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TAKEAWAYS
Most sustainability reports in Japan need improvement
Audiences, including employees, are better able to recognize greenwashing
Use your report to recognize where there are gaps in your sustainability efforts, and start to design real business strategies
To get straight to the point, a good Sustainability Report is a consequence. It's not something you produce in an editing room, something you dream up in a messaging meeting. It something that comes out of being a truly sustainable business organization. Build a sustainable businesss, and your Sustainability Report will inevitably be a good report.
What's the current quality of reporting?
Thousands of Japanese companies today are producing “self-declared” Integrated Reports that pair financial and non-financial disclosures, with thousands more releasing standalone Sustainability Reports.
As of 2023, the Japanese Financial Services Agency (FSA), says that more than 4,000 entities are legally required to include sustainability disclosure in annual securities reports.
So how meaningful are the current batch of reports out there?
Quality varies greatly among companies. The 70-plus Japanese listed entities that are real sustainability leaders can report on actual, meaningful changes to their business practices.
For the rest, from our own research, there is great room for improvement.
In some cases, this is because companies don’t tell the full story of good actions they are taking, as they may not understand what their stakeholders are looking for.
More often, though, sustainability reporting is simply treated as an obligation to be met rather than as an opportunity to understand how to adapt to a new business environment.
The weakness of many reports is not in their ability to tell stories, it’s in not having meaningful stories to tell at all.
While we wait for full adoption of these standards ... sustainability reporting can become how companies understand their own lack of action
Sustainability reporting as an incentive for change
Sustainable leaders don’t just measure ESG (Environment, Society, and Governance) metrics and talk about business-as-usual. They analyze their businesses through the lens of materiality and sustainability goals, making commitments to reduce E&S impacts, and determining what needs to change to do so. In identifying their most material issues, and setting GHG emissions, human rights and other targets, they reorient business plans to achieve success.
This is reflected in the narrative of their Integrated and Sustainability reports. So how can other companies get to this point?
The GRI, GHG Protocol, and SASB force companies to consider metrics that they may not have thought were important in the past. But these frameworks have failed to change fundamental behavior.
EFRAG’s ESRS in the EU and the International Sustainability Standards Board’s IFRS S1 and S2—which should become a global standard by 2025—can be seen as providing guidance on how to recognize issues and consider changes to companies that have not internalized sustainability thinking. But we’re not there yet.
While we wait for full adoption of these standards, the legal requirement for basic sustainability reporting can become how companies understand their own lack of action. Doing so will prepare you for the imminent arrival of these more rigorous standards.
Guidance from reporting
Most good Sustainability Reports feature a standard set of content. In our research into Japanese leaders' Sustainability Reports, this includes:
Recognition by management for a need to change, and statement of ownership of the issue
Explanations of why ESG issues are material to their company, in their industry
Discussions of how business planning will address priority materiality areas
Identification of stakeholders important to their efforts, why they are prioritized, and how they are engaged
Sustainability commitments, long-term goals, and shorter-term targets they are setting to drive action
E&S data tracking how they are performing against their goals
Explorations of their E&S initiatives, why they are important and how they fit into the greater business plan
Governance section outlining structure, processes, and policies; diversity of board members; discussions of materiality issues, actions taken, and how sustainability KPIs are linked to compensation
External validation and verification of efforts
Data books for GRI, GHG Protocol, SASB and TCFD
In each of these dimensions, if you have nothing concrete to report—or it’s clear your report writers are jamming in business-as-usual activities—the only way to resolve such omissions is to actually take action.
Thus a properly produced sustainability report, required by new regulations, forces laggards in the adoption of sustainable business practices to confront their lack of, or wrong types of, initiatives to report on.
Employees are some of the biggest readers of sustainability reports, as they want to understand the larger view of the company
Identification of gaps is a call to action
But this is a reason for celebration. Essentially, by identifying the gaps in your sustainability narrative, you can start to identify the gaps in your sustainability strategy.
Are you discussing material ESG issues in your business strategy? If not, it is time to do a proper materiality analysis, based on SASB, and map the results across to a business plan.
Have you set E&S targets, tracked with annual data? If not, it is time to establish the practical targets for your industry and how to make progress.
Can you discuss the diversity of your board, or how it incorporates E&S considerations into processes? If not, it is time to address such weaknesses in your Governance structure.
Your audience
While all your stakeholders are the audience for your sustainability reporting, there are a couple to take into particular consideration, especially in Japan where companies are less exposed to pressure from NPOs and consumers.
Like an annual financial report, sustainability reports are for investors and the regulators supporting them. Investors are driving the adoption of many sustainability frameworks, in an effort to understand new risks to the capital they manage. Regulators advance this with policies that make such disclosure a legal requirement.
But there is another captive audience for your sustainability reports—your employees and prospective employees. Today, having a sustainable business strategy is a must for talent retention and the ability to recruit the best candidates. This is especially true in a time when younger talents are even more sensitive to greenwashing.
Employees are some of the biggest readers of sustainability reports, as they want to understand the larger view of the company on the subject, how serious executives are, and what they are doing.
Once you have read a few reports with attention, it becomes clear who is doing the work, and who is only talking. If your sustainability story has gaps, they need to be filled with real action to become believable.
Making the investment
The truth is, advancing sustainable business models, and sustainability reporting, are investments in the future.
Like past investments in operational efficiency or marketing departments, and more recently in digital transformation, companies that fund efforts to reduce their environmental and social impacts, to increase their resilience to climate change, and to improve their governance, will position themselves to be competitive for the long run.
Whether embracing sustainability comes to your business from having to report on what you didn’t even consider import before, or from establishing a vision of how your organization needs to change for current times, doesn’t matter ultimately.
Because it’s not how you get there, it’s figuring that you had to go there in the end.
If you want to understand this subect better, check out Read the Air's ESG Assessment & Reporting page.
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