Examining the Role of Sustainability in Modern Business

Before the New York Stock Exchange mandated financial audits for all listed companies in 1932 following the Great Depression, a company’s financial information was considered nearly irrelevant in the minds of both investors and the general public. As many governments and stock exchanges noticed, the practice spread to the point where today, financial reporting regulations are enumerable and entire fields of financial accounting exist for auditing purposes.

Nearly 100 years after this landmark decision, the Securities and Exchange Board of India mandated a Business Responsibility and Sustainability Report (BRSR) for the top 100 listed Indian companies. In SEBI’s own words, this report was because “In recent times, adapting to and mitigating climate change impact, inclusive growth and transitioning to a sustainable economy have emerged as major issues globally. There is an increased focus on investors and other stakeholders seeking businesses to be responsible and sustainable towards the environment and society. Thus, reportage of a company’s performance on sustainability-related factors has become as vital as reporting on financial and operational performance.”

So, what is a sustainability report? Why are organisations globally beginning to see it as part of their annual disclosures? In essence, similar to a financial report, a sustainability report intends to break down a company’s contribution to sustainability practices across the entirety of its businesses. Most sustainability reports focus on three main factors: Environmental, Social and Governance (commonly referred to as ESG).

When it comes to the environmental part of reports, in the past, companies have focused heavily on offsets, typically through carbon credits. Carbon credits are financial contributions that companies make to various environmental causes geared towards the regeneration or protection of the environment to offset their carbon footprint. Carbon credits have recently fallen into disrepute with many companies being accused of “greenwashing” by utilising improper carbon credits to disguise a heavily polluting or exploitative business model. Recently, companies have chosen to move towards a reduction-based approach by reducing their emissions in different parts of their operations, including switches to greener fuel sources and greater use of sustainably sourced materials among others. These are usually used in conjunction with carbon credits to ensure that the organisation can maximise its contribution given its operational constraints.

Social and Governance initiatives typically look at company culture, hiring and promoting practices within the organisation and any social work initiatives a company may have. In 2014, the Parliament amended the Indian Companies Act to mandate the creation of Corporate Social Responsibility (commonly referred to as CSR) initiatives for all companies above a certain profit level. CSR initiatives allow companies to invest a stipulated portion of their profits into social programmes that intend to uplift communities and provide necessary support as a spillover benefit of thriving business operations within countries. CSR scopes and initiatives can vary widely depending on the exact nature of the organisation’s work and the resources dedicated towards CSR initiatives.

Sustainability reporting is still in its very nascent stages, unlike the world of financial reporting, where standards such as GAAP (Generally Accepted Accounting Principles) exist to help create uniformity in reporting practices. It assists companies easily create these reports and makes them more understandable for investors and the general public. The primary issue arises with defining the scope of such reports. While factors like environmental scope bases for carbon emissions exist, the same does not hold for governance practices beyond basic governmental regulation. The dimension for social responsibility is even more vaguely defined—competitors within a given field often have vastly different social causes to which they choose to dedicate their support.

How do we get around this issue—in the same way that the business of financial audits through financial auditing firms expanded to ensure third-party verification for all claims laid out within annual reports, companies are now employing these firms for their sustainability accounting. Major accounting firms, including the Big 4, have taken cognisance of the rising importance of sustainability reports and are working to include third-party audits to provide validity to the information contained within the reports. The turning point within this field now exists with regard to governmental regulation when defining reporting guidelines.

It seems impossible to standardise reporting formats into a one-size-fits-all approach that annual reports have been able to achieve through components such as the balance sheet or income statement. That said, the present regulation is trying to set clear dimensions under which companies can begin their evaluation process. A pioneering example of this is the presence of Fair Work principles seeking to understand the treatment of employees based on five different dimensions. Fair Work ratings are published annually with a transparent and publicly available scoring system. Initiatives like Fairwork create a good starting point for the future of such regulatory standards. We hope to see more governments giving greater importance to regulatory standards and modifying them to include country and industry-specific factors for evaluation purposes.

Looking closer to home, we see that even educational institutions like Ashoka University are taking the cause of sustainability reporting with great sincerity. The Sustainability At Ashoka webpage highlights its commitment to various aspects of sustainability. This page also includes the flagship Ashoka SDG Report, which details Ashoka’s commitment to sustainability under each of the 17 SDGs. These consist of academic contributions like coursework, published research, collaborations and various infrastructural changes at the University.

The growing importance given to sustainability at an international level will play an integral role in the structure and functioning of modern businesses. As the regulatory landscape begins to solidify, we have to make a lot of efforts before we can see real change.