Sustainability. We know it matters, but how do we measure it?
Written by Renard Siew
Globally, there has been an increase in demand for higher transparency on environmental, social and governance issues. This has generated a worldwide debate about best practice when it comes to the process of measuring and reporting on sustainable development.
Researchers from all backgrounds have jumped on the bandwagon to define what it means to be sustainable in their respective areas of expertise and which criteria should be looked into to inform us of the progress we have made. A direct consequence of this is the emergence of a plethora of Sustainability Reporting Tools (SRTs) which can be further classified into frameworks and standards, as well as ratings and indices.
It’s encouraging to note that even with this variety of tools and methods the adoption of sustainability reporting by S&P 500 companies has increased by 62% between 2011 and 2016.
Frameworks are defined as a set of principles or guidelines provided to assist companies in their disclosure efforts. The Global Reporting Initiative (GRI) is perhaps one of the most prominent reporting frameworks available to corporations.
According to the GRI guidelines, a typical report should consist of the following elements: vision and strategy; governance structure and management; GRI content index and performance criteria (economic, environmental and social). Such disclosures are usually based on ‘materiality’ which is defined by GRI as criteria that reflect a company’s significant economic, environmental and social impacts or that would substantively influence the assessments and decision of stakeholders.
Standards have a similar function to frameworks but exist in the form of more formal documentation that spells out the requirements and specifications that can be used to ensure sustainability efforts are consistently achieved. For example, standards on social criteria include OHSAS 18001, AS/NZS 4801 and SA8000, while standards that cover environmental criteria include ISO14001.
Ratings and indices are third-party reporting of a company’s sustainability performance. More commonly these are known as environmental, social and governance (ESG) ratings among institutional investors. They measure how well a company has performed in terms of ESG and rank and file companies into an index based on their performance. Examples of these include the FTSE4Good Index, the Dow Jones Sustainability Index (DJSI) Index and the MSCI Index.
The trouble with SRTs
In the initial stages of development, SRTs were no doubt useful to provide guidance and set a context as to where we were headed in terms of sustainable development. But because the number of these tools has grown at such an exponential rate they are now creating extreme confusion among different stakeholders.
Looking at sustainability tools to measure green buildings alone, almost every country has its own framework: Green Star is used in Australia, Building Research Establishment Assessment Method (BREEAM) is used in the UK, Leadership in Energy and Environmental Design (LEED) is used in the US and the Green Building Index (GBI) is used in Malaysia. There are varying performance benchmarks employed too and conflicting tools in use even within the same geographical boundaries, for example, in Malaysia GBI continues to compete with other local tools such as GreenRe, developed by the Real Estate and Housing Developers’ Association of Malaysia (REDHA).
The main problem identified with current SRTs is a lack of standardization in the criteria, terminology and methodology proposed. This makes it difficult to compare and benchmark the sustainability performance of companies. A similar view is shared by Escrig-Olmedo et al. (2010) in their study examining the varied criteria proposed across different sustainability reporting tools.
Delmas and Blass (2010) claim that some tools “choose to focus on past or current measured performance while others put emphasis on the potential to improve future performance based on current management practices”. They also highlight a trade-off between what can be measured and what should be measured, emphasizing data availability as a concern.
Since the adoption of these tools is voluntary, practices among reporters vary significantly. Existing evidence suggests that those who have already adopted sustainability reporting are confused as to which of these tools they should choose. There seems to be a natural inclination towards a tool that puts a company in the best possible light, which may constitute “greenwashing” in the eyes of activists.
When you look at the capital markets, ratings and indices are commonly used to rank and file companies based on their socially responsible practices. Yet, once again, there are cases where the outcomes of assessments differ greatly depending on which rating tool was used. The same corporation could end up in the high-performance band or a lower performance band depending on the tool used to assess them. At the end of the day, this inconsistency is what creates confusion for both institutional and retail investors.
The World Economic Forum’s inaugural Sustainable Development Summit is expected to convene more than 500 stakeholders, including global business, government and civil society representatives. This gathering is timely as it will allow the world’s leaders to discuss the 17 Global Goals and their 169 targets. Hopefully, some of the discussions that take place will lead us toward a more “convergent” outcome, perhaps by harmonizing existing SRTs. At the very least there should be a concerted effort to explore ways to minimize the confusion brought about by the myriad of terms, criteria and benchmarks involved in SRTs.
SOURCE: World Economic Forum