Towards a Purpose-based Sustainability Disclosures regime*

Understanding the sustainability disclosure landscape

This millennium has seen a rash of sustainability disclosure frameworks like never before, much to the consternation of companies who are expected to report on! A few mandatory ones have emerged such as the EU’s Non-Financial Reporting Directive mandatory, while India’s Business Responsibility and Sustainability Report (BRSR) mandated for the top 1000 listed companies in India is an interesting example from the emerging economies.

Voluntary frameworks, which dominate the landscape, these may be classified as broad-based (in that they cover several aspects of the sustainability landscape) and specialised. The broad-based ones include Global Reporting Initiative (GRI), the UN Global Compact along with its Communication of Progress (UNGC-CoP), Integrated Reporting (IR), Sustainability Accounting Standards Board (SASB), WEF’s Measuring Stakeholder Capitalism and the emerging draft of the newly-formed International Sustainability Standards Board (ISSB). Specialised frameworks include CDP (previously, Carbon Disclosure Project) and Task Force on Climate-related Financial reporting (TCFD), both of which focus on climate change, and the upcoming Task Force on Nature-Related Financial Disclosures (TNFD) outputs that focus on what may be broadly called environmental issues

Remembering the purpose of disclosures – a means and not the end

In this rush of blood, it is important to step back, take a deep breath and remind ourselves of the fundamental purpose of sustainability disclosures. They must serve 2 purposes. The first is external – to inform a company’s stakeholders (not only investors) of its plans and progress. And the second is internal – to enable a company to reflect on its strategies, performance and impacts to take corrective actions. Arguably, the second is as important, if not more, than the first since disclosures are to be a means to a sustainable world and not the end.

So, how do the current ones stack up against these twin purposes? The early voluntary disclosure frameworks – GRI and UNGC-CoP – were based on the widely-accepted triple bottom-line (TBL) and the 10 principles of the UNGC respectively. Thus, there was an underlying framework that described what sustainable behaviour looked like and hence enabled companies to identify how they can get better at it. GRI uses a globally consultative process, inviting all stakeholders of business to participate while the UNGC is based on globally acceptable goals, making them relevant to all stakeholders. Thus, both these frameworks tick both the boxes in that they cater to the information needs of all stakeholders and are based on widely-accepted sustainability frameworks.

The subsequent disclosures – CDP, IR, SASB, SASB, TCFD – have been largely driven by one
stakeholder: Investors. While there is no doubt that investors are important but it is not clear how much the other stakeholders matter! Also, barring IR, the “S” issues are inadequately covered, arguably since many of these investors are based in the developed world, where “S” issues are reduced to Diversity & Inclusion. Further, while these disclosures may have met the ever-evolving needs of investors and point to the issues that concern them, they provide very little guidance to companies on how they can perform better in a coherent and strategic way.

Making disclosure frameworks purposeful
The decade of the 2020s will be critical in the way sustainability and disclosure frameworks evolve. For sustainability disclosures to fulfil the twin purposes of being useful to both a company and all its stakeholders, there are some basic building blocks that must be kept in mind:

1. Disclosures must rest on widely-accepted sustainability frameworks. As has been argued earlier, there must be a clear and objective understanding of what constitutes sustainable behaviour. Only then can disclosures provide a basis for both stakeholders and companies to understand where they are and what more needs to be done.
2. Multi-stakeholder engagements are key. If stakeholder capitalism is core, then all stakeholders must necessarily be involved, both in defining what constitutes sustainable behaviour and what should be disclosed. Easier said than done yes, but SDGs and the GRI have shown this can be done
3. Recognise the diversity of businesses and contexts. Businesses belong to different sectors, have different products and operate in diverse geographies. Frameworks – both sustainability and disclosure – must cater to this diversity. The search for a single, “universal” framework could produce one that either too detailed or too high level and hence not useful.

4. Balance depth and width of coverage. Sustainability by definition covers a wide range of issues, popularly classified as E, S and G. For instance, CDP can get in-depth data from its reporters because it sticks to a few topics and can dive deep. If the more broad-based GRI or IR were to do the same, it could result in a disclosure framework that would collapse under its own weight!

    

Conclusion

If sustainability disclosures are to be a means to sustainable development and not the end, they must fulfil the twin purposes that they are meant to serve – they must be meaningful to all stakeholders and must provide guidance to companies on what they need to do to be on the sustainability path. Therefore, the way forward lies in building a consensus on what constitutes sustainable behaviour from the perspective of all stakeholders, depending upon their sector and geography, and designing disclosures that reflects this.