Is mandatory corporate sustainability reporting in the future for public companies?  Not necessarily. If companies continue to voluntarily report on their sustainability and corporate responsibility efforts, mandatory reporting, at least in the United States, may not come to pass anytime soon. 

That doesn't mean there won't be attempts to make it happen. For example, the Sustainable Stock Exchanges Initiative recently made an attempt at expanding mandatory reporting at the United Nations sponsored Rio+20 Conference on Sustainable Development in June. The initiative was introduced to encourage improved transparency and reporting on Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) initiatives. NASDAQ OMX announced it was joining exchanges in Sao Paulo, Johannesburg, Istanbul, and Cairo to encourage listed companies to report on ESG results.

The Sustainable Stock Exchanges Initiative includes over 4,600 companies. Brazil's Bovespa exchange recommended in January that listed companies declare whether or not they report ESG data and to explain why if they do not. The Copenhagen exchange, owned by NASDAQ, also adopted a “comply or explain” policy for the largest 1,100 companies.

On the investor side, over 500 large institutional investors have signed the UN-backed Principles for Reasonable Investment, which provide a voluntary framework by which all investors can incorporate ESG issues into their decision-making and ownership practices. All of the major U.S. private equity companies have also signed on to the PRI.

While seeds of mandatory ESG and CSR reporting are being sown by some international exchanges, what is more profound is the growing number of global and U.S.-based corporations that are voluntarily publishing reports on their initiatives in the area.  “There has been a dramatic increase in the number of reports published during 2011 compared with 2010, and we are finding that 2012 is likely to outpace last year based on the number published thus far this year,” says Hank Boerner, chairman of the Governance & Accountability Institute based in New York, which tracks such reports. The G&A Institute is the data partner for the Global Reporting Initiative, a top advocate and a standard setter for sustainability reporting.

Boerner says S&P 500 and Fortune 500 companies published 345 reports on ESG or CSR in 2011.  Some companies produce reports annually, some bi-annually, and some update previously published reports. Fifteen major U.S. based companies are now publishing an integrated report, combining the traditional annual report with an ESG or CSR report.

While seeds of mandatory ESG and CSR reporting are being sown by some international exchanges, what is more profound is the growing number of global and U.S.-based corporations that are voluntarily publishing reports on their initiatives in the area.

Of the 345 reports in calendar year 2011, 273 followed the Global Reporting Initiative format, 23 referenced the GRI framework, and 49 created their own reporting format. The GRI is a set of guidelines on sustainability reporting that establishes consistent definitions and provides a reporting framework that when used allows for comparability among reports. Some say the genesis of the movement for corporations to address their impact on the environment stems from the 1989 incident involving the oil tanker Exxon Valdez that crashed in the Prince William Sound off the coast of Alaska spilling some 11 million gallons of crude oil.

Following that, the Boston-based organization called Ceres was founded by Joan Bavaria, former president of Trillium Asset Management, a socially responsible investment fund. Ceres is now headed by Mindy Lubber and is the leading coalition of investors, environmental organizations, and other public interest groups working mostly with companies and investors to build sustainability into the capital markets.  A common misperception is that the ESG movement started in Europe when, in fact, it began with Ceres in Boston with the development of the Valdez Principles that later became the Ceres Principles.  Following that, the Global Reporting Initiative was founded in Amsterdam.

Nasdaq is not the only exchange intent on improving ESG reporting by listed companies. The New York Stock Exchange created the position of vice president for corporate responsibility in 2010 and hired Michele Greene in that role to work with its listed companies in their sustainability and CSR initiatives. Greene is the former deputy assistant secretary for financial education and financial access for the U.S. Department of Treasury. The NYSE has published its own CSR report, and NASDAQ is reported to be working on one.

When asked if voluntary reporting is investor driven or initiated by the stock exchanges, Boerner says, “It's 90/10—90 percent initiated by investors; 10 percent based on exchange efforts.”  “Not only are institutional investors, particularly pension funds, calling on companies to report on their ESG and CSR initiatives but within industry groups, peer pressure is also a factor,” he adds. H. J. Heinz and Campbell Soup, for example, have become standouts in the food sector for their sustainability reports, pushing others in the industry to consider filing their own reports, says Boerner. Both companies have senior-level executives heading their sustainability programs. 

Campbell Soup reached out to the socially responsible investor community in 2010 when it held a meeting in Boston to showcase its CSR program.

H. J. Heinz manages its CSR processes from the perspective of the entire enterprise, much the way the international food products company manages its risk assessment and management processes for its manufacturing facilities and the risks associated with extensive global supply chains in over 40 countries. Its slogan is “sustainability is a key ingredient at Heinz from the field to the fork.”

There's still plenty of work to do on ESG and CSR reporting. An unresolved issue is a definition of materiality regarding ESG and CSR information.  David Blood of Generation Investment Management—Al Gore is a co-founder—says many reports he sees do not have material issues in the content.

According to Boerner, trying to define materiality in ESG reporting could be a serious challenge in the effort to achieve mandatory reporting. For example, on climate change, is materiality defined by the science of climate change or is it defined by the company in terms of the impact of climate change on its operations and systems?

While the significant increase in voluntary sustainability reporting is largely investor driven, there remains a chasm in understanding that separates corporations and investors on quantifying corporate responsibility initiatives, particularly when it comes to making a bottom-line assessment.  Rory Sullivan, in his highly regarded book “Valuing Corporate Responsibility: How Do Investors Really Use Corporate Responsibility Information,” says despite the volume of such reporting, the usefulness of these reports to investors is often mired by inconsistency, lack of balance, lack of contextualization within the company strategy, and the difficulty of matching performance with commitment.  Certainly the GRI framework has worked at addressing this problem, although not all companies are currently using it.

Improving Comparability

There are other efforts under way at improving comparability of these reports. As a result of the Rio+20 conference, a private sector not-for-profit organization is being created with a goal of becoming to ESG reporting what the Financial Accounting Standards Board is to financial reporting.  The Sustainability Accounting Standards Board will determine a list of ESG standards that are material and industry specific that can be included in the risk factors of the Form 10-K filed with the Securities and Exchange Commission. Such standards are going to be more difficult to define than those in financial reporting simply because they are more subjective and open to interpretation.

Before we get to mandatory sustainability reporting, however, there are issues that need to be resolved in order to define what constitutes compliance with the reporting process.  Materiality is but one of them. Meanwhile, the Global Reporting Initiative provides a reasonable framework for the increasing number of companies pursuing voluntary sustainability reporting.  The embrace of the GRI framework by major U.S. corporations is a clear indication that voluntary reporting of financial and non-financial performance is a positive development with a growing number of investors and stakeholders. As more companies join the cause, the better the chances that mandatory reporting doesn't come to pass in the first place.