Are sustainability reports driving change or just 'losing the signal'?

Early in my career I had an epiphany. It was the mid-80s and I was working for the US Environmental Protection Agency, developing risk assessments for regulating toxic air pollution. I was asked to work on a new law: the Superfund Amendments and Reauthorization Act (Sara), which – in section 313 – required that companies report on releases of toxic chemicals from their factories. My initial impression was that this was a ridiculous requirement. I could not envision how lumping a bunch of very different chemicals together and simply reporting their combined releases could tell you anything useful.

Wow, was I wrong ...

Sara 313 was arguably one of the most effective laws in the history of toxic substance control, and a big part of its success lay in its radical (at that time) transparency requirement. When the law was implemented, the press had a field day. Every year, as companies reported their toxic emissions, stories came out with titles like “The Dirty Dozen” or “Top Ten Toxic Polluters.” All of this negative publicity got attention and, in short-order, companies started to reduce their toxic emissions.

The key lesson was that transparency can be a powerful force for good.

Today, transparency – or disclosure of corporate sustainability information – is common practice across a variety of industries. As of this writing, CorporateRegister.com lists over 60,000 sustainability reports covering nearly every aspect of corporate behavior. But while Sara 313 clarified the cause-and-effect relationship between reporting and emission reductions, today’s proliferation of sustainability reports begs the question: is corporate sustainability reporting in its current format truly driving results?

The main problem with today’s version of transparency is its breadth. We measure almost everything that can be measured. Not only is it impractical for companies to manage this large scope of issues, but reporting on a dizzying array of topics can obscure important issues by overemphasizing the merely interesting. This is not to say that transparency reporting is wrong, or to discount the gains that have occurred because of it. The issue, rather, is whether we are reaping enough of a return on our investment in corporate sustainability reporting.

Sara 313 was effective for three basic reasons: it was easy to understand, it focused on an important issue, and it generated easy-to-compare corporate results. The last point – comparability – was especially vital, as it greatly accelerated the power of transparency to improve performance. Each year, when the Sara 313 data was released, companies were ranked by the amount of toxic materials that they emitted. Needless to say, nobody wanted to top that list!

But while transparency can drive comparison – and action – too much transparency can, ironically, work against the end goal of improving performance. Today’s sustainability ratings address factors ranging from environmental emissions to the diversity of the workforce to the compensation of the CEO. These myriad measurements, summed up under the umbrella of “environmental, social and governance” (ESG) metrics, are rarely presented in a way that enables easy comparison between companies. In essence, when we measure too much, we can lose the signal in the noise.

One good example of this is the Global Reporting Initiative, which advertises as the de-facto global standard for corporate sustainability reporting. It encompasses about 90 “key” performance indicators, which require companies to gather together reams of information. To put this in context, the 2014 survey for the Dow Jones Sustainability Index was 129 pages long!

Not only are these reports a lot of work, but their complexity makes them inaccessible to most people. Several firms attempt to function as a go-between, summing up these disclosures into easily-digestible sustainability ratings and rankings. But the broadness of the ESG spectrum makes these ratings nearly meaningless.

Boiling down these numerous issues under the “corporate sustainability” label – which can include almost anything – requires tough choices. Stakeholders need to align on the issues that are most critical and that have the highest potential payoff for people and the planet.

The US Food and Drug Administration’s food labeling may be a good model for sustainability reporting. Faced with a wide array of diet-related health issues, the administration was tasked with creating a standardized disclosure that was easily understood and which allowed easy comparison between foodstuffs. Its solution – the ubiquitous FDA nutrition label – accomplished that goal with a flexible and responsive reporting instrument that consumers could easily use. People who are trying to lose weight can easily scan calories and carbs. People with high blood pressure can scan sodium content. In essence, the FDA took complex and vital information and made it actionable.

Creating a sustainability reporting “nutrition label” is possible, but difficult. Getting agreement on a critical few items for consistent, comparable reporting will take a lot of work, but, the payoff of getting this right could be massive. Imagine the impact if consumers could easily compare the sustainability performance of competing products at the point of purchase. Or, if socially conscious investors were able to review the sustainability performance of companies as easily as their financial reports. It could change the nature of reporting, and of market involvement in sustainability.

Almost 30 years ago, I learned an important lesson about the power of transparency to achieve good in the world. Now that sustainability reporting is commonplace, perhaps we can re-think our approach to get more value from our investment in transparency. By simplifying corporate sustainability reports to generate meaningful and comparable data, we could fuel a race to the top by unleashing competition to achieve the best performance on the most important sustainability issues.

Tim Mohin is director of corporate responsibility for Advanced Micro Devices (AMD) and the author of the book Changing Business from the Inside Out: A Treehugger’s Guide to Working in Corporations. His opinions in this blog and his book are his own. Follow him on Twitter @TimJMohin.

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