Indonesia’s financial services authority (OJK) made sustainability reporting mandatory for banks in 2019, followed by publicly listed companies in 2020 — which got delayed to 2021 due to Covid-19. The reports will have to disclose a company’s environmental, social, and governance (ESG) performance, impact and strategy to achieve its sustainability targets in the short to long-run.
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Since ESG is deeply linked to managing risks and building trust with stakeholders, sustainability reports become a critical for investors to better understand how a company monitors and handles ESG impacts and risks from its operations.
However, a recent study shows that more than 90 per cent of investors surveyed perceive that corporate sustainability reports include some unsubstantiated claims, which a third-party independent assurance will likely help to address. At the moment, regulators in Indonesia do not require independent assurance, but stakeholders beyond investors, like Gen Z consumers, can still use these reports to assess a company’s sustainability credentials.
The following steps serve as a guide to help consumers identify some valuable parts of sustainability reports using Global Reporting Initiative (GRI) standards, which are among the most-widely used standards in Indonesia.
First, look at the GRI content index
Consumers can quickly look at the GRI Content Index located at the back part of the report. This index provides the list of specific disclosures and performance indicators the companies focus on. For example, GRI 305 on emissions has seven disclosures, asking companies to measure direct and indirect greehouse gas emission (GHG) arising from their operations and value chain.
Second, review materiality
A materiality analysis shows the process and rationale why companies decide to focus on and report specific ESG topics. An ESG issue can be material if it is has a significant financial and non-financial impact on the organisation and its stakeholders. For example, a fast-moving consumer goods company might consider waste management as a material topic, due to its significant waste generation. Usually, companies engage various stakeholders to identify the positive and negative impacts generated by their operations.
Third, look at the relationship between materiality analysis and sustainability strategy
Sustainability strategy usually links the materiality analysis and the companies’ ESG targets. After the prioritisation of ESG topics, companies usually set their targets for each material topic and their strategy to achieve them. At the start of the reports, most companies explain their short and long-term ESG targets and key performance indicators for each material topic. For non-first time reporters, they often describe their progress so far in achieving the target, followed by an assessment of whether they are on track to meet their set targets.
Fourth, understand the companies’ management of each ESG topic
To provide evidence of the progress, companies present the data based on the performance indicators required by the reporting standards. For instance, when companies aim to disclose their non-discrimination and social inclusion performance, they can use GRI 405 (Diversity and Equal Opportunity), which requests data on the diversity of governance bodies and employees, or GRI 406 (Non-discrimination), which requires information on discriminatory incidents and actions taken. Besides such information, it is also important to check how the companies track and evaluate the effectiveness of the actions for each topic.
Fifth, be conscious of the ESG data context
When reviewing the information, consumers should be aware of the boundaries and reasonableness of ESG data. First, it is possible that the companies do not report the data from all their operations, and might disclose the information from several offices, factories, or projects. Ideally, sustainability reporting discloses all the impacts throughout the companies’ value chain that may include the supply chain. However, most companies must start from somewhere and gradually expand the data boundaries in the following years. Second, challenges are inevitable in implementing ESG. There might be ups and downs in the ESG performance from year to year. Companies usually provide the contextual background and reasons behind such quantitative fluctuations to avoid misperception from the readers.
The above list is not meant to be exhaustive. But these are steps consumers can take to start identifying key components of sustainability reports of the companies from where they purchase products and services. By empowering the consumer to use and monitor the contents of sustainability reports, business will have more incentive to provide robust, accountable and clear ESG information, to positively influence the consumer’s purchasing decisions and brand loyalty.
Hendri Yulius Wijaya is a writer and corporate ESG practitioner. He formerly served as the Indonesia Country Program Manager for the Global Reporting Initiative (GRI), which developed a set of international sustainability reporting standards. Currently, he is pursuing a PhD in School of Social and Political Science (joint supervision with Faculty of Business and Economics) at Melbourne University, Australia.
