To disclose or not, that is the question

In context of current headwinds facing corporate sustainability reporting practices and mandatory disclosures in particular, one might wonder if sustainability disclosures are at risk. In the absence of the obligation to disclose, companies may still find good reason to produce voluntary disclosures that should be comparable, reliable, and easy to use.

As most sustainability professionals sit dazed and confused by the political/policy pullback on many environmental, social, or governance-related practices, many bravely argue for the continued corporate embrace of sustainability. In the process, messaging tends to conflate the importance of integrating sustainability to the company’s business model and management processes with the importance of disclosing sustainability-related information to external stakeholders (hereafter referred to as external users of the information).

For the purposes of this article, the principle of materiality is assumed; companies should only be managing and disclosing on issues that are relevant to the conduct of their business as a going concern. This holds whatever the materiality lens – financial, impact, or both – they choose to determine those issues.        

However, the motivations for managing material sustainability-related issues are not the same as for disclosing about them. In deciding whether or not to manage such issues, companies should be driven by going-concern considerations of risk management, financial performance, and value creation—however narrowly or widely they happen to define value. In deciding whether or not to disclose information about such issues, companies should be driven by whether external users are asking for this information and what they will use it for. Two different decisions, requiring two different approaches.

Of course, managing and disclosing are obviously intertwined. But while it might be difficult for a company to justify disclosing while not managing issues that are material to its business, it is quite conceivable for a company to manage its sustainability-related issues while not disclosing anything about that. After all, if no one is asking for this information, why provide it??

In a recent post, Andreas Rasche posed an excellent question: “Would a business stop its financial reporting, if it was no longer legally required?” His answer was “probably not”.

I’m not so sure.?Or rather, I believe that companies would only voluntarily disclose financial information if they have good reason to, in other words if external parties are using this information to make decision that ultimately affect the companies in the conduct of their business and the achievement of their objectives. It would then be in their best interest to voluntarily disclose this information to these external users.

And what holds true for financial information also holds true for sustainability information.

The changing sustainability reporting landscape

Not only is no one calling for financial disclosures to be deregulated, but the overall objective remains to bring sustainability disclosures to the same level of quality and usefulness as their financial counterparts. The best way to achieve this is through disclosure regulations, which merely enshrine market demands by external users for corporate sustainability-related information to be widely available, comparable, and reliable, because it’s essential to their decision-making process.?

Realistically, current headwinds are likely to slow such a regulatory shift, at least for a while. So, I expect we’ll be reverting back to focusing on market demands for (read: voluntarily disclosed) useful sustainability-related information.??

If companies are under no obligation to disclose, should they?

As mentioned above, in situations where companies don’t have to disclose, the question becomes whether they need to, i.e., what’s in it for them. The answer to this question lives in who’s asking for the information and why. That is to say, whether there are any external users of the information, and whether they are using it to make decisions that end up affecting the company’s going-concern considerations of risk management, financial performance, and value creation. Here, we’re talking about investors using sustainability-related information to make decisions about whether (and at what price) to invest in the company; insurance companies using it to determine whether (and at what price) to insure the company’s activities; lenders using it to determine the cost of lending to the company; and of course customers using it to decide whether or not to do business with the company.?

Direction of travel remains pretty clear

Companies need to get clarity, not only on whatever disclosure obligations they have but also on whether they should be producing voluntary disclosures to meet external users’ information needs. If they do, then they should apply commonly used standards—to make their disclosures comparable—, develop proper internal processes to collect quality, audit-ready data—to make them reliable—, and provide their information in a digitized (and likely tagged) format—to make them easy to use.

Such clarity brings an added bonus: the ROI on disclosures becomes pretty obvious, or moot.