Sustainability reporting is a process for publicly disclosing an organization’s economic, environmental, and social performance. Many organizations find that financial reporting alone no longer satisfies the needs of shareholders, customers, communities, and other stakeholders for information about overall organizational performance.
The term “sustainability reporting” is synonymous with citizenship reporting, social reporting, triple-bottom line reporting and other terms that encompass the economic, environmental, and social aspects of an organization’s performance. (From Global Reporting Initiative, FAQs, Sustainability Reporting: Who, How, Why; What is Sustainability Reporting).
More Chinese companies are producing sustainability reports, according to standard-setter the Global Reporting Initiative (GRI), driven largely by regulation and stock exchange listing requirements. Marjolein Bajhuis, Amsterdam-based director of communications and network relations for the GRI, said the number of sustainability reports produced in China has risen from 600 in 2009 to about 700 in 2010. Of these, around 60 applied the GRI’s guidelines. Chinese firms are increasingly required to produce such reports by regulation – including the listing requirements of the Shanghai Stock Exchange. (From Sustainability reporting on rise in China, Environmental Finance, June 14, 2011).
In May 2008, the SSE issued a Notice on Strengthening Listed Companies' Assumption of Social Responsibility (Shanghai CSR Notice) and the Guidelines on Listed Companies' Environmental Information Disclosure (Shanghai Environmental Disclosure Guidelines). According to the two documents, Shanghai Exchange-listed companies should fulfill social responsibilities, address interests of stakeholders, and commit themselves to promoting sustainable economic and social development.
These two initiatives are based on the philosophy that the SSE’s listed companies are pillars of the national economy and should be encouraged to assume a leadership role in promoting sustainable development. For listed companies that promote CSR, the SSE sometimes offers incentives such as priority election into the Shanghai Corporate Governance Sector, which may benefit a company's public image, or simplified requirements for examination and verification of temporary announcements.
The Shanghai notice encourages all listed companies to enhance their own CSR awareness and develop a strategic CSR plan for their operations. Listed companies may disclose the goals and achievements of their CSR activities and annual social responsibility reports through announcements posted temporarily on the SSE website. To assist with this, the SSE has also developed the concept of social contribution value per share (SCVPS) - a new method of measuring companies' value creation. SCVPS is calculated by adding the tax revenues paid to the state, salaries paid to employees, loan interest paid to creditors (including banks), and donations to - and other value for stakeholders, minus any social costs that arise from environmental pollution and other negative factors. SCVPS is intended to allow the public to understand the value companies create for their shareholders, employees, customers, creditors, communities, and society as a whole. Companies may choose to disclose their SCVPS calculation in their annual CSR reports.
The Shanghai Environmental Disclosure Guidelines indicate that the SSE may “adopt necessary punishment measures” against companies and relevant personnel for violations of the disclosure rules and regulations. They do not, however, define “necessary punishment measures”. It is therefore unclear what sanctions or fines could be imposed for violations.
A similar measure has also been taken by the Shenzen Stock Exchange, which issued CSR Guidelines for Listed Companies in 2006.
In recent years the number of companies releasing sustainability reports has continued to increase on a global level as well as in China specifically. According to Klynveld Peat Marwick Goerdeler (KPMG), in 2008, 79 percent of global 250 companies published sustainability reports. In China, the number of sustainability reports reached over 700 in 2010. There is a widely established expectation that companies wanting to obtain a leadership position and become competitive in the global marketplace need to effectively manage their environmental and social performance, disclosing challenges and achievements in a sustainability report. Moreover, corporate product and service innovation should aim to contribute to society's well-being. Studies show that in China, however, most companies release sustainability reports for reasons of reputation and development of government relationships, not fully taking advantage of opportunities for risk management and investor relations. The study included a wide literature review and interviews with a selection of key stakeholders. A general comparison was undertaken of the characteristics of 25 existing international and national frameworks related to corporate disclosure. (World Bank, Research, Announcement and Abstract: Sustainability reporting guidelines mapping and gap analyses for Shanghai stock exchange, June 1, 2011).
- Stock Exchanges are increasingly stepping in to help address the need for improved dialogue between investors and listed companies on the topic of sustainability. The Johannesburg Stock Exchange in South Africa now requires that listed companies prepare an integrated annual report, which includes coverage of sustainability performance. The U.S. Securities and Exchange Commission issued guidelines in 2010 requiring companies to weigh the impact of climate-change laws and regulations when assessing what information to include in corporate filings.
The Shanghai Stock Exchange (SSE) has followed this trend by becoming one of the first stock exchanges to issue a directive for companies to publish a sustainability report. Understandably, SSE has adopted a cautious approach by not being overly prescriptive about what companies should report. This approach has been successful in helping to generate an overwhelming response by Chinese companies to produce their first sustainability reports.
Publishing a first sustainability report can be resource intensive for a company, but, if internal capacity is built, the process can become much less costly in subsequent years. The current guideline is therefore a good starting point.
Nevertheless, this study finds that existing frameworks provide guidance that is either too vague or too broad when it comes to the issues that companies should cover, and that they too often still allow companies to tell a good story without providing rigorous and verified data on performance.
A forward-thinking framework for sustainability reporting could therefore greatly assist Chinese companies to move more rapidly towards sustainable practices that generate value for their business as well as for stakeholders. It could also provide a platform for proactive engagement between companies and investors.
The gap-analysis between the SSE Directive on CSR Reporting and the four best-practice examples in this study provide suggestions for further improvement. The short-term focus should be to standardize the SSE Directive and to enrich the document with more information about potential indicators that companies can report on. Recommendations for SSE are listed below:
Priority should be given to certain performance indicators. SSE can comprehensively or gradually prioritize certain indicators over others, thereby strengthening the guideline over time. Some suggested indicators are: energy consumption, GHG emission, solid waste and water pollutants, occupational health & safety and product safety.
SSE will benefit by consulting with key stakeholders when drafting the guideline. Concerns of key stakeholder groups, especially government and regulators, investors, the media and NGOs, should be considered. By this means, the guideline can be in line with government policy and the interest of mainstream investors.
SSE may consider developing specific guidelines for pilot sectors. Some sectors, such as heavy polluting sectors and the financial sector, which are highly impacted by environmental and social factors, can have sector specific guidelines.
SSE may consider developing a specific guideline for pilot issues. Some issues are critical for China at the current development stage. A specific guideline focusing on the energy (carbon) issue, water, or food safety would be highly supported by government and be attractive to investors. It is highly recommended to consider the carbon issue. IFC’s Carbon Efficiency Index and Carbon Disclosure Project may provide valuable experiences to SSE.
Third party audits are emerging as an invaluable component in the sustainability reporting process. An independent audit contributes to credibility of the final report; but more importantly, can help to guide companies towards particular improvements. SSE may consider recommending or requiring that companies include a third party audit of the sustainability report.
Integrated reporting is a new trend. In future, financial reporting and sustainability reporting may become more integrated, leading to the publication of one single annual corporate report. It would be good if SSE can consider this trend when developing the new sustainability guideline.
SSE should take measures to encourage the use of the guideline. Possible measures are: training, seminars, grading scheme of application disclosure level, mandatory third party audits, and recognition of key stakeholders.
Importantly, best practice reporting and performance frameworks, as shown by this study, emphasize corporate strategy and systems for managing risks, impacts and opportunities of sustainability. Greater disclosure about these aspects will enable stakeholders to engage with the company and create shared value, while also contributing to overall improved management and business performance.(Id., at 4-6).