Critique of Sustainability Reporting Flashcards
Why should entities publish sustainability reports:
How could an entity being sustainable help with risk management?
Organisations which act in a socially or environmentally irresponsible manner face an increased risk of reduced future financial returns.
Because:
Fines, clear up cost from causing environmental damage
Reduction in productivity due to employee strike action (recently with teachers pensions, NHS pay and railway pay). Volkswagen emissions scandal as well
Why should entities publish sustainability reports:
How could an entity being unethical reduce financial performance?
Scandals regarding ESG often reduce sales
e.g. nestle due to child labour, exploitation and pollution concerns.
Furthermore, Sustainable entities are more resilient to the economic shocks
e.g. Covid-19 (Broadstock et al, 2020)
e.g. FInancial Crisis (Lins et al, 2017)
Why should entities publish sustainability reports:
How could an entity gain strategic advantage by publishing ESG reports?
Vogel (2006) argued that for some organisations, sustainability reporting forms a ‘eco-friendly’ image.
(Patagonia, M&S).
Other organisations could use sustainability reports defensively (greenwashing) in unsustainable industries such as oil companies and fast fashion. They often produce an extensive sustainability report.
why should entities publish ESG reports:
How could entities gain potential investors from ESG reporting?
Socially responsible investment has grown massively since 1980s. Now a lot of investors considers sustainability (ESG) as a key factor when investing
Indexes such as FTSE4Good filter the entities that perform strongly on ESG metrics such as human rights and carbon emission, using GRI or UNSDG frameworks
Why should entities publish sustainability reports:
Why should entities perform ESG reporting legally?
Increased mandatory requirements in legislation and listing rules.
E.g. emissions test for cars (recent scandal includes Volkswagen scandal which reduced their sales by 20% after the scandal became known in 2016)
Challenge of measuring ESG information:
How do we define what is sustainable? and can we achieve faithful representation by just reporting the ESG based on the entity itself?
Many of the key issues is whether entities report on a fairly inward-looking individual level or whether a faithful representation can only be achieved by reporting the ESG impact of the organisation of a wider basis.
e.g. environmental impact of the supply chain (Puma found that 94% of total environmental cost derived from the supply chain.
Cars have been criticised for excluding the environmental damage caused by the use of their cars..
Challenge of implementing ESG reporting:
Cost of Information in ESG reporting…
Gathering good quality ESG data and reporting it may be extremely costly. Entities often need to engage extra resources into producing and monitor the reports.
Cost of information may deter entities away from esg reporting.
Furthermore some sustainability factors are hard to quantify
Challenge of implementing ESG reporting:
Lack of quantitative, comparable measures in ESG reporting….
There isn’t a consistent framework in place which compromises comparability and faithful representation of ESG reporting.
e.g. PwC found 72% of surveyed companies mention UNSDG, 14% mention specific targets and 1% used quantitative measures to show progress towards the target
Challenge of implementing ESG reporting:
Some entities may be deterred from ESG reporting because of potential reputation damage
Publishing truthful ESG information can damage reputation damage.
E.g. GAP retailer, one of the first retailers to report ESG had received backlash for labour malpractice in some factories and suffered in sales. But did not see many commendations for transparency and signs of committing to improving sustainability.
Challenge of implementing ESG reporting:
Some entities exploit ESG reporting….
Greenwashing is a common term for entities that uses sustainability to portray their entity in a positive light. Whereas, the reality of the situation may be bleak. (Sealy 2021)
Furthermore, asymmetric treatment of good and bad results from ESG is found in research (Clatworthy & Jones 2003).
The need for assurance:
Is sustainability reporting reliable?
Most sustainability information is not externally audited -> reduces the credibility of the reports. (Reliability of the report is also hindered, IASB)
Some are, such as emissions/pollution
What is the potential problem of separating financial reports and ESG reporting?
As we know ESG disclosure is separate from financial statements.
Some commentators argue that the silo approach makes the financial statement less useful to the users if they are not integrated with ESG information.
Materiality may be called into question.
Such that information is material if omitting or misstating it could influence the decisions of investors/lenders.
Problem with the emerging ISSB standard, why might their approach of investor focus alarm commentators?
Current ISSB focus on investor interest, in line with traditional financial reporting
Commentators argued that the capitalist focus on value creation may not be appropriate to address social issues.
Furthered argued that ESG under ISSB would only require reporting information that is ‘relevant’ to the investors. Instead of faithful representation of the ethics of the entity.
ESG reporting frameworks ignore the SME sector, why, and why might this be an issue?
Mandatory reporting requirements are only imposed on listed companies in the UK.
However, most companies are not listed and privately owned. This means that most organisations may not meet a certain level of sustainability that are expected in modern society.
Commentators argue that this issue may not improve current social and environmental issues,
such as climate change and labour exploitation.
