“Standardization of sustainability reporting: rationale for better investment decision-making”

The role of sustainability reporting in investment decision-making is not clear and obvious. Despite the steady increase of such statements in corporate annual reports, the relationship between the sustainability reporting and the financial performance of companies is not always positive. The main problems of sustainability reporting nowadays are insufficient comparability of reporting, accuracy (lack of materiality, reliability and validity of indicators), lack of common approaches for its verification. Synthesis of standardization and regulation features of sustainability reporting, which is provided in this paper in different dimensions (countries, regulatory standards), allows to identify long-term trends of this reporting to ensure its quality during investment decision-making in traditional and responsible financial markets.


Introduction 
Sustainability reporting (SR) is an important part of sustainable development (SD). According to objective of sustainable development 12.6, SR is a revolutionary product of accounting systems. It reveals both the dimensions of sustainable development (environmental, social and governance (ESG)) and their corresponding criteria for responsible investment in financial markets.
Considering the theory of legitimacy, stakeholder theory and agency theory, the modern practice of distributing integrated reporting is a mainstream trend in research of SR and corporate social responsibility (CSR) of companies to establish their interrelationship with the financial performance of companies. SR ensures long-term value for stakeholders in general, improves the image, competitiveness and reputation, flexibility in attracting financing and ability to respond to the challenges of the environment, attracting public support, transparency of the company for counterparties and regulators, the loyalty of employees, as well as performance on the financial markets: prices and earnings per share, market capitalization, etc. Friede (2015) finds more than 2000 evidences that there is a positive correlation between the ESG criteria of the companies and their financial effectiveness.
Despite the wide distribution of SR, it is still quite varied in format, scope of information, approaches to CSR indicators (according to ESG criteria), measurement and interpretation, as well as ways of presenting overall corporate performance. Important issues are SR assurance and verification by independent third parties and quality criteria.
These aspects raise a question about standardization of SR and its mandatory disclosure for meeting growing needs of different stakeholders in more transparent and relevant reporting, especially in investors' decision-making processes.
The question is, therefore, whether the more transparent and complex voluntary SR with ESG criteria is better for investor decision-making? Do we really need to introduce mandatory SR for more grounded investor decisions and close linkage between SR and companies financial performance?
The aim of the present study was to explore the main problem areas of SR; tendencies in SR standardization, mandatory disclosure, regulation; and to provide some propositions for further development of the SR as a ground for better decision-making in traditional and responsible financial markets.
The practical implementation of research results is the substantiation of necessity of further development and standardization of SR as a basis for making traditional and responsible investment decisions and the companies' financial efficiency.
In this paper, the following aspects of the SR are discussed: standardization and mandatory regulation both globally and for the individual countries; key issues of the voluntary distribution during investment decision-making in traditional and responsible financial markets. Also, promising regulatory directions are proposed.
The remainder of the paper is organized as follows: section 1 briefly reviews the literature on linkages between SR and companies' financial performance and rationale for it standardization. Section 2 contains problem areas of SR; section 3 outlines recent tendencies in SR regulation all over the world. Finally, last section presents some policy implications concerning future prospects of SR as a ground for investor decision-making.

SR as a basis for better investment decisionmaking
The study of the relationship between adhering to the principles and goals of sustainable development by companies that are disclosed in SR and financial performance of companies acquired considerable popularity in academic circles over the past 35 years.
A study of the literature, which focuses on the three main groups, revealed three relationships.
Firstly, there is a positive relationship between reporting on sustainable development and corporate financial performance in market efficiency measurements, as studied by the following researchers: Eccles et al. (2012) -companies with high sustainable development are significantly superior to competitors with low rates in terms of stock market and accounting activities (efficiency); Khavech et al. (2012) -there is a significant positive relationship between reporting on sustainable development and the price of shares of companies; Ngwakwe (2009) -there is a link between investments in sustainable development indicators and improving interaction with stakeholders; Schadewitz and Niskala (2010) -there is a connection between reporting standard GRI and reduction of information asymmetry between stakeholders and the market value of the company; Bayoud et al. (2012) studied the connection between the disclosure of CSR and reputation of the company for stakeholders; Reddy and Gordon (2010) -SR is statistically significant for explaining abnormal returns for Australian companies and reporting on CSR for companies from New Zealand); and Ekwueme et al. (2013) report on the triple outcome (triple bottom line disclosures), which has a dual positive effect on the growth of market share and market capitalization of companies.
Secondly, there is a negative relationship between sustainable development reporting and corporate financial performance, as reported by these researchers: Cormier and Magnan (2007) -the rising cost of disclosure and the possibilities of using it by competitors lead to reduced efficiency of financial activity; Detre and Gunderson (2011) -there is a negative connection between the price of the shares of agricultural enterprises and their inclusion in the DJSI Index in the short term; and Lewis (2016) -most of the multinational companies analyzed in the context of disclosure of the environmental impact of their supply chains can be accused of 'green camouflage' or 'greenwashing'. Additional costs on disclosure and reporting of sustainable development and its verification, specific cases of 'green camouflage' do not give SR advantages to investors for greater validity, relevance and reliability in making investment decisions in financial markets. This link between CSR and financial performance is negative ( Also, there is a number of studies which analyze relationship between compliance to the ESG criteria and financial effectiveness of the companies. Among the researchers who define a positive relationship between a set of sustainable development criteria, which correspond to the company and their financial effectiveness, the following authors should be named: Abramson  Rüdiger and Kühnen (2013) describe main research gaps in SR regulation as groups of issues concerning voluntary and mandatory reporting, reporting on government and company level, reporting quality, stakeholder perception and external assurance. Similar results are obtained by Eccles and Serafeim (2014) who discuss a role of regulation in integrated reporting (Anglo-American) and Ioannou and Serafeim (2011) who examine the effect of mandatory sustainability reporting on corporate disclosure practices in China, Denmark, Malaysia, and South Africa, Wensen et al. who researched the needs of stakeholders involved in CSR are met business reports when reporting is centrally regulated.
As can be seen, there is no single answer to the question "Does SR provide a basis for better investment decision-making?" That is why the role of standardized SR in investment decision-making needs further study.

Problematic areas of SR
Despite obvious advantages of the SR for the companies, its coverage is still very low. According to Gray and Milne (2007), only 2K of analyzed 60K companies use SR. The other problems are incomparability and low quality of SR.
An important aspect of the SR is disclosure of negative aspects of the companies according to ESG criteria. Hahn and Lülfs (2014) analyzed the communicative legitimation strategies of companies with reported "negative aspects", i.e., negative ecological and social impact caused by corporate activity. They investigate such strategies as marginalization, abstraction, indicating facts, rationalization, authorization and corrective actions and SR itself, do not meet the requirement of impartiality, as postulated by the GRI guidelines.
There is an interesting idea, described in a study by the Organization for Economic Co-operation and Development (OECD, 2014), reporting on ESG criteria. The study originated as a voluntary practice in response to the needs of stakeholders, exchanges, investors and international Organizations after the summits for sustainable development (such as the Rio+20 Summit 2012), which gradually became compulsory for listed companies in selected countries. According to the representatives of the Organization, such reporting should be mandatory not only for the listed, but for all companies, and should attract the attention of the government for ordering volume, structure, its key characteristics and role in ensuring the investors' decisionmaking process on traditional and responsible financial markets.
Among the key reasons that arise during the preparation of SR and its integration with the financial statements there are:  the lack of relevant data in the company;  the poor quality of their completeness and accuracy;  limited resources; and  the need for external confirmation of SR.
A specified list of procedural reasons may be supplemented by such factors as a significant lack of a unified methodology for preparation and submission of SR in an integrated format. Except for voluntary practices GRI, there exist disparate standards ISO 26000 (International Organization for Standardization), the UN Global Compact, SA 8000.
Another important aspect in the presentation of SR is that it should not only ensure comparability of reporting, but also its quality characteristics (Table 1) Finally, there remains an open problem to provide independent confirmation of SR as part of a corporate report and SR in an integrated format by the existence of different approaches to standardization of such a confirmation (AA1000), Assurance Standard, International Standard for Assurance Engagements (ISAE 3000), additional cost of services of such a confirmation for SR issuers, and the absence of generally accepted criteria of quality of such statements. Table 1. Problematic areas of SR presentation

Problem direction Gist
General questions of SR preparation and submission The lack of clear understanding and defining target groups of stakeholders and their information needs in SR The lack of communication between SR and the overall corporate strategy of companies The need for the involvement of external stakeholders to form an integral vision of SR indicators

Balance of information
The need to determine the relationship between different dimensions of sustainable development and financial activities at their disclosure in an integrated format The need for an integrated format Eliminating duplication between financial information and indicators of the economic dimension of sustainable development

Comparability
The low level of comparability of SR given the sectoral features, especially in the regulation and representation (financial and retail Organizations focused on disclosing social information, automotive and mining companies on the environment)

Clarity
The lack of standardized approaches to the preparation and submission of SR in terms of a significant number of indicators, stakeholder requests and formats of reports do not provide a clear understanding of the essence Ensuring the proper level of assurance for SR In the absence of independent verification of data, consumers of reported information are not inclined to trust its content Ensuring quality information requires independent confirmation with different types of assurance

Empirical evidence in standardization of SR
Standardization of SR is an important way of ensuring quality, comparability and linkage between SR, CSR and financial performance of companies. This linkage can be realized by better investment decision making based on more understandable SR.
To explore standardization of SR all over the world we will make the following steps:  outline general trends in the implementation of regulatory instruments to SR in the world;  review experience of some countries in standardization and regulation of SR;  analyze the initiatives of financial regulators and exchanges in SR regulation;  examine the prevailing standards of SR and their verification.
Carrots and Sticks (2016) analyze regulation of SR in the world. They show that the number of regulatory instruments in the sphere of SR has increased dramatically during 2013-2016. For example the number of regulatory instruments used in 44 countries for the purposes of SR was 180, but in 2016, this number was close to 400 (see Table 2).
As can be seen, key role is played by the state. 80% of the countries all over the world implement requirements for such reporting as an official rule. Most of these instruments are developed and adopted by public authorities in the fields of Environmental Protection (57 instruments), Business and Commerce (28), Finance and Treasury (22). The vast majority of these instruments (two-thirds) in 2016 have a mandatory status. The gradual increase in the proportion of voluntary standards and 35% also needs to be mentioned.
Geographically, the largest number of regulatory instruments and the fastest growth rates are demonstrated European countries -40.5% of all the instruments used in the world in 2016. This is caused by the implementation of Directive and the requirements for trading GHG emission.
Mandatory requirements are mostly used for the big companies both listed and non-listed ones (Figure 1). Most of these mandatory requirements are developed by financial and exchange regulators to protect investors. Financial companies have the biggest number of regulatory instruments in SR (40% of all).

Fig. 1. Instruments of standardization and regulation in SR by the company types in 2016
Source: based on Carrots and Sticks (2016).  Table 3).  Table 4.    Table 6 for details). To guarantee the quality and reliability of SR for the use of investment decision-making, audit opinions should be used. Standardization of audit activity in SR allows to unify audit methodology in this sphere and to provide reasonable (or high) level of assurance. Nowadays there is variety of regulatory instruments for SR assurance (Table 7). Regulation and standardization are the key trends in SR, and GRI is the most famous system of standards in SR. Still a number of unsolved problems evidences in favor of further development of these aspects, especially for the voluntary reporting.

Policy implications and conclusions
Due to the lack of standardized approaches to the preparation and submission of SR in terms of a significant number of indicators, stakeholder requests and report formats, unverified reporting creates a set of options in its interpretation, reducing its quality for consumers of information. Finding the balance between the benefits and problems of SR creates preconditions to the further spread of SR and better investor decision-making process. Among the main directions of further development of SR in the context of ensuring its comparability and reliability on traditional financial markets and responsible investment markets, we can name the following:  in order to reduce information asymmetry in financial markets it is necessary to ensure transparency at the corporate level to perform qualitative characteristics of accounting information in general and complete disclosure of indicators, which reveal its activity, corresponding with ESG criteria and appropriate objectives of sustainable development;  coordination of sustainable development goals, mission and corporate strategy, operational policies and disclosures in the SR progress in achieving them interdependently and influencing the activity of companies at the corporate level;  setting at global level, the criteria and requirements for the use of SR of companies to rate them in terms of sustainable development, evaluation of methodology of responsible formation of investment indices at global level (for exam-ple promotion of initiatives of the Global Initiative for Sustainability Ratings);  ensuring SR at global level of comparability by developing a common methodology of compilation and reporting and bringing it to a single conceptual framework of standards (Global Reporting Initiative, Sunshine standards, GRI, AA1000 [AccountAbility], SA8000, ISO 14000, 26000, UN Global Compact, IIRC, etc.);  identification, investigation of the 'green camouflage' practice and of mechanisms responsible for unfair disclosure of the objectives of sustainable development at the level of national regulators;  working out at the international level the approaches to verification and ensuring the reliability of SR, laying as the foundation the efforts of IFAC to standardise criteria of auditory confirmation of SR; and  the harmonisation of global efforts of regulators on display in SR and integrated reporting of progress towards achieving the objectives of sustainable development Objective 12.6 (the sustainable development goals [SDGs] [Goal 12.6]), which indicates the need for integration of the reporting cycle of companies of the information on sustainable development (for example, in 64 countries, there are about 400 regulatory tools to regulate SR).