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Chapter 12

International Sustainability Reporting

Timothy Doupnik | Mark Finn Giorgio Gotti

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
 Learning Objectives
• Explain the meaning of sustainability reporting.
• Explain why companies publish sustainability reports.
• Describe the difference between traditional and socially responsible investors and discuss
why each group would have an interest in the information conveyed by sustainability
reports.
• Explain how companies use standards promulgated by the Global Reporting Initiative (G R
I) to prepare and organize information in a sustainability report.
• Explain the concept of nonfinancial materiality and its importance in sustainability
reporting.
• Describe the differences between the G RI and the Sustainability Accounting Standards
Board (SASB).
• Explain the general approach to measuring carbon dioxide equivalent greenhouse gas
emissions.
• Distinguish between Scope 1, Scope 2, and Scope 3 greenhouse gas-producing activities.
• Identify activities that are included in Scope 3 emissions.
• Understand the role that limited assurance plays in auditing sustainability reports.

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 Introduction 1

Sustainability reporting augments traditional financial

reporting by providing information about an enterprise’s
environmental and social policies and practices.
• Most large companies provide it in some form.
• Usually publish a stand-alone sustainability report.
• In 2020, 92% of S&P 500 companies prepared one.
• Integrated approach: weaves sustainability disclosures into
the company’s annual report.
• Becoming more common.

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 Introduction 2

Sustainability report dimensions:

• Environment.
• Social Capital.
• Human Capital.
• Business Model and Innovation.
• Leadership and Governance.

There is a large variety in reporting structures and inconsistent use of

terms.
It is largely voluntary and unregulated.
U.S. companies sometimes refer to it as “corporate social responsibility
(CSR) reporting”.
• “ESG (environmental, social, and governance)” reporting is another
popular variant.
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 Theories to Explain the Emergence of
Sustainability Reporting
The Global Reporting Initiative (GRI) is the largest voluntary reporting
framework.
Theories behind the dramatic increase in companies publishing annual
sustainability reports with the GRI framework:
• Stakeholder theory:
• Disclosures in response to stakeholder demands for social and
environmental information.
• Problem with this theory: companies in the same industry and same location
provide different disclosures.

• Legitimacy theory:
• Reporting is a tool to assist companies dealing with exposure to political,
economic, and social pressures.
• After the Exxon Valdez oil spill, other oil companies increased disclosures.
• Allows company to report accomplishments.

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 Investors’ Demand for Sustainability
Information
Sustainability reporting has a wider set of users compared to just
stockholders.
• Even investors have more concern regarding the social and
environmental performance of companies.
• Two types of investors:
• Traditional investors: focus on company’s profitability and stock
performance.
• Socially responsible investors (SRIs): make social and
environmental performance a significant factor in decisions.
• Both groups care about social and environment factors; the
difference in the two groups is the amount of emphasis placed on
these matters.

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 The Information Needs of Traditional
Investors
• Companies with superior social and environmental performance
also out-perform their peers financially over the long run.
• Social/environmental factors correlated with traditional success
factors:
• Governance issues like executive compensation, board structure,
and procedures for long-range planning.
• Investments in intangible assets, such as energy conservation.
• Efficient cost-cutting, reducing use of energy, water, packaging, etc .
etera

• Better identification of emerging business opportunities (example,

organic foods).
• Avoidance of declining products (example, tobacco and soft drinks).
• Risk mitigation (product safety and workplace conditions).

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 The Information Needs of Socially
Responsible Investors
The Forum for Sustainable and Responsible Investment.
• Two categories of SRI investment strategies:
1. Those that screen for negative attributes to avoid:
• Pension fund for doctors that prohibits investment in tobacco.
• Avoid industries such as coal, gaming, or those with child labor
problems.

2. Those identified as promoting a positive impact:

• Focus on energy conservation.
• Focus on alternative energy development.

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 The Structure of the Sustainability Reporting
System
The Global Reporting Initiative.
• Sets forth the most widely accepted sustainability standards.
• As of 2020, 84% of Fortune Global 250 companies used the GRI
reporting system.
• Several others borrow certain elements, known as “GRI-informed”
reporting.
• GRI framework developed consensus-seeking process from:
• Business.
• Civil society.
• Labor.
• Professional institutions.
• Established standards, with G4 being the most widely used.

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 The Organization of GRI Standards
GRI standards organized into four categories:
• Universal.
• Basic reporting issues of reliability, timeliness, and comparability.
• Economic.
• Corruption and anticompetitive behaviour.
• Environmental.
• Energy and water consumption.
• Biodiversity.
• The emission of pollutants.
• Social.
• Labor practices.
• Human rights.
• Product responsibility.
• the most widely used.

Disclosures both quantitative and qualitative.

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 The Global Sustainability Standards Board

• Deliberative body that exercises authority over GRI

standards.
• 15 members: Australia, Hong Kong, India, the EU, the
U.K., South Africa, Switzerland, and the U.S.
• Board is multi-stakeholder: represents business
enterprises, civil society organizations, labor organizations,
investment organizations, and mediating organizations.

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 Nonfinancial Materiality
To prevent information overload, GRI G4 explicitly introduces
materiality as a reporting criterion.
• Materiality defined in two dimensions:
• Importance to internal stakeholders.
• Customer relations and customer satisfaction.
• Pricing integrity and anti-trust compliance.
• Importance to external stakeholders.
• Water management.
• Biodiversity management and quarry rehabilitation.

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 Other Sustainability Reporting Frameworks
1

Sustainability Accounting Standards Board (SASB).

• U.S. non-profit organization.

Carbon Disclosure Project (CDP)

• Main focus is carbon emissions; also focus on water, supply chains,
and forest usage.
• Established Climate Disclosure Standards Board to standardize
climate disclosures.
• 2020: 790 institutional investors were signatories to the C DP
disclosure system.
• 13,000 companies report through CDP.
• 64% of global market capitalization.
• 96% of FTSE 100.
• Over 80% of S&P 500.
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 Other Sustainability Reporting Frameworks
2

Task Force on Climate-related Financial Disclosures (TCFD).

• Disclosures related to the financial risks and opportunities
presented by climate change.
• Created by G20 in collaboration with CDP.
• U.S. SEC is considering adopting it.

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 Other Sustainability Reporting Frameworks
3

Sustainability-related standards published by the

International Standards Organization (ISO).
• ISO 26000: Social Responsibility.
• ISO 14001: Environmental Management.
• ISO 13485: Medical Device Quality.
• ISO 45001: Occupational Health and Safety.
• ISO 37001: Anti-bribery Management Systems.

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 Other Sustainability Reporting Frameworks
4

The ESG ratings system of Institutional Shareholder Services

(ISS).
• Scoring systems, not reporting frameworks.
• Influence scope and structure of system through demand
pull effects.
• Assists fund managers in deciding how to vote on
shareholder resolutions.

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 Toward Mandatory Sustainability Reporting

European Union
• European Union’s Directive 2014/95/EU [also called the
Non-Financial Reporting Directive (NFRD)] requires
mandatory sustainability reporting for companies with 500+
employees.
• Acceptable reporting frameworks:
• GRI.
• OECD Guidelines for Multinational Enterprises.
• ISO 26000.

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 Mandatory Sustainability Reporting in the
European Union
EU: European Commission adopts proposal for Corporate
Sustainability Reporting Directive (CSRD) to replace NFRD.
• Extend sustainability reporting mandates to all firms.
• Require an external audit of sustainability reports.
• Require adherence to EU sustainability standards.

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 Sustainability Reporting Required by the
Hong Kong Stock Exchange 1

Hong Kong Stock Exchange

• Disclose-or-explain approach.
• Robust set of sustainability-related key performance
indicators (KPIs).
• Firms must either report these KPIs or explain why they are
unable to report them.

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 Sustainability Reporting Required by the
Hong Kong Stock Exchange 2

KPIs:
• Air pollution and greenhouse emissions.
• Amounts of hazardous waste produced.
• Consumption of energy, water, and packaging material.
• Work hours, workplace safety, and workplace discrimination.
• Supply chain risks, including practices to detect and eliminate child
and forced labor.
• Product health and safety.
• Measures to prevent bribery, fraud, extortion, and money laundering.
• Descriptions of community engagement initiatives.

Each KPI has specific metrics for measurement

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 Mandatory Sustainability Reporting in the
United States
U.S. law sets forth many specific reporting requirements regarding
sustainability reporting
• Available to public through the Freedom of Information Act.

The U.S. SEC’s Climate Change Reporting Requirements

• Threats and opportunities posed by climate change and climate
change regulation to be incorporated in the 10-K.
• Business Description: cost of complying with environmental laws
including anticipated capital expenditures.
• Legal Proceedings: litigation related to emissions and violations of
environmental rules.
• Risk Factors: risks related to climate change and climate-related
legislation.
• Management Discussion and Analysis: incorporate the effects of
climate change and climate regulation into required disclosures.
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 The Sustainability Accounting Standards
Board
• SASB developed comprehensive disclosure framework
that resembles international counterparts.
• Focuses on investor needs and linked to reporting
requirements of U.S. securities law.
• GRI: broad cross-section audience.
• SASB: investment community audience.
• Nonfinancial materiality: linkage between its metrics and
disclosure requirements.
• Materiality map: ranks level of importance a sustainability
topic has for a given industry from an investor’s
perspective.

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 The International Sustainability Standards
Board
• Created in November 2021 to be the sustainability
equivalent of the IASB.
• The ISSB will oversee the development and promulgation
of IFRS Sustainability Disclosure Standards.
• The ISSB will take a capital-markets perspective.

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 Carbon Emissions Reporting
Especially important for industries associated with:
• The production of fossil fuels
• Large-scale consumption of fossil fuels:
• Oil and gas.
• Power generation.
• Mining.
• Heavy manufacturing.

Many in these industries are making such disclosures to get

ahead of the situation.

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 Measuring Carbon Emissions 1

Large degree of international convergence in arriving at a framework to measure

and report carbon emissions.
“Greenhouse Gas Protocol” forms basis for reporting by virtually all groups,
including the GRI.
• Gives different gasses different carbon dioxide equivalents.
• Methane: 25 times CO 2 .
• Nitrous oxide: 295 times CO 2 .
• Sulfur hexafluoride: 23,900 times CO 2 .

• Accounts for both direct and indirect emissions.

• Carbon producing activity in three scopes:
• Scope 1 Emissions: direct emissions of the entity.
• Scope 2 Emissions: indirect emissions traceable to the purchase of electricity, heat,
or steam.
• Scope 3 Emissions: other indirect emissions, relative to entity’s place in supply
chain.
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 Measuring Carbon Emissions 2

Scope 3 emissions (other indirect emissions):

1. Purchased goods and services.
2. Capital goods.
3. Fuel- and energy-related activities not included in Scopes
1 and 2.
4. Upstream transportation and distribution.
5. Waste generation in operations.
6. Business travel.
7. Employee commuting.

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 Measuring Carbon Emissions 3

Scope 3 emissions (continued):

8. Upstream leased assets.
9. Downstream transportation and distribution.
10.Processing of sold products.
11.Use of sold products.
12.End-of-life treatment of sold products.
13.Downstream leased assets.
14.Franchises.
15.Investments.

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 Measuring Carbon Emissions 4

Carbon Emissions Intensity.

• Look at consolidated entities as separate and combined.
• Maybe some improvements through streamlining operations.
• Intensity metrics:
• Production volume.
• Size.
• Number of employees.
• Sales revenue.

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 Sustainability Reporting Practices of MN
Cs 1

Four levels of sustainability reporting:

• Comprehensive reporting within the GRI framework (Mazda).
• GRI-informed reporting (IKEA).
• Link between sustainability reporting and traditional financial reporting
(Baxter International).
• Mandatory sustainability reporting required by SEC Release No. 33-
9106 (ExxonMobil).

External Assurance in Sustainability Reporting.

• Unlike financial statements, external assurance is voluntary.
• Much greater flexibility in designing scope of assurance service.
• Almost half of the sustainability reports in the GRI database are
externally assured.

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 Sustainability Reporting Practices of MN
Cs 2

Benefits of External Assurance:

• Enhanced credibility of sustainability disclosures.
• Better communication between the entity and its stakeholders.
• Reduction of risk of misstatement that could lead to controversy
between the entity and its stakeholders.
• Improvement in the internal processes by which sustainability
initiatives are managed.

Wider use of third-party assurers: over one-third are non-

accounting firms with expertise in engineering or sustainability
topics.
Could be “reasonable assurance,” or quite commonly “limited
assurance”
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 Mazda’s 2020 Sustainability Report
Following the GRI’s materiality framework, Mazda ranks the importance of
sustainability topics along two dimensions:
1. Their effect on stakeholders.
2. The degree to which they present risks/opportunities for the Mazda group.
• Topics receiving high ranking on both dimensions:
• Energy.
• Water source in community.
• Emissions, including greenhouse gases (not just production, but also an estimate of
greenhouse gas emissions of cars on the road after purchase).
• Effluents and waste.
• Occupational health and safety.
• Diversity and equal opportunity.
• Customer health and safety.
• Indirect economic impacts .

• KPMG assurance limited to four of Mazda’s Japanese factories and five of its
overseas factories.

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 IKEA Group’s 2021 Sustainability Report

GRI-informed, but not full-fledged GRI.

• Sustainably managed forests is a major concern
• Lists priority areas: “where there is a higher risk of illegal or
irresponsible forestry practices”.
• Uses two-tiered system of standards since IKEA is so dependent on
others for wood.
• Basic standards: minimum level of compliance with established norms.
• Advanced standards: where the company hopes to move over the long
run.
• Also concerned with labor standards in India and China.
• Ernst & Young’s assurance was only partial, ignoring global
supply chain impact.
• 2021 report has no external assurance.
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 Baxter International’s 2020 Sustainability
Report
Baxter International is a U.S. medical products company
• Uses the GRI system.
• GRI 416, “Customer Health and Safety,” requires two
disclosures:
• 416-1: “the percentage of product and service categories for
which health and safety impacts are assessed for
improvement”.
• 416-2: the “total number of incidents of non-compliance with
regulations and/or voluntary codes concerning the health and
safety impacts of products and services”.
• In the 10-K, the Management Discussion and Analysis section
discusses warning letters from the FDA and a description of an
unresolved noncompliance case.

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 Climate Change Disclosures in ExxonMobil’s
2021 Form 10-K
Publishes annual sustainability report based on International Petroleum
Industry Environmental Conservation Association (IPIECA).
GRI-informed
Assured by Lloyd’s Register Quality Assurance, Ltd.
In its 10-K, includes a variety of climate related disclosures.
• Environmentally focused capital expenditures (in Business Description
section).
• Investments in clean fuel.
• Projects to monitor/reduce nitrogen oxide, sulfur oxide, and greenhouse
gas emissions.
• Important climate-related risk factors discussed.
• Threat that climate regulation will have on demand for hydrocarbons.
• Government support for alternative energy technology.

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