Following news of Oxford Brookes University’s recent analysis and the demonstrable shortcomings of FTSE 100 organisations’ sustainability reporting, it’s time to stand back and contemplate what the purpose of this reporting actually is and how best to achieve it.

In the current climate of global stakeholder concern over growing environmental degradation, social inequality and high-profile corporate misdemeanours, there is an increased focus, particularly among the millennial generation, on corporate behaviour.

Stakeholders, including investors, regulators, consumers, employees and civil society need to understand both financial and non-financial data in order to assess corporate performance.

Pressure from shareholders for a fair presentation of sustainability impacts is likely to escalate, particularly given the requirement from October 2020 onwards for pension funds to publish statements of investment principles, outlining the extent to which environmental, social or governance (ESG) topics are considered in investment decisions.

Consequently businesses are looking to respond by investing to a greater or lesser extent, in improving corporate sustainability practices.

This rise in demand for accountability has led to a promulgation of independent sustainability reporting guidelines and corporate sustainability reporting is now accepted as a de facto requirement.

Reporting boundaries

While improvements in sustainability reporting practice are evident, the approach to the subject remains compromised. Corporate narratives are frequently decoupled from underlying organisational realities, resulting in a weak correlation between reporting quality and actual social and environmental performance.

As a result it is difficult for stakeholders, including investors, to use current non-financial information to assess risks to corporate reputation and the value added by sustainability initiatives. This means that the efforts of organisations seeking to offer genuine accounts of their activities and to discharge accountability are undermined.

Our research, analysing the boundaries companies adopt when creating sustainability reports, highlights this. For a report to be useful its boundaries should be transparent and, ideally, created in consultation with stakeholders to demonstrate a commitment to accountability, and a genuine acceptance of responsibility.

On average, our findings show that sustainability reporting boundaries mirror those adopted within financial reporting, which are narrower in scope. The indirect impacts from activities that fall outside of the defined “group” of subsidiaries are excluded from such disclosure, resulting in sustainability reports that are promotional and effectively unfit for evaluating ESG impacts and risks.

Management are currently free to define the boundaries of sustainability reporting as standards such as the Global Reporting Initiative or Integrated Reporting Framework do not specify boundaries, or require the disclosure of the type of boundaries adopted.

Management have therefore been given licence to decide the extent to which an impact is included or excluded in sustainability reporting. For example, should reports include safety data relating to employees, but exclude data relating to contractors working at the same site? Should upstream or downstream impacts of products be ignored because they are deemed to fall outside of the organisational boundaries of the report?

This facilitates the provision of a partial, biased account of activity as a company can claim compliance with a reporting standard through the provision of disclosure on ESG topics prescribed, while concurrently adopting narrowly defined boundaries for those areas. This is misleading for stakeholders who wish to use the disclosure for decision-making purposes.

Regulation vs innovation

So what is the solution? We have found evidence that regulation, such as that associated with modern slavery, can be employed to improve disclosure as the boundaries are clearly defined. Regulatory compliance, however, is expensive and can stifle innovation from pioneer reporters, indicating that a market-led solution, if achievable, may be preferable.

There are some easy steps CSR executives can take, beginning with benchmarking their own approach to the best-in-sector, to better understand how more progressive companies have determined their reporting boundaries.

This is particularly pertinent for those areas that have been highlighted as being particularly importance to stakeholders following stakeholder engagement activities. There are, however, a substantial number of published corporate stakeholder interest matrices that bear no relationship to the ensuing disclosure because materiality has been determined from a shareholder, rather than stakeholder, perspective. This gives the impression of having satisfied stakeholder interests, but fails to discharge accountability.

The provision of robust non-financial information for senior management scrutiny, as is the case with financial information, is beneficial to organisations as it allows monitoring of the impact of ESG initiatives, responds to stakeholder enquiries and evaluates associated financial benefits.

If there are also some agreed principles relating to the provision of non-financial information—for example, recognition, measurement and boundary of reporting—then organisations can learn from each other and best practice will be shared and further developed.

As a starting point, the following questions should be considered:

• What is the objective of the sustainability report?
• Who is the report being prepared for?
• What is the boundary of reporting?
• How is materiality defined and by whom?
• How should disclosure be measured?
• When should impacts be recognised?
• How should the information be disclosed?

These are good starting points for the development of a much-needed conceptual framework providing guidance for reliable and robust sustainability reporting that is internally consistent, theoretically sound and a useful source of data for decision-making.

The interlocking principles should be considered jointly, as a lack consistency will result in reports that lack credibility.

The marketplace offers a confusing myriad of guidelines, developed by a mixed collection of organisations in pursuit of their own agendas. These need to be coordinated, aligned, rationalised and standardised.

In the absence of this type of meta-analysis, any void will be filled by increased complexity, which will amplify the opportunities to misappropriate, misinterpret and misunderstand sustainability disclosures.

Dr Samantha Miles is reader in accounting and finance, and Dr Kate Ringham is programme lead in applied accounting, at Oxford Brookes University.