Transformational governance is a principles-based philosophy — not a new legal concept — that calls on businesses to be more accountable, ethical, inclusive and transparent as a driver to responsible conduct, enhanced ESG performance and strengthened public institutions, laws and systems. This means fostering a culture of integrity, fairness and inclusion beyond legal formality — asking not just what is legal but what is right.
With the increasing overlap and urgency on environmental, social and governance (“ESG”) issues, transformational governance is a prism through which businesses can expand their understanding of the “G” in ESG. It demonstrates how businesses can assess and implement SDG 16 through three interrelated dimensions of governance: conventional, sustainable and global governance.
Central to successfully ensuring progress along these dimensions is understanding, measuring and communicating business performance, including environmental, social and governance (“ESG”) performance and criteria through corporate reporting.
The Importance of Reporting
Practically speaking, corporate reporting has a number of objectives for businesses themselves and for stakeholders, including regulators, investors and civil society. Reporting generates evidence-based data including the risks businesses face, the positive and negative impact of business activities on ESG factors and their efforts to address these. As the need to integrate sustainability into business strategies and risk management increases, so will the need for quality data on sustainability issues as a means of informing businesses’ strategic decisions and effectively engaging with various stakeholders. Generating data and reporting will make business engagement on sustainability factors more evidence-based, ultimately enhancing the strategic value of this engagement and aligning it with the larger goals of the business.
Corporate reporting is therefore an important means of operationalizing transformational governance through greater accountability and transparency. While this Framework presents examples of monitoring and reporting throughout the targets, there remain many opportunities to integrate SDG 16 into strengthened corporate reporting and support for Government reporting.
Reporting on SDG 16
Businesses, investors and regulators are beginning to think about the SDGs, including SDG 16, in a more holistic way. In 2018, The Global Reporting Initiative “GRI” and the UN Global Compact published a 3-steps practical guide to integrating the SDGs into corporate reporting.
Research by engageability and swisspeace, commissioned by the PeaceNexus Foundation, in collaboration with the UN Global Compact, on corporate reporting of SDG 16 found that 84% of investors and ratings agencies consider it “very relevant” for businesses to report on SDG 16. This is unsurprising given the relationship between the targets of SDG 16 relating to peace, justice, and strong institutions and the stable, profitable and sustainable environments in which businesses and societies thrive. Advancing the targets of SDG 16 allows businesses and investors to spur economic development and innovation, generate jobs and living wages, reduce poverty and inequality, and expand opportunities for the communities in which they operate.
Adopting a transformational approach to governance -- one that is underpinned by the tenets of good governance embodied in SDG 16 -- deepens our understanding of governance across all ESG considerations, promotes cross-functional collaboration and ultimately strengthens corporate purpose and performance.
Investors, Government and Civil Society
Beyond business itself, integrating SDG 16 into corporate reporting generates value for a range of other key stakeholders.
For investors, corporate disclosures and reporting on SDG 16 provide insight into factors central to a business’ ability to succeed, including key risk factors. Because SDG 16 is effectively a roadmap for a sustainable and profitable business environment, how a business assesses risk on the various dimensions of SDG 16 and works to mitigate those risks provides valuable insight into the probability of its own success.
Corporate disclosures and reporting on SDG 16 can also facilitate broader engagement between investors and their investment targets on a range of key issues that matter significantly to both of them. According to the UN-supported Principles for Responsible Investment (PRI), investors in Europe and North America are looking at ways to “use the SDGs as a risk management tool and as a source of common language around ESG risks that can affect different industries, geographies and asset classes”. PRI notes that investors have traditionally understood ESG engagement as a compliance or risk management tool, thereby making ESG engagement “reactive rather than proactive and focused on the current, specific risks faced by a particular company”. That said, a number of investors use the SDGs to take their risk discussions with companies to “the next level” on issues of climate change and human rights. This next level of engagement “goes beyond fixing a specific deficiency to working together with companies to find long-term solutions and build better practices. The notions of risk and performance have become broader and the widely endorsed SDGs give investors new language and processes to drive ESG engagement”.
This increased engagement between investors and businesses around the SDGs, and the proactive dialogue it generates on a host of sustainability issues, has significant potential to advance progress on ESG issues. It is also a key means of implementing the transformational approach to governance through the tents of SDG 16 as advanced in this Framework — and to ultimately expanding the “G “in ESG.
Corporate disclosures and reporting allow Governments to assess compliance with existing laws and regulations on various themes within SDG 16 while exposing any gaps in the regulatory environment that need to be addressed. This lens includes business efforts to mitigate corruption risk in their operations, prevent child and slave labour in their supply chains and expand the diversity and inclusion of their boards.
In addition, it can potentially assist Governments in assessing business performance on a range of ESG issues. For example, the European Union is currently debating two legislative proposals aiming to support the further integration of sustainability into corporate strategies. The first, a reform of the European Union (EU) Non-Financial Reporting Directive, is intended to ensure transparency with respect to businesses’ sustainability performance, thereby improving accountability and encouraging more sustainable finance and investment. The second, the EU Sustainable Corporate Governance Initiative, is intended to clarify business responsibility to identify, prevent and mitigate severe human rights and environmental impacts and to require board oversight of sustainability risks, strategies and targets. If enacted, these regulatory developments, among others, will strengthen corporate governance of environmental and social factors, with the responsibilities of corporate boards and executive management focused more explicitly on sustainability and in turn, subject to greater accountability and transparency.
In the United States, the Securities and Exchange Commission (SEC) has signalled the importance of “human capital, human rights and climate change” as “fundamental” to markets and is recommending the adoption of strengthened ESG disclosure requirements in climate risk and a number of areas related to SDG 16. This includes an amended rule strengthening disclosures around extractives revenue transparency (Dodd-Frank 1504).
Finally, businesses have the ability to contribute to a Government’s own monitoring and reporting on SDG progress. The UN-led Global Alliance for Reporting Progress for Peaceful, Just and Inclusive Societies supports Governments in planning, monitoring and reporting through the collection of data from Governments, civil society and the business community to advance SDG 16. Because much of the data needed to assess progress on SDG 16 sits across stakeholders, Governments can look to data maintained by businesses in order to assess progress. Further, businesses can collect and release data or provide technical expertise or funding.
This data has the potential to improve a Governments’ own understanding of its progress to advance peace, justice and strong institutions. The United Nations Voluntary National Review (VNR) process requires Governments to gather information and report annually on their progress to advance the SDGs, including on SDG 16. To be sure, there are risks to this data sharing, including the uncertain quality and objectivity of data provided by businesses and the potential conflicts of interest. Finally, businesses must take care to protect the individual privacy and fundamental freedoms (Target 16.10) of those whose data is being provided to the Government.
Corporate reporting on SDG 16 provides civil society organizations with data and insight on ESG performance around which to focus advocacy and engagement. Such reporting assists these organizations and the communities they represent to understand what businesses are doing on these issues and opportunities for partnerships.
Where Are We Now and Where Are We Headed?
In recent years, there has been a strong call from stakeholders, including the business and investment communities, for global unified standards on sustainability reporting. Leading global sustainability and integrated reporting organizations have pledged to work together to further align their standards and some jurisdictions at the national or regional level and are working towards further regulating and mandating corporate sustainability disclosures (e.g. the European Union). Progress towards such consolidation and consistency will significantly enhance the utility of data and the efficiency of due diligence efforts on the part of businesses as well as investors and stakeholders.
Challenges of Reporting on SDG 16
While many of the targets under SDG 16 (e.g. corruption and money laundering, child and forced labour and diversity, equity and inclusion) are currently reported on by businesses through existing voluntary standards and regulatory frameworks, the scope of SDG 16 targets as they relate to business are still being understood and developed. Among the challenges of reporting on SDG 16 are the complexity and sensitivity in measuring the issues. Further, given that the primary responsibility for delivering the SDGs rests with Governments, it can limit — rightly or wrongly — businesses’ ability for direct impact. These challenges, combined with the limited knowledge that many businesses have in assessing and measuring their impact on SDG 16-related issues, mean that the current state of corporate reporting on SDG 16 is also limited.
The research and recommendations provided by engageability and swisspeace identified several key themes in the challenges and opportunities for corporate reporting on SDG 16.
Despite the many existing sustainability reporting frameworks, there is no emerging consensus on how businesses should report on SDG 16. The GRI and the UN Global Compact have done the initial work to map existing standards to SDG targets to guide businesses in their reporting on SDG 16. However, it is not always clear how key voluntary reporting frameworks link to SDG 16. For instance, while some elements of SDG 16 can be found in the Voluntary Principles on Security and Human Rights or the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, these linkages to SDG 16 are not being made consistently and therefore, diminish the potential for businesses to report progress on this goal.
Advancing Reporting on SDG 16
Developments taking place in the business and investor community as found through the aforementioned research provide the foundation for advancing business reporting on SDG 16. Among the more important of these are:
- 84 percent of investors and rating agencies believe that business reporting on SDG 16 is “very relevant”, which provides strong incentive from outside business to assess and report impact on SDG 16.
- Businesses already see the SDGs as a complementary framework against which they can report, alongside their ESG/sustainability reporting frameworks. This recognition provides alignment and synergy between SDG reporting and ESG reporting that should be built upon.
- Most of the individuals interviewed indicated that they were “very informed” about SDG 16 and the targets it seeks to achieve, indicating a working understanding of the issues that could be leveraged. Nonetheless, there is significant scope to expand awareness and understanding of the importance of SDG 16 to business.
- Businesses that are reporting on issues encompassed within SDG 16 are not currently linking directly to this goal. For example, while businesses report on their contribution to anti-corruption, human rights and rule of law, they do not mention this as a contribution to SDG 16. Therefore, there are a number of reporting metrics that could be leveraged to support more robust reporting on SDG 16.
- Practical guidance on how to report on SDG 16 credibly and effectively from the perspective of each of the key stakeholders would be highly valued, providing an opportunity for further work to address this need.
This research included initial guidance for corporate reporting on five targets of SDG 16 that were identified as the “most operationally relevant ” for business and investors. The guidance identifies three preliminary indicators that could be further developed in the context of reporting on SDG 16: (i) the commitment of the company; (ii) the disclosure of implementation of this commitment, including disclosure of incidents of non-compliance; and (iii) external engagement on the issue.
The research also identifies illustrative indicators that capture business engagement in global governance. For example, Target 16.b, the “promotion and enforcement of non-discriminatory laws and policies for sustainable development”, could be reflected in reporting on business engagement with “Government and/or other stakeholders in activities aimed at raising awareness and/or fighting discrimination in all forms” or “evidence of engagement in public action against discrimination, at either the international or national levels”. Target 16.3, which is to “promote the rule of rule of law at the national and international level and ensure access to justice for all”, includes indicators related to the business’s engagement with Government in legislative review processes.
As the main accountability mechanism of the UN Global Compact, participants are required to submit an annual Communication on Progress (CoP) that highlights and communicates efforts to respect and support the Ten Principles of the UN Global Compact and the SDGs. The CoP is a tool to strengthen accountability systems and demonstrate measured progress. A revised and enhanced CoP will be launched in 2022 (mandatory implementation by participants is expected in 2023) with the aim of strengthening corporate transparency and accountability, better tracking progress, inspiring leadership, fostering goal-setting and providing learning opportunities. There will be an opportunity to develop metrics to be added to the CoP as reporting on SDG 16 evolves over time.
From an investor perspective, business action that supports peace, justice and strong institutions is beginning to emerge as an area for direct investment. The Cadmos Peace Investment Fund, for example, was founded in 2018 and manages €18 million, investing in listed companies with a footprint in conflict affected-countries that have the potential to contribute to social cohesion and good governance in the jurisdictions in which they operate.
These efforts have the potential to contribute to expanding and integrating standards for reporting on SDG 16 that take into account internal and external activities. It is important for the investor community, including PRI, to be engaged in these efforts to build consensus on how business could and should report on these issues in a comparable way. Sustainable and profitable investment as well as business environments depend on national and global progress in strengthening peace, justice and strong institutions.
Embracing a broader approach to corporate reporting that includes the targets of SDG 16 can harness the great potential of business, promoting transparency and accountability within business organizations inclusive of corporate boards, management and shareholders, with Government regulators and the wider public; advance sustainability across environmental and social risks; and forge opportunities to support transformational governance guided by mutuality of interest among key stakeholders.