Sustainability Reporting is Broken, and how we can fix it
When a company says that it is "creating value" what exactly does that mean? When the Business Roundtable and the World Economic Forum both say that the purpose of a company is to create value for (1) the firm, (2) shareholders, (3) customers (4) employees, (5) partners, (6) society, and (7) the planet, how do we actually measure this value?
If you're like me, maybe you've assumed that there's a clear way to measure these that any company, regardless of its size, industry or location can apply to their efforts to measure and manage the value they create across these stakeholders.
Would it shock you to hear that this actually isn't true? And that as of yet, the world hasn't figured out a way to objectively & transparently measure and report on value creation (and destruction) across these stakeholders?
Wait, but I thought ESG (Environment, Social, Governance) reporting was taking care of this
Honestly, I did too... but it doesn't, which is a big problem for someone who has recently published a book on creating a value-focused marketing strategy. This means that instead of one established way of measuring value, that each time a company creates a value measurement framework, their measurement approach is unique. This isn't so bad if you're one single company trying to do the right thing for one or many of these stakeholders. But if every company is pulling in its own direction to create value, everyone will be pulling in their own unique direction without us ever accomplishing any specific goals. Not bad if you're trying to build a brand, but horrible if you're actually trying to make meaningful changes for any or all of these stakeholders.
Which is why last year, I assembled a team of research assistants to help me dig into all of the global ESG reporting and disclosure frameworks that focus on a standard set of sustainability metrics or KPIs (that included (1) the UN’s Sustainable Development Goals (SDGs), (2) the Global Reporting Initiative (GRI), (3) Global Impact Investing’s GIIN-IRIS+, (4) the Sustainability Accounting Standards Board (SASB), (5) B-Lab’s B Impact Assessment (BIA), (6) the International Living Future Institute’s JUST 2.0, The Capitals Coalition’s (7) Natural Capital Protocol and (8) Social & Human Capital Protocol, Canada’s (9) Common Approach to Impact Measurement, The UK’s (10) The National TOMs Framework, Michael Porter’s (11) Measuring Shared Value, Richard Branson’s (12) The B-Team, RBL’s (13) Organizational Guidance System, (14) McKinsey’s Five Fifty psychological safety framework, and McDonough & Braungart’s (15) Cradle to Cradle Certification), as well as a number of other stakeholder-specific sustainability frameworks to see if we could arrive at a common, shared set of goals that any company, regardless of size, industry or location could implement.
Value Washing: The Heart of the Problem
In our assessment of 15+ of the world's top ESG reporting frameworks we found a critical problem that calls into question the true value of ESG efforts to help us truly move towards a more sustainable future.
The Main Problem: Value Washing
You've surely heard of greenwashing, where a company (or their agency) calls something "environmentally friendly" in some way, shape or form, when in fact it is not. Ecowatch boiled these down to 7 Sins of Greenwashing, but these are all focused on a company's relationship with the environment or nature. Unfortunately, a company can also misrepresent value creation across all other stakeholders as well, which I have come to call Value Washing. This is a devastating problem for ESG assessment especially for any company that's serious about creating value for any of these stakeholders because it means that anything that they do may under scrutiny turn out to actually not be a value-creating exercise at all. Or even if it is a value-creating activity, when pooled together with other companies that actually are value washing, outside evaluators (most importantly your customers) may not be able to tell the difference. At the same time, the ability to value wash provides ample cover for any company that isn't serious about making true positive impacts to call whatever actions they take "sustainable" or ESG-focused.
In our assessment of the world's top sustainability reporting frameworks, value washing is possible because of the existence of the following 4 problems.
Problem #1 - Lack of clear goals
Just as the Cheshire Cat explained to Alice, if you don't know where you're going, any road will do. And one way to value wash related to sustainability efforts is to simply report on an activity without putting it into context of an end goal. For example, a company can report on its activities to work with Fair Trade certified suppliers, but never match this up against an actual goal that specifically shows the percentage they are aiming to achieve. Beyond this, even if one company creates its own goals, how can we compare their activities and impacts with a different sized company in a different market that sets a different goal?
If there is no common benchmark against which to align a company's efforts, then it becomes incredibly easy to value wash and call any stakeholder focused activity good and impactful without needing to justify these impacts against a bigger picture. Most every ESG and sustainability reporting framework that we reviewed, except for the International Living Future Institute's JUST 2.0 system, failed to provide a clear set of end goals and Key Performance Indicators (KPIs) along the way against which to chart their course forward.
Problem #2 - Lack of transparent feedback loops
The next major issue we found is related to transparency and the existence, or lack of reliable feedback loops related to the information that companies actually disclose. Again using the example of Fair Trade certified suppliers, if a company discloses that it only sources inputs from Fair Trade suppliers, what feedback loop exists to support or refute this claim? Without these feedback loops in place, any company can say anything about their efforts irrespective of whether or not they are actually achieving the impacts that they report.
Similarly, and more troubling is that these same transparent feedback loops do not exist for ESG assessors. For example, B-Lab's Business Impact Assessment, one of the world's leading sustainability frameworks doesn't publish or reveal the mechanism by which its scores are calculated. On one hand, this protects its proprietary system against hacking from companies trying to beat the system. But on the other, such a system opens itself up to potential accountability issues, as actual company behaviors are not linked to specific scoring outcomes.
In both of these instances, transparent feedback loops are critical for an effective value assessment framework, and without it, value washing by both companies and assessment organizations becomes increasingly possible.
Problem #3 - Lack of Objectivity
It was surprising to learn that many ESG reporting systems rely on subjective measures of value by the disclosing company. For example, the UK's National TOM's framework asks companies to disclose “Innovative measures to promote local skills and employment to be delivered on the contract,” but although these may actually exist, we could not find a definition of how or why a specific practice can be called “innovative,” or an objective scale against which to judge innovativeness of different organizations. Other frameworks such as the Organizational Guidance System allow companies to self report on a set of scales that similarly provide no objective benchmarks.
For a sustainability reporting framework to be objective, there needs to be some check and balance set in place even for self-reported measures to confirm that a company's assessment of its actions match with those of an outside, unbiased assessor. While the frameworks that we have studied created an incredibly important foundation, the need for objective measures is fundamental to the removal of value washing going forward.
Problem #4 - Complexity by design
In total our research team spent more than 600 hours poring through hundreds of impact measurements and tens of thousands of individual questions that some of these frameworks ask across the spectrum of its assessment surveys. Within individual disclosures there are also multiple reporting requirements that span different stakeholder groups and constituencies, making the task of organizing all of these into something even remotely understandable difficult at best. Clearly most executives don't have this much time to allocate to understanding these different assessment frameworks, let alone small businesses or solo entrepreneurs.
It seems from our analysis that the complexity of these systems was purposefully architected rather than a random oversight. Whether this was done to create a market for sustainability data (a market estimated at $1 billion this year and growing), or for a new area of management consulting, the ability for individual entrepreneurs or interested executives to implement an effective sustainability strategy based on a clear, objective & transparent reporting system remains out of reach.
How to fix it
The goal for this entire research project has been to arrive at a model that was built on a high level of rigor, could be widely accepted by experts in value measurement across each of these seven stakeholder groups, and provided a set of objective goals that any company could implement regardless of their size, industry or location.
An effective sustainability reporting or ESG disclosure framework then must be created with the purpose of avoiding value washing. To do so,
(1) It must be simple to understand to the point that even a solo entrepreneur or business owner can implement it, but rigorous enough to also be effective for large, multinational companies.
(2) It must provide clear goals, or end states that help set the direction for where every company or organization should be aiming. Rather than stopping at words like "social value" or "employee value" an effective value measurement system must define exactly what each of these mean and paint a picture of the end state that it is aiming to help us all collectively achieve.
(3) It must include transparent feedback loops, to ensure that (a) what a company says it is doing can be confirmed by an objective outside party, and (b) that a score given by any assessor can be checked and confirmed to keep the entire system fair.
(4) It must be built on objective measures so that an outside observer is able to arrive at the same or a very similar measurement as the company executive whose job it is to create the sustainability report in the first place.
We've just published our new model for value assessment that introduces 80 goals, grouped into 27 unique categories that will help companies measure and manage the value that they create across all seven stakeholder categories. While this is still not a perfect model, I'm truly hoping that it offers a path forward towards a sustainable future by removing value washing from the equation.
The question now is who will fix this?
In order for this system to work though, access to actual sustainability-related information across each of these seven stakeholder groups is required. This is why the success of this entire system relies on a collaborative effort between all seven stakeholders. Government regulators, the key representatives of society hold the most important role in mandating the open, fair, transparent reporting on each of the 80 goals that we have identified, as well as the endorsement of objective, 3rd party assessors to help ensure that the entire system of disclosure and reporting runs smoothly.
Over the coming months, our team will be doing our best to begin to engage leaders across each of these stakeholder groups, but at the same time we are also always looking for help and support to bring these efforts to a wider audience. If you have an idea or recommendation for who we should be speaking with or reaching out to, please don't hesitate to reach out either in the comments below, or directly by email. And of course, if you're interested in collaborating with us, we'd love to hear from you.
To read more about our research, please feel free to download the Executive Summary to our white paper Valuing Value in English or Japanese below.
Or if you'd like to read the full white paper, you can download it in English or Japanese for free by following the links below (you'll need to share your name and email address with us though):
Download the full white paper in English HERE
And if you'd like to read the full 150+ page discussion paper in English or Japanese, please feel free to email me directly at psugai[at]mail.doshisha.ac.jp.