Introduction
In the past decade, we have witnessed an increasingly higher number of companies embracing the concept of non-financial reporting. For example, Alesina and Weder (2002) report that in 2000, very few organizations (only about 44) were reportedly implementing the concept of sustainability reporting as popularized by the Global Reporting Initiative. By 2010, this number had increased significantly and as Rubin (2012) has noted, some 1,973 firms had already complied with these rules. In tandem, stock exchange authorities and national governments have endorsed sustainability reporting further by embracing rules and regulations that govern sustainability reporting.
The paper is an attempt to critically examine how the increased demand from customers and investors for companies to have enhanced disclosures has elicited a growing appetite for global benchmarks in non-financial reporting (Alesina & Weder 2002). In addition, the paper shall also endeavor to evaluate how the adoption of such non-financial reporting compulsory standards may enhance non-financial reports like those on economic risk and corporate social responsibility. Finally, the paper shall try to explore how the adoption of such benchmarks plays a role in the better management of an organization’s environmental risk.
Sustainability reporting
As a result of the growing pressure to be accountable and transparent, many firms have not opted to embrace the concept of non-financial reporting. The new strategy that is now popularly referred to as sustainability reporting, entails reporting on corporate social responsibility or risk management issues (Kolk 2004, p. 53). Sustainability reporting involves the public declaration of the environmental, economic, as well as a social performance of an organization (Gwendolen 2009). The majority of the firms have realized that the growing needs of their customers, shareholders, communities, as well as other stakeholders, can no longer be satisfied by financial reporting alone.
This is because there is a dire need for the aforementioned parties to have an overall overview of the firm’s performance if at all they are to be assisted in their decision-making processes (Markus, Wolfgang & Witte 2006, p. 11). In this respect, “sustainability reporting” can also be regarded as a form of “triple bottom line” reporting or citizenship reporting (Kolk 2004, p. 54). This is because sustainability reporting has been noted to enable readers to better comprehend the level to which the reporting firm abides by the “triple bottom line” of social, environmental, and economic performance.
When these nonfinancial reports have been released voluntarily, they also help to shed light on the sustainability-related opportunities and risks that the reporting organization might be faced with, be it a private or public company, an academic institution, a government agency, or even a nonprofit organization (The Economist 2004). The expectation is that if a firm decides to publicize its sustainability practices, this is also a sign that it is ready and willing to reveal the areas where it has fallen short of expectation, in addition to the successes achieved. In the short-term, this is bound to bring about a state of reputational risk.
However, there are a lot of advantages associated with the adoption of sustainability reporting practices by a firm such that in the long-term, these will more than compensate for the short-term disadvantages. Walmsey and Bond (2004) opine that sustainability reporting can improve the reputation of an organization, in the long run. Separately, Schaltegger, Bennett and Burritt (2008) have identified some of the benefits of sustainability reporting to a firm and they include enhanced risk management and improved efficiency of the firm’s operations. Also, the firm is likely to win the trust of various stakeholders.
The majority of the aforementioned benefits are linked to the internal controls and processes that the companies in question may have implemented in a bid to help them gather, store and process non-financial data (Farneti & Guthrie 2009, p. 94). For example, companies that have implemented systems to collect real-time, quality data on such issues as water use, greenhouse gas emission and supply chain activities not only enable such organizations to improve their decision-making process but also to reduce any associated risk as well (Markus et al 2006). In contrast, companies that fail to report on sustainability end up increasing risk.
Increased demand for global benchmarks in mandatory and voluntary non-financial reporting
The past decade has seen proponents of mandatory and voluntary reporting standards engage in lively debates. Such debates have almost always ended in conflicts owing to perceptions and vested interests (Goldsmith 2012). A decade ago, organizations strongly supported voluntary standards; on the other hand, pressure groups, trade unions and NGOs called for compulsory benchmarks to guide the adoption of non-financial reporting.
This is because they doubted whether firms would agree to give objective non-financial information willingly (Cazier, Corley & Gora 2011). A report released by ACCA Global (2010) reveals that a high number of CFOs (35%) are convinced that such stanzas would go a long way toward enhancing non-financial reports in such areas as environmental risk concern and corporate social responsibility, with only 9 % of the CFOs who think otherwise. About half of the CFOs (46 %) are convinced that the establishment of global benchmarks that will facilitate the release of non-financial reports would be very useful in enhancing the reputation of firms among consumers and stakeholders.
Nonetheless, CFOs are in general agreement that the risk management attached to companies stand a chance to benefit from such an arrangement. Executives are also of the opinion that global benchmarks or standards in corporate governance are vital in inculcating a culture of ‘long-term’ thinking in a firm (Kearins, Collins & Tregidga 2010, p. 514).
However, the majority of the executives and CFOs concur that corporate governance would be a good strategy to adopt at boardroom meetings as it would help members to foster ‘long-term’ thinking (Adams & Whelan 2009, p. 124). Then again, the legislator may decide to remain passive, in effect leaving it to international bodies or market forces to issue sustainability reports; alternatively, they may decide to support different non-governmental efforts as a way of thwarting efforts by companies to embrace non-financial reporting (Needles & Powers 2010). Conversely, the legislators may decide to introduce some measures as below:
- Compulsory regulations with a requirement to report;
- Offering companies incentives to report;
- Endorsing the GRI Guidelines to persuade industry players to adopt them;
- Voluntary guidelines and rules on performance that may or may not refer to such international benchmarks as GRI and UN Global Compact
- Giving such regulating authorities as to the NYSE the regulatory power
As an increasingly higher number of firms publish their financial reports to align with global standards, they are also likely to encounter increased pressure to offer more than just the usual bottom-line results (Kearins et al 2010, p. 521). Such demands have been fueled by various concerns but mostly, they are a result of deeper insights to take care of the environmental and social effects of corporate activity (Weiss 2012). A good example worth of exploration is the decision by the Corporate Sustainability Reporting Coalition to campaign for enhanced accountability and transparency from corporate boards (Horrigan 2010).
This push was announced in September 2011 at the UN’S General Assembly. The ACCA is an affiliate member of the Corporate Sustainability Reporting Coalition lobby group. It is in turn made up of made investors who are in charge of managing assets valued at more than US$1.6 trillion (ACCA Global 2010). By and large, the survey carried out by the ACCA in 2011 indicates that both investors and issuers jointly support a decision to create codified measures to determine corporate performance not just in non-financial areas, but also in the financial areas as well. This is a strong sign that global standards have the power to shape the way investors and corporate boards communicate.
Although the present surge in non-financial reporting can be traced as far back as the last decade, nonetheless, executives and CFOs opine that there is a need to have in place global standards so that this information can remain genuinely useful. Even as the publicizing of non-financial reporting demonstrates that firms are in the right direction, their main intention should be to see to it that they minimize risks associated with their operations (Schaltegger, Bennett & Burritt 2006).
This is because emphasizing disclosure helps us to identify non-optimal standards. For example, in case a firm decides to disclose something that is, by and large, not nice, then investors are normally required to possess the necessary skills required to identify such a thing. Thereafter, the investor may get in touch with the company’s executives and make the necessary enquiries until they are no longer uncomfortable with the risk in question (Saudagardan 2001). By and large, most of the survey respondents who were interviewed by the ACCA Global report (2010) said that establishing global standards in as far as non-financial reporting is concerned, would act as a useful tool that would enable the executives of a firm to manage potential environmental risks better (ACCA Global 2010).
Certainly, most companies now seem to favor the creation of global benchmarks in non-financial reporting because they have realized that members of society and investors are now increasingly relying on such reports before making decisions. Such decisions could be about purchasing a product or an investment. As such, there is a need to ensure that such a report is structured well so that both consumers and investors may have an objective view of how your business activity would affect them. In the same way, establishing global standards in non-financial reporting may also have a material impact on your company’s balance sheet.
Should companies adopt compulsory non-financial reporting?
There are several reasons in support of and against the adoption of compulsory and voluntary financial reporting. Compulsory non-financial reporting helps to change the culture of the organization. As a result, leaders can play a leading role in innovation (Pratt 2010). In addition, it leads to legal certainty, not to mention that it enables the firm to save costs. There is also the issue of minimizing the non-diversifiable market risk.
Besides, the firm also attains standardization. Voluntary non-financial reporting also enables the firm to remain flexible, to comply with the established regulations and shows that the organizations in question are aware of the collective interests of the sector (Smith, Haniffa & Fairbrass 2011. Also, the firm is unlikely to be flexible when faced with complex change. There is also the issue of constraints about competitiveness and efficiency, not to mention that incentive for innovation is lacking. Furthermore, voluntary non-financial reporting may lead to conflicts of interest, under-enforcement, insufficient sanctions and global competition. It may also be faced with insufficient resources.
Firms that fail to release sustainability information can and do in fact seem less transparent in comparison with their competitors, and could be regarded as laggards, although this may not be the case (Pilot 2011). Additionally, organizations that issue incomplete sustainability reports with inadequate vigor soon realize that in case it becomes mandatory to issues such reports and when the benchmarks are raised, conspicuous inconsistencies emerge between past reports and the current ones (Lohr 2011).
When the aforementioned factors combine, firms may feel under a lot of pressure to ensure that they publicize their non-financial reporting practices (Adams & Whelan 2009, p. 124). Consequently, the majority of the organizations are intent on reporting, although they are yet to establish the required systems and processes. We also have other firms that are on the lookout for novel ways to improve the quality of their current reporting procedures to minimize any long-term risks associated with sustainability and also to manage their reputation.
Application of environmental reports
Environmental reports are especially useful when the management wishes to communicate with customers, investors and other stakeholders on several issues like investment, business development, corporate responsibility, capital development funding, community impacts, expansion, and recruitment. Environmental reports give a public face to the firm, not to mention that they add acceptance of and credibility to the activities undertaken by the firm (Cazier et al 2011).
Clearly, in case the information reported is incorrect or in case the firm fails to attain the benchmarks it has set or fails to honor pledges outlined in reports, the ensuring repercussions may be very embarrassing, not to mention that they could have a profound effect on the reputation of the organization (Brunetti & Weder 2003). Under certain circumstances, the results could affect a company’s share price negatively. Consequently, the entire organization must and should be fully aware of the obligations set in the report (Horrigan 2010). At the same time, the organizations should be ready to achieve and accept the commitments and targets made.
Commercial benefits
Researchers appear divided on whether there is a direct relationship between, on the one hand, environmental reporting and on the other hand, financial benefits. In their study to determine if environmental reporting played a role in supporting the share values of companies listed on FTSE 100, Walmsley and Bond (2003) found out that on average, companies that decide to issues environmental reports did not fare any better financially in comparison with the firms that did not report.
On the other hand, a mixed assessment of the financial services and energy and utility sectors revealed that firms with the best reports stood a higher chance of benefiting from improved reputation and improved share prices because investors saw in them a good opportunity worth investing in. besides, the study showed that firms that reported witnessed lower share price volatility and presumably indicated stable growth. Furthermore, sustainability of environmental reporting provides investors with additional information so that they can recognize companies that would enable them to invest their resources in an eco-efficient way, thereby reinforcing both non-financial and financial value as far as sound environmental management practices are concerned.
Conclusion
Organizations are faced with an increased demand to report their non-financial performance is a new concept popularly known as sustainability reporting. This is a complete departure from the conventional reporting whereby emphasis has been on the economic performance of firms.
In contrast, non-financial reporting is mainly concerned with the environmental and sustainability aspects of a firm. Investors, customers and other stakeholders are slowly realizing that there is a need to gain additional information about a certain firm, beyond the end-of year financial results. Such information has proven useful in helping them to make the right investment and/or purchase decisions. As a result, organizations are under a lot of pressure from various stakeholders to publicize their non-financial performance details, in the form of sustainability reporting.
Whereas there are reports that non-financial reporting could put to risk the reputation of a firm in the short-term, on the other hand, the company that decides to embrace this practice stands to benefit a lot from sustainability reporting in the long-run. For example, investors and customers gain the confidence of the company, and this acts as a vital competitive advantage.
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