Katie McGarry, KPMG
Rob Brouwer, KPMG
By enabling greater organizational transparency, corporate sustainability reporting is generating significant and tangible business benefits, including enhanced marketplace reputations, improved operational efficiencies and greater competitiveness. Demonstrating how businesses are preparing for long-term growth in a complex and changing environment is paramount to developing trust and fostering critical relationships with stakeholders.
Corporate transparency – Why does it matter?
According to the historical Canadian data from the KPMG Survey of Corporate Responsibility Reporting, there has been steady growth in the percentage of the 100 largest companies in Canada producing sustainability reports, from 41% in 2005 to 83% in 2013[1].
While much of this trend in reporting is voluntary, the introduction of reporting requirements by governments and stock exchanges around the world has also played an important role in driving enhanced corporate transparency and accountability. As research shows, regulation has resulted in almost 100% reporting rates in countries such as Denmark, France, and South Africa[2]. This trend is unlikely to reverse.
As the perceived value of corporate transparency has grown, so have the roles of government, securities regulators, and the C-Suite in driving corporate sustainability strategies.
The increase in corporate transparency is being driven largely by reputational concerns and media coverage, customer and employee expectations, and investor requests. Corporate reporting is a method and tool to build relationships, drive accountability and help companies be clear about progress. Essentially, reporting is a tool for responding to and engaging with stakeholders, creating opportunity and reducing risk.
Sustainability performance is also important for a company’s reputation in the international marketplace given the increasingly globalized nature of competition for resources, customers, and capital.
Companies are also addressing the social and environmental 'megaforces,' such as growing global population, limited natural resource supply and climate change, relative to competitive, regulatory, social, legal and reputational risks for the company.
Regulatory drivers
The introduction of reporting requirements by governments and stock exchanges is also playing a role in driving enhanced corporate transparency and accountability worldwide.
Both the Canadian and U.S. Securities Commissions require public companies to disclose information related to material financial or operational effects of environmental protection regulations and related issues. For instance, in 2010, the U.S. Securities and Exchange Commission (SEC) issued guidance on disclosure related to climate change, which references the Global Reporting Initiative Guidelines as a widely used reporting framework that can provide important information to investors[3].
Securities regulators and governments are expected in time to take more concerted global actions to mandate corporate responsibility disclosures, and drive improved corporate sustainability performance. Regulation can encourage more consistent and comparable reporting both globally and locally, and better inform investor decision-making, since the data disclosed can help companies and society make consistent comparisons. Nevertheless, sustainability reporting remains for now primarily a voluntary and market-driven practice in North America.
Tone at the top
The global financial crisis of 2008 prompted society, governments and investors to question the ability of financial institutions and regulatory bodies to deal with financial innovation in our globalized world.
Now public opinion increasingly questions a company’s ‘social license to operate,’ and investors are incorporating ESG (environmental, social and governance) information as a standard part of investor value assessment. The rising demand for more information and enhanced accountability impacts the way businesses define and engage with their key stakeholders. A company’s key stakeholders have to go beyond the investor, as boardrooms increasingly learn about the importance of earning the respect of the communities in which their company operates. This reflects the importance of C-Suite engagement in the sustainability process, indicating that there is a significant role for the CEO, CFO and Boards of Directors in embedding sustainability into core business strategy.
It is more and more clear that transparency does matter, and corporate leaders do play an important role in driving and improving corporate sustainability disclosure and performance. Trust and reputation, market oversight, and C-Suite engagement are now central to discussions around corporate transparency – and will intensify in importance over time.
Although corporate sustainability reporting has gone mainstream, many investors and C-Suite executives have yet to fully engage in the opportunities it can provide, such as building trust between business and society at large, and improving overall business performance.
Corporate responsibility disclosures are expected to take on greater importance, in addition to traditional financial disclosures, as companies and their key stakeholders become more literate in sustainability and transparency, and investors integrate ESG data into their decision-making.
Calls by investors and other stakeholders for companies to communicate their activities, and the value of their social investments, continue to strengthen. Investor relations teams should consider how broader corporate transparency can support and enhance their investor communications, and embrace it as an opportunity for more focused reporting, and a more relevant and open dialogue with the broader stakeholder community.
Katie McGarry, CPA, CA is a Senior Manager, and Rob Brouwer, FCA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.