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Gearing Corporate Reporting to Promote Sustainable Development

September 26, 2014 • CRITICAL ANALYSIS, Editor’s Choice, Unprotected Post, World Development

By James X. Zhan

The post-2015 sustainable development goals (SDGs) currently being devised by the international community cannot be fulfilled under the auspices of the public sector alone. Private sector investment will be key to their delivery. However, in order to successfully mobilise the private sector to promote sustainable development, more transparent corporate sustainability reporting is crucial – as James Zhan argues in this article, what gets measured is what gets managed.

The international community is currently formulating a set of sustainable development goals (SDGs). These new goals will chart the way for development efforts when the Millennium Development Goals (MDGs) expire in 2015, and are intended to galvanise global action on poverty alleviation, food security, human health, education and a range of other economic, social and environmental imperatives.

The goals will have significant resource implications. According to UNCTAD’s World Investment Report 2014, at the global level, total investment needs in SDG-related sectors are in the order of $5 trillion to $7 trillion per year to 2030. In developing countries alone total investment needs top $4.5 trillion annually. At the moment, investment in relevant sectors is about $1.4 trillion, which implies an annual investment shortfall of as much as $3.1 trillion.

This formidable resource gap puts the fulfillment of commitments under the SDGs beyond the reach of the public sector alone. To progress meaningfully means that the private sector, with its enormous financial and innovative muscle, has a key role to play in delivering on the development agenda.

Current private sector participation in investment in SDG sectors varies between 20 and 80 per cent, depending on the sector, which implies there is considerable scope to increase the business sector’s contribution.

In the new era of development-led globalisation, public policy has tremendous power in shaping market structures and outcomes. However, involving business in the fulfillment of the SDGs will require smart public policy solutions that work with both market structures and the private corporate responsibility policies of individual firms.

The private sector, with its enormous financial and innovative muscle, has a key role to play in delivering on the development agenda.

One key tool in this area is corporate sustainability reporting linked to the SDGs. This was recognised last year in the United Nations Report of the High-Level Panel of Eminent Persons on the Post-2015 Development Agenda. In this report, the panel proposed that “in future – at latest by 2030 – all large businesses should be reporting on their environmental and social impact – or explain why if they are not doing so.”1 Reporting on social and environmental performance and measuring the impact of business activities is key to the promotion of SDG investment since it facilitates proactive management, enables public monitoring and prompts financial institutions and private investors to improve their corporate behavior on environmental and social issues.

Innovative changes in the area of sustainability reporting have been underway for some years. The Global Reporting Initiative (GRI), which is the producer of the most widely used sustainability reporting guidelines, and the International Integrated Reporting Council (IIRC), which developed an inclusive reporting framework, have recognised sustainability as a contributor to value creation and have actively promoted reporting practices and standards at the international level. There are many other important players in this space, including the Carbon Disclosure project, the Carbon Disclosure Standards Board, the Accounting for Sustainability project, the United States focused Sustainability Accounting Standards Board and UNCTAD’s own intergovernmental working group on accounting and reporting. With years of experimentation and progress, it is time to bring together the work of disparate groups and promote a more harmonised approach that better lends itself to adoption by regulators and policy makers. In this regard, the “Corporate Reporting Dialogue”, which was launched earlier this year and is organised under the auspices of the IIRC, has united many of the relevant international initiatives and entities seeking to adopt a consensus approach to sustainability reporting. This is a good start.

However, giving life to standards, guidelines and frameworks requires investment leaders to think about implementation and changing current behaviours. Reporting requirements in most jurisdictions today are focused on short-term financial results, which often encourages narrow short-term management thinking. Sustainable development – as well as financial stability – requires a broader long-term perspective and reporting requirements could usefully be enhanced to promote this.

In this respect, stock exchanges and capital market regulators are strategic partners to give traction to sustainability reporting. Essentially functioning as the interface between investors, companies and government policy, stock exchanges and capital market regulators are key to helping transmit information about changing policy orientation and effect buy-in through enhanced reporting requirements. Changing market practices in this manner could spawn change across industries and throughout value chains.

Maximising the contribution of corporate sustainability reporting is a multi-stage process (see figure 1). Sustainability information should feed into systems of analysis that can produce actionable information in the form of corporate sustainability ratings. Such ratings on corporate debt and equities could be integrated into the decision-making processes of key investment stakeholders – including policy makers and regulators, portfolio managers, transnational corporations and civil society. These investment stakeholders can seek to implement a range of incentives to provide market signals that will help to better align the outcomes of market mechanisms with countries’ sustainable development policies. To be truly transformative, this integration process needs to align itself with the policy objectives of the SDGs and to create material implications for poor sustainability performance.

Figure 1 UNCTAD

Finally, sustainability ratings and standards can also be used as a basis for capacity-building programmes to assist small and medium-sized enterprises in developing countries adopt best practice in the area of sustainability reporting and management systems. Stock exchanges can also play a vital role in this respect, helping companies to create the capacity to meet the evolving information needs of investors, and navigate increasingly complex disclosure requirements and expectations, through training initiatives and guidelines.

In concert, this complementary and interlinked quartet (refined corporate reporting requirements, a new ratings system, integration strategy, and systematic capacity-building) can generate a powerful feedback loop, creating a virtuous cycle that fosters the adoption of sustainable development management systems.

To help spur the dialogue between public and private sector players on ways in which to work together to galvanise investment-for-development, UNCTAD will host the World Investment Forum from 13 to 16 October in Geneva, Switzerland. Among the Forum’s summits and high-level sessions will be the Fourth Global Dialogue of the Sustainable Stock Exchanges initiative, which focuses on how the world’s exchanges can work together with investors, companies, regulators and policy makers to create more sustainable capital markets. The Global Dialogue’s core purpose is the sharing of experiences to encourage exchanges and their regulators to adopt best practices. With CEOs and chief regulators from around the world, the discussions will focus on enhanced listing rules and voluntary and regulatory initiatives to promote integrated sustainability reporting.

Reporting on social and environmental performance and measuring the impact of business activities is key to the promotion of SDG investment.

While sustainability reporting alone is not a panacea for sustainable development challenges, it is a key enabler and an important first step in this process. Maximising the private sector contribution to fulfillment of the SDGs requires that we start by measuring and reporting progress. It is an old cliché that what gets measured is what gets managed. But it is also true. Markets run on information, and to involve the private sector in the achievement of the SDGs, we need to broaden the information that guides the markets.

About the Author

James-Zhan_James Zhan is director of Investment and Enterprise at UNCTAD and the editor-in-chief of the World Investment Report of the United Nations. The 2014 edition of the World Investment Report is on the theme ‘Investing in the SDGs: An Action Plan’.

References

1. United Nations Report of the High-Level Panel of Eminent Persons on the Post-2015 Development Agenda. ‘A New Global Partnership: Eradicate Poverty and Transform Economies Through Sustainable Development’. (United Nations Publications, New York), p. 24

 

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