We need transparency and accountability. We don’t need bureaucratic burdens, distraction and misdirection– which is what much of sustainability-related reporting has become. The reporting world increasingly pushes companies to do what can be measured, rather than to do what needs to be done. It’s time to admit it and try to improve it.
Corporate sustainability leaders are in a bind, but many are uncomfortable discussing it openly. Most value CSR/ESG reporting and welcome outside assessments. They know that reporting meets valid stakeholder needs for information, helps companies get stakeholder input, and provides valuable leverage with senior management. But the costs, burdens and distraction are getting ridiculous.
Unfortunately, the ratio of burden to value seems to be getting worse. The world of Reporters, Raters and Rankers (the 3Rs) is out of control. Many corporate sustainability leaders say this privately. But they hesitate to say much publicly because they don’t want to offend the raters and rankers who give them their grades.
The CSR/ESG reporting burden
Reporting has been a burden for years. Now the burden is getting worse in two ways:
- Increasing complexity and volume. The loudest complaints used to be about DJSI/SAM. Now they are about CDP. When a company gets a 200+ page guidance document for doing one report — just one report among many — the burden is only getting worse.
- Increasing inconsistency. One CSR leader summed it up: “Everyone has to have their own questions and systems – and that’s where the breakdown is. Nothing is uniform – it could be, and should be, but it isn’t. CDP, MSCI, Sustainalytics…all of them.”
Another corporate leader summarized:
The raters put out their surveys, shame companies (in most cases) to report, or in their scoring. Yet, they don’t justify why their survey is needed, why it’s better than the myriad of other reports, how they are actually scored, etc. In other words, they ask for disclosure… transparency and relevance, but provide none in return.
Companies share some responsibility for the reporting burden. At an industry sustainability conference a few years ago, the reporting leads for different companies commiserated about the amount of time they spend on reporting. When questioned, they could not differentiate between work they had to do in order to satisfy critical demands from essential stakeholders, versus what they chose to do in competition with industry peers. They lived in an echo chamber of corporate reporters, reporting consultants, NGOs, raters and rankers, valuing their reporting for its own sake.
This burden might be worthwhile if it helped companies focus on what’s important. Instead, much of reporting distorts priorities.The 3R world values what can be easily counted, collected, collated and compared. As a result, companies focus valuable energy on doing what can be measured, instead of doing what needs to be done (and then figuring out how to measure it).
This overemphasizes issues that can be quantified, that have a clear direction (i.e. less is better or more is better) and are geographically fungible. That can work well for carbon emissions. It is less clear for things like water. It can break down entirely on other issues. In an article I recently co-authored with Dean Alborough, we noted:
The most important, dearly-held human values are often the hardest to measure. Energy and environmental issues are essentially about physical conditions in the real world, and thus susceptible to quantification. Human rights issues are hard to quantify and compare: we know what a degree of temperature is (and it is uniform globally), but what is a degree of human freedom or choice?
Earlier this year I asked environment and sustainability leaders at major companies about a particular sustainability issue that may present material business risks and opportunities. I asked what helped or hindered focusing on this issue. Without prompting, they cited reporting as diverting more than focusing attention. “We’ve had no internal queries from the Corporate sustainability reporting group about any of this,” admitted one participant. Some said their sustainability programs concentrated on reporting more than on business performance, focusing on raters’ and rankers’ agendas rather than what was really important. One wise sustainability veteran warned of overreacting to those external reporting groups: “Don’t make their objectives your obsessions.”
This distortion is particularly damaging for new CSR leaders. Repeatedly I hear dismay and discouragement from those newly hired who find that their first year or two are spent on reporting rather than on strategic direction, rigorous diagnostics and practical programs.
This burden also might be worthwhile if it helped stakeholders really understand how companies are performing. Instead, as a recent article by WRI noted:
[One] sustainable asset manager explains, ‘Rating agencies often assess companies on the quality of disclosures, or whether they have policies in place, rather than on actual performance.’ It is hard to know which, if any, scores indicate material performance.
And let’s face it, some corporate programs (and their resourceful consultants) are adept at manipulating the 3R process to highlight what they want and to look better than they are. They use it to direct attention away from their vulnerabilities and back toward safe areas of performance that don’t challenge their business model. Several years ago I wrote: “There is an entire industry of folks who set CSR expectations, write reports about meeting those expectations, and evaluate reports to see if they met those expectations. It’s all too easy to separate all that CSR stuff from what companies actually do in their day-to-day business.” I wish I could say that it has improved since then.
Reporting often doesn’t live up to its promise to provide transparency. It doesn’t open a window into true sustainability performance. It’s not providing a lens that helps companies and their stakeholders focus on what is truly important. Instead, it is sometimes a fun-house mirror in a carnival sideshow, charging companies the price of admission while enabling some to stretch or shrink their image at will.
Time to start fixing this
I’m NOT urging companies to stop reporting. But there are things we can do:
- Companies can choose to focus on the few reports and requests they think are critical, and ignore the rest.
- Corporate sustainability leaders could better balance performance and reporting. Make sure your team puts more effort into improving your company’s performance than into reporting about that performance.
- Corporate sustainability leaders can use materiality as a strategic process for their companies’ actions (that happens to inform reporting), rather than as a tick-the-box exercise.
- Corporate executives and Boards of Directors could stop the drift toward knee-jerk response to raters and rankers (remember the years when we all lived and died by the much-derided Newsweek rankings?). Get back to what Boards are best at: asking meaningful questions about opportunities and especially risks, how those are identified and anticipated, and what’s actually being done about them.
- Investors should help companies focus on what’s important rather than aiding and abetting the piling-on by raters and rankers. Making companies spend resources on reporting is not cost-free. Truly responsible investors will ask hard questions and will also communicate clearly which critical few reports they really care about.
- Sustainability media can better balance the attention paid to performance versus to reporting. Don’t fall into the same competitive-ranking trap as colleagues in the political media who report on the “horse race” aspects of campaigns (like fundraising and meaningless early polls) more than on candidates’ qualifications and policies.
I don’t expect NGOs, raters and rankers to change what they ask for. They are just like the rest of us: they have their own organizational strategies which depend on bolstering their visibility and cash flow. They have to sell what they have to sell. We just don’t always have to buy what they’re selling.
[Opinions in this blog are solely those of Scott Nadler and do not necessarily represent views of Nadler Strategy’s clients or partners, or those cited in the post. To share this blog, see additional posts on Scott’s blog or subscribe please go to nadlerstrategy.com.]