Sustainability reporting: voluntary disclosure should inform regulation

17 Mar 2014

Europe is about to legislate for more sustainability information in reports – but research from the US shows that more rules doesn’t necessarily mean better reporting. What can European companies and regulators learn?

EU-listed entities will soon have to report more relevant and useful non-financial environmental and social sustainability information in their management reports.

The European Commission has proposed that companies disclose ‘concise, useful information necessary for an understanding of their development, performance, position and impact[s]’, benefitting investors and society at large.

But there are concerns: “Forcing companies to report these issues by introducing regulation means that the information they report can become boilerplate overnight,” said Mark O’Sullivan, Corporate Reporting director at PwC. “Reporting should strike a balance between what companies think is important for them to report, and what the people who want the information most demand of them.”

Mr O’Sullivan’s comments echo the findings of a report by US sustainability lobbyists, Ceres. The report shows that since legislation prescribing enhanced climate change and strategic sustainability reporting was enacted in the US in 2010, the average length and quality of such disclosures in mandatory 10-K filings has actually gone down.

According to Ceres, the Securities and Exchange Commission (responsible for monitoring disclosures) appears to be paying less attention too. Their comment letters on the issue number 25 out of a total 45,000 letters written over the period examined ­– largely sent to small-cap, low-risk companies. And few letters were specific in their content – not, says Ceres, what you would expect.

However, the Ceres report also revealed that voluntary reporting by the same companies on the same issues is of a much higher quality. According to Mr O’Sullivan, this is the nub of the issue. Why do companies report more informatively on a voluntary basis than they do in mandatory filings, and is this a trend that needs to be reversed?

Unlike the voluntary reporting, the 10-K is subject to a higher level of assurance, making it – according to Ceres – one of the most useful communications a company can make. That higher level of assurance, says Mr O’Sullivan “can be a worry to companies in a heavily regulated environment.”

“You have to get companies comfortable with reporting useful, assured information in their 10-Ks. But you don’t want to legislate too prescriptively, too soon – and you don’t want to do away with the good voluntary reporting. The key will be to increase the perceived value of voluntary reporting, using assurance to support rather than hamper the movement in reporting in general.”

According to Mr O’Sullivan, achieving good sustainability reporting – voluntary or otherwise – comes down to the second part of what the Commission is asking of companies: to link their sustainability disclosures to their performance, making their strategic decisions around sustainability as explicit as possible.

The Commission’s proposals aren’t tied to the same fate as the SEC’s 2010 legislation. They recognise “the role that complementary regulation plays in creating an environment [is] more conducive to enterprises voluntarily meeting their social responsibility.” It is this aspect of the proposals that may improve the compliance rate in the EU compared to US-listed companies.