1. EXECUTIVE SUMMARY

Business organizations play important roles in society by interacting with a variety of constituencies in creating value for all stakeholders. Proper communication of sustainability performance is important in disclosing commitment to creating stakeholder value as well. Corporate reporting is a process by which public companies disclose their mandatory financial economic performance and voluntary non-financial information on governance, social, ethical and environmental (GSEE) activities to all stakeholders. Corporations report their economic activities and performance in compliance with regulatory requirements and contractual covenants to satisfy financial information demands by investors. Corporations also voluntarily disclose their non-financial information on GSEE matters for a variety of reasons including demand from stakeholders, as a means of avoiding the attention of regulatory bodies where sanctions for non-compliance are imminent, and as a means of signaling compliance with industrial codes and best practices. This chapter presents corporate reporting consisting of both financial economic sustainability performance (ESP) and non-financial GSEE sustainability performance reporting and assurance.

2. INTRODUCTION

The past decade has witnessed wide attention to the accountability and social responsibilities of corporations, caused by a wave of global financial scandals at the turn of the 21st century which led to growing demand for corporate accountability on issues ranging from economic to all-embracing social responsibilities. The demand for more transparent corporate reporting reflecting economic, social, governance, ethical and environmentally sustainable performance is increasing in the context of sustainability reporting. Corporate sustainability reporting originally focused on environmental and corporate social responsibility (CSR) matters and evolved into presenting all multiple-bottom-line (MBL) issues.

Corporate reporting in this chapter is referred to as sustainability performance reporting, CSR, or MBL reporting, and reflects the role of corporations in society and disclosure of their accountability to all stakeholders. Corporate reporting focuses on both financial and non-financial key performance indicators (KPIs) to ensure corporations are held accountable to all stakeholders and fulfill their responsibility in managing their affairs in a fair and transparent fashion. In recent years, both mandatory and voluntary sustainability initiatives have been developed to promote business sustainability and to advance sustainability from greenwashing and branding to a business imperative, since investors demand, regulators require and companies report sustainability performance information. This chapter presents both mandatory and voluntary business sustainability performance reporting and assurance initiatives worldwide and in Asia.

3. FINANCIAL AND NON-FINANCIAL KEY PERFORMANCE INDICATORS

Corporate success stories can be measured and disclosed through KPIs. KPIs can be prepared for both financial and non-financial activities to present a company's progress toward achieving its goals. KPIs should reflect a company's strategic mission and goals and how these goals are measured and achieved. KPIs should communicate key activities used by the board of directors and officers in managing an organization such as achieving desired return on investment for shareholders, maximizing customer satisfaction or attracting and retaining the best and most talented employees. The extent and types of both financial and non-financial KPIs can vary among companies, their peers, industries, and countries with one overriding determinant—that of being relevant to the company and its operations. For example, KPIs most relevant to a petroleum industry are exploration success rate, refinery capacity and utilization, reserve resources and related replacement costs, whereas for the banking industry the most common KPIs are deposits and assets under management, loans and loan loss provisions, capital adequacy and asset quality. The number of KPIs depends on the type and size of the business and its strategy, mission, goals and activities, with at least one KPI for each major activity and sometimes multiple KPIs for each of the five economic, governance, social, ethical and environmental (EGSEE) dimensions of sustainability performance.

The guiding principles for relevant KPIs are linkage to corporate strategies, precise definitions and measurements, intended purposes, benchmarks, sources, interpretations, assumptions and limitations. KPIs should be forward looking in order to identify, measure and disclose trends, drivers, and factors relevant to stakeholders, particularly investors' assessment of current and future EGSEE sustainability performance. Exhibit 10.1 lists a set of KPIs for all five EGSEE dimensions of sustainability performance. The Balanced Scorecard as a strategic management system can be used to relate financial KPIs to non-financial KPIs and their integrated link to business strategy using a multi-dimensional set of financial and non-financial performance metrics. Financial and non-financial KPIs relevant to environmental, ethical, social, and governance (EESG) dimensions of sustainability performance are summarized in Exhibit 10.1.

4. SUSTAINABILITY REPORTING

The role of corporations in our society has evolved from profit maximization to creating shareholder value and, in recent years, to protecting the interests of all stakeholders. In today's economic environment, global businesses face scrutiny and profound pressure from lawmakers, regulators, the investment community and their various stakeholders to focus on sustainability performance. Corporate disclosures, either mandatory or voluntary, are the backbone of financial markets worldwide. Public companies are required to disclose a set of financial information as long as their securities are held by the public. The primary purpose of corporate disclosures is to provide economic agents (e.g. shareholders, creditors) with adequate information to make appropriate decisions. Mandatory corporate reporting (including financial reports disseminated to investors and filed with regulators) is designed to provide investors with relevant, useful and reliable information in making sound investment decisions. Moral hazard occurs in the presence of information asymmetry when management knows more about the company's actions and effects than is disclosed in the financial reports and chooses to withhold proper financial information from investors.

Voluntary sustainability reports usually include any disclosures outside of financial statements that are not mandated by regulators and standard-setters. Until the late 1990s, sustainability reports have been largely voluntary as part of the firm's supplementary disclosures. In recent years, many jurisdictions have adopted sustainability reports including Australia, Austria, Canada, Denmark, France, Germany, Hong Kong, Malaysia, the Netherlands, Sweden, and the United Kingdom. Regulators in other countries are expected to follow suit. Many global regulators, standard-setters and other organizations including the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC) now promote and suggest guidelines for integrated/sustainability reporting and assurance. Business sustainability requires organizations to focus on achieving all five EGSEE dimensions of sustainability performance by taking initiatives to advance some social good beyond their own interests (e.g., compliance with applicable regulations and enhancement of shareholder wealth).

The true measure of success for corporations should be determined not only by their reported earnings but also by their governance, social responsibility, ethical behavior and environmental performance. Business sustainability has received considerable attention from policymakers, regulators and the business and investment community over the past decade and is expected to remain the main theme for decades to come. Sustainability theories, standards, policies, programs, activities, risk management and best practices presented in the previous chapters of this book should assist business organizations worldwide with the integration of the five EGSEE dimensions of sustainability performance into their management processes in order to improve their KPIs as well as the quality of financial and non-financial sustainability information disseminated to their stakeholders.

The concept of sustainability performance suggests that management must extend its focus beyond maximizing short-term shareholder profit by considering the impact of the company's operation and entire value chain on all stakeholders including the community, society and the environment. Disclosure of EGSEE dimensions of sustainability performance while signaling management's commitment to sustainability and establishing legitimacy with all constituencies poses a cost-benefit trade-off with implications for investors and business organizations. In creating stakeholder value, management should identify potential social, environmental, governance and ethical issues of concern and integrate them into their strategic planning and managerial processes. There are many reasons and justifications why management should integrate sustainability performance into its processes and practices including pressure from the labor movement, the development of moral values and social standards and the change in public opinion about the role of businesses in environmental matters, governance and ethical scandals. Companies which are or aspire to be leaders in sustainability are challenged by rising public expectations, ever-increasing innovation, continuous quality improvement, effective governance measures, high standards of ethics and integrity and heightened social and environmental problems. Thus, management should develop and maintain proper sustainability programs that provide a common framework for the integration of all five EGSEE dimensions of sustainability into their management processes consisting of:

• Establishment of financial and non-financial KPIs relevant to all five EGSEE dimensions of sustainability performance that support management's strategic decisions and actions.
• Integration of financial and non-financial sustainability KPIs into business and investment analysis, supply chain management and the decision-making process.
• Communication of the company's management sustainability strategies, practices and expectations to major stakeholders including suppliers and customers to mitigate risks and foster corporate values and culture.
• Continuous assessment of the company's sustainability initiatives and related managerial processes to monitor and improve sustainability performance and identify challenging areas and risks that need further improvement.
• Promotion of product innovation and quality, customer retention and attraction, employee satisfaction and talent attraction and productivity through management sustainability processes.
• Development of environmental, social, ethical and governance initiatives that will impact the company's ability to generate sustainable financial performance for shareholders and create value for all stakeholders.
• Development of integrated sustainability reports to ensure that relevant financial and non-financial sustainability performance information is disclosed to all stakeholders.
• Periodic certification of both financial and non-financial sustainability KPIs, issuance of integrated sustainability reports and securing of external assurance reports on all five EGSEE dimensions of sustainability performance.

The global trend toward business sustainability performance, reporting and assurance encourages and rewards companies that focus on financial ESP and non-financial GSEE dimensions of sustainability performance and disclose their sustainability performance in sustainability reports with assurance. Taken together, the persistent challenges of maintaining sustainability have been the proper identification, measurement, recognition, reporting, and assurance of financial and non-financial KPIs. Examples of these challenges according to a 2015 report by the Corporate Economic Forum are:¹

1. Operational resources: The integration of business sustainability into the company's supply chain management is challenging when dealing with price volatility and the availability of scarce resources.
2. Government regulation: Management faces the challenge of effective compliance with all sustainability regulations, rules and standards, all of which have increased the cost of compliance.
3. Mergers and acquisitions: Business sustainability generates and promotes merger and acquisition activities and can cause companies to add or divest assets. Management should recognize the sustainability impact of these changes and make proper decisions.
4. Major investors: Institutional and socially responsible investors have recently shown much interest in business sustainability. One can witness such developments in Asian jurisdictions such as Hong Kong, which has started to make impact investment products available in global private banks. Thus, management should recognize this continuing interest in sustainability and its possible impact on the cost of capital.
5. Activist shareholders: Shareholders are more actively involved with sustainability activities and many shareholder resolutions in recent years are related to the environment and society. Management should address these resolutions to avoid reputational or financial damages.
6. Reporting requirements: Financial and non-financial sustainability information is more popular and is demanded by external stakeholders. Management should recognize such continuous interest in sustainability information and integrate it into corporate reporting.
7. Talent acquisition: Employees are interested in business sustainability as shown by their desire to work in environmentally friendly, diverse and socially responsible companies. Thus, management should demonstrate commitment to sustainability to attract and retain talented employees.

5. SUSTAINABILITY ASSURANCE

Assurance providers play an important role in providing assurance on sustainability reports reflecting all five EGSEE dimensions of sustainability performance. Objectivity, reliability, transparency, credibility and usefulness of sustainability reports are important to both internal and external users of the reports and can be enhanced by the provision of assurance on reports. Sustainability assurance can be provided by internal auditors or external assurance providers. While internal auditors are well qualified to assist management in the preparation and assurance of sustainability reports, external users of sustainability reports may demand more independent and objective assurance on reports. This type of assurance can be provided by certified public accountants (CPAs), professional assurance providers or equivalent accredited individuals, groups or institutes. Current auditing standards are intended to provide reasonable assurance on financial and internal control reports prepared by management. However, the degree of reliance placed on non-financial information such as sustainability reporting is not clear. Assurance standards on different dimensions of sustainability performance reports vary in terms of rigorousness and general acceptability. For example, auditing standards governing reporting and assurance on economic activities presented in the financial statements are well established, and widely accepted and practiced. Assurance standards on other dimensions of sustainability including governance, ethics, social and environmental standards are yet to be fully developed and globally accepted.

An integrated model for assurance on all five EGSEE dimensions of sustainability performance reporting is desirable. Auditing standards published by the Public Company Accounting Oversight Board (PCAOB) are relevant to the economic dimension of sustainability in auditing financial statements and internal controls over financial reporting. Two recent standards released by the International Auditing and Assurance Standards Board (IAASB), namely the International Standard on Assurance Engagements “Other Than Audits or Reviews of Historical Financial Information” 3000 (ISAE 3000) and ISAE 3410 (Assurance Engagements on Greenhouse Gas Statements) can be used for each dimension of EGSEE sustainability.² This integrated model provides policy guidelines with practical and educational implications for employing EGSEE reporting and auditing. The growth of sustainability reporting use and its potential to raise important assurance issues will be very important in the future.

Recognition of the growing number of assurance services seems apparent from the issuance of assurance practice guidance statements by influential bodies such as AccountAbility,³ the Global Reporting Initiative (GRI)⁴ and the European Federation of Accountants (FEE).⁵ Two important sources of guidance on the assurance of sustainability reporting, each released in 2003, are provided by AccountAbility's (AA) AA1000 and the IAASB's International Standard on Assurance Engagement (ISAE) 3000. The AA1000 assurance standard provides guidance for an assurance engagement for assurance providers from outside the accounting profession while ISAE 3000 provides guidance for an assurance engagement for members of the accounting profession. The ISAE 3000 (issued by the IAAS Board in 2004), the AICPA's Attestation Standards (AT section 101), CICA section 5025 and the AA1000 Assurance Standards (AS) (issued in 2008 by AccountAbility) all provide guidance for assurance on the non-financial dimensions of sustainability.⁶

External assurance is an important part of integrated reporting as assurance providers verify the information contained in the reports and publish those conclusions so that others, generally less experienced in the particular areas in which the assurance providers have expertise, may be assured that the practices faithfully confirm the statements made by management. The G4 Guidelines state that assurance providers must:

• Be independent from the organization and therefore able to reach and publish an objective and impartial opinion or conclusions on the report.
• Be demonstrably competent in both the subject matter and assurance practices.
• Apply quality control procedures to the assurance engagement.
• Conduct the engagement in a manner that is systematic, documented, evidence based and characterized by defined procedures.
• Assess whether the report provides a reasonable and balanced presentation of performance, taking into consideration the veracity of the data in the report as well as the overall selection of content.
• Assess the extent to which the report preparer has applied the Guidelines in the course of reaching his or her conclusions.
• Issue a written report that is publicly available and that includes an opinion or set of conclusions, a description of the responsibilities of the report preparer and the assurance provider, and a summary of the work performed to explain the nature of the assurance conveyed by the assurance report.⁷

Numerous bodies have developed methodologies and standards for external assurance for global, regional and country-specific audiences. Many of these bodies come in the form of trade associations of accountants, engineers and other professionals who come together to write standards that will raise the quality of their respective industries as a whole.⁸ As reporting becomes more nuanced, there will be somewhat of a reckoning for companies. Those that have not been disclosing issues well may see a downtick in their equity capital as investors realize there are more liabilities than previously thought. Conversely, those that receive good marks from external assurance providers may see an uptick in their value as investors find that there is less risk than previously perceived. One of the benefits of having external assurance is that companies will be forced to deal with issues previously unforeseen (perhaps even by the companies themselves) and improve their procedures accordingly. Those that use this as an opportunity to grow will be rewarded accordingly in general while those that do not will suffer. From an overall market perspective, this will help the product and security markets to become more efficient and, all else being equal, more profitable for those with the best practices.

Business sustainability promotes long-term profitability and competitive advantage; helps maintain the wellbeing of society, the planet and people; and creates value for all stakeholders. It is expected that integrated reporting will play an important role in future corporate reporting and in rebuilding investor trust and confidence in public financial information. Trust in public companies' financial reporting has been eroded in recent years and there is concern about the short-term focus on only financial information and the lack of attention given to non-financial GSEE performance information. Integrated reporting enables organizations to integrate EGSEE sustainability performance reporting into the mainstream corporate reporting process.

The important principles of integrated reporting are:

1. Ensuring that corporate strategy is articulated well as a core part of the report
2. Connecting all parts of the business as a whole
3. Making information concise and easily readable
4. Being future oriented and inclusive of multiple stakeholders
5. Taking care to provide materiality, value, and assurance to the audience of the report.⁹

6. GLOBAL STATUS OF SUSTAINABILITY PERFORMANCE REPORTING AND ASSURANCE

Many countries have and are adopting laws and regulations that make sustainability reporting mandatory for large companies. According to the GRI, the number of organizations releasing standalone sustainability reports grew from 44 firms in 2000 to 1,973 in 2013.¹⁰ This number is expected to rise as more and more companies realize the potential of reporting their practices. Sustainability reporting can be promoted in three ways:¹¹

1. Through market forces including the demand for and interest in EGSEE performance reporting by investors and financial markets.
2. Through mandatory sustainability reporting requirements of regulators and listing standards of stock exchanges;¹² a successful case is that Directives of the European Parliament require large public companies in Europe to report on their social, governance, environmental and diversity initiatives.
3. Through a combination of mandatory and voluntary initiatives.

Over the last couple of years, companies have begun to stray away from the mindset of “profit only” to one that recognizes that building and maintaining sustainable business practices is a good strategy for their companies. The 2013 Global Corporate Sustainability Report released by the United Nations Global Compact presents the current state of business sustainability by reviewing the actions taken by companies worldwide in advancing their business sustainability.¹³ The report uses 10 principles of sustainability and processes in its suggested model as benchmarks in assessing corporate sustainability actions and performance. The report presents the responses of 2,000 companies in 113 countries regarding their sustainability progresses and challenges. The key findings of the 2013 sustainability report are:

1. Companies are taking proper actions to achieve sustainability performance as evidenced by 65 percent of signatories committing to sustainability at CEO level, with about 35 percent training their managers to integrate sustainability into their strategies and operations.
2. Large companies are leading the way toward sustainability performance and integrated reporting while small and medium-sized enterprises (SMEs) still face challenges to achieve sustainability.
3. Supply chains are a roadblock to the achievement of improved sustainability performance.
4. Companies are moving forward with a focus on the achievement of all dimensions of sustainability performance from education to poverty eradication, employment growth and climate change.¹⁴

There is no mandatory guidance at this time for sustainability reporting. However, there are several voluntary guidelines for sustainability reporting, including the reporting frameworks released by the GRI, the Connected Reporting Framework and the reporting publications of AccountAbility. An alternative to mandatory sustainability reporting should be considered, taking account of the following issues:¹⁵

• Standardization of the diverse sustainability reports that are currently issued.
• Establishment of a globally accepted reporting framework for sustainability information.
• Creation of uniformity in objectively reporting all five dimensions of EGSEE performance.
• Action to ensure that a wide range of users including investors have access to uniform and comparable sustainability reports.
• Facilitation of uniform sustainability assurance.
• Unlike audit reports on financial statements, assurance reports on sustainability information are not standardized, regulated or licensed.
• As mentioned earlier, IFAC's ISAE 3000¹⁶ and ISAE 3410 on reporting greenhouse gas (GHG) statements.
• GRI also recommends that assurance be provided on sustainability reports by external assurance providers, which can be designated with a “+” added to the application level declared by firms regarding their sustainability reporting and assurance. Alternatively, GRI can examine the content of sustainability reports and express an opinion on the extent of compliance with the GRI Guidelines but not comment on the quality and/or reliability of disclosed sustainability information.¹⁷

Currently, sustainability reports are voluntary and (normally) not audited by external auditors. Existing sustainability reports bearing different names (green reporting, CSR reporting) serve different stakeholders in achieving a variety of purposes and vary in terms of content, structure, format, accuracy and assurance. A more standardized, integrated and audited process is required to make sustainability reports on EGSEE performance comparable, commonly acceptable and relevant to all corporate stakeholders.

7. SUSTAINABILITY REPORTING AND ASSURANCE IN ASIA

Like the global trend, sustainability performance reports in many Asian countries are voluntary and generally not audited by external assurance providers. There is a substantial steady increase in the amount of sustainability reporting and the number of reports with assurance statements issued in all 12 examined Asian economies. The GRI database provides a snapshot of the current trends in sustainability reporting and assurance practices for a sample of 10,377 companies across the 12 Asian jurisdictions over the 2005–2016 period. Exhibit 10.2 presents the number of sustainability reports in these jurisdictions from 2005 to 2016. The majority (71 percent) of sustainability reports were issued in the past five years and sustainability assurance reporting made steady progress in Asia in the five years from 2010 to 2016. The top three countries/jurisdictions in Asia for sustainability reporting, represented by more than 10 years (2005–2016) of reporting, are Japan with 2,989 reports (28 percent of a total 10,610 reports), followed by Mainland China with 2,289 reports (22 percent) and Taiwan with 1,457 reports (13 percent). Mainland China has shown significant increases in sustainability reports from zero in 2005 to 632 sustainability reports in 2016.

With the development of CSR and CSR reporting practices, more Asian firms provide CSR reporting assurance to increase the credibility of their CSR reports. This provides an answer to critics who have concerns about the verification and viability of sustainability reporting. Simnett et al. (2009) used a sample of 31 countries to show that Japanese firms ranked top in Asia in terms of the number of firms providing CSR assurance followed by a handful of firms from Hong Kong, South Korea, India and Malaysia. However, there was no evidence of assurance of CSR reports in other Asia jurisdictions such as Singapore, the Philippines, Taiwan and Thailand. Their study suggests that Asia lagged behind the world average in terms of CSR assurance as of the end of 2004.¹⁸

Rao (2017) surveyed 1,100 international firms who assured sustainability reports in 2009, 2010 and 2011. The study reveals that Europe has the highest number of sustainability reports assured during the period (with 54 percent compared to Asia with 25 percent, South America at 9 percent followed by a tie between Australia and North America). Only 2 percent of reports came from Africa. More recently, the GRI dataset (Exhibit 10.3) presented the numbers for sustainability assurance in the 12 economies in Asia, with the top five economies for sustainability assurance over five years showing Taiwan with 589 statements (29 percent), South Korea with 378 statements (18 percent), Japan with 296 statements (14 percent), India with 205 statements (10 percent) and Mainland China with 151 statements (7%). The overall quality of both sustainability reports and assurance has substantially improved during the last five years in Asia. Exhibit 10.4 presents the status of sustainability reporting and assurance in Asia. A combination of mandatory and voluntary sustainability reporting and assurance is developed and practiced in the different jurisdictions, as further explained in the following subsections.

8. BEST PRACTICES OF SUSTAINABILITY REPORTING AND ASSURANCE

In recent years, corporations have been under more pressure from a variety of stakeholders including regulators and socially responsible investors to disclose both financial and non-financial information pertaining to their ESP and GSEE sustainability performance. Corporations worldwide are now searching for an effective and efficient way to improve the quality of their financial reporting while ensuring compliance with all applicable rules, laws, regulations and standards through integrated sustainability reporting. Sustainability reports cover all areas of economic viability, ethical culture, corporate governance, social responsibility and environmental awareness. Sustainability reporting and assurance evolves as investors demand more relevant sustainability disclosures, regulators require more extensive sustainability reports and business organizations integrate sustainability into their strategic decisions, actions and performance. Best practices of sustainability performance, reporting and assurance have also been developed. According to greenbiz.com and United Parcel Service (UPS), there are five ways to convey the vital importance of sustainability to senior executives:⁶⁸

1. It enables cost reduction and efficiency improvement.
2. It incentivizes organizations to focus on risk assessment, management and mitigation (financial, operational, compliance, strategic and reputational risks).
3. It creates new competitive and revenue-generating opportunities.
4. It encourages innovation.
5. It promotes talented employee recruitment, development and retention.

Best practices of sustainability performance, reporting and assurance (presented in Exhibit 10.5) suggest that:

1. Sustainability strategies should be integrated into corporate decision-making processes in promoting the achievement of all five EGSEE dimensions of sustainability performance.
2. Companies should use a principles-based approach in integrating both financial and non-financial sustainability information into their corporate reporting.
3. Companies should assess sustainability risks in all aspects of strategy, operations, compliance, finance, and reputation and minimize their impacts on EGSEE sustainability performance.
4. Companies should provide assurance on their sustainability reports to gain credibility, investor confidence and public trust.

Corporate sustainability in action for a small sample of global companies can set a benchmark for other companies to follow. Best practices of sustainability for a small sample of international companies, as presented in Exhibit 10.4, suggest that management should develop and maintain proper sustainability programs that provide a common framework for the integration of sustainability issues and activities into the business model that consists of:

• Integration of sustainability issues, programs and activities into the business and investment analysis and decision-making process.
• Incorporation of sustainability issues and activities into business and investment policies and practices to improve overall performance in both financial ESP and non-financial GSEE sustainability performance.
• Promotion of appropriate disclosure on sustainability ESP and GSEE performance in an integrated sustainability report.
• Collaboration among all stakeholders to enhance the effectiveness of sustainability programs.
• Promotion of product innovation and quality, customer retention and attraction, employee satisfaction and productivity through sustainability programs.
• Periodic disclosure of both financial and non-financial KPIs relevant to ESP and GSEE sustainability activities and performance to all stakeholders.

These best practices of sustainability reporting and assurance are gaining global acceptance. A 2014 survey of investors conducted by PwC finds that about 80 percent of responding investors stated that they considered GSEE sustainability issues in their investment decisions, when acting as voting proxies and when making investment portfolio decisions in the past year.⁶⁹ Among the top sustainability issues considered by investors are climate change, resource scarcity, CSR and good citizenship. Investors' primary drivers for considering sustainability issues, in order of performance, are risk reduction (73 percent), avoiding firms with unethical conduct (55 percent), performance enhancement (52 percent), cost reduction (36 percent), attracting new capital (30 percent), improving capability to create value (30 percent) and being responsive to interest groups (21 percent).⁷⁰ Investors are typically more dissatisfied than satisfied with sustainability information provided by firms relevant to sustainability risk, challenges, opportunities and sustainability performance dimensions.

Assurance on sustainability reports is voluntary. The reports can be audited or reported on by an independent auditor. Auditors may perform assurance on sustainability reports for the intended parties or at the request of third parties or professional organizations. In these situations, auditors of public companies can consider the guidance in PCAOB AS 2710, Other Information in Documents Containing Audited Financial Statements. In compliance with this guidance, the auditor should read sustainability information, consider whether such information or the manner of its presentation is inconsistent with the audited financial statements and ask management to eliminate any discovered inconsistencies. The auditor's report on sustainability information is an attestation engagement covered by attestation standards and is limited to either assurance based on an examination or negative assurance based on a review. The auditor's assurances pertain to the sustainability information presented by management. Two types of assurance reports can be issued by auditors on sustainability reports: (1) Examination Report on Sustainability Information and (2) Review Report on Sustainability Information. Exhibit 10.6 presents samples of both types of assurance reports.

9. RELEVANCE OF SUSTAINABILITY INFORMATION

A report by the Conference Board presents many cases in which non-financial GSEE sustainability actions and performance have a positive impact on financial performance.⁷¹ The report also highlights the importance of establishing the link between financial and non-financial EESG sustainability KPIs. Sustainability information on GSEE is typically considered an externality beyond disclosure of economic performance, which can be viewed positively or negatively by market participants.

A 2013 joint study by the Investor Responsibility Research Center Institute (IRRCI) and the Sustainable Investments Institute (Si2) reports that only 1.4 percent of the S&P companies (seven firms) issued a standalone sustainability report by mentioning sustainability reporting in their regulatory filing of 10-K reports whereas almost all S&P companies (499) disclosed at least one piece of sustainability information, 74 percent placed monetary value on their sustainability-related disclosures and about 44 percent linked their executive compensation to some type of sustainability criteria.⁷²

Although business sustainability is a relatively new concept, research conducted by academic and professional bodies has highlighted the importance of sustainability performance as well as disclosure. Indeed, financial gains generated by sustainability performance in 2013 is up to 37 percent compared to 23 percent in 2010 and about 50 percent of companies adapted their business models in response to sustainability initiatives.⁷³ In its G4 Guidelines released in May 2013, the GRI promotes sustainability reporting as a standard practice of disclosing sustainability-related issues that are relevant to a company's business and stakeholders.⁷⁴ The G4 Guidelines present Reporting Principles, Standard Disclosures and an Implementation Manual for sustainability reporting on both ESP and ESG sustainability performance by all organizations regardless of their type, size, sector or location. Global investors consider various dimensions of sustainability performance in their investment analysis as socially responsible investing (SRI) increased by more than 22 percent to US$3.74 trillion in managed assets during the 2010–2012 period (Social Investment Forum).⁷⁵ At the same time, stock exchanges worldwide either require or recommend that their listed companies report sustainability information (e.g., Singapore Stock Exchange, 2011; Toronto Stock Exchange, 2014; Hong Kong Stock Exchange, 2015) and more than 6,000 European companies will be required to disclose their non-financial ESG sustainability performance and diversity information for their financial year 2017.⁷⁶

The KPMG 2013 Audit Committee Roundtable Report highlights the importance of long-term sustainable performance by suggesting that focusing on quarterly earnings can undermine a firm's long-term sustainable performance.⁷⁷ The KPMG report suggests the use of additional financial and non-financial KPIs and drivers of sustainable performance like operational efficiency, customer satisfaction, talent management, and innovation to measure sustainability performance. Although the conventional measures of cash flows, earnings, and return on investment are essential in evaluating financial performance, they cannot reflect sustainable performance and future growth. To obtain a complete picture of business profitability and sustainability, the 2013 KPMG report identifies a number of key measures of performance that are essential for understanding business sustainability. These measures include operational efficiency, customer satisfaction, talent management and innovation, which could be derived from internal factors related to strategy, risk profile, strengths and weaknesses, and corporate culture as well as external factors related to reputation, technology, completion, globalization and utilization of natural resources.⁷⁸

A 2013 United Nations study suggests that non-financial GSEE dimensions of sustainability performance are value relevant to investors by presenting new risks and opportunities that are fundamental in performance analyses and portfolio investment valuation.⁷⁹ The study argues that GSEE performance information enables investors to conduct economic and industry analyses of GSEE non-financial information including trends, externalities and industry competitiveness effects that may affect shareholder value creation as well as assessment of the company's sustainability strategies and practices that may change the traditional investment valuation parameters and assumptions.⁸⁰ Proper understanding of sustainability theories, standards, risk assessment and performance has been a major challenge for companies in measuring, recognizing and disclosing the five EGSEE dimensions of their sustainability performance, and for corporate stakeholders including shareholders in effectively using sustainability performance information in their investment valuations and portfolio analyses.

Companies have found that emphasizing sustainability improves their profitability, generates greater loyalty and commitment from employees, and cements relationships with customers and suppliers. The 10 key elements to sustainable business practices in SMEs include (1) taking a broad view of sustainability (2) defining in detail what sustainability means to your company (3) engaging all stakeholders (4) remembering that you are not alone (5) establishing responsibility and communicating widely (6) taking it step by step (7) walking the talk (8) tying sustainability to profit (9) measuring, monitoring and reviewing (10) investing in the future.⁸¹ Integrated reporting in a broader context is far more common in the United States, as 499 out of 500 companies made at least one sustainability-related disclosure. In addition, nearly three-quarters of companies place a dollar figure on at least one sustainability-related initiative and 43.4 percent of companies link executive compensation to some type of sustainability criteria.⁸²

10. CONCLUSIONS

Conventional corporate reports do not effectively reflect corporate accountability to all stakeholders. Future corporate reporting should disseminate high-quality financial and non-financial information regarding all five EGSEE dimensions of sustainability performance to enable all corporate stakeholders to make sound decisions. All relevant information pertaining to the five EGSEE dimensions of sustainability performance can be incorporated into one report commonly known as the “integrated report”. This integrated report can be prepared in compliance with the G4 Guidelines of the GRI, be forward looking, and present both financial and non-financial KPIs discussed in this chapter. Integrated sustainability reporting and assurance has made steady progress in the 12 economies of Asia during the past decade. The most noticeable improvement is in Hong Kong and Taiwan regarding mandatory sustainability reporting on environmental, social and governance performance information. The development in Asia can be used as a benchmark for standard-setters (GRI, IIRC, and SASB), business organizations and researchers in other countries in promoting sustainability performance, reporting and assurance.

11. CHAPTER TAKEAWAY

1. Make sure corporate reports are comprehensive and relevant in portraying both financial and non-financial information on all five EGSEE dimensions of sustainability performance to all stakeholders.
2. Align corporate reporting and communication strategy.
3. Improve relationships with all key stakeholders.
4. Sustainability managers have more incentive to focus on financial sustainability performance that can create tangible shareholder value (return on investment) than social investment with less tangible outcomes.
5. Sustainability managers should use the balanced scorecard to link non-financial KPIs to financial KPIs and their integrated impacts on achieving the organization's objectives in creating sustainable value for all stakeholders.
6. Ensure incorporation of sustainability development into decision-making, planning, implementation and evaluation processes.
7. Expand and redesign corporate reporting on sustainability and accountability with a keen focus on supporting the information needs of long-term investors regarding sustainable performance as well as performance in the environmental, social, governance and ethical dimensions.