Sustainability Reporting vs Traditional Financial Reporting: Key Differences for Malaysian Companies
As global attention on environmental, social, and governance (ESG) issues intensifies, businesses in Malaysia are increasingly adopting sustainability reporting alongside traditional financial reporting.
Both types of reports serve essential functions, but they differ significantly in focus, content, and purpose.
While traditional financial reporting primarily addresses a company’s financial performance, sustainability reporting provides insights into how an organization manages its environmental and social impacts.
Gaining understanding of the key differences between these two forms of reporting is important for Malaysian companies seeking to enhance transparency, meet regulatory requirements, and satisfy stakeholder expectations.
Purpose and Focus
The most fundamental difference between sustainability reporting and traditional financial reporting is their purpose and focus.
Traditional financial reports are designed to provide stakeholders, including investors and regulatory bodies, with a comprehensive understanding of a company’s financial health.
These reports focus on financial statements such as the balance sheet, income statement, and cash flow statement, detailing profits, losses, assets, and liabilities over a specific period.
Sustainability reporting, on the other hand, focuses on a company’s impact on the environment, society, and governance practices. It reflects a broader range of performance metrics, including carbon emissions, energy consumption, waste management, employee welfare, and corporate governance.
Sustainability reports enable companies to demonstrate their commitment to sustainable development goals (SDGs) and provide transparency on non-financial performance.
For many Malaysian companies, this type of reporting has become crucial, especially in industries with high environmental impact, such as manufacturing, energy, and agriculture.
Regulatory Requirements
Traditional financial reporting is governed by stringent accounting standards and regulations. In Malaysia, companies must comply with the Malaysian Financial Reporting Standards (MFRS), which align with international standards such as the International Financial Reporting Standards (IFRS). These standards ensure that financial reports are accurate, consistent, and comparable across different entities.
Sustainability reporting, while becoming increasingly important, is subject to less formalized regulation. However, regulatory bodies in Malaysia, such as Bursa Malaysia, have introduced guidelines to encourage the adoption of sustainability reporting.
Since 2016, listed companies on Bursa Malaysia have been required to provide a Sustainability Statement as part of their annual report. This move reflects the growing importance of ESG factors in the business landscape.
Yet, compared to financial reporting, sustainability reporting regulations remain more flexible and are often driven by industry best practices or voluntary guidelines, such as the Global Reporting Initiative (GRI) Standards.
Timeframe and Reporting Frequency
Another notable difference between sustainability reporting and traditional financial reporting is the timeframe and reporting frequency.
Traditional financial reports typically follow an annual or quarterly cycle, depending on the size and nature of the business. This frequency aligns with regulatory requirements and investor expectations for regular updates on a company’s financial status.
Sustainability reporting may not adhere to the same rigid timelines. While many companies include sustainability information in their annual reports, some organizations opt to release standalone sustainability reports that may cover longer periods or specific projects.
For instance, a Malaysian company focused on reducing its carbon footprint may provide detailed updates on the progress of its sustainability initiatives over several years, rather than limiting its reporting to an annual cycle.
Data and Metrics
The data and metrics used in traditional financial reporting are predominantly quantitative, focusing on numerical data such as revenue, profits, expenses, and shareholder equity.
Financial reports are standardized and rely heavily on universally accepted accounting principles, which makes them highly comparable and precise.
Sustainability reporting, however, incorporates both quantitative and qualitative data. Quantitative metrics might include figures like greenhouse gas emissions, water usage, and energy efficiency ratios.
Qualitative information, such as narratives about a company’s efforts to improve employee well-being or promote diversity and inclusion, is also integral to sustainability reports.
This combination of data types makes sustainability reporting more diverse but also less standardized than financial reporting, as companies have more discretion in selecting which sustainability metrics to highlight.
In this regard, an audit firm in Malaysia can verify both quantitative and qualitative sustainability data to enhance its credibility.
Audience and Stakeholders
While both sustainability and financial reports serve a broad range of stakeholders, the audience for each type of reporting can be different.
Traditional financial reporting primarily targets investors, shareholders, regulators, and financial analysts who are interested in a company’s financial performance and outlook.
The data provided in financial reports enables these stakeholders to make informed decisions about investments, credit ratings, and regulatory compliance.
Sustainability reporting appeals to a broader group of stakeholders, including employees, customers, suppliers, local communities, and non-governmental organizations (NGOs).
These groups are interested in how the company manages its environmental and social responsibilities.
For instance, a Malaysian company involved in large-scale industrial activities may use sustainability reporting to communicate with local communities about efforts to reduce pollution or improve local employment opportunities.
As sustainability becomes an increasingly important factor in consumer choices and corporate partnerships, companies are seeing a rise in stakeholder interest in their sustainability practices.
Assurance and Verification
Both financial and sustainability reports require verification, but the processes involved differ. In traditional financial reporting, audits are conducted by certified auditors to ensure the accuracy and reliability of financial statements.
In Malaysia, audit firms play a critical role in this process, ensuring that companies adhere to the required accounting standards and regulations. Financial audits are often mandatory for public companies, providing investors and regulatory authorities with confidence in the reported financial figures.
In contrast, sustainability reporting assurance is relatively new and often voluntary. However, an increasing number of Malaysian companies are seeking third-party assurance from audit firms in Malaysia to verify their sustainability reports.
This assurance process adds credibility to the reported environmental and social data, especially when companies are making bold claims about their ESG performance.
Although not yet as regulated as financial auditing, sustainability assurance is becoming more common as stakeholders demand greater transparency and accuracy in non-financial reporting.
Long-term Strategic Focus
Traditional financial reporting tends to focus on short-term financial performance, particularly quarterly and annual profits, losses, and liquidity.
While financial reports do provide some insight into long-term performance through assets and liabilities, their primary goal is to offer a snapshot of a company’s financial health at a given moment.
Sustainability reporting is inherently long-term in focus. It tracks ongoing efforts to address environmental and social issues, often looking at impacts that stretch across years or even decades.
A Malaysian company committed to sustainable development, for example, might report on its plans to reduce greenhouse gas emissions over a 10-year period or its strategy to integrate sustainable sourcing practices.
This forward-looking approach reflects the growing recognition that sustainable business practices are critical to long-term success.
In a Nutshell
Sustainability reporting and traditional financial reporting serve different but complementary roles in the corporate environment.
As Malaysian companies strive to meet the increasing demands of stakeholders, they must balance financial performance with environmental and social responsibility.
Getting to know the key differences between these two reporting formats is a must for businesses aiming to enhance transparency and build trust with both investors and the wider public.
As sustainability continues to shape the future of business, the integration of financial and sustainability reporting will likely become a standard practice for companies across Malaysia.
