Sustainability Report: for whom is it mandatory and how to prepare it?

A sustainability report is a report prepared annually and on a voluntary basis by an organization, company or entity, which examines the economic, social and environmental impacts (both positive and negative) of its activities, as well as the expectations of its stakeholders. The latter, to whom the document is addressed, are also called stakeholders, i.e., all those interested in the activities of that particular company: employees, suppliers, shareholders, potential investors, customers, the media, authorities and associations in the area.

Another purpose, on the other hand, is the annual financial statements, a document that the company must prepare periodically to make a summary of its financial position, including its economic results. 

Sustainability report: for whom it is mandatory

Currently in the for-profit corporate world, the sustainability report is required by law to be submitted only by publicly traded companies and large companies belonging to the insurance banking sector.

In fact, Directive No. 95 of 2014 (2014/95/EU), transposed only at the end of 2016 by the European Parliament and Council, made this type of report mandatory for all "large companies that constitute public interest entities and public interest entities that are parent companies of a large group, in each case having an average of more than 500 workers, in the case of a group, to be calculated on a consolidated basis." A consolidated basis is defined as an entity that has certain size criteria: total net sales and service revenues exceeding 40 million euros or, alternatively, a balance sheet total exceeding 20 million euros.

How to draw up a sustainability report

To date, there is no real law that mandates a uniform method for preparing a sustainability report. However, companies can adhere to the standards of the Global Reporting Initiative (GRI), an internationally recognized nonprofit organization that sets the principles for drafting and content of the document. 

According to GRI's guidelines, the reporting path consists of six steps.

The first is stakeholder mapping, which identifies the stakeholders most relevant to the organization, determining which ones to involve in assessing the materiality aspects to be reported.

This is followed in order by internal and external materiality analysis, carried out by management and stakeholders to define sustainability aspects based on two criteria: the relevance of the issue to stakeholder decisions and the relevance of the impacts generated by the organization. The assessment is usually supported by questionnaires, interviews or interviews, and is based on the GRI model, which can be supplemented with other specific elements as needed.

The materiality matrix represents the outcome of the corporate reflection process, aimed at identifying the most significant sustainability aspects, with a view to both reporting and strategic orientation.

Once the material aspects to be reported in the financial statements have been identified, the fourth phase will define the "indicators dashboard," where each aspect will be described through an introduction of the management approach (internal policy and procedures), an argumentation regarding suitable qualitative and quantitative indicators, and a description of specific initiatives.

Particularly delicate is the data collection phase, which involves all business functions and areas, each of which is required to provide information from its area of expertise.

All the extrapolated data will then be processed to finally flow into the drafting of a single, comprehensive and publicly usable document. The result is a book that tells all stakeholders about the organization and its commitment to environmental and social issues.

The Global Reporting Initiative (GRI)

The use of the GRI model enables organizations to measure and put into the public domain the environmental impact of their activities, generating reliable, relevant and standardized information through which risks and opportunities can be assessed.  

The GRI standards thus constitute the parameters of sustainability reporting: they have an interconnected and modular structure, so that they are updated independently of each other, and provide companies with a common language that is clear and transparent in the eyes of stakeholders.

There are 3 material themes, covering the areas of economy (GRI 200), environment (GRI 300) and social (GRI 400), respectively. 

The place to start, however, is GRI 101 - Foundation, a document that explains how to prepare a report, outlining principles for defining content (stakeholder inclusion and engagement, sustainability context, relevance and completeness) and quality (accuracy, balance, clarity, comparability, reliability and timeliness). 

By following these indicators, it will be possible to compile a relevant, meaningful and shoehorned report, followed by two other documents: the GRI 102 General Disclosure and the GRI 103 Management Approach. The former helps organizations gather information about their reporting environment and practices, while the latter serves as a guide to analyze how the most relevant sustainability-related issues are being addressed within the organization.

The Sustainability Report: an example

The Moncler Group's commitment to increasingly responsible development is summarized in the Sustainability Plan, which is updated annually in order to report on the status of project implementation and set new goals. With this in mind, a Sustainability Unit has been created to promptly identify and report risks related to sustainability issues to top management, as well as to identify strategies and promote dialogue with stakeholders. 

The Unit also plays a key role in the drafting of the Sustainability Report, which is divided into seven points preceded by a Letter to Stakeholders, which lists the reasons that contributed to the formation of this report; and a report on the numbers of the Moncler Group, which draws attention to respect for the environment and all the actors present throughout the production chain. 

The third part represents a real sustainability plan, in which numerous aspects are analyzed: corporate governance and sustainability, human resources, product and supply chain, customer relations, environmental impact, and community development and support.

The benefits of the sustainability report

The report is conceived by many exclusively as a useful tool for monitoring and implementing corporate performance on an ongoing basis, but few know its real benefits and consequent opportunities.

To begin with, communicating to various stakeholders the sustainable actions implemented by the company allows it to make its reputation more solid, authoritative and credible over time.

Initiatives to improve the perception of the company are also essential for accessing new forms of financing. Indeed, the use of new methodologies in different production processes opens up new avenues and gives companies the opportunity to be able to take advantage of new forms of capital and investment, as well as to discover new frontiers.

Undertaking sustainable activities is also something that helps companies eliminate inefficient operating costs-a goal that all organizations aim for in order to offer a product or service in the marketplace at a competitive price. Sustainability reporting allows companies to put into practice continuous monitoring and refinement of this performance.

Among the most relevant internal benefits of the report is also the more efficient management of risks. The preparation of the report is functional in the implementation phase of so-called risk management, during which the organization considers social, environmental and governance risks that have a direct impact on various dimensions of business operations.  

Recently, Confindustria has published the Sustainability Reporting Guidelines for SMEs: a document that aims to support small and medium-sized companies in non-financial reporting, in alignment with international standards and including Sustainable Development Goals, albeit in a simplified logic that can be adapted to different company sizes.

Differences between sustainability, social and environmental budgets 

When discussing budgets pertaining to sustainability, expressions such as "social report," "sustainability report," and "environmental report" are often used indiscriminately, as if they were interchangeable synonyms. The reality is that there is a different name for each document due to differences in form and substance.

What first distinguishes the social report from the sustainability report is the reference framework adopted, namely the GBS standard, named after the Social Reporting Study Group. According to the latter, the social report is "a reporting, management and control tool for companies that intend to adopt socially responsible behavior and addresses the audience of stakeholders as directly or indirectly affected stakeholders of the business activity." In other words, the social report is a universal format report by which the company publicly discloses the strategies and policies it has adopted to its stakeholders, understood both as consumers and as local communities close to the company or affected by its activities.

Compared to the social report, the environmental report deals with a determined part of the company's activity, analyzed following specific parameters and guidelines defined by several international organizations, namely CEFIC (Council of European Chemical Industry), PERI (Public Enviromental Reporting Initiative) and FEEM (Fondazione ENI Enrico Mattei). An environmental report is defined as a public document that describes the relationship between the company and the environment and communicates the direction taken by the company for environmental improvement. It consists of a set of accounting frameworks necessary to derive information useful for managing relations with the outside world and for the internal management of corporate environmental policies. The accounting frameworks illustrate the company's activities through the quantification of inputs (resource use), impacts produced on the environment, and expenditures incurred to mitigate that impact. 

The natural evolution of the social report and the environmental report is the sustainability report, which aims to account for the impacts generated with respect to the environmental dimension and the social dimension, while also informing the stakeholder about the economic dimension.

In conclusion, it is possible to say that the social report, the environmental report and the sustainability report are three different ways of telling and disclosing a company's commitment, activities and impact.