Published: 19 December 2023
Contributors: Tom Krantz, Alexandra Jonker
A sustainability report is the disclosure of non-financial performance policies, methodologies and metrics to stakeholders, including investors, employees, customers and the public.
The practice encompasses environmental, social and governance (ESG) metrics. However, a sustainability report differs from an ESG report in that ESG evaluates the performance of companies against ESG metrics, while sustainability looks broadly at the larger business model and methodologies.
More specifically, an ESG report uses a set of metrics to evaluate a company's ESG initiatives. Using various ESG reporting frameworks, companies can inform stakeholders of their positive impact on society and the environment, and of their corporate governance practices.
However, a sustainability report encourages more responsible and ethical business practices by considering the organization’s relationship with the world around it. Sustainability is complex, so there are many reporting frameworks for companies, usually covering important topics like sustainable development, carbon emissions, supply chain and corporate social responsibility (CSR).
One of the main differences between ESG and sustainability is the notion of motivation versus outcomes. A sustainability report examines the business model or methodologies that motivate a company and its employees to act in the best interest of society. An ESG report is the measurement and outcome of those initiatives and provides both companies and investors with the ESG data needed to inform decision-making.
Similar to CSR, both ESG and sustainability reports help organizations improve trust and reputation among consumers by setting goals, meeting reduction targets and besting industry benchmarks. Companies can significantly improve decision-making and risk management by considering the three dimensions of sustainability in their larger sustainability strategy.
Take a look at the trends shaping the world of sustainable business and the insights that can help drive transformation.
Register for the ESG reporting guide
The three dimensions of sustainability are environmental, social and economic.
Environmental sustainability focuses on addressing environmental issues such as climate change, greenhouse gas (GHG) emissions and loss of biodiversity. One way for companies to reduce their environmental impact is to move away from finite resources like fossil fuels and natural gas and embrace renewable energy sources.
Social sustainability is not yet as clearly defined. Some scholars say it embodies all human activity, and that all domains of sustainability fundamentally rely on social factors. This dimension prioritizes human rights and recognizes that the well-being of all people dictates the longevity, efficacy and sustainability of a society.
Economic sustainability means that businesses must be both profitable and environmentally conscious, which can sometimes conflict. However, companies are making progress in addressing climate issues. Chief sustainability officers, for instance, must reimagine value chains to improve ESG performance across entire global operations. That might mean a business must refine the way they source raw materials, adopt a fleet of electric vehicles or prioritize decarbonization initiatives. Regardless of the approach, the main goal for businesses remains to balance financial success with environmental protection.
Sustainability reports play a crucial role in fostering sustainability in business, which refers to a company's strategy to reduce the negative environmental and social impact resulting from its operations. An organization’s sustainability practices are typically analyzed against ESG metrics, which they share with the public through annual reports.
Businesses can better understand both the challenges and opportunities they face by creating sustainability reports that track ESG milestones and progress. Insights derived from these reports can help companies move away from traditional linear economic models. Instead, they can empower the circular economy, which emphasizes leasing, recycling, refurbishing, repairing, reusing, and sharing existing material and products as long as possible.
Companies can gain several benefits from creating a sustainability report:
Concerns around climate change and working conditions have been growing in recent years, especially for businesses experiencing supply chain disruptions. A sustainability report can help organizations effectively manage the adverse effects of various ESG issues by providing a vehicle to measure, assess and understand their operational footprint.
A comprehensive sustainability report can help organizations reimagine their business models to better balance financial performance with sustainability goals. Through annual sustainability reports, businesses can attract investors who are interested in continual progress in meeting sustainability reporting requirements.
Stakeholders expect more transparency from brands and businesses as ESG becomes intrinsically linked to a company’s performance. Sustainability reports provide an actionable way to meet this call for transparency by demonstrating that a company and its network of partnerships are prioritizing sustainability issues.
A sustainability report provides companies with valuable insights into ongoing environmental and societal shifts, as well. Companies can see how their ESG initiatives stack up against larger sustainability trends and discover potential areas for improvement. This can inform decision-making that leads to better sustainability performance and alignment with regulatory requirements.
Whether a company is required to submit a sustainability report depends on its location. In Europe, for instance, regulations around sustainable investing and ESG are mandated for some organizations. Consider the Corporate Sustainability Reporting Directive (CSRD), a European Union legislation that requires companies to report on the environmental and sustainable impact of their business activities, and also their ESG initiatives.
Conversely, in the United States, companies are not mandated to provide ESG or sustainability metrics in their annual reports, except for California, which has recently enacted climate laws that mandate certain climate-related disclosures. However, it’s often in their best interest to do so as institutions and individuals increasingly factor companies’ ESG scores into their investing decisions.
What’s more, companies in North America must still adhere to guidelines that the Security Exchange Commission (SEC) established. The SEC is responsible for identifying any ESG-related misconduct such as greenwashing or fraud. Third-party organizations, such as Bloomberg and S&P Dow Jones Indices, measure the potential impact of ESG risks and these ratings may be used in conjunction with other economic data to inform investors’ decisions.
Starting in 2026, public companies in Brazil will be required to annually disclose sustainability and climate-related information. The requirements will be based on the standards of the International Sustainability Standards Board (ISSB). Similarly, large businesses in Australia will be required to follow mandatory climate-related financial disclosure requirements starting in 2024. While set by the Australian Accounting Standards Board, these standards will also align with those set by the ISSB.
There are several resources to guide organizations throughout the reporting process.
To start, companies can reference the Sustainable Development Goals (SDGs), which act as a guiding framework for governments and organizations alike. Introduced by the United Nations, the SDGs set a global agenda for sustainable development with the hopes of achieving a more sustainable future by 2030.
From there, companies can turn to several third-party organizations that set the sustainability reporting standards and can help businesses find the right sustainability reporting framework to use:
The Sustainability Accounting Standards Board (SASB) is a nonprofit organization that establishes and maintains industry-specific standards to help guide the disclosure of sustainability information, such as GHG emissions, to investors and other financial stakeholders.
The ISSB is an independent standard-setting body. The ISSB’s mission is to create a comprehensive global baseline of high-quality sustainability disclosure standards to meet investor and financial market needs.
The Global Reporting Initiative (GRI) is a nonprofit organization that provides a globally applicable guidance framework for a full range of ESG and sustainability issues. Today, GRI standards provide a baseline, as well as a roadmap, for companies that want to set goals and create their own sustainability reports.
CSR reporting is one approach which provides corporate visibility to key stakeholders on an organization’s social and environmental performance.
SASB is a standards-setting organization for disclosing sustainability risks and opportunities.
CSRD requires businesses to report on the environmental and social impact of their business activities, and on the business impact of their ESG efforts and initiatives.
The Task Force on Climate-related Financial Disclosures (TCFD) seeks to keep investors better-informed about companies' climate-related risks.
ESG reporting frameworks are used by companies for the disclosure of data covering business operations and opportunities and risks that are related to the ESG aspects of the business.
Net zero is the point at which greenhouse gases emitted into the atmosphere are balanced by an equivalent amount removed from the atmosphere.