Harmonization of sustainability reporting standards – a solution to which problem?

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Text by: Svetlana Gross and Jenni Puroila, PhD students at Misum

Currently there are more almost 400 different sustainability reporting instruments globally[1]. The SDGs (Sustainable Development Goals) include a specific goal (Goal 12.6) to encourage companies to report on sustainability as part of their reporting practices. Governments, NGOs, market regulators, stock exchanges, industry associations and standard setters have developed requirements for reporting. The question is no longer about whether companies should report on sustainability but rather how. Today the discussion is focused on standardization and harmonization of the reporting, but less so about its purpose and long-term effects.

Earlier in November Misum had the pleasure of hosting a public lecture by its board member Prof. Bob Eccles, who is currently Visiting professor of Management practice at Saïd Business School at Oxford University. The lecture’s topic was “Setting standards for non-financial information: what is the solution?”, and Prof. Eccles raised some important and interesting points on the topic. The question he brought into the discussion was “who should take the responsibility of developing the global standard for non-financial reporting”.

This request for a solution is relevant since the proliferation of standards has been criticised to have increased the reporting burden for companies but also creating a certain amount of confusion among reporting entities and among information users. Therefore, the current call for harmonization and alignment seems to be echoing all over. However, the large number of standards reflects the breadth of sustainability-related issues as well as the innovation and experimentation process in this emerging field. The question that is commonly being ignored or taken for granted is to whom the reporting is directed to.

It is an important question to ask, because it determines what purpose this reporting is serving and what kind of decisions it is supposed to influence: operational, strategic or purely financial? The standards for sustainability related information such as SASB and IIRC are developed to provide information for financial decision-making. As are the more traditional financial reporting bodies such as FASB (US) or IASB (the rest of the world). Throughout Prof. Eccles’ lecture the assumption that the investors are the main audience of sustainability reporting was not questioned. What it means in practice is that information about the non-financial aspects of the company’s environmental and social impacts need to be translated, and integrated, into financial terms.

Including financial implications of social and environmental risks as a part of financial reporting provides more accurate financial information and is in fact fulfilling those reporting requirements that are already in place in financial reporting regulations. This is nothing new. But it does not fulfil the purpose of sustainability reporting if we assume that its purpose is to support the transition towards more sustainable economy.

Today, the investors are expected to make the “right” decisions about our common future, but based on which grounds? One of the most recent and acclaimed efforts in integrating environmental, or specifically climate-related, information into the current accounting and investor decision-making is The Task Force on Climate-related Financial Disclosures, TCFD[2]. It has recently published a framework and recommendations for reporting to be used by financial and non-financial organizations representing the largest greenhouse gas emitting industries: energy, transportation, materials and buildings, agriculture, food and forestry. The focus is on financial impact of climate-related risks and opportunities on an organization, rather than the impact of an organization on the environment.

Recommendations include describing “the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario”. If focusing on the organizations’ impact on the environment, an honest analysis from fossil-based extraction and energy companies will be – “there is no scenario consistent with a 2°C warming where our company survives”. The accepted moderate emissions reduction pathway consistent with (a 75% chance of keeping the global warming below) 2°C includes that fossil-fuel emissions should peak by 2020 at the latest and fall to around zero by 2050[3]. Scenarios for lower than 2°C require even faster phasing out of fossil fuels. Will the companies adhere to this analysis when focusing solely on the financial impact on an organization as requested by these recommendations?

There is nothing wrong with the approach of those standards highlighting investors’ point of view as such, but problems arise when this approach becomes the dominating one. Giving the lead responsibility of alignment and harmonization to those organizations that focus on the investors’ perspective means maintaining the status-quo. This kind of reporting does not give enough incentive for companies to transform their practices towards more sustainable economy but rather contributes to their financial stability. Should this kind of reporting even be categorized under the 400 sustainability reporting instruments when in fact its purpose is to provide financial information about non-financial matters without requirements of measuring the impacts outwards to society and environment?

The sustainability challenges are larger and encompass issues that have implications reaching beyond the financial performance. If we want to find a solution for these major sustainability challenges we need a broader and more inclusive perspective that changes the target from sustaining the financial returns to sustaining our planet and humanity.

Text by: Svetlana Gross and Jenni Puroila, PhD students at Misum

Follow Jennie Puroila on Twitter: @jennipuroila

[1] UNEP, GRI, KPMG & the Centre for Corporate Governance in Africa (2016) Carrots and Sticks Global trends in sustainability reporting regulation and policy. Available at: https://assets.kpmg.com/content/dam/kpmg/pdf/2016/05/carrots-and-sticks-may-2016.pdf

[2] https://www.fsb-tcfd.org/publications/final-recommendations-report/, June 2017

[3] Rockström, J., Gaffney, O., Rogelj, J. et. al. 2017. A roadmap for rapid decarbonization. Science, Volume 355 Issue 6331

 

Crowdfunding for Sustainability: A new vehicle for green growth?

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Text by Kristian Roed Nielsen, PhD and Misum Postdoc researcher

The emergence of reward-based crowdfunding as novel source of funding for entrepreneurs (also labelled innovation finance) has been hailed as a democratizing revolution within innovation finance (Lawton and Marom 2012; Mollick and Robb 2016). The potential to engage consumers directly for capital is proposed to be changing “how, why, and which ideas are brought into existence” (Gerber and Hui 2013:1) by, for example, reducing the geographical constraints of traditional funding (Agrawal, Catalini, and Goldfarb 2015) in addition to expanding access to entrepreneurial finance to a greater range of individuals and teams (Lehner and Nicholls 2014; Sorenson et al. 2016). Its potential for enabling sustainable entrepreneurship is therefore also gaining popular and academic traction. But is this hype or does reward-based crowdfunding truly represent a needed innovation funding boon for sustainable entrepreneurs? This is exactly what my dissertation sought to explore by examining under which conditions and to what extent reward-based crowdfunding could financially benefit entrepreneurs with social and/or environmentally-oriented products. And can it? Well it depends.

The dissertation finds that while consumers represent a significant and growing source of innovation finance this does not necessarily translate into more sustainable finance[1]. Instead, funding success for sustainable entrepreneurs depends on the purpose of their endeavor (i.e. social or environmental); the amount of financing sought; entrepreneurs’ geographic location, social capital, network and prior experience; and – in no small part – the product [offered].  The fact that innovation finance can now be driven by consumers rather than professional investors does not in itself change consumer demands; demands which more often than not fail to correlate well with sustainable behavior. Instead reward-based crowdfunding appears for certain types of campaigns as an enabler of sustainable product innovation, while in other circumstances it enables egocentrically-oriented campaigns.

The factors that influence funding success for sustainable entrepreneurs are five-fold. Firstly, while consumers are on aggregate more likely to support socially-oriented ventures – as compared egocentrically-oriented campaigns – environmentally-oriented campaigns often perform worse than their egocentric counter-parts. Secondly, entrepreneurs should consider how much funding they are seeking as in reward-based setting as entrepreneurs who seek more than 8,000 US$ (€7,400) will on average find it increasingly more difficult to garner funding. Thirdly, location still matters even with crowdfunding context and entrepreneurs located in an urban setting with a high median income and social capital will find it significantly easier to garner funding. Fourthly, an entrepreneur’s personal network in addition to past experience with crowdfunding strongly influences the likelihood of funding success. Prior success with crowdfunding resulting 173% increase in expected funding, while failure results in a 17,7 % decrease. Finally, the products on offer themselves strongly influence individual pledging behavior both in terms of sustainable and unsustainable pledging, but also in terms of whether social or environmental orientation garners support. Hence when we look at a more detailed picture of the products themselves individuals seem motivated by different things when pledging. Specifically there is some indication that for fashion items, electronics and other “wearables” consumers pledge for egocentric reasons (i.e. style, make and color), while for other more out-of-sight items social (i.e. fair wages) and environmental (i.e. recycled materials) values win the day.

Hence while reward-based crowdfunding is not a silver bullet often espoused by its proponents for tackling the funding concerns of sustainable entrepreneurs “the crowd” does hold a significant potential that thus far remains largely untapped. It is this untapped potential that hope to unravel with my work at Misum.

If you want to read the none-condensed version of my dissertation you can find it here.

Text by Kristian Roed Nielsen, PhD and Misum Postdoc researcher

Follow Kristian on Twitter: @RoedNielsen

[1] Sustainable finance referring to capital that is invested in entrepreneurs or ventures who pursues a good, service, or process system that offers an improved or the same economic performance with lesser externalities in the form of social and environmental hazards (Bos-Brouwers 2010; Halme and Laurila 2009).

References
Agrawal, Ajay, Christian Catalini, and Avi Goldfarb. 2015. “Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions.” Journal of Economics & Management Strategy 24(2):253–74. Retrieved (http://dx.doi.org/10.1111/jems.12093).

Bos-Brouwers, Hilke Elke Jacke. 2010. “Corporate Sustainability and Innovation in SMEs: Evidence of Themes and Activities in Practice.” Business Strategy and the Environment 19(7):417–35. Retrieved (http://dx.doi.org/10.1002/bse.652).
Gerber, Elizabeth M. and Julie Hui. 2013. “Crowdfunding : Motivations and Deterrents for Participation.” ACM Transactions on Computer-Human Interaction 20(6):34–32.
Halme, Minna and Juha Laurila. 2009. “Philanthropy, Integration or Innovation? Exploring the Financial and Societal Outcomes of Different Types  of Corporate Responsibility.” Journal of Business Ethics 84(3):325–39. Retrieved (http://dx.doi.org/10.1007/s10551-008-9712-5).
Lawton, Kevin and Dan Marom. 2012. The Crowdfunding Revolution: How to Raise Venture Capital Using Social Media. New York: McGraw Hill Professional.
Lehner, Othmar M. and Alex Nicholls. 2014. “Social Finance and Crowdfunding for Social Enterprises: A Public-Private Case Study Providing Legitimacy and Leverage.” Venture Capital 16(3):271–86. Retrieved (10.1080/13691066.2014.925305).
Mollick, Ethan and Alicia Robb. 2016. “Democratizing Innovation and Capital Access: The Role of Crowdfunding.” California management review 58(2):72–87.
Sorenson, Olav, Valentina Assenova, Guan-Cheng Li, Jason Boada, and Lee Fleming. 2016. “Expand Innovation Finance via Crowdfunding.” Science 354(6319):1526 LP-1528. Retrieved (http://science.sciencemag.org/content/354/6319/1526.abstract).