Sustainability reporting in Japan and Sweden - a brief comparison

Introduction

The other day I was asked about what I thought were the main differences in sustainability reporting of Japanese companies and companies in my home country of Sweden. I thought the question was intriguing and might be of interest to others and so I put down my thoughts in writing which resulted in this article.

I have spent the better part of a decade working as a consultant in the field of sustainability reporting. After joining PwC Sweden in 2009 I soon realized that non-financial reporting would become ever increasingly important to companies. Then in 2018, I got the chance to join PwC Japan where I have spent the past two years helping clients develop and improve on their sustainability reporting. During all these years I have had the opportunity to work with some of the largest corporations in both countries and it is based on experiences that I am basing my conclusions in this article.

On a side note, as we have many names for the things we love (Sustainability, ESG^*1, CSR^*2, Non-financial reporting etc.) it sometimes gets a bit confusing as to what we are actually talking about. In this article I will use the term Sustainability Reporting which to me encompasses all of the above mentioned concepts. As for the statistical and numerical information in this article it is based on the a study of the FY2019 sustainability reporting by the 50 largest companies (by market capitalization) on the TOPIX 100 index on the Tokyo Stock Exchange and the 30 largest listed Swedish corporations making up the OMX30 index on the Stockholm Stock Exchange. All numerical comparisons refer exclusively to this sample.

History and development of sustainability reporting.

One important point one should take in consideration when making comparisons such as the ones I am attempting to do is the time period over which sustainability reporting has developed and matured. While financial reporting has had several hundred years to mature, sustainability reporting is a relatively new concept which still has a long way to go before it is as established as its financial cousin.

In Japan most major corporations started issuing environmental reports in the 1990s and in the early 2000s publishing a CSR report became commonplace among the largest companies.The next crucial milestone, when sustainability reporting really started gaining mainstream attention, came in 2015. As far as I understand, there were three main triggers that coincided in time. One being the Government Pensions Investment Fund (GPIF) in Japan becoming an PRI^*3 signatory and the other two being the adoption of the Japanese Stewardship Code in 2014 and the Japanese Corporate Governance Code in 2015. This meant listed corporations now had a whole new set of guidelines and expectations to live up to which resulted in rapid development of more disclosures on environmental and social matters as well as governance practices. The fact that so many Japanese corporations issue integrated reports according to the IIRC^*4 framework is a telltale sign of this development. Another illustrative example is the fact that Japan is the number one country in terms of absolute number of corporate TCFD^*5 supporters^*6.

Sustainability reporting in Sweden has a similar history. Mandatory environmental reporting was introduced in the 1990s and by the early 2000s most major corporations were issuing voluntary CSR reports. 2008 was a defining year with the launch of the Swedish Code for Corporate Governance requiring disclosures on corporate governance practices such as board composition and executive remuneration by all listed companies. The same year also saw the introduction of mandatory GRI^*7 reporting as well as third party assurance over non-financial data for all state-owned companies. The decision was motivated, by the then serving Secretary of Industry and Trade, based on the principle of “what gets measured gets done” to drive these companies to pursue more sustainable business strategies. This set a standard for the private sector in which voluntary GRI reporting soon became a de facto standard among large listed companies.

Then, in 2014 the EU adopted the NFR Directive^*8 requiring public interest companies to report on significant risks and policies regarding the environment, social issues, human rights and anti-corruption. The directive was incorporated into Swedish corporate law and came into effect in 2017. While the Swedish (and European) legislation doesn’t prescribe a specific format for the report or stipulates exactly which indicators a company should report on, it does make it clear that the sustainability report and its contents is ultimately the responsibility of the Board of Directors. This I believe has had a significant impact on the quality of the reporting and the resources companies spend on their reports.

In other words, Sweden and Japan have a similar history of sustainability reporting which can be traced back to the 1990s, Sweden as a member of the European Union has taken the path of mandatory, statutory disclosures whereas reporting in Japan is still very much based on voluntary disclosures.

Length of reporting - is less perhaps more?

One thing that struck me when first getting acquainted with sustainability reporting among Japanese companies was how comprehensive and often lengthy the reports are. When looking at the 50 largest Japanese companies, the average length of their sustainability reports is a whopping 113 pages. Besides disclosures on governance, materiality analysis and numerical data related to key issues identified as material by the organization the reports often contain numerous examples, or “case studies” of individual initiatives undertaken by the company. These can cover items such as the introduction of a specific process at a specific operational facility or details on a particular volunteering activity for employees organized by the company.

While such initiatives are of course commemorable, I do wonder how relevant they are from an investor perspective? The investment community, including analysts, are in my experience mostly interested in the overarching corporate strategies and accomplishments of the investees rather than in information on individual projects as these say relatively less about how the company as a whole is managing a certain risk or capitalizing on an opportunity. I am a bit concerned that filling the reports with these case studies hurts more than it contributes. Besides being difficult to use in comparisons between companies they also tend to blur the overall message and the consolidated information which analysts and investors use in their investment decisions.

Also, as described in the introduction, Japanese companies are putting significant efforts into producing integrated reports, i.e. reports that cover both financial and non-financial impacts, results and outcomes. This means the Japanese reports contain a significant amount of financial information, on top of the sustainability-related information, which adds to the volume of the reporting. While this should be the goal of all companies, in my experience there is less of “integration” and more of “combination” in the Japanese reporting. What I mean by this is that while both the financial and non-financial information is there, the link between the two and their interdependencies is often not very clear. So while the ambition is good, at the moment the sheer volume of information might make the reports less accessible to the readers.

In contrast, the average length of the reports issued by the Swedish companies is 49 pages, i.e. less than half of the Japanese average. While there of course are case studies and highlights of individual initiatives included in the Swedish companies’ reporting as well, the content tends to be more focused on company-wide strategies, management approaches and results. It is my experience that this approach makes the reports more accessible to investors, analysts and other external stakeholders. As a comparison, you would not for example see the annual financial report being filled with examples of how individual sales deals were concluded or how a particular cost reduction initiative affected a specific factory. The annual report contains consolidated information put in a format that is comparable between companies to be used as a basis for decision making by third parties. I don’t see any reason for why the sustainability report should be treated any differently.

Also, Swedish companies tend to keep the financial reporting limited to the annual report with only concise highlights making their way into the sustainability report which helps keep the volume of information down. If the primary purpose of the reporting is disclosing information that is usable by the investment community then I believe this scaled-down, no-fuss, approach is to be prefered. However, if a company is successful in producing a truly “integrated” report in a concise and accessible format, then that approach is of course the preferred one. And, as Japanese companies are actively pursuing this path they will probably get there faster than their Swedish counterparties.

Promoting comparability - making use of reporting frameworks.

Among the Swedish companies, about eight in ten (83%) base their reporting on the GRI Sustainability Reporting Standards and are claiming that their reports are drafted “in accordance” with the Standards. And while many Japanese companies (60%) mention GRI as something they have considered in their reporting, the share of companies actually claiming to be in accordance with the Standards is a mere 14%.

One of the most frequent things mentioned by analysts covering sustainability reporting, when asked about how it could be improved, is the need for increased comparability. This is one of the reasons I personally believe that the thorough application of a reporting framework, such as for example the GRI Standards, is fundamentally a positive thing as it promotes consistent and comparable reporting both between companies but also comparability in disclosures over time reported by the same company. In addition, by aligning your reporting to a framework you automatically tick off many of the boxes for public disclosures and transparency asked for by major rating agencies such as S&P Global (DJSI), CDP and FTSE which hopefully can have a positive impact on your overall ESG rating.

My experience is also that applying a reporting framework throughout the whole reporting process, from start to finish, is beneficial for the reporting companies themselves. This is because the framework helps you prioritize among and organize information in a pre-defined way which hopefully makes the overall process run more smoothly. When you have a clear framework to adhere to, the decision between which information should be included and which information can be omitted becomes much less complicated as much of that has already been decided by the standard-setter.

Communicating trustworthy and reliable information - the use of external assurance.

One criticism of sustainability reporting is that it is perceived to be less reliable compared to financial information. One way companies can address this issue is by seeking external assurance over their reporting. The share of companies opting for voluntary third party assurance over their sustainability reporting is about the same in Japan and Sweden and stands at roughly two thirds (66% in Japan and 72% in Sweden). Limited assurance, as opposed to reasonable assurance (the equivalent of a financial audit) is also the prevailing level of assurance opted for in both countries.

What differs though is the scope of the assurance. In almost all of the Japanese companies who get assurance it covers selected individual and numerical performance indicators with the most commonly assured data point being greenhouse gas emissions. In a large majority of the Swedish companies which get assurance have their whole sustainability report assured and only a few have opted to just have individual indicators assured. The criteria^*9 used by the assurance providers in Sweden is almost exclusively application of the GRI Standards.

Again, I believe the Swedish approach better promotes conformity in reporting among companies. Besides ensuring that all required disclosures are included and that numerical data is presented as prescribed in the Standards, the auditor is also expected to assess whether the underlying reporting principles prescribed by GRI are adhered to or not. This includes principles related to defining report content such as “materiality” and “stakeholder inclusiveness” as well as principles for defining report quality such as “completeness”, “accuracy” and “clarity”. This in turn drives both the reporting companies as well as the auditors to reflect on and assess how the reporting as a whole meets the needs of stakeholders and how data, both numerical and qualitative information, is presented - which I believe promotes better and more useful reporting.

Explaining your ambitions - setting relevant goals and targets.

Another aspect that both financial and non-financial reporting often gets criticized for is its focus on historical performance and lack of forward looking information. While it by definition is impossible to measure future performance, companies do often communicate targets related to financial performance such as growth in revenues, future levels of ROE and solidity to name a few. This gives shareholders and other stakeholders an idea of where the company is heading and together with historical performance gives them tools to evaluate how successful the board and management are in executing their strategies.

I believe that sustainability data needs to be treated the same way. I.e. companies need to set relevant and measurable targets for their most material issues - be they greenhouse gas emissions reductions, diversity among employees or supplier ESG risk assessments - and communicate these externally together with clear follow-up reporting on performance against those targets. In Japan about 60% of the largest companies have set targets related to their material issues and while that constitutes a majority of companies it still means 4 out of 10 haven’t.

Among the Swedish companies 90% have set such KPIs which hints at relatively more companies actually having established strategies for sustainability. I believe the main reason for this might be regulation. The EU NFR Directive, as it was incorporated into Swedish legislation, stipulates that companies should report on relevant performance indicators related to their material issues or, if no KPIs are set, explain why that is the case. For several reasons few companies tend to want to use this “comply or explain” option and the result is an overwhelming majority reporting on KPIs and targets, which is probably what the legislator was aiming for from the very beginning.

In closing

This rather limited comparison shows that there are differences in how Swedish and Japanese Companies approach sustainability reporting. While Japanese companies tend to disclose more information, I personally am not convinced that this is always to the benefit of the company or its stakeholders. Since I am obviously somewhat biased I leave it up to you the reader to draw your own conclusions. However, I am personally a strong supporter of the “Swedish approach” which I have summed up into these four main points.

Less is more - keep your reporting relatively short and limit its contents to only the most relevant information based on your stakeholder’s information needs. If you want to include both financial and non-financial information, make the connection between the two as clear and concise as possible.
Frameworks are the reporter’s best friend - use them throughout the whole reporting process, not just at the very end, to create relevant and comparable information.
Get a second opinion - getting third party assurance not only for individual indicators but also for underlying reporting principles will help you further refine your reporting.
Be clear on where you want to go - use relevant and measurable targets to communicate where your sustainability strategies are meant to take you and the benefits that will bring to the company as well as its stakeholders.

With this I thank you for taking your time to read this and hope these tips can be helpful.

*1 ESG stands for Environment, Social and Governance which are the three main categories of non-financial information and performance. The term is mostly used on the investor side of the business community whereas Sustainability and/or CSR is used by the investees to describe their own practices and performance.

*2 CSR stands for Corporate Social Responsibility and is a term commonly used by companies during the 1990s and 2000s to describe their contributions to environmental protection and social considerations in their business practices. In Europe this term has largely been replaced with the term “Sustainability” as the former is associated more with philanthropic rather than strategically important activities.

*3 Principles for Responsible Investments. A UN backed initiative to promote responsible investment practices in the financial services industries.

*4 Integrated Reporting is a concept where companies aim at describing their whole value creating spectra, both financial and non-financial, in an integrated fashion following guidelines published by the International Integrated Reporting Council (IIRC).

*5 Task force on Climate-related FInancial Disclosures. An initiative to promote voluntary disclosures on how climate change impacts companies in terms of risks, opportunities, strategies and governance.

*6 TCFD 2019 Status Report［PDF 8,142KB］

*7 (GRI) Global Reporting Initiative. A non-profit organization issuing the world’s most widely referenced (voluntary) standards for sustainability reporting.

*8 The EU Directive on Non-financial Disclosures was adopted in 2014 and came into effect in all EU member states in 2017. The directive sets out minimum requirements for sustainability disclosures but opens up for member-states to introduce more (but not less) comprehensive requirements.

*9 The “standard” against which the assurance provider assesses the information in scope.

Point of Contact

Eric Lindholm
Manager, PricewaterhouseCoopers Aarata LLC