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Corporate sustainability reporting: the new Black in Bangladesh's private sector

Towfiqul Islam Khan and Ifaz Kabir | November 26, 2023 00:00:00

Sustainability reporting is a common practice that discloses an organisation's economic, social, environmental, and governance practices to stakeholders. It increases transparency and accountability, involves data collection and progress evaluation, and contributes to global sustainable development targets.Systematic sustainability reporting assists organisations in measuring the impacts they cause, setting targets, and managing and communicating necessary change. It ensures businesses' transparency, accountability and credibility, which builds trust and attracts an increasing base of sustainability-conscious customers and employees.

Where Bangladesh stands on this score ought to be illustrated to list out what needs to be done. Sustainability reporting has become increasingly common among the world's largest 250 companies. According to the Global Reporting Initiative (GRI), 96 per cent of these companies produced sustainability reports in 2020, with 73 per cent of them adhering to the GRI standards. However, Dhaka Stock Exchange (DSE) has one of the lowest rates in South Asia in making environmental sustainability disclosures. Out of the 320 companies listed on the DSE in 2019, only 49 submitted sustainability reports to the GRI database, just 11 of them conforming to the GRI guidelines. In contrast, the Bombay Stock Exchange (BSE) in India, where the Securities and Exchange Board mandated disclosures for the top 1,000 listed companies, had one of the highest reporting rates, with 498 publicly listed organisations.

How it can contribute to Bangladesh's LDC transition and achievement of the SDGs is elaborated upon as follows. Effective discourse can be a powerful tool for addressing structural weaknesses in Bangladesh and outlining the role of businesses in achieving the UN-designated sustainable development goals or SDGs. It is also crucial in fulfilling commitments to making Bangladesh more resilient to climate change at COP27. This will require the implementation of 113 actions across eight vulnerable sectors, at an estimated cost of US$230 billion between 2023 and 2050.

Climate-related vulnerabilities. The Climate Risk Fund, introduced in 2015, requires banks to commit 10 per cent of their CSR budget to this fund, which raised more than Tk 1.85 billion in fiscal year 2021, according to Bangladesh Bank statistics. As Bangladesh stands to lose its assistance from the UNFCCC upon LDC graduation, such initiatives, among others, as "Green Bonds"to finance low-carbon and climate-friendly projects, may be a future watershed.

Access to the international market: As Bangladesh stands to lose Duty-Free, Quote-Free access to the European Union under the "Everything But Arms (EBA)" preferences, its exports could face an average duty of 8.7 per cent. It may especially open up a Pandora's box for the readymade garment sector, which would lose its preferential access, while the tariff structure of other major exports remains unchanged. Therefore, Bangladesh should look towards attaining the GSP+, a special incentive to encourage human and labour rights, environmental and good-governance advances. Hence, sustainable business practices and sustainability reporting will be key to remaining competitive.

Lack of awareness is among the current challenges in Bangladesh context in this respect. In Bangladesh, the concept of sustainability is relatively new and only emerged in the last decade. However, companies are facing some hidden challenges when it comes to adopting sustainable practices. One of the biggest concerns is the long-term cost of producing sustainable products and services. Additionally, there are concerns about the quality of reporting, as management may lack the necessary skills to report accurately, and data reliability remains uncertain.

Dearth of capacity. Sustainability reporting differs from financial reporting in that it lacks strict guidelines. Managers are generally less familiar with non-financial reporting and data collection than they are with financial reporting. Furthermore, companies often lack the necessary in-house capacity to collect and track data for ESG metrics, particularly those with low market capitalisation.

Absence of culture: Sustainability reporting is on the rise as private-sector companies become more aware of its importance. However, a strong culture of sustainability reporting has yet to develop in the country's private sector. Some companies produce reports only to fulfill requirements, rather than for the purpose of long-term sustainability assessment.

Weak corporate governance is another shortcoming. The Bangladesh Bank has made it mandatory for the financial sector to report their sustainability practices based on the GRI framework. However, some banks are not complying with this mandate. On the other hand, non-financial industries are performing even worse, as the Dhaka Stock Exchange (DSE) has only provided voluntary guidelines to listed companies. It has been observed that most sustainability reports do not follow the guidelines and fail to establish links with the sustainable development goals or SDGs.

Unavailability of strong regulatory guidance makes things worse. In Bangladesh, there is no single regulatory authority that can mandate the formation of a platform to assure quality and reliability, and adherence to good practices in sustainability reporting. Additionally, there is a significant lack of a platform that would allow reporters from the private sector to exchange best practices in reporting. Although the central bank has mandated GRI-based reporting since 2011, most reporting banks do not follow the guidelines, while some do not report at all.

Vague incentives for the private sector: Sustainability reporting is a process that helps a business uncover its shortcomings and positive aspects in terms of sustainability. It also highlights potential advantages that can be derived from sustainable practices. Unfortunately, private- sector entities are often unaware of the benefits of sustainability reporting, resulting in a lack of motivation to engage in the practice.

As such, the agenda for Banglsdesh in the offing should be as follows:

Ensuring harmony and quality. In order to promote harmony, the DSE has established guidelines that require reporters to provide context for business performance and disclose information relevant to the company and its industry. Additionally, all relevant stakeholders must provide input during the process, and the information presented must be comprehensive in terms of scope, boundaries, and time. To ensure quality, reports must maintain accuracy, balance, clarity, comparability, reliability, and timeliness.

Interregnum in the global order: In 2022, two institutes - GRI and ISSB - known for their sustainability- reporting frameworks, decided to coordinate and harmonise their efforts for international reporting. However, this collaboration between the Northern institutes may result in overlooking the unique perspectives of the Southern region in the sustainability- reporting practice.

Therefore, regulatory bodies in Bangladesh must be vigilant and consider their local context while forming meticulous guidelines that engage all local stakeholders. It is essential to include the SMEs, start-ups, and informal sector in the conversation, which are often neglected by GRI. For these entities, tracking ESG metrics can be too expensive. Hence, it is necessary to strike a balance between global frameworks and best practices while keeping the local context in mind.

Market-driven and financial motives. Sustainable business practices can bring financial benefits in the form of tax rebates and other incentives for businesses that adopt them. For instance, companies that engage in a specific set of social-welfare activities listed under 22 CSR may qualify for a 10-percent income-tax exemption. Such practices can set a company apart in competitive industries, building investor confidence, consumer trust, and staff loyalty, all of which can lead to market-driven rewards for profit-maximising businesses.

Reporting requirements as motivation. Reporting, particularly for listed companies, should be made mandatory in a gradual manner. To avoid any unintended shocks to the markets and to ensure that the reports are of good quality, a "Comply or Explain" approach can be introduced as an interim measure. This will pave the way for a Sustainability Act that makes reporting mandatory. Therefore, the active participation of the DSE and CSE is vital in the practical application of a Sustainability Act and in advancing guidelines for reporting.

Ameliorating sustainability reporting through policy interface. Companies looking to finance their sustainability and reporting efforts should explore equity financing, in addition to debt financing. However, some companies hesitate to go public because they want to avoid the increased regulations and scrutiny that come with being publicly listed. A report by the World Economic Forum (WEF) in 2022 found that 68 per cent of start-ups integrate ESG reporting into their business strategy from day one, while only 2 per cent do so after becoming publicly listed. To make sustainability reporting more affordable for private- sector companies, including unlisted ones, the national policy interface should provide reasonable guidelines and financing options.

Finally, it is important to have a central system to compare and analyse the reports at both sectoral-and national-policy levels. These reports can provide policymakers with valuable information about the state of different sectors and assist in the development of sectoral and national policies as a formal and effective tool.

Towfiqul Islam Khan is Senior Research Fellow, Centre for Policy Dialogue (CPD). [email protected]

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