Canadian companies must embrace social reporting to remain competitive.
Analysts are giving more positive recommendations to firms that score higher and report on environmental, social and governance measures, recent research from the London Business School and Harvard Business School shows. And those that adopt mandatory sustainability reporting requirements have seen positive effects on corporate performance.
This makes sense: Disclosure of that kind of information creates incentives for companies to manage such issues more effectively, even if only to avoid having to disclose bad performance to their stakeholders.
And a recent MIT/Boston Consulting Group survey of corporate leaders found that companies are taking notice – agreeing across all sectors that social reporting is growing in importance. The divergence is now between "embracers" and "cautious adopters" – companies that are pressured to catch up by policy makers, investors, employees and customers.
There are a range of environmental and social issues that directors should consider to ensure their companies become "embracers" – those that successfully balance long-term vision with projects offering concrete wins in the near term.
The key is authenticity – communicating challenges as well as successes, listening as well as reporting. Acting with integrity doesn't mean waiting to act until you can get things perfectly right – innovation is all about making errors, learning and adapting. For example, Paul Polman, the chief executive officer of Unilever PLC, recently acknowledged that the company had yet to come up with answers to many environmental and social sustainability issues in its operations, but stressed its willingness to work with others to do so.
Our conception of corporate reporting must also evolve from thinking of it as a modular process – built up within the corporation and delivered to shareholders (and other stakeholders) to a more robust form of engagement both within the corporation and with stakeholders. To take an obvious example, it should come as no surprise that employees are often more aware of sustainability challenges than management. Engaging them on these issues tends to drive up productivity and promote a more attractive culture for new talent.
Global momentum is shifting rapidly toward mandatory reporting requirements. Denmark, Sweden, France and South Africa now require some form of sustainability or integrated (financial and social) reporting. In August, 2010, the International Integrated Reporting Committee was formed, to create a globally accepted integrated financial and social reporting framework. Last November, the International Organization for Standardization launched a new standard, providing guidelines for social responsibility and public reporting thereon. Many stock exchanges now brand themselves (or listing categories and indexes) based on social reporting.
If Canada is to keep up, the onus can't fall completely on the companies. Regulators must take a more active leadership role. The Ontario Securities Commission has taken the lead on environmental disclosure, but regulators have otherwise tended to be passive, assuming that sustainability reporting would emerge as the result of market forces. That hasn't happened, so something must change. Interim measures should include guidance on concepts such as the "materiality" of social issues to investor decisions and long-term corporate performances. This needn't involve new requirements at this stage. If anything, existing regulations may need to be reviewed to ensure they do not create undue barriers. Ultimately however, regulations dictating mandatory reporting will be required. Regulators should pro-actively engage stakeholders in the development of such standards.
Measuring sustainability commitments in the same manner as any other investment is rapidly becoming the norm. It is reflected in evolving legal practices with respect to the duties of directors to consult with, and consider the interests of, various stakeholders. And an Ontario proposal for pension plans to disclose whether their statements of investment policies address environmental, social and governance factors reflects a growing global standard of accountability. The OSC should play a leadership role in accelerating this process as a source of competitive advantage for our economy.
As published in today's Globe and Mail.
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