journal N1 2025

DOI: 10.52340/ekonomisti.2025.01.07

Expanded Summary

 The Purpose and Challenges of Sustainability Reporting

Sustainability reporting, specifically focused on financial disclosures relating to Environmental, Social, and Governance (ESG) factors, is a growing area of interest and importance. It provides stakeholders with critical information on a company's impact and performance regarding sustainability, beyond just financial metrics. This type of reporting integrates ESG factors into the broader financial narrative, aiming to improve transparency, accountability, and decision-making across various levels of corporate management and investment strategies.

The Purpose of Sustainability Reporting

1. Transparency:
• One of the primary goals of sustainability reporting is to improve clarity and accessibility of sustainability-related information for key stakeholders such as investors, customers, regulators, and the general public. By providing clear insights into a company’s environmental, social, and governance efforts, the goal is to make the company’s operations more transparent and reduce information asymmetry. This also allows stakeholders to evaluate a company's commitment to responsible practices.
• Transparency helps create a more open dialogue between businesses and the public, especially when it comes to how companies are impacting the environment and society. It allows stakeholders to understand not just financial performance but also the broader effects the company has on the world.
2. Accountability:
• Sustainability reporting holds companies accountable for their sustainability goals and objectives. This is vital because accountability creates trust and confidence among stakeholders. When companies publicly disclose their progress or setbacks in meeting ESG objectives, it reinforces their responsibility toward fulfilling their sustainability promises.
• As businesses face increasing pressure from investors, regulators, and consumers to commit to sustainable practices, accountability in sustainability reporting is key to ensuring that these promises are not only made but also kept.
3. Decision-Making:
• Sustainability reporting plays an essential role in decision-making. By providing reliable and consistent data on sustainability performance, it helps investors, management, and other decision-makers identify risks and opportunities related to sustainability. This, in turn, informs strategic planning and investment decisions.
• Companies with strong sustainability performance may benefit from better access to capital, lower costs, and enhanced reputations. For investors, data on sustainability risks and opportunities can influence investment decisions, ensuring capital is allocated towards businesses with long-term, sustainable growth potential.

Challenges of Sustainability Reporting

Despite its growing importance, sustainability reporting faces several challenges that hinder its effectiveness and universal adoption:

1. Data Collection Challenges:
• One of the most significant obstacles to sustainability reporting is the difficulty in collecting accurate and comprehensive data related to sustainability metrics. This is often due to the lack of standardized frameworks, systems, or definitions for measuring ESG factors. Without consistent metrics, it becomes difficult for companies to report on these issues, and even more challenging for stakeholders to compare performance across organizations.
• Inconsistent or incomplete data can undermine the credibility of sustainability reporting, reducing its ability to influence decision-making or improve accountability.
2. Integration with Traditional Financial Reporting:
• Integrating ESG data with traditional financial reporting is another ongoing challenge. ESG factors are often reported separately from financial statements, which can make it difficult to assess the overall performance of a company, especially for investors and analysts used to financial data presented in conventional formats.
• While there has been progress toward harmonizing ESG disclosures with financial data, the integration remains inconsistent across industries and jurisdictions. For example, some industries have clear guidelines on reporting, while others are still struggling to define relevant sustainability metrics.
3. Balancing Stakeholder Expectations:
• Different stakeholders often have varying demands and expectations regarding sustainability reporting. Investors may prioritize different ESG factors than customers or regulators, creating tension around what to report and how to prioritize it.
• For instance, investors might be interested in how ESG risks could impact long-term returns, whereas customers may focus more on environmental and social impacts. This disparity in stakeholder expectations can make it difficult for companies to satisfy all parties with a single report.
4. Limited Resources for Small Companies:
• Many companies, especially small businesses, struggle with the limited resources (financial, human, technological) required to implement robust sustainability reporting practices. For small businesses, the costs of collecting and analyzing ESG data, and the technology infrastructure to report on sustainability metrics, can be a significant barrier.
• This issue is particularly prominent in less regulated regions or industries where sustainability reporting is not yet mandatory. Small businesses may lack the necessary capacity or expertise to meet even basic ESG reporting standards, which can create disparities between large and small companies.

Overall Impact and the Path Forward

While corporate sustainability financial reporting aims to enhance transparency and accountability, the challenges persist, largely due to data limitations, varying regulatory landscapes, and the complex task of integrating ESG factors with traditional financial performance metrics.

To address these challenges, there is growing advocacy for the adoption of standardized reporting frameworks like the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), and SASB standards. These frameworks help establish uniform guidelines for collecting and presenting ESG data. Moreover, technological advancements in data analytics and reporting platforms could simplify the integration process and improve the accuracy and consistency of sustainability reporting.

In conclusion, while sustainability reporting has made significant strides in recent years, there is still much work to be done to ensure it becomes an integrated, transparent, and effective tool for stakeholders across industries. Through better data collection practices, enhanced regulatory frameworks, and improved resource availability, sustainability reporting can become a key driver of responsible and sustainable business practices globally.