Climate change, sustainability and ESG considerations are increasingly taking center stage on corporate boards around the world. When measuring and communicating corporate sustainability performance through sustainability reporting or ratings, leaders face a complex and rapidly changing set of choices. As a result, companies risk falling behind or choosing inappropriate reports and ratings that do not drive sustainability performance and open the door to accusations of greenwashing. This article introduces the Sustainability Reporting Matrix, a tool that helps executives and sustainability managers focus on the sustainability reporting standards and ratings that best fit their strategic requirements and business needs. informing their stakeholders.
Deciding which metrics to use to report on corporate sustainability performance can be a daunting task for leaders. Some companies only report their greenhouse gas emissions, while others publish glossy reports on their CSR (corporate social responsibility) initiatives or use their ESG (environment, social and governance) ratings as a badge. of honor. But most leaders don’t know why – or when – to choose one of these reports over another.
The past decade has seen a boom in sustainability reporting options. The abundance of choices can be dangerous for executives. With so many options, companies may end up investing in sustainability information, while failing to meet the expectations of regulators, customers, investors, and employees. Moreover, the information disclosure exercise often does not translate into meaningful action or impact.
that of Dubai Sustainable city recently developed a better way to navigate this complex set of choices. The 46-hectare mixed-use community is designed to achieve net zero energy, but the developer’s knowledge arm (the SEE Institute) was unsure how to best report on achievements toward that goal. It was difficult to choose from a wide range of reporting standards, each with a different view of what sustainability reports should cover. The international sustainability ratings he reviewed did not fit the local context, while the locally developed ratings lacked international comparability.
In response to these challenges, we have developed a matrix to categorize reporting standards and ratings. By categorizing all available reporting and scoring options based on the breadth of topics they cover and their target audience, sustainable city leaders were able to define a sustainability reporting approach tailored to the needs of the organization. company and its stakeholders. The exercise resulted in an annual sustainability report focusing on the most critical environmental challenge that the sustainable city can have an impact: the reduction of greenhouse gas emissions, measured according to the Greenhouse Gas Protocol and verified by a outer part.
Since none of the existing ratings proved able to adequately summarize an entity’s performance in reducing greenhouse gas emissions, it was decided not to seek a sustainability rating. . This decision allowed the company to focus its communication on its essential message of the fight against climate change and earned it multiple regional awards for its report on sustainable development. Communicating information about greenhouse gas emissions to Sustainable City residents also helped them think about how they could help reduce emissions through behavioral change.
The sustainable city of Dubai is not unique in the choices it has had to make. The matrix we have developed can help others find the optimal approach for deciding both sustainability reports and sustainability ratings. Here’s how it works.
Sustainability Reporting Standards
Sustainability reporting refers to the information that companies regularly provide to the outside world about their performance in a structured way. Sustainability ratings (see below) provide a summary indicator of an entity’s performance.
There are at least seven well-known sustainability reporting frameworks and standards, each backed by credible organizations and with reputable people on their board. In alphabetical order, these are:
- CDP – Carbon Disclosure Project
- CDSB – Climate Disclosure Standards Board
- GRI – Global Reporting Initiative
- IIRC – International Integrated Information Council
- SASB – Sustainability Accounting Standards Board
- TCFD – Working Group on Climate Related Disclosures
- WEF IBC – World Economic Forum International Business Council
Each standard deals with a different scope, from the narrowest (an exclusive focus on greenhouse gas emissions, for example) to the broadest (encompassing all of ESG or all of range of the United Nations Sustainable Development Goals), and is aimed at different audiences from a narrow set of stakeholders (primarily investors) to broader groups including customers, employees and society as a whole.
The first matrix developed by Dubai’s Sustainable City sorted out these differences by placing the subject on one axis and the audience on the other. The company then analyzed all of the major global sustainability reporting standards and placed each in the corresponding quadrant of the matrix.
Using this matrix, executives can see that if they want to report the specific risks that climate change presents to their financial results, they can choose to use the CDSB (a specific standard) or the TCFD (a general framework). Companies looking to report on a wide range of issues (such as the company’s contribution to the United Nations Sustainable Development Goals) can use SASB and IIRC, which have now merged into the Value Reporting Initiative .
In the upper half of the graph, CDP focuses on a company’s impact on greenhouse gas emissions. The CDP enables companies to report on their impact on climate, water and forests, with climate reporting generally based on the Greenhouse Gas Protocol. Finally, companies wishing to report on a wide range of environmental and social topics can use the GRI or the WEF IBC. GRI is the most widely used sustainability reporting standard in the world. The WEF IBC has mapped its own metrics to the GRI standards, allowing some level of comparability between the two.
Managers using this matrix must decide whether to focus only on environmental aspects or include a broader set of non-financial topics in the report. A second consideration is whether companies report on their impact on the environment or the impact of the environment (specifically, climate change) on the company. The first question is of interest to a wide range of stakeholders, while the second concerns mainly the company’s management and investors. Although both rely on a solid understanding of climate change and its causes, they are essentially separate issues and use different reporting standards. The sustainability reporting standards matrix provides guidance on which standards are appropriate in each of the four scenarios that arise.
The second matrix developed by the sustainable city draws up the sustainability ratings.
A sustainability rating provides a standardized, independently determined summary indicator of sustainability performance based on a specific set of criteria. These ratings are generally solicited and paid for by the rated entity. Ratings are easy-to-understand communication tools that can facilitate performance comparisons between organizations and over time.
Leaders face a wider variety of sustainability-related ratings than reporting standards. In order to facilitate decision-making on which ratings to adopt, if any, companies should first decide whether to require a rating that focuses only on environmental aspects or on a broader set of topics, such as ESG considerations. At the same time, companies need to decide whether they want a rating aimed only at investors or at a broader set of stakeholders.
On the bottom left, companies looking to issue bonds for projects that meet the greenhouse gas emissions trajectory of the Paris Agreement can issue green bonds. The Climate Bonds Initiative is the main body that certifies green bonds, usually on the basis of verification by accredited third parties. Issuance of green bonds is growing rapidly and exceeded a cumulative total of $1 trillion in 2021.
Bottom right, ESG ratings published by major global financial rating agencies and information providers generally measure either the quality of a company’s disclosure of information along the ESG dimensions, or the risk that companies face on ESG-related issues. Often these two go hand in hand, as companies that disclose ESG information transparently are generally perceived as less risky. ESG ratings continue to grow, with a recent study finding little correlation between the ESG ratings of five major agencies. According to Bloomberg, by 2025, one-third of assets under management (equivalent to US$53 trillion) will be ESG-focused, so it’s no surprise that companies are paying increasing attention to ESG ratings.
In the upper half of the matrix, several ratings are communicated to a wide range of stakeholders. Science Based Targets verifies that companies’ greenhouse gas emission reduction targets are in line with the goals of the Paris Agreement. Similarly, built environment ratings (such as LEED and BREEAM) communicate the sustainability characteristics of buildings and communities to a wide audience. Other ratings, such as EcoVadis Supplier Ratings, assess company performance on a broader set of topics, including environmental and social.
Superior durability and business performance
Measuring, reporting and managing a company’s sustainability performance will only have a greater impact on business performance, reputation and risk. As companies navigate towards net zero, choosing the right approach is essential and senior managers must be informed enough to be able to actively participate in the discussion and decision-making. Sustainability reporting and scoring matrices can be useful tools to reflect on a company’s choices and help ensure regulatory compliance, responsiveness to stakeholder needs and ultimately lead to sustainability and to superior business performance.