PITFALLS IN MEASURING CORPORATE SUSTAINABILITY

January 27, 2015

 

We thought this post on Triple Pundit was especially insightful and well-worth a read:

 

Business directors are fond of the phrase, “What gets measured gets managed.” According to a 2013 report by KPMG, 86 percent of large American companies use some form of sustainability reporting, up from 74 percent in 2008.

 

To date, all sustainability reporting in the U.S is voluntary self-reporting, but a growing number of indexed stock portfolios are based on corporate environmental and social governance (ESG) metrics. Firms like MSCI and ENSOGO scrutinize report contents and provide detailed evaluations to stock analysts, and companies that don’t file a corporate sustainability report are now perceived as laggards in corporate citizenship.

 

The Dow Jones Stock Exchange even has its own index — the Dow Jones Sustainability Index (DJSI) — for publicly-traded companies.

 

The field of sustainability reporting is still a bit of a minefield, however, stewing in an alphabet soup of acronyms. Analysts struggle to standardize metrics and measurements. Reports may not be comparable from year to year, as the frameworks for measurement continue to evolve. Worse yet, companies are free to define their boundaries in whatever terms they choose. Some will interpret boundaries in the broadest sense, reporting on the environmental impact of all of their suppliers (Walmart, for example, asks each of its suppliers to file a sustainability report), as well as the impact of their products once they’ve been purchased and used by consumers. Others ignore these factors and only report on their corporate offices or factory floor.

A close examination of a number of reports reveals that some are difficult to distinguish from a company’s regular annual report to stockholders. Accomplishments in energy conservation and public relations are highlighted while indirect costs such as water pollution, carbon emissions, and other health and social impacts are glossed over. Some reports seem to be based on a loose definition of sustainability that refers only to the financial sustainability of the company.

 

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