In today's world, information is the oxygen of the market.

By Marina Grossi and Tatiana Botelho

Sustainability reporting has been heavily criticized by both groups that support social and environmental causes and by its opponents. The most serious of the criticisms is related to the instrument’s objective: “greenwashing”. In other words, companies use sustainability reporting to create a “green” image, without improving their environmental performance. The question is whether sustainability reporting is a valid instrument. Everyone agrees that companies should report, transparently and efficiently, their social and environmental impact, both positive and negative. There are even those who consider this information to be as important as, or even more important than, financial information.

Corporate disclosure is the foundation of the health of modern financial markets. Capital cannot be allocated wisely and safely in companies that do not adequately disclose the risks to which they are exposed. The reason is simple: less information means less certainty for investors. Just as omitted financial data led to millions in losses in the Enron scandal of 2000, BP investors faced losses of up to US$1.4 billion (US$32 billion) of the company's market value because they were not informed about the risk of accidents. Information is the oxygen of the market. In today's world where intangible assets represent, on average, 801.3 billion of the market value of a publicly traded company, disclosure of social and environmental performance becomes essential.

Companies will need to report metrics on assets they influence, not those they control.

In addition to correcting market failures, reporting socio-environmental information boosts corporate management of these assets. By compiling data and practices, the company begins a process of collecting and monitoring this data, a necessary step to advance corporate management and, consequently, improve its performance. Until the late 1990s, corporate sustainability reporting was virtually unknown. In just under a decade, it became a widespread practice among large companies, and today, more than two-thirds of Fortune 500 companies publish sustainability reports.

A major problem with reports, however, is the lack of context, which results in decision-makers failing to understand the information. Today, a company finds it difficult, for example, to measure and disclose its efforts to reduce the consumption of a given natural resource. Investors are still unable to perceive the added value that these efforts will bring to the company. Furthermore, with the lack of geographic information on the consumption of this resource, the government has no input to guide public policies. Customers and consumers, in turn, are unable to compare the performance of a company with that of its competitors. And the chain of misunderstanding continues. The report is also unbalanced, with the past taking up much more space than future plans and commitments. In this context, neither investors, nor consumers, nor NGOs, nor partners are able to understand the company's contribution from the perspective of social and environmental issues.

It is time to turn this game around and measure progress towards sustainability. This requires the use of real-world metrics, that is, placing companies in a larger context. To do this, it is necessary to consider metrics such as planetary boundaries, the millennium goals and, in the near future, the sustainable development goals. Because a company cannot succeed in a socially fragile environment around it, nor is it environmentally irresponsible. In the future, the valuation of a company must consider all forms of capital in a balanced way: economic, social and environmental. And reporting has an essential role in this transformation: providing the market and society with a decision-making tool. It must be as easy to understand as a financial statement.

Three major changes this year promise to revolutionize the way companies understand and report sustainability. Earlier this year, the Carbon Disclosure Project, now known as CDP, announced the creation of the world’s largest natural capital database. The CDP, which is supported by 722 investors and manages US$87 trillion in assets – that is, one-third of the world’s invested capital – has started collecting carbon, water and forest data from more than five thousand companies. In doing so, it brings to the market reliable and comparable metrics of past performance and future strategy, seeking to integrate the supply chain.

The second new development was the launch of the Integrated Reporting (IR) framework for comments in April. The IR seeks primarily to change the process, aiming to measure gains and losses in six capital flows: financial, manufactured, intellectual, human, social and relational, and natural. The main objective is to explain the creation of value from extra-financial aspects to investors. Brazilian companies such as CCR, Natura, Petrobras, BNDES, AES, Itaú, and Votorantim have already joined this initiative with pilot programs.

Finally, the new generation of Global Reporting Initiative (GRI) guidelines has brought greater focus on materiality and a simple but revolutionary change to the scope of reporting: companies will have to report their metrics on the assets they influence instead of reporting on those they control. In this context, it is impossible to talk about material issues without including the production chain. When we bring suppliers and consumers into the discussion, it is difficult not to integrate sustainability not only with the financial sector, but with all areas of the company.

We believe that these tools will help build equitable and resilient economies, in which companies operate in an integrated manner with their supply chain, markets, society and economies, and with the planet. May these instruments better encompass the full complexity of corporate sustainability, promoting reporting that is increasingly simple and understandable for everyone.

Marina Grossi is the executive president of the Brazilian Business Council for Sustainable Development (Cebds)

Tatiana Botelho coordinates the Cebds transparency and reporting initiative

Source: Valor Econômico