[3] Sustainability reports can help companies build consumer confidence and improve corporate reputations through transparent disclosure on social responsibility programs and risk management.
[4] Such communication aims to give stakeholders broader access to relevant information outside the financial sphere that also influences the company's performance.
According to Freeman's theory,[10] the company's shareholders are not the only ones to be considered, but also its employees, customers, suppliers, local communities, governments: the society in the broadest sense.
It was carried out by companies initially on a voluntary basis, with the aim of mitigating some of the skepticism of users of financial reports and restoring the trust of stakeholders by expressing a willingness to behave responsibly.
[18][17] The publication of non-financial reports thus began in an ad hoc and rather anecdotal manner, confined to a few subjects deemed worthy of interest by the companies themselves.
The objectives of developing guidelines are to provide companies with a concrete methodology and to make the published data understandable, credible and comparable for their users.
[21] Reporting guidelines are issued either by private non-governmental organizations (whose adoption by companies is therefore voluntary), or more recently by governments on the basis of mandatory standards.
In line with these developments, some consulting firms have started ESG advisory services and help companies to draft their sustainability reports.
[23][24] These companies generally benefit from a more diversified investor base, for example through their inclusion in actively managed investment portfolios or sustainability indices.
[25] In addition, companies that effectively communicate their non-financial engagements and have a high performance in this area are more likely to attract and retain talents thanks to their greater social credibility, as this stimulates employees' motivation and meets their values.
In South Africa, companies listed on the Johannesburg Stock Exchange must publish an integrated report for all financial years ending on or after March 1, 2010.
In North America, the Securities and Exchange Commission requires Canadian and US companies to disclose non-financial information in their annual reports.
As governments and financial regulators continue to issue and update reporting requirements, companies are increasingly obligated to disclose their non-financial information.
The outcome of this consultation is the European Commission's proposal on 21 April 2021 to revise the NFRD by introducing the Corporate Sustainability Reporting Directive (CSRD).
According to the EU, by putting forward a unique standard, this will reduce the costs of disclosure for companies and improve the way investors and stakeholders compare and use the information disclosed.
Indeed, as public opinion increasingly values these initiatives, companies tend to perceive CSR more as a competitive advantage, putting aside ethical reasons.
[59] Another alleged pitfall of this practice is that, for the companies that are legally obliged to report in Europe, there are currently no harmonized control rules at the EU level.
For most of the Member States implementing this directive, the national designed control stops at the simple verification of the production of these sustainability data.
Indeed, while financial reporting is by nature quantifiable, easy to verify and reliable, non-financial information is struggling to gain legitimacy in the eyes of stakeholders.
From this stems that the selection and presentation of important information to be disclosed is often a matter of managerial discretion, generating the risk of manipulation bias in narrative disclosure.
[66] In addition, many researches raise concerns about the actual reliability of non-financial KPIs, particularly those related to employee performance, community, environment and innovation.
[65] This trend can be observed as much in the different existing ways of measuring the same data, as in the diversity of indicators that one company can choose to illustrate social or environmental disclosures, for example, compared to another.
Finally, while various indicators are necessary for a company to report on the evolution of its sustainable performance, recognized standards (e.g., GRI) can be a good reference for firms.
[66] Nevertheless, according to some authors, it remains important for businesses to develop their own indicators adapted to their specific characteristics in order to ensure a proper sustainable reporting.