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Rise of Sustainability Reporting Brings Questions of Motivation, Agenda

Chris Gaetano
Published Date:
Sep 20, 2019


Editor’s note: This is the second in a projected three-part series about the corporate sustainability movement. The first part is available here.

The use of sustainability accounting has grown apace with a rising demand from both investors and consumers for information on firms’ environmental, social and governance-related (ESG) impacts to the point where, today, 85 percent of S&P 500 companies report on such matters in some form or another. Yet with this rise have also come concerns that, in some cases, these reports are less for informing stakeholders about accountability and growth, and more for managing public perceptions.

In a recent speech, Hans Hoogervorst, chair of the International Accounting Standards Board, went so far as to say that “greenwashing”—promoting one’s company as doing more to protect the environment than it really is—was “rampant.” He pointed  out, for example, that at the same time Volkswagen was engulfed in its emissions scandal, it topped the Dow Jones sustainability index for the automotive sector.

John Elkington, the founding partner and chairman of sustainability-focused consulting firm Volans, who has served as a board member of both the Global Reporting Initiative (GRI) and the International Integrated Reporting Council, made a similar point when he told The Trusted Professional that greenwashing efforts of one sort or another are “routine,” often involving omissions of major issues that are not yet part of their materiality analyses.

Steven S. Mezzio, who teaches sustainability accounting at Pace University, and is chair of the Society’s Future of Accounting Education Committee and a member of its Sustainability Committee, echoed the viewpoint that sins of omission are more common than those of commission in the sustainability space.  Unlike the financial reporting mandates that bind public companies, sustainability reporting, so far, is voluntary, which Mezzio said means that entities can be selective about what kind of information they disclose. So a soft drink conglomerate might release glowing reports about its water management work in Africa, while being more taciturn about, say, the public health impact of its products. This type of imbalance, he said, arises because sustainability accounting does not currently have the same reporting infrastructure as financial accounting.

“The greenwashing risk is particularly acute because of the inherent risks within the company,” he said, noting that companies “don’t have good internal controls, and frameworks are principles-based and vague.” He characterized the viewpoint of management as, “I can change frameworks, I can change assumptions in the frameworks, and I don’t have a third party doing a deep dive into what I’m saying.”

Michael L. Kraten, a CPA, professor of accounting, management consultant and member of the Sustainability Investment Leadership Council, countered that this was no worse than what we see in the financial reporting space, noting that counterintuitive results regularly crop up there, too.

“I think it’s no different than the strangely unique things you see in the financial statements of any company,” he said. “That is why we have a stock market. People look at certain financial statements and say, ‘This firm is doing fantastic,’ and the other person says, ‘This firm is doing terrible,’ and they’re both right in their own ways, and this is the case for these companies in the ESG sphere. So it is very possible for an entity to be exemplary from certain perspectives and very weak from others.”

And so, for example, while one might not expect ExxonMobil to be the biggest holding in an Invesco global sustainable equity portfolio, Kraten said that ExxonMobil’s reports “are quite detailed, and in many ways, they have made significant progress in what they do.”

Elkington, however, was less impressed.

“ExxonMobil and other oil companies should not be permitted in ESG or similar rankings or portfolios, period,” he said—“at least until over 50 percent of their revenue comes from renewables or efficiency services, with plans to drive fossil fuels to zero over time.”

But Alan White, co-founder of the GRI, noted that such results may not necessarily be a sign of greenwashing, which, he pointed out, has a certain element of premeditation that is key to the concept. The term, he said, describes a company knowingly and willingly producing misleading information regarding its sustainability credentials. When counterintuitive results emerge from sustainability reports, there could factors other than deliberate misinformation at work. For example, there could be metrics that lack context or are based on faulty science, or there could be a misunderstanding or misapplication of the framework’s principles. Another possibility is that the framework itself could have blind spots that don’t properly account for certain factors. On top of all that, White emphasized, this process is still new for many companies.

“Does the company knowingly understate its carbon emissions, knowingly underreport the effects of coal ash?” he said. “Or is it simply in stage one of reporting? Reporting doesn’t happen overnight. Even the best reporters are still modifying and adapting and changing.”

Corporate influence on framework organizations

Another factor could be in the governance of the framework organizations themselves. White said that when he co-founded the GRI in the 1990s, he knew that he needed to bring together a lot of disparate groups that may not have that much in common, and that even if they all acknowledge that they share problems, “they’re ready to solve [them] for different reasons, for different expected benefits.” Each of these parties exerts influence, and one of the biggest of all was the business sector, something he was keenly aware of from the start.

“The concern about the influence—the undue influence—of business and about greenwashing was not unheard of at the time,” he said.“ The only way to neutralize that for the long term was to build a governance structure that would ensure corporate voices would not dominate.” 

In the GRI’s case, this took the form of mandates that the board have a certain number of representatives from different parts of civil society, as well as the stakeholder council, which functions as an independent oversight body. Considering a theoretical sustainability framework organization, White said that a governance failure might produce greenwashing, which would erode its credibility.

Elkington, too, stressed the importance of ensuring that corporate voices do not drown out others in the standards-setting process. He noted that corporations’ primary purpose continues to be making money, even if done in an ostensibly sustainable way, which limits the scale and scope of the changes they seek. 

“The association of a framework with individuals or organizations whose primary motivation is financial return [increases greenwashing risk],” Elkington said, explaining that businesses have a financial incentive to dilute the framework’s standards.

Charles H. Cho, the Erivan K. Haub Chair in Business & Sustainability at Toronto’s Schulich School of Business, believes that a dilution of standards has already happened within the major sustainability frameworks. Having published several papers looking at the efficacy of sustainability reporting, he has concluded that the current landscape has been largely coopted by corporate interests in order to lend them credibility in wider civil society. In a 2012 paper in Accounting, Organizations and Society that he co-authored, he found that, based on a cross-sectional sample of 92 U.S. firms from environmentally sensitive industries, environmental performance is negatively related to both reputation scores and membership in the Dow Jones Sustainability Index. Other papers that he has authored since have expressed similar conclusions.

“The reasoning is that if poor environmental performance induces companies to increase their environmental disclosure, and if the disclosure moderates the image of that performance, then poor performance may not result in negative impacts on reputation—and this is obviously not good for the environment,” Cho said in an email. 

Going even further than that, Christian Kerschner, an assistant professor in the Department of Sustainability, Governance, and Methods at Vienna’s Modul University, suggested that the problem could exist at the paradigm level. Inherent in the idea behind sustainability reporting, he said, is that customers will automatically buy the right things, just as investors will automatically invest in the most sustainable companies, given enough information (as in eco-labelling), which then become the most profitable ones, forcing everyone to adopt sustainable practices. In reality, levels of sustainability in products are inherently complex to measure, consumers are not sovereign in the marketplace and investors, and corporations are unlikely to forgo any substantial profits in order to be more sustainable unless forced to by legislation. Also inherent in this idea is that companies can generally decouple economic activity and thereby economic growth from environmental impacts. In a report that he co-authored for the European Environmental Bureau (a coalition of nongovernmental organizations—NGOs), however, he argued that this hypothesis ”appears highly compromised, if not clearly unrealistic,” based on theoretical and empirical analysis.

One reason, he said, is that, in this paradigm, the burden is on the individual consumer or investor for the planet’s future, but, in his view, “If we rely on individuals to save us from a very dramatic situation, we are pretty much doomed. Collective action, both bottom-up and top-down, is what’s needed—and in a direction that does try to do things radically different.”

“The market was never ‘invented’ as a platform that magically solves our deeper, societal, economic and ecological problems,” Kerschner said, expressing a skepticism of “market optimism.” He added, “It’s just that some people would like it to be able to do that, because it would make things so easy. No difficult negotiation processes, no intervention that would cause conflicts, no systematic changes and no changes in power structures or distribution.” 

Elkington raised a similar point, saying that both framework organizations and firms are reluctant to acknowledge the full scope and scale of the problem, which led to weaknesses in the reporting space. A reporting and accountability system worth its salt, he said, would routinely force business model changes on firms, something “vanishingly rare these days.”

“[There] has been a combination of an unwillingness to engage the full nature and scope of the systemic crisis we face, coupled with the very human sense that going a little faster and doing things a little better will crack the problems. It won’t—and can’t,” he said.

The lack of mandatory attestation

Regardless of whether the issue exists at the entity, framework or paradigm level, a persistent factor in greenwashing attempts that sustainability experts mention again and again is the lack of mandatory attestation for sustainability reports. Mezzio noted that while many companies do get third-party attestation for their reporting, most are limited-scope engagements that mostly consist of nonspecific conclusions. For example, he said, such a third party might take on such an engagement thinking, “I’ll look at some things, and if anything is really out of whack, I’ll identify something, but [I‘m] not doing a deep dive of the evidence.”

Mezzio contrasted this form of reporting with the financial reporting world, which not only has a mandatory attestation requirement, but also uniform standards and principles that bind all public companies, as well as internal control systems that provide an initial check. While he acknowledged that there are still deep problems in this arena, he said these factors still make it all “fairly sound.”

“So, if you compare the two, you have good reason to rely on financial statement audits, and not a good reason to rely on some of those sustainability reports,” he said.

Kraten noted that when someone prepares a financial report, that person knows it’s going to be subject to a full set of audit procedures from an independent party and, consequently, compiles the information in a way that, he said, “will feel a lot more objective.” Conversely, if someone knows that the information will not receive that same level of scrutiny, it will change how the person ultimately writes the report, which, he reasoned, is “just human nature.”

“It doesn’t quite mean someone coming out with unaudited information is intentionally trying to greenwash or subvert or mislead the reader, but that information is being prepared in a different manner, and therefore you can expect it to have a different outcome,” he said.

Cho said that the idea behind attestation in the sustainability field is good, but since there is a lack of monitoring and enforcement in the same manner as financial reporting, as well as a lack of authoritative bodies like the Securities and Exchange Commission which could add real accountability, the standards themselves have “no weight or authority.” With this in mind, he said that the limited-scope engagements currently in use are more like consulting than a real audit.

“This is voluntary and very lucrative for firms providing it, so again, while the idea behind ‘assuring’ sustainability reports is a good one, it seems to have been hijacked—just like the reporting itself,” he said.

The sustainability world, however, does seem to be evolving away from everything being 100 percent voluntary, according to White. For a long time, sustainability reporting was governed mostly through norms, which he called “soft law.” But in recent years, at least for the GRI, “dozens and dozens of countries have embraced GRI reporting in law, in regulation policy, and in legislation.” So while the framework itself might still be governed by soft law, the principles and standards it promotes are being increasingly enacted into more mandatory structures, a development he supported “unwaveringly.”

Kraten has observed that increasingly, the market seems to be demanding mandatory attestation as well, which “is not necessarily an unhealthy thing.” The system, overall, seems to be maturing.

“I’m certainly not saying that a full set of nonfinancial and sustainability information [attestation] will be mandated by the federal government in the very near future; I think the momentum and the trend is all toward more reporting, more quantitative reporting, and a higher level of assurance by an outside accounting firm on the data that is required,” he said.

Elkington sees such a mature sustainability reporting system that can fully account for a company’s impacts as an important part of the overall mission of creating a more sustainable world.

“Ordinary people are beginning to wake up to the fact” that a mandatory reporting system is necessary for sustainable future, said Elkington—“particularly young people.”

The third part of this series, to be published in the November/December issue, will focus on how the rise of sustainability reporting has and has not changed the behavior of corporate entities.

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