Sustainability Reporting: Great Intentions Fall Short
By Robert Ludke, Skytop Contributor / November 17th, 2021
Over his career Bob Ludke has advised policymakers in the U.S. Senate and House of Representatives, taught at the United States International University in Nairobi, Kenya, and provided counsel on sustainability, corporate governance, supply chain management, and environment, social, and governance (ESG) strategies for companies in the retail, oil and gas, transportation, and finance sectors.
He is the author of Transformative Markets, a book about the role of markets in fostering a more sustainable society (published in April 2020 through the Creator Institute of Georgetown University), and the creator of the Voices of Nature podcast in partnership with Global Conservation Corps.
Bob is a Senior Fellow at The Harkin Institute for Public Policy & Citizen Engagement. His work at The Harkin Institute focuses on research and engagement with the disability community, investors, and the private sector to facilitate ESG investment practices being used as a catalyst for achieving competitive, integrated employment of persons with disabilities.
The Disconnect of Current Reporting
Kenneth Pucker recently published a thought provoking and well-argued article in Harvard Business Review entitled, “Overselling Sustainability Reporting”. In his article Pucker asserts that, “the impact of the [sustainability] measurement and reporting movement has been oversold. During this same 20-year period of increased reporting and sustainable investing, carbon emissions have continued to rise, and environmental damage has accelerated. Social inequity, too, is increasing.”
Pucker articulates several reasons why the proliferation of sustainability reporting has not meaningfully addressed the pressing challenges facing society, be they environmental or social. Among the points cited by Pucker: the sheer complexity of measuring corporate performance on most every sustainability-related topic, the lack of effective mandates and meaningful audits to ensure compliance, “specious targets”, and complex and opaque supply chains, to name a few.
Intentions Stated Yet Lackluster Performance
As one who has spent more than a decade preaching the merits of sustainability reporting (such as improved risk management, greater precision in executing corporate strategy, strengthened reputation, and fostering social good) and written a book on how to foster markets for sustainable goods and services, Pucker’s argument struck me as both accurate and personally disappointing.
An even more damning assessment on the effectiveness of sustainability commitments and disclosure has been made when looking at the impact and outcomes achieved from the August 2019 “Purpose of a Corporation” letter signed by 181 CEOs.
Coordinated by the Business Roundtable (BRT), the letter called for corporations to serve all stakeholders, not just shareholders, to allow “each person to succeed through hard work and creativity and to lead a life of meaning and dignity.”
Subsequent research has shown the lofty commitments of the Purpose of a Corporation letter have not been met. For example, a recent paper by Lucian Bebchuk and Roberto Tallarita asserted that “the BRT Statement was mostly for show and that BRT Companies joining it did not intend or expect it to bring about any material changes in how they treat stakeholders.”
Even worse, Bebchuk and Tallarita found that in, “reviewing the 2020 proxy statements of the BRT Companies, we find that the great majority of these companies did not even mention their signing of the BRT Statement, and among the minority of companies that did mention it, none indicated that their endorsement required or was expected to result in any changes in the treatment of stakeholders.”
If companies are not reporting how commitments to stakeholders are impacting their business strategy through their proxy statements (let alone sustainability reports) that serves as a further validation of Pucker’s assertion – sustainability reporting is not fostering the meaningful changes in business behavior needed to achieve a better future.
The Rate of Change
While I firmly believe that sustainability reporting has helped the private sector become more responsible and sustainable in how it operates, I also believe that the outcomes achieved by sustainability reporting have been incremental.
The growth in sustainability reporting has not accelerated the transformational changes to how business operates. Which means that the fundamental challenges we face – inequality, poverty, resource scarcity, and climate change – will not be meaningfully addressed before we witness more human suffering, more deprivation, and exponentially growing financial losses.
Pucker is correct. We wrongly assumed that increased disclosure on sustainability issues will foster broad-based impact across society driven by a fundamental shift to the operating models of companies around the world.
Hope Still Abounds
Despite its unfilled promises, corporate sustainability reporting is here to stay. And that is a good thing. If we remove the pressure for transparency on corporate practices, we risk significant backsliding in the gains that have been made over the last 10 years in how the private sector creates value for society.
Going forward, I suggest we use sustainability reporting to bring more clarity to how companies are using their business models to transform seemingly incremental solutions to those that foster broad-based and lasting impact. I recognize this means doubling down on sustainability reporting in the face of Pucker’s well-reasoned critique.
George Serafeim makes a compelling case that, while sustainability and ESG reporting remain important, “Companies must move beyond box checking and window dressing….they must look to more-fundamental drivers – particularly strategy – to achieve real results and be rewarded for them.”
To do that, companies must be imbued with a true sense of purpose – employees believing and seeing the impact of their work on society.
Companies such as HILOS, Unilever, Mars, Crocs, Mi Terro, and Ikea are models for Serafeim’s vision of purpose driving strategy. Unfortunately, they tend to be the exceptions rather than the norm.
Achieving Purpose and Fostering Transformation
Going beyond the basics of disclosure and reporting I believe there are several “tells” that provide insight as to whether a company is scaling transformative, positive change with its sustainability efforts.
Below are examples of “tells” to look for in sustainability reporting to see if a company is truly committed to changing its business model and helping transform society:
Partnerships – Collaborations with NGOs, academic institutions, and even market competitors demonstrate a commitment to thinking outside the box, trying new approaches, and using shared resources to scale an effort beyond what could have been achieved individually.
Engagement – Being active with all kinds of audiences – such as experts with varied points of view, local community leaders, and young entrepreneurs – is important if corporate leaders want to understand and appreciate what the future might hold and what their company must do to both mitigate risk and seize opportunities.
Education – Education is not selling or marketing. If organizations want to build support for their sustainability initiatives, they must educate internal and external audiences as to the importance of those initiatives. A true commitment to sustainability means giving an honest assessment of where things stand today, explaining the short- and long-term value proposition of sustainability commitments, and outlining a metric-driven course of action to fulfill the commitments.
Board composition – As Senator Tom Harkin (ret.) and I argued in a Bloomberg column, companies with a truly diverse board unlock market growth and value creating opportunities beyond those with “old school” boards of directors.
Money – Where and how companies spend their money is perhaps the clearest “tell” of them all. If a company is investing in innovation aligned with sustainability commitments (measured by metrics such as patents filed or R&D spending) and providing startup capital to small companies with a potentially impactful business model, that company is likely committed to value creation.
In contrast, excessive executive compensation, share buybacks, and political spending focused with partisan causes that are not aligned with the business are signals of a company on an unsustainable trajectory. The CPA-Zicklin Index is a great resource to understanding the connection between corporate political spending and commitments to ESG and sustainability considerations.
The Path Forward
Much of what Pucker, Bebchuk, and Tallarita have argued is correct. However, simply dismissing sustainability reporting as a worthless exercise will not help achieve a more sustainable, responsible, and prosperous future. Rather, we must continue efforts to demand a higher degree of disclosure from companies, provide clearer expectations on what is – and what is not – acceptable disclosure.
As the quality of disclosure increases, so too will our ability to hold bad actors accountable and reward those companies using their business model to transform our society for the better.