope for key indicators to be calculated in a consistent manner.  However, sustainable development issues are complex and interdependent and cannot be made simple.  Investors, analysts and companies need to skill up in interpreting qualitative information as well as quantified metrics.

The bottom line

The importance of mandating a sustainable development focus, the importance of considering thresholds and planetary boundaries and consulting broader stakeholders to identify risks and opportunities for the organisation, cannot be understated. Unless this comes first, enterprise value cannot be accurately determined and will not be maximised. Unless we achieve sustainable development investors will lose out (as will we all).


[1] This is the GRI definition of sustainability reporting and is widely understood and accepted.

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Comments

  1. Fully supported.

  2. Gabriel Donleavy says:

    Utterly agree with every word of this post

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