Sustainability reporting
Sustainability reporting (also called non-financial reporting), is the information disclosed by companies about their nonfinancial performance and how they manage social and environmental challenges (Hahn et al 2023).
Companies engage in sustainability reporting for a range of reasons, including pressures and demands from stakeholders and legal requirements. Recently, more jurisdictions and financial markets have made sustainability reporting compulsory, mainly for larger companies. In general, large companies and companies exposed to media and stakeholder pressure are more likely to engage in sustainability reporting (Hahn & Kühnen 2013).
Reporting regulations and contents
Reporting regulations and contents vary across countries. In the EU legislation will be harmonized because of the recently implemented Corporate Sustainability Reporting Directive. According to the new Norwegian accounting act (valid from the accounting year 2024), large companies (two out of three: total assets >290 millions, net sales >580 million, employees >250) as well as other listed companies must include sustainability reporting in their annual report. The sustainability reporting must include:
- A description of the business model and firm strategy and how it relates to sustainability, sustainability risk, climate change including net zero, and stakeholders
- A description of the firm’s sustainability goals including carbon emission goals, whether the climate coals are science based, and whether the company is in position to reach the goals
- The role and competence of the board and other governing entities on sustainability issues
- A description of the company guidelines related to sustainability
- Information about incentives for sustainability for the governing entities
- Information about the company’s due diligence regarding sustainability, the negative effects of the company’s activities, and what the company has done to limit such negative effects
- A description of the risks related to sustainability
- Which part/portion of the company’s activities is sustainable, as defined by the EU Taxonomy
The EU taxonomy
The EU Taxonomy for sustainable activities is a classification system introduced by the European Union to define environmentally sustainable economic activities. The taxonomy seeks to provide a common language and a clear definition of what is ‘green’ or ‘sustainable’ to all stakeholders. To be classified as sustainable, economic activities must:
> Make a substantial contribution to one of six environmental objectives (climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems).
> Not significantly harm any of the other environmental objectives.
> Meet minimum social and governance safeguards.
The EU Commission can provide more detailed rules about what contributing (or not harming) the objectives mean in practice.
The taxonomy does not “forbid” any activities or rate companies as good or bad, the intention is that the taxonomy will help in investments and business decision, making the level of sustainability more objective and transparent.
Source: EU Taxonomy Navigator
The reporting should follow the European sustainability reporting standard (ESRS). The ESRS define what should be reported and how. In most cases companies must report on climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy, own workforce, workers in the value chain, affected communities, consumers and end-users, and business conduct. All companies must do a double materiality analysis as part of their reporting. In such an analysis, the company has to establish how they affect stakeholders and the environment, and how stakeholders and the environment affect them. Anything that is established to be material (important) for the company or the stakeholders must be included in the reporting.
Reporting in practice: ATEA ATEA is an IT infrastructure company headquartered in Norway and with operations in the Nordics and the Baltics. In 2023 the company had 32,7 billion NOK in turnover and more than 8 000 employees. Their sustainability report for 2023 is integrated in the annual report. In the sustainability report they write about their strategy, stakeholder analysis, goals and progress regarding circular economy, carbon emissions, work conditions, and supply chain. The report has a materiality assessment and an EU taxonomy report. In the materiality analysis, customer privacy and data security, business ethics, and handprint (helping reduce emissions for their customers) come out as the most important issues. ATEA has impressive sustainability results in most areas, scope 3 carbon emissions have been reduced with 37% since 2019. ATEA also has an extensive webpage where all information (and more than in the annual report) can be found, including data/numbers in easily accessible format.
Small firms typically need to report less (or not at all) about sustainability. In the Norwegian accounting act, small companies do not have to report anything. Medium-sized companies (two out of three: total assets >84 millions, net sales >168 million, employees >50) must report on working conditions, initiatives to improve working conditions, environmental impact, and initiatives to improve environmental impact.
The Transparency Act (Åpenhetsloven)
The Norwegian Transparency Act was introduced in 2022. Companies above a certain size (2 out of 3: Sales more than 70 mnok, balance more than 35 mnok, more than 50 employees) must do due diligence in their supply chains to discover human rights and decent work problems, implement measures to rectify such problems, implement these processes in their operations, and inform about their work on these issues. They have to publish an annual report about their due diligence work, findings, and measures taken. Most of the issues in the Transparency act also have to be reported in the Sustainability report (but note that the Transparency act applies to more companies). Also, according to the Transparency act consumers have the right to get information about the company’s results or efforts if they contact the company.
Other types of sustainability communication
Companies can communicate about sustainability through other channels, such as their webpage, through advertising, or social media. This is often useful since few people apart from shareholders and finance professionals read annual reports. What separates sustainability reported mandated by law from other types of communication is that the compulsory reporting also includes what the company perhaps would like not to communicate about.
Companies may also be part of programs, associations or certifications that oblige them to engage in additional reporting. Companies that have committed to the Science-based targets will be included in the webpage of the Science based target initiative with some data. The Ethical trading initiative in Norway is an organization working to improve working conditions and human rights in supply chain. Their members submit an annual report presenting their work.
Does sustainability reporting matter?
Companies report much more about sustainability now than 10 or 20 years ago, partly because of the increased legal requirements. Has this led to changes in the actual sustainability performance of companies? One of the reasons for the increased legal requirements is the belief that if the different stakeholders such as investors, banks, employees and customers get more and more correct info about sustainability, they can “reward” good companies and punish bad ones, by investing more in the more sustainable ones, choosing to work for such companies, etc. However, it is not clear whether this has happened and thus led to any substantial improvement in actual performance. So far it seems that sustainability reporting legislation has led to more sustainability reporting, but not sustainability performance (Hahn et al 2023).
External sustainability measurement and rating
In addition to the company’s own sustainability reporting there is a whole industry of companies and consultancies that provide external sustainability ratings. Such ratings are often called ESG (environmental, social, governance) ratings. ESG ratings are typically provided by specialized research and rating agencies such as MSCI, Sustainalytics, and others. They use sources such company disclosures, media, and other public data to create these ratings, as well as tailored surveys sent out to the different companies.
Investors use ESG ratings to screen potential investments for ESG risks, as part of their due diligence process and to construct ESG investment portfolios. Similarly, companies can use these ratings to screen suppliers or to benchmark their ESG performance against competitors.
ESG ratings providers vary in methodologies and data used (and are not always 100% transparent about their methods), and ratings for the same company can vary considerably. Ratings from different providers correlate, but the correlations are pretty low (Chatterji et al. 2016).
Accessing ESG data The sustainability ratings are normally payment/subscription-based, but some have limited free versions available
> Sustainalytics, part of the Morningstar group, has limited ESG risk score data available for large, listed companies
> MSCI, a large provider of financial data and funds, has more comprehensive ESG and climate data available, again for large listed companies
ESG data at the OsloMet libraryThe library subscribes to database of company financial information from LSEG. This database includes ESG data and is available on three computers in the library in P35.
References
Chatterji, A. K., Durand, R., Levine, D. I., & Touboul, S. (2016). Do ratings of firms converge? Implications for managers, investors and strategy researchers. Strategic Management Journal, 37(8), 1597–1614. https://doi.org/10.1002/smj.2407
Hahn, R., Reimsbach, D., & Wickert, C. (2023). Nonfinancial Reporting and Real Sustainable Change: Relationship Status—It’s Complicated. Organization & Environment, 36(1), 3–16. https://doi.org/10.1177/10860266231151653.
Hahn, R., & Kühnen, M. (2013). Determinants of sustainability reporting: A review of results, trends, theory, and opportunities in an expanding field of research. Journal of Cleaner Production, 59, 5–21. https://doi.org/10.1016/j.jclepro.2013.07.005