My paper explores foundational sustainability reporting concepts, including what corporate sustainability reporting is, what form it should take, what difference it makes and what role ought to be played by reporting standards.

The starting point is the Brundtland definition of sustainable development (Brundtland, 1987) and the Sustainable Development Goals (SDGs; UN, 2015). These have two implications for the corporate sector. First, to the extent that corporations provide the goods and services with which society meets its needs, there is public interest in the ongoing financial viability (and therefore profitability) of the corporate sector. Second, to the extent that the private economic incentives of corporations (and their investors) are realised at the expense of sustainability goals (including at a cost to future generations), there is conflict between the interests of society and those of investors and others with beneficial interests in corporate activity.

Taking the perspective of corporate reporting, my paper evaluates the complementary information provided to investors by the financial statements and sustainability-related financial disclosure, both of which are components of financial reporting. These are critical in factoring sustainability into investment decisions, enhancing efficient capital allocation in that regard. Yet such mechanisms cannot alone address the core challenge in sustainability, which is the absence of economic self-interest, even in the long term, in eliminating external costs. In recognition of this conflict, the paper sets out and evaluates complementarity between financial reporting and impact reporting, with both having a distinctive role in aligning corporate and societal interests in a collective transition to a sustainable economy.

The information flows in a comprehensive system of sustainability reporting are set out in the diagram below. The ‘impacts and dependencies’ box, at the centre of the figure, represents data available to the reporting entity, which could come from sources ranging from the entity’s own transactions data to direct engagement with stakeholders. Take the example of water. Impacts include the consumption of freshwater in water-stressed areas and the pollution of waterways, either of which could affect stakeholders external to the entity’s commercial activities. Dependencies include the reliance of the business on the availability of freshwater and on the use of waterways for logistical purposes, either of which could affect the entity’s financial prospects if interrupted or if more generally unsustainable.

Financial reporting applies two filters to impact and dependency data: (1) is there financial interest in gathering these data? (2) which financial information might reasonably be expected to affect investment decisions, to include in the financial report? Impact reporting to other stakeholders also has two filters: (1) what data are available about how business activities impact stakeholders? (2)  what subset of these data might reasonably be expected to affect stakeholders’ decisions, to disclose in an impact report?

 The figure illustrates how financial reporting is designed to meet investors’ information needs. It can also be used to explain why reporting to investors alone would not meet the information needs of all stakeholders. This is for three reasons. First, the business relevance filter excludes data for which management sees no decision-making usefulness, even though there might be stakeholder impact from the associated business activity. Second, investors and stakeholders might want different information on the same business activity, because it affects them in different ways. Third, and through the materiality filter, investors are interested in (financial) information aggregated at the level of the company as whole, not in (non-financial) information disaggregated at whatever level individual stakeholder groups are affected by the impacts that occur.

For impact reporting, an additional question needs to be asked: who are the users of the report and what decisions are they assumed to be making? The answer to this question is well established for the users of financial reports yet not for impact reports. The notion of reporting to ‘all stakeholders’ is too vague; there are too many potential stakeholders with too many different interests. Without a focused audience and purpose, quality is poorly defined, and the risk is that multistakeholder reporting can become (if mandatory) a compliance exercise served by the least-cost means of not failing to comply and (if voluntary) vulnerable to selective and self-serving disclosure. Critical here is to ensure that impact reporting is grounded in science-based targets for climate and nature and in targets (such as the SDGs) for human and social factors. It is at this macro, systemic level that the core challenge of sustainability is most keenly felt. To illustrate, the recent fire damage in LA was the consequence of systemic failure. Whether couched in terms of loss of property, defaults on home loans, costly insurance claims, human tragedy or decimation of forest and biodiversity, the experience was damaging across all stakeholder groups. Protection of the system is the context in which impact reporting is needed and the lens through which it should be understood.