NICOLENE WESSON: Moves to address flaws in sustainability reporting

There is an urgency, according to global standard-setters, to raise the bar on corporate sustainability reporting. We might rightfully ask: why more standards? Who will benefit? And what will the compliance cost be for organisations?

Especially in the African context, we need to consider our role in this debate. As we celebrated the 60th Africa Day in May we had the opportunity to reflect on the continent’s journey towards independence, unity and sustainable development. We are reminded of Africa’s commitment to the AU’s Agenda 2063, the Sustainable Development Goals of the UN and the Paris Agreement on climate change mitigation. This is a time to reaffirm our aspiration to become a prosperous continent that is a global player and partner in inclusive growth and sustainable development.

Globally, it is well recognised that organisations play a key role in sustainable development because their activities affect people and the planet — starting with their own prosperity and the prosperity of the economy. So organisations need to understand the environment in which they operate, by identifying risks and opportunities to allow them to create and preserve long-term value for themselves and their stakeholders.

Organisations’ acceptance of accountability for their environmental, social and governance practices is displayed in sustainability reporting. In response to the demand from stakeholders (especially the investment community), sustainability reporting has evolved significantly over the past three decades through the increased global adoption of standardised metrics.

Global frameworks such as the Global Reporting Initiative and the industry-specific standards of the Sustainability Accounting Standards Board have been widely accepted, but most frameworks and standards are applied voluntarily. The latest global benchmark study (covering the 2020 reporting year) conducted by the International Federation of Accountants on sustainability reporting and assurance throws light on current sustainability reporting practices.

The results of the benchmark study reveal that when multiple sustainability reporting frameworks and standards are applied, sustainability disclosures are not necessarily confined to a separate sustainability report, and generally no assurance (audit) is obtained. And when assurance is obtained, it is limited assurance rather than the reasonable assurance applicable to audits. The usefulness of sustainability reporting for decision-making may therefore be marred by a lack of reliability, transparency and comparability between organisations and countries. 

The renewed global debate on sustainability reporting has been sparked by the urgency of the climate crisis and the realisation that the present fragmented approach to sustainability reporting has not brought about large-scale improvements. For this reason the tightening of corporate governance measures and the introduction of a globally co-ordinated process are proposed, with planned implementation as early as 2024.

Three aspects of corporate governance now on the agenda are: developing a global set of sustainability reporting standards (which first addresses climate change); mandating assurance of sustainability reporting; and providing compilers of sustainability reports with guidance on ethical behaviour. These global standard-setting efforts on sustainability reporting — led by the International Sustainability Standards Board, International Auditing & Assurance Standards Board, and International Ethics Standards Board for Accountants, respectively — are grounded in a process of extensive consultations and partnerships to ensure scalability for large and small organisations.

Specifically, the International Sustainability Standards Board — established towards the end of 2021 — has the task of developing sustainability standards that represent a global baseline and are cost-efficient and decision-useful. This board plans to build on existing and widely used standards and frameworks. It is envisaged that a benchmark set of sustainability standards will reduce the complexity of sustainability reporting and the compliance cost. Also, the comparability and transparency of sustainability reporting will be enhanced and lead to high-quality sustainability disclosures and practices. 

But the question remains: will a set of globally accepted sustainability standards, underpinned by assurance and ethical requirements, ensure that all organisations recognise the urgency for sustainable business practices? Sustainable business practices should not be a mere compliance exercise. For sustainability reporting to truly address the urgency for sustainable business practices, increased governance is required to hold boards of organisations accountable for the oversight of the strategic direction of the organisation.

The design of executive remuneration incentives to include sustainability metrics is a well-recognised governance mechanism. The general lack of sustainability expertise and reliable data on sustainability metrics, however, hampers effective sustainability management and should be proactively addressed. Furthermore, the total value chain of sustainability reporting (including shareholders, sustainability reporting service providers, assurers, sustainability reporting ratings agencies, policymakers, lenders and customers) should recognise their accountability in redirecting the focus of an organisation to long-term value creation.

The recent global developments on sustainable reporting require a concerted effort from all stakeholders to ensure that the urgency of delivering on long-term value creation is achieved. The exposure drafts on the first two standards of the International Sustainability Standards Board — on general requirements and climate change — are already open for review, with the drafts on the assurance and ethics standards expected to be issued towards the end of July 2023.

Africa is in an ideal position to contribute towards the global debate — not only because of the unique sustainability challenges of the continent, but also based on our history of promoting sustainability reporting through our world-class King Reports on Corporate Governance and our leading role in integrated reporting. In the spirit of Africa Day, we have the opportunity to be a global player in the sustainability reporting landscape — for the ultimate benefit and prosperity of our continent and the planet. 

• Prof Wesson is head of the Centre for Corporate Governance in Africa at Stellenbosch Business School.