Designing Your Company’s Sustainability Report

Designing Your Company’s Sustainability Report

by Bloomberg Stocks
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Climate change, sustainability, and ESG considerations are increasingly taking center stage in corporate boardrooms across the world. When measuring and communicating corporate sustainability performance through sustainability reports or ratings, executives face a rapidly evolving and complex set of choices. As a result, companies are at risk of falling behind or choosing inappropriate reports and ratings that don’t drive sustainability performance and open the door to accusations of greenwashing. This article introduces the sustainability reporting matrix, a tool that helps executives and sustainability managers to focus on the sustainability reporting standards and ratings that are most closely aligned with their strategic requirements and the information needs of their stakeholders.

Deciding which metrics to use when reporting on corporate sustainability performance can be overwhelming for executives. Some companies report only their greenhouse gas emissions, while others publish glossy reports about their CSR (corporate social responsibility) initiatives or use their ESG (environment, social, and governance) ratings as a badge of honor. But most executives don’t know why — or when — to choose one of these reports over another.

The past decade has seen a boom in sustainability reporting options. The abundance of choice can be dangerous for executives. With so many options, companies can end up investing in sustainability disclosures, while still not meeting the expectations of legislators, clients, investors, and employees. In addition, the exercise of disclosing information often does not translate into meaningful action or impact.

Dubai’s Sustainable City recently developed a better way to navigate this complex set of choices. The 46-hectare mixed-use community is designed to achieve net-zero energy, but the developer’s knowledge arm (the SEE Institute) didn’t know how to best report on achievements towards that goal. It was difficult to choose from a wide range of reporting standards, each with a different view of what sustainability reporting should cover. The international sustainability ratings it reviewed didn’t fit the local context, while locally developed ratings lacked international comparability.

In response to these challenges, we developed a matrix to categorize reporting standards and ratings. By categorizing all available reporting and rating options in terms of the scope of topics they cover and their target audience, executives at the Sustainable City were able define a sustainability reporting approach that fits the needs of the company and its stakeholders. The exercise resulted in an annual sustainability report that focused on the most critical environmental challenge that the Sustainable City can impact: the reduction of greenhouse gas emissions, measured according to the Greenhouse Gas Protocol and verified by an external party.

Because none of the existing ratings were found to be able to adequately summarize an entity’s greenhouse gas emissions reduction performance, it was decided not to seek a sustainability rating. This decision enabled the company to focus its communication on its critical message of combating climate change and earned it multiple regional awards for its sustainability reporting. Communicating information on greenhouse gas emissions to the Sustainable City’s residents also helped them to reflect on how they could help reduce emissions through behavioral change.

Dubai’s Sustainable City is not unique in the choices it had to make. The matrix we developed can help others find the optimal approach for deciding on both sustainability reporting and sustainability ratings. Here’s how it works.

Sustainability reporting standards

Sustainability reporting refers to the information that companies provide about their performance to the outside world on a regular basis in a structured way. Sustainability ratings (discussed below) provide a summary indicator of an entity’s performance.

There are at least seven well-known sustainability reporting frameworks and standards available, each one backed by credible organizations and with reputable individuals on their Board. In alphabetical order they are:

  • CDP – Carbon Disclosure Project
  • CDSB – Climate Disclosure Standards Board
  • GRI – Global Reporting Initiative
  • IIRC – International Integrated Reporting Council
  • SASB – Sustainability Accounting Standards Board
  • TCFD – Taskforce on Climate Related Disclosures
  • WEF IBC – World Economic Forum International Business Council

Each standard deals with a different scope of topic from narrow (an exclusive focus on greenhouse gas emissions, for example) to broad ones (encompassing all of ESG or the entire range of UN Sustainable Development Goals), and caters to different range of audiences from a narrow set of stakeholders (primarily investors) to broader groups, including customers, employees and society at large.

The first matrix developed by Dubai’s Sustainable City sorted through these differences by placing topic on one axis and audience on the other. The company then analyzed all the major global sustainability reporting standards and placed each one in the relevant quadrant on the matrix.

Using this matrix, executives can see that if they want to report on the specific risks that climate change present to its financial results, they can choose to use CDSB (a specific standard) or TCFD (a broad framework). Companies looking to report on a wide range of issues (such as the company’s contribution to the UN Sustainable Development Goals) can use SASB and IIRC, which have now merged into the Value Reporting Initiative.

On the top half of the chart, the CDP focuses on the impact of a company on the greenhouse gas emissions. CDP allows companies to report their impact on climate, water and forests, with reporting on climate typically based on the Greenhouse Gas Protocol. Finally, companies looking to report on a broad set of environmental and social topics can use GRI or the WEF IBC. GRI is the world’s most widely used sustainability reporting standard. The WEF IBC has mapped its own metrics to GRI standards, enabling some level of comparability between the two.

Managers who use this matrix need to decide whether to focus reporting only on environmental aspects or to include a broader set of non-financial topics in the report. A second consideration is whether companies are reporting their impact on the environment or the impact of the environment (in particular, climate change) on the company. The former question is of interest to a broad set of stakeholders, whereas the latter is of relevance primarily to the company’s management and investors. Although both are based on a solid understanding of climate change and its causes, they are essentially separate questions and use different reporting standards. The sustainability reporting standards matrix provides guidance on which standards are appropriate in each of the four scenarios that arise.

Sustainability ratings

The second matrix the Sustainable City developed charts sustainability ratings.

A sustainability rating provides an independently determined, standardized summary indicator of sustainability performance based on a specific set of criteria. These ratings are usually solicited and paid for by the entity being rated. Ratings serve as easy-to-understand communication tools that can facilitate comparisons of performance between organizations and over time.

Executives face an even greater variety of sustainability related ratings than reporting standards. In order to facilitate decision making on which, if any, ratings to adopt, companies first need to choose whether they require a rating that is focused on environmental aspects only or a on broader set of topics, such as ESG considerations. In parallel, companies need to decide if they want a rating that is aimed at investors only or at a wider set of stakeholders.

On the bottom left, companies looking to issue bonds for projects that are in line with the greenhouse gas emissions trajectory of the Paris Agreement can issue green bonds. The Climate Bonds Initiative is the main organization that certifies green bonds, usually on the basis of a verification carried out by approved third parties. Issuance of green bonds is increasing rapidly and has surpassed a cumulative total of $1 trillion in 2021.

On the bottom right, ESG ratings published by the main global financial rating agencies and information providers typically measure either the quality of a company’s disclosure of information along ESG dimensions or the risk that companies face on ESG related matters. Often these two go hand in hand, as companies that are disclosing ESG information in a transparent manner are usually perceived as less risky. ESG ratings are still developing, with a recent study finding little correlation between the ESG ratings of five leading agencies. According to Bloomberg, by 2025 one third of Assets Under Management (equivalent to US $ 53 trillion) will have an ESG focus, so it is no surprise that companies are paying increasing attention to ESG ratings.

On the top half of the matrix there are several ratings that communicate to a wide range of stakeholders. Science Based Targets verifies that corporate greenhouse gas emission reduction targets are in line with the goals of the Paris Agreement. Similarly, ratings for the built environment (such as LEED and BREEAM) communicate sustainability characteristics of buildings and communities to a broad audience. Other ratings, such as the supplier ratings from EcoVadis, assess corporate performance along a wider set of topics, including environmental and social.

Superior Sustainability and Corporate Performance

Measuring, reporting and managing a company’s sustainability performance is only going to have a greater impact on corporate performance, reputation and risk. As companies navigate towards net zero, choosing the right approach is critical and senior executives need to be sufficiently informed to be able to actively participate in the discussion and decision making. The sustainability reporting and rating matrices can be useful tools to think through a company’s choices and help ensure regulatory compliance, responsiveness to stakeholder needs and ultimately lead to superior sustainability and corporate performance.

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