“Events over the past couple of years have raised profound questions about the ways in which banks and businesses contribute to society. For both to play their full part, they must restore trust and become better citizens in a publicly demonstrable way.” So writes disgraced Barclay’s CEO Bob Diamond in his opening to the Bank’s most recent ‘Corporate Citizenship’ report. A report released several weeks before the LIBOR scandal broke and which carries the hefty weight of Ernst & Young’s stamp of assurance.
And therein lies the irony. And the concern. If the reputable E&Y ‘audited’ Barclay’s environment, social and governance (ESG) performance, how could they miss out corruption to the tune of $US360 trillion in interest rate-fixing?
Equally puzzling is how PricewaterhouseCoopers could sign off HSBC’s “Sustainability Report” shortly before the bank was dragged before US Congress for allegations better suited to a renegade playboy than a major financial institution.
It’s hard to believe that some of the world’s best auditors, dogged detectives of misplaced decimal points, didn’t discover money laundering to Mexican drug lords or matey interest-rate fixing.
While the same questions could be asked of the financial report auditors, it is the particular promise of sustainability reports to reveal the values and ethics underpinning corporate decision-making which makes them especially important in these instances.
Corporate uptake of sustainability reporting
Since 2006, the numbers of companies publicly reporting on their ESG performance through ‘sustainability reports’ has grown globally and exponentially. The Global Reporting Initiative (GRI), the world’s leading sustainability reporting framework, reports that 95% of the top 250 global companies now produce an annual sustainability report, with more than 70% of those companies having their reports audited by one of the Big Four accounting firms. Ninety-four of the ASX100 produce some form of sustainability disclosure.
It is critical that the information provided in sustainability reports is accurate, reliable and truthful - especially when such information bears the imprimatur of a respectable auditing firm.
Sustainability reports inform decision-making
Financial analysts use these reports to make investment recommendations. Governments read them to inform regulatory decisions. Everyday consumers reference them for information about issues like climate change, fair trade and labour practices concerning products they buy.
Sustainability reports also inform the inclusion of publicly listed firms on market indices, like the Dow Jones Sustainability Index (DJSI) or the FTSE4GOOD. A tick of approval from these indices signals to investors that all is well within a firm even beyond its financial figures.
Improving auditing to assure report quality
All of the Big Four UK banks feature on the FTSE4GOOD. All are embroiled in the Libor scandal. Even our own DJSI-listed National Australia Bank now faces investigation of its British banking arm.
So how did certain bank’s sustainability reports achieve Shakespearean levels of tragic irony?
Because current sustainability report auditing processes disempower the auditors.
As E&Y’s “assurance statement” for Barclay’s states: “Our responsibility, in accordance with management’s instructions, is to provide a limited assurance engagement. …Any reliance any such third party may place on the Report is entirely at its own risk.”
It is common practice for firms to set the boundaries of information covered in sustainability report audits, and to what level of detail. Report data is provided to auditors by management and, for the most part, must be taken at face value. Current auditing procedures make it exceptionally difficult for auditors to fully deploy their investigative skills. Rarely are they afforded their Columbo moment when, standing to leave the CEO’s office, they turn and ask, “I’m sorry, Bob, but I just have one more question….” If only.
Don’t lose faith just yet
So should we lose faith in sustainability reporting altogether?
Decades of work and the expertise of hundreds have gone into the creation and spread of sustainability reporting frameworks. It is a practice vital to healthily functioning market economies. But it must be improved - and respected.
Improvement begins by empowering the auditors. Only through provision of powers similar to those afforded to financial auditors can auditing firms truly scrutinise corporate ESG behaviours.
Proper training and certification of sustainability report auditors must also occur. Currently, anyone can “assure” a sustainability report. And while efforts are made to assign specialist auditors, it is not always the case that auditors hold the social and environmental measurement knowledge required to uncover sham data.
While improvements are being made in this area, certification - for example, through systems similar to the AccountAbility1000 Assurance Standard - would ensure that ticks of assurance are provided only by qualified professionals.
Sustainability reporting frameworks must be tightened to ensure more robust reporting. Next year, the GRI rolls out the fourth (and greatly improved) version of its reporting guidelines. More detailed performance indicators, better instructions and strengthened requirements concerning reporting of management approaches to key sustainability issues are all steps in the right direction.
Better auditing of sustainability reports - and for that matter, financial reports - will not of itself prevent management from concealing what it wants to conceal. But it does help to foster a culture of disclosure and transparency within organisations.
Companies are now beginning to produce “integrated reports” - a holistic company report showing financial figures alongside ESG data - and this practice may result in greater scrutiny of both ESG and financial claims.
Regulation of integrated reporting marks the final (and perhaps most important) step in ensuring that analysts, governments and the public receive clear, accurate and trustworthy information on all aspects of corporate performance. The work of the International Integrated Reporting Council and regulatory initiatives in countries including South Africa and Denmark suggest this will happen. One day.
Until that time, sustainability reports will continue to provide a wealth of corporate information unavailable elsewhere.
But in the now ironic words of Bob Diamond: “Restoring people’s trust may take longer”.