Ethical Performance
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Just how transparent is your data?

May 2015

The type of information provided by corporate sustainability reports, and in non- financial disclosures varies widely. Investment analysts or other report users may believe they are reading comparable data when they’re not. Elisabeth Jeffries reports on the responsible investor’s conundrum


Oil sands are shifting. Two fossil fuel companies who over a decade ago declared their emissions from end-use products are now silent on the matter. Campaigners examining the disclosures they do make have yet to extract the core. The companies are BP and Shell and the analysts Carbon Tracker, a trailblazing non profit trying to shake more data from the corporate stable.

“BP and Shell...demonstrated such reporting was possible years ago taking a leadership approach, but then took a backward step, not continuing to provide data on emissions relating to their products,” points out founder Mark Campanale. Continual change is confusing to stakeholders and investors.

Cast about in a sea of varying rules, the type of information provided by corporate sustainability reports, and in non- financial disclosures generally, varies widely. Investment analysts or other report users may believe they are reading comparable data, such as emissions numbers, but the basis on which it is published often differs even within a particular industry.

Tenant emissions may be omitted in one property company report, but included in another. End-user (scope 3) emissions are often lacking in industries with high consumer impacts, such as ICT or vehicle production. Among the unresolved problems affecting comparisons is a sheaf of reporting standards and a labyrinth of reporting regulations. Standards requirements differ. The Climate Disclosure Standard requirements Board (CDSB), a consortium of global business and environmental NGOs aiming for consistency, has identified 400 different emissions reporting rules across the world.

They ranged from provisions in stock exchange rules and business law amendments, environmental reporting regulations and climate change legislation. Rules are being introduced each year, such as the Singapore Stock Exchange’s new mandatory sustainability reporting requirement for all listed companies.

As CDSB executive director Lois Guthrie points out, the fragmented nature of the different policies is an obstacle to meaningful assessment and peer group comparison: “While ownership of who is in charge of developing non-financial reporting is dispersed, it’s quite difficult to get a language on how to codify standards,” she says.

Institutions responsible for setting rules vary in individual countries. In the US, listed companies respond to guidelines by the Securities and Exchange Commission. “SEC guidance is extremely variable. Guidance encourages companies to report. But very few standards set out the requirements for compliance,” says Guthrie. In Australia, climate risk is the responsibility of corporate governance, while in the UK it comes under the Companies Act.

Three major areas require different approaches according to standard. The first is materiality – the extent to which an organisation’s activities are relevant. “The problem with materiality is that it can’t be defined in isolation from the purposes and audience of the report. You need the context of the user,” she says. Thus an industrial company’s human rights record and accident rate might be material in themselves to an NGO. By contrast, conventional investors might only find them material to the extent they incur a financial penalty.

Climate change creates particularly sharp distinctions in materiality definitions, as Lois Guthrie explains: “the impact of environmental matters is sometimes delayed. If a company’s planning horizon is five years, it can legitimately say that climate change is not material” she points out.

Secondly, companies also set their reporting boundaries at different points, and this also disturbs comparison. For example, one company may report the activities and impact of the whole group but leave out subsidiaries. Others will include subsidiaries and joint ventures, associates, upstream suppliers and downstream activities. A third area of disagreement is the extent of assurance required. One standard will require information to be checked by a third party, another may not. The purposes of the verification may differ, as can the type of information to be checked.

Standard-setting organisations have different objectives depending on their stakeholders, and this partly explains these distinctions. “sustainability standards… are generally tailored to different target audiences, with varying expectations and different levels of understanding of sustainability,” points out Friederike Jebens, Senior Consultant at consultancy thinkstep (formerly PE Consulting).

A popular standard is the Greenhouse Gas Protocol developed by World Resources Institute and World Business Council on Sustainable Development. “It has all the hallmarks of an appropriate and rigorous standard, but the way it is applied can vary.
“For instance, a hybrid approach is taken to exclusions from reporting, which are not always stated,” points out Guthrie. Other standards include the Global Reporting Initiative (GRI), Climate Registry: Oil & Gas Protocol, ISO 14064-1 and dozens more. They vary in a number of areas. Some, like the GRI, cover ESG reporting overall, and others particular concerns like climate. Some cover a wide range of stakeholders, and others only shareholders.

For investment analysts and others trying to make sense of the data, therefore, the picture is still opaque. At the moment, a case-by-case approach works best. “You have to familiarise yourself with how the organisation reports,” explains Jebens. Users need to understand the basis on which reports have been prepared before drawing meaningful conclusions about an industry. One reason is the way definitions of concerns such as materiality in non-financial reporting are shaped. This differs from company to company.

“Under the GRI, investors have some licence to determine the definition themselves, but in practice the company runs stakeholder programmes to decide on the key issues.

“Some may be interested in water, others more in human rights. So you end up with a quite bizarre range of definitions, even if the organizations are in the same industry,” says Lois Guthrie.

Disclosure is improving, though, at least in terms of quantity. In most of the European Union, more than 83% of the FTSE Global 500 are now revealing carbon emissions data. Nevertheless, businesses are still going through a formative, intense era in global non-financial standard and regulation development. This has a positive side, however: it allows NGOs and other campaigners to set the terms for disclosure in future.

Standards are also gradually drawing closer together. According to Lois Guthrie, the US Sustainability Accounting Standards Board, the International Integrated Reporting Council and her own organisation CDSB “have the most in common on mainstream reporting. GRI and the Carbon Disclosure Project are more aligned on wider range of reporting, such as supply chain.”

Like many non-financial reporting reformers, the CDSB would like to see a globally governed set of requirements. The end goal is an international system akin to the International Financial Reporting Standards (IFRS) providing a common global language for business so that company accounts are understandable across national boundaries. “We are always looking for that analogy in financial reporting to be applied [to sustainability reports],” she says.

But the IFRS has taken decades to develop, and adjustments take years to agree. By implication, an international non-financial reporting system might not be in place until at least the 2020s. Financial reporting implementation requirements have had time to develop a consistency of narrative to be more transparent. The definition of an asset is one example. Likewise, sectoral accounting requirements are more clearly defined.

The same level of detail is lacking in non-financial reporting. But Lois Guthrie looks ahead to a more positive future again aligned with the financial reporting world: “All of this good activity just needs a bit of order brought to it by an institutional home for gathering and ordering that information.” 

Global | Transparency

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