The stability of our financial system starts with better corporate reporting
The way our current financial system values corporate success is too narrow. By prioritizing financial performance as the only important element of value creation, it ignores the social and environmental impacts a business may have.
This needs to change.
Although some people tend to tune out when they hear the words “corporate reporting,” the reality is that it has the power to change the financial system, and get us back on track towards a sustainable future.
To get to a more sustainable world, the financial system must receive the right information about the impact of non-financial issues, like sustainability, on long-term financial performance. And business is the best-positioned to make that change, through better corporate reporting.
Reporting on non-financial issues, like sustainability, helps send the right signals to the financial system about the true value and impact of business.
We’ve already seen massive progress in this kind of corporate reporting.
It started back in 1969 – when the Cuyahoga River caught fire. The event symbolized the culmination of decades of unrecorded and unchecked industrial pollution and ignited an environmental and corporate reporting revolution.
Fast forward to 1992 and the Rio de Janeiro Earth Summit Conference, when sustainable development and climate change came front and center with many governments acting to understand how business was adding to rising greenhouse gas levels and other environmental issues.
Now, 25 years later, research shows that there are nearly 1000 reporting requirements on environmental, social and governance topics across 60 countries.
While well-intentioned, the rapid pace of change in corporate non-financial reporting has resulted in an overwhelming number of disconnected reporting requirements that haven’t been sending the right signals to change the system.
How can we change it?
We need to reduce complexity
Unlike financial reporting standards, which developed over hundreds of years and are structured and rules based, non-financial reporting has been less uncoordinated, with a lack of alignment between reporting guidelines and requirements.
As such, companies have been able to report on non-financial performance by any number of standards, frameworks or methodologies.
This has this made it tough for businesses to keep up – and has made things even more difficult for the most sustainable companies to demonstrate how they’re creating value for the financial system, society and the environment.
In other words, because the world of corporate reporting has become so complex, companies haven’t been able to send the right signals to the financial system.
The good news is, there are new tools available to help.
The Reporting Exchange, developed by WBCSD in partnership with the Climate Disclosure Standards Board and Ecodesk, is a big step in the right direction. For the first time ever, over 1750 reporting requirements and resources are now organized and available within one standard online framework.
With this, business leaders can zero in on key reporting requirements and use available resources to help embed sustainability into corporate management approaches. This will go a long way towards improving sustainability reporting disclosure and getting those important sustainability signals to the financial system.
Getting the signals right
Sending the right signals will help address the challenges with the global financial system, but we need to focus on three steps to make that happen:
1) Streamline corporate reporting requirements. Consistent, comparable and meaningful information on environmental, social and governance issues (ESG) will make sure the signals to markets are clear and not confused.
2) Promote shared understanding about how to apply the concept of “materiality” (i.e. what will financially impact a company) in ESG decision-making. If companies uniformly apply materiality concepts to their reporting and decision making, it will help make sure the signals sent through corporate reports are relevant and applicable to stakeholders.
3) Get better at identifying, managing and disclosing non-financial risk. New research shows a disconnect between the issues companies consider to be material risks in their sustainability reports versus what they declare in their legal risk disclosures. If companies can get better at integrating non-financial risks, like climate change and resource scarcity, into their enterprise risk managements processes, we will see better signals about a company’s long-term sustainability efforts reaching the financial markets.
A future where more sustainable companies are rewarded
In the future, the right signals will help ensure that the financial system adapts to only reward the most sustainable companies. This is the goal we will keep working towards, and the reason why we need consistent and global support for better corporate sustainability reporting.
So, the next time you hear the words “corporate reporting,” don’t tune out – or you might miss the boat to a more sustainable future.
Andrew Beanland is manager of redefining value at the WBCSDWorld Business Council for Sustainable Development