One reason behind the popularity of sustainability reporting is that transparency not only helps companies tell their story, it also drives improvements in performance. As per the business axiom, “You can’t manage what you can’t measure.” Transparency is a currency that builds trust.
Because of this success, multiple sustainability reporting frameworks have emerged. Companies complain of an increasingly fragmented and burdensome process. Part of this discussion is whether companies should use the standards from the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). This is often framed as a competition; a choice between rivals.
We’re writing to set the record straight: This is a false choice.
At a time when we are confronted with existential threats such as climate change, as well as egregious issues such as human trafficking, we don’t have the time or resources to waste on such false distinctions.
Rather than being in competition, GRI and SASB are designed to fulfill different purposes for different audiences. For companies, it’s about choosing the right tool for the job.
Established in 1997, GRI developed the first corporate sustainability reporting framework. Today, GRI’s standards are used by the majority of companies reporting sustainability information. The standards are designed to provide information to a wide variety of global stakeholders ranging from civil society to investors. Consequently, the GRI standards include a very broad scope of disclosure. Typically, companies use them to develop and design their sustainability or corporate responsibility reports.
SASB, established in 2011, develops standards for the disclosure of material sustainability information to investors in mandatory filings (financial disclosures). SASB standards, available for 79 industries, identify material sustainability factors that are likely to impact financial performance.
Investors have their own unique needs, different from those of suppliers, customers, communities, interest groups and other stakeholders. They demand reliable and comparable sustainability information with clear links to financial performance. Focused on this need, SASB standards identify the subset of sustainability issues that are reasonably likely to be material to investors. In order to preserve a focus on financial materiality as well as to attain comparability among peers, SASB standards are industry specific.
Different audiences, unique needs
As you can see, GRI and SASB are intended to meet the unique needs of different audiences. The GRI standards are designed to provide information to a wide variety of stakeholders and consequently, include a very broad array of topics. SASB’s are designed to provide information to investors and consequently, focus on the subset of sustainability issues that are financially material.
As such, deciding between GRI and SASB is a false choice. Companies that produce a sustainability report also should (and in many cases must, when required by law) disclose financially material sustainability information in their mandatory financial reports, such as a 10-K. Conversely, companies that only disclose sustainability impacts that meet a financial materiality test are potentially ignoring issues critical for sustainable development.
Truly sustainable companies do both. They identify sustainability impacts that are financially material (and therefore compelled to be disclosed to investors) as well as the impacts relevant to a broader range of stakeholders. They communicate their story to investors and other stakeholders in the appropriate reporting channels and ensure consistency.
The bottom line is that the GRI and SASB standards are not mutually exclusive; they are mutually supportive. Transparency is still the best currency for creating trust among investors and other stakeholders, but companies should focus on which stakeholders need which information in which format.
The world needs corporations to understand, reflect and act on a broader range of concerns than those raised by financial stakeholders. Stakeholder concerns are often leading indicators of what may become financially material to a company in the future.
Investors need standardized, high quality information on material factors that can affect price or value. When sustainability disclosure distinguishes between that which is material to the investors (because it may affect price or value), and that which is of interest to stakeholders (because it describes company’s impacts and could affect the company trajectory in the long-term), all stakeholders benefit. SASB and GRI are designed to meet these respective needs.
Actions driven through the financial markets and actions driven through a wider range of stakeholders are important in different ways. Both SASB and GRI recognize this and we pledge to support one another in this common quest on improving corporate performance on sustainability issues.
We hope that cooperation between our organizations will further the understanding of the sustainability disclosure needs of different stakeholders and promote the harmonization of the corporate reporting landscape. It is imperative that we all work together. Companies need to better navigate the landscape of multiple frameworks and get on with the business of articulating their sustainability impacts in formats that meet their business objectives and stakeholder needs.
GRI and SASB are both here to help companies move from transparency to performance. There is no time to waste.
South Africa isn’t ready to launch a carbon tax because there are insufficient alternatives to fossil fuel energy, a City of Tshwane official said.
“Ninety-five percent of our energy requirement is still very much fossil fuel-based,” Dorah Nteo, the chief sustainability specialist for the municipality, said this week. “We have not allowed the infiltration of enough renewable” power sources, she said.
A proposed carbon tax would be delayed from this year to 2016 to allow time for public consultation and the drafting of legislation, former finance minister Pravin Gordhan said in 2014. Draft legislation on the levy will be published later this year, his successor, Nhlanhla Nene, said in his budget.
Eskom is struggling to meet demand with aging plants following years of underinvestment. While the department of energy has approved 79 renewable power projects from private companies with a capacity of 5 243MW, Eskom is also building two coal-fired power plants with a potential combined output of 9 564MW.
“A carbon tax can play a role in achieving the transition to a low carbon economy and South Africa’s commitment to help in the international efforts to reduce greenhouse gas emissions,” the committee said in April.
“These commitments and aspirations should also take into account any possible negative economic and social impacts of the carbon tax.
“What has been introduced effectively is the fuel levy for your motor vehicles, rather than your broader carbon tax,” Nteo said. “That is because with cars you have a choice between big cars or small ones, there are alternatives.”
Source: The Citizen
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Given that disclosure of financial risk always has been a difficult mandate for publicly-traded companies, requesting the voluntarily disclosure of sustainability risks may seem like a nearly Sisyphean task.
Currently, the Securities and Exchange Commission, under rule 405, requires disclosure of anything considered “material” through annual or quarterly filings.
The Financial Accounting Standards Board defines materiality as “the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.”
Accountants often rely on what is known as the 5 percent rule, meaning that if something could affect the company’s net income by 5 percent, it is material. The SEC has stated that this should just be used as a rule of thumb.
However, with the exception of some mandates on climate change and conflict minerals sourced from the eastern Democratic Republic of the Congo, sustainability disclosures largely have been omitted by SEC regulation.
Although more companies are disclosing sustainability information, there are few standards and the reporting is often vague and subjective.
The casual reader of SEC annual filings might find the concept of materiality — or the mandatory disclosure of anything vital to the investment making decision — and large-scale sustainability issues, such as fossil fuel use, climate change or massive droughts, as slightly paradoxical.
For example, for a company in the food and beverage industry, future profitability is directly linked to climate change and natural disasters, which would make those potential events material. Yet, under current SEC regulations, these factors are not deemed as material.
According to Michael Muyot, president of the sustainability analytics firm CRD Analytics, companies “will keep doing it [not disclosing sustainability information] as long as they can get away with it. I don’t know if they don’t think it’s not material.”
“It’s just that it’s so fragmented within the large corporation that there’s no central strategic accountability,” he added. “They’ll keep doing it, especially in B2B because the penalties aren’t there.”
This leaves sustainability non-profit accounting boards such as the Global Reporting Initiative (GRI), the Sustainable Accounting Standards Board (SASB) and the International Integrative Reporting Council to ask companies — at least in the U.S. — to voluntarily disclose information.
SASB was formed in 2012 with a mission to “develop and disseminate sustainability accounting standards that help public corporations disclose material, decision-useful information to investors.”
The organization specifically focuses on sustainability disclosure on SEC annual and quarterly public filings known as a 10-Ks and 10-Qs. According to Doug Park, SASB’s director of legal policy and outreach, working with companies to disclose this information on its 10-Ks provides a way to hold companies accountable for the accuracy of their disclosures.
“The company has to sign a certification saying that the information in the 10-K or 10-Q report is accurate and complete and does not misstate anything,” Park said.
“The company has to make these certifications under the Sarbanes-Oxley Act. And the penalty for making inaccurate or incomplete or misleading statements are civil penalties — in terms of fines — as well as potential criminal liability.”
While the SEC has few requirements about sustainability reporting, the SEC did propose guidelines for companies to disclose climate change information in 2010. It seems few companies actually have followed through, and it is rather left up mostly to the companies themselves to determine what event or damage from climate change is material.
According to a 2014 report by the sustainability non-profit Ceres, “41 percent of S&P 500 companies failed to address climate change in their 2013 filing.”
Ceres also scored the quality of the companies’ climate change disclosures in their 10-Ks. The organization scored the quality of disclosures in 2013 as lower than in 2011 even though the number of companies that disclosed information increased.
“I think you can only go so far with voluntary [disclosure]. Then you’re relying completely on the carrot and that could take anywhere from five to 10 years,” said Muyot. “I think the combination of both the carrot and the stick — with the regulatory stock exchange listing requirements and direct investor shareholder return reward — can be done in less than five years.”
In several countries outside the U.S., regulatory agencies mandate more disclosure of sustainability information by companies. In South Africa, the Johannesburg Stock Exchange requires all listed companies to adhere to a strict set of guidelines for sustainability disclosure.
“Regulation around the world is playing an increasing role in driving behavior change and disclosure,” said Kristen Sullivan, a partner at Deloitte and Touche LLP and head of Sustainability Reporting, Assurance and Compliance Services in the U.S. “An example would be the passage of the EU directive back early last year in 2014 that will mandate non-financial disclosure.”
In 2014, the European Union issued a directive that requires sustainability reporting for companies with over 500 employees. In 2017, over 7,000 companies in Europe will report “on environmental, social and employee-related, human rights, anti-corruption and bribery matters.”
Although the U.S. does not have mandatory disclosure policies like the EU, voluntary disclosure is becoming more prevalent. However, there is little enforcement to ensure that the information that companies are reporting on is accurate and has quality.
“In the last three to four years the numbers of companies that have been disclosing information about sustainability and sustainability efforts has been increasing,” said Park.
According to a Reuters article, “Comments by SEC Chairman Mary Jo White and Commissioner Daniel M. Gallagher indicate that the Commission does not view sustainability reporting as a priority.”
In regards to ensuring that these standards will be upheld, Muyot said, “It’s a challenge. But it’s kind of just like with sports; a $10,000 fine to LeBron James doesn’t mean anything. The fine and the penalty has to actually hurt.”
The risk of stranded assets
Some companies have been under increasing pressure to disclose sustainability information from investors in part due to increasing concerns over the risk of stranded assets.
According to the Smith School of Enterprise and the Environment at the University at Oxford, “Stranded assets are assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities and they can be caused by a variety of risks.”
The risk of assets being stranded is a particular concern for energy companies involved with fossil fuels such as oil and coal. These companies hold substantial fuel reserves, but with evolving federal regulations to meet climate change and environmental goals these reserves will become unburnable.
A study by the University College London Institute for Sustainable Resources stated that up to 80 percent of coal reserves could become unusable by 2050.
“Companies have known this for a while; they are just trying to get as much out of these assets as they can. But I think the writing is on the wall,” said Muyot.
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By Lloyd Macfarlane
UNDERSTANDING THE CONCEPT OF FINANCIAL CAPITAL FOR CORPORATE REPORTING
Traditional accounting practices place large emphasis on the extent to which good financial capital man- agement is responsible for the economic success of the business – traditionally the main issue of concern for shareholders and investors. However, companies are increasingly required to take a more holistic approach to the many forms of capital in the business, and to do so with key stakeholders in mind. The corporate sustainability agenda is changing the way that companies contemplate and report on financial capital, so what is financial capital in the context of value creation and sustainability?
Financial capital is used by people, organizations, corporations, and governments, to build and maintain their livelihoods. This includes all financial assets, instruments, and resources (including loans, bonds, stock, expenses, assets, equity, and cash flows) used throughout the organisation’s activities. It could be said that financial capital reflects the productive power of all other types of capital in the business, although technically there may be exceptions to this Financial capital plays an important role in our economy, enabling the other types of capital to be owned or traded. Proper management of financial capital is crucial to maintaining effectiveness, efficiency and economic sustainability in the organisation.
Generally speaking financial capital has no value of its own (except if the company’s business is a holding company or a bank). It is not productive, for instance, in the sense that a manufactured product produces value. Instead, the value of financial capital lies in the facilitation of economic production. Financial capital controls ownership of physical capital and is a representation of the value of the other four capitals. In other words, money has to go out before more can be brought in.
Companies may have access to many forms of financial capital but little can happen without expendable cash as a resource (particularly in terms of operations). Financial capital can be obtained through earnings, banks (in the form of short or long term loans), private equity (and venture capital transactions) and grants.
The integration and management of all types of capital is essential if a company
is to target sustainability, and so any discussion about financial capital should reference this integration. The IIRC’s Integrated Reporting Framework <IR> tackles the concept of integrated thinking and sustainability performance by focusing on the ‘six capitals’: financial, manufactured, human, intellectual, natural and social.
There is mounting evidence that companies with strong sustainability performance deliver improved long-term financial returns. For example, a July 2013 Harvard Business School study found that “High Sustainability” companies significantly outperform their peers over the long-term,
in both stock market and accounting terms (Eccles, Ioannou and Serafeim, 2013).
Whilst there is still some discussion about what in fact causes this performance, these companies are generally managing risk more effectively and positioning themselves advantageously in their respective value chains – objectives that are ultimately linked to the corporate sustainability agenda.
If the primary objective of business is value creation then financial capital is the tool with which this takes place. Sustainable businesses create value for all key stakeholder groups and not just shareholders – this is where the direction of financial capital is becoming increasingly important. The returns on investments in employees or local communities for example can be difficult to quantify, however the risks of ignoring these investments can be meaningful and even critical for the business.
Although the way an organisation applies other forms of capital may be in stark contrast to the way it deals with financial capital, all these components are often connected to expenditure – investing in “any other form of capital usually requires good management of financial capital.
THIS MEANS THAT AN INVESTMENT IN RELATIONSHIPS WITH THE COMMUNITY OR OTHERS MAY BE GOOD FOR REPUTATION AND IMPROVED SALES, BUT ONLY UP TO A CERTAIN LEVEL, says Pieter Conradie,
Programme Director for Integrated Reporting at the Albert Luthuli Centre for Responsible Leadership (University of Pretoria). There is risk in expending too much financial capital in order to fund corporate social investment projects for example.
“This is of course a very pragmatic or instrumental way to look at investments, but in my mind this is also the way that most executives look at things, because proving a positive ROI from investments in social projects can be very tenuous because of all the extraneous variables at play,” says Conradie.
All of the <IR> capitals are connected to financial capital in some way. Conradie suggests that “the obvious challenge is to determine the causality between the other capitals and financial capital, especially in determining how an investment in other capitals may lead to returns in financial cap- ital.” This is the holistic aspect of integrated reporting and the relationship between financial and non-financial information. Everything about a company’s performance is intrinsically linked.
A company’s annual report has traditionally been enough for investors and shareholders who until recently haven’t been that interested in sustainability reporting. This is changing as shareholders realise the extent to which their investments are impacted by the stability and value created by the business for other key stakeholder groups.
Recently appointed Chief Executive of the Global Reporting Initiative (GRI), Michael Meehan says that one of the reasons that organisations report is to understand their commitment to sustainability. “Over the years, for better or worse, GRI has become synonymous with the report. To me, that
is not what’s important.
What’s important is the process by which you understand the information, collect the information and communicate it,” says Meehan Corporate reports have historically been comprehensive but cumbersome and now the integrated reporting process aims to change this, by providing more focus and more relevance in a format that has more application. Even if the report is not written for, or read by other key stakeholder groups, it should at least deal with financial capital in terms of how it relates to the other capitals of the business.
Source: Green Economy Journal
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By: Carol Adams
The potential of integrated reporting to drive changes in the way business does business lies in its focus on long- term strategic planning, the multiple capital concept and its potential to change how we define value. A focus on short-term financial value is increasingly being seen as bad for business, let alone society and our natural resources.
Changing the way business leaders and their investors think is a prerequisite for real change towards social, environmental and economic sustainability. A focus on the longer term and thinking about value in non-monetary terms, means thinking about people, relationships, know- how and the natural environment and how they create value, rather than just what they cost or how we impact on them. And a reading of the best South African integrated reports reveals a concerted effort to think about the business differently.
It is pleasing to see reports which highlight key non-financial performance indicators, along with financial indicators right up front. For example, in Sasol’s case these include environment, safety and equity measures and, in the case of greenhouse gas emissions (only) a quantified long-term (2020) target. It is also exciting to see reports which talk about values and goals in broad terms and analyse the context in which the business is operating, its risks, including reputation risk, and opportunities.
Some of the reports available, such as Sasol’s 2013 annual integrated report, attempt to follow the IIRC’s consultation draft, but they all predate the recently released International <IR> Framework (IIRC, 2013 and Adams 2013). Yet they provide many learnings for companies new to integrated reporting.
Sasol explicitly acknowledges the link between values and behaviour:
“Our shared values define what we stand for as an organisation and inform our actions and our behaviour. They determine the way in which we interpret and respond to business opportunities and challenges.”
-Sasol Annual Integrated Report 2013 p7
So what behaviours is Sasol aiming to nurture? A focus on people, relationships and long term value for those connected with the company: “To grow profitably, sustainably and inclusively, while delivering value to stakeholders through technology and the talent of our people in the energy and chemical markets in Southern Africa and worldwide…our common goal To make Sasol a great company that delivers long-term value to its shareholders and employees; a company that has a positive association for all stakeholders”. -Sasol Annual Integrated Report 2013 p6
‘Sustainably’ in this case might mean both “environmental sustainability and longevity: “We also remain acutely aware of the environmental impact of extending our operations to 2050. We are working on initiatives to mitigate greenhouse gas and carbon dioxide (CO2) emissions as well as on those related to air quality and water stewardship.” -Sasol Annual Integrated Report 2013 p27.
Social and environmental issues feature prominently in ‘top issues impacting our business’ (page 30), but neither here, nor in ‘Looking towards 2050’(page 27) is there any mention of the carbon bubble. Should there be? Well, it has been getting quite a lot of attention, it may impact on value to investors (and employees and stakeholders) and integrated reporting requires identification of material issues and discussion of the context in which a company is operating including risks and opportunities. So, yes, I think there should be a discussion on the likelihood of a carbon bubble impacting on future value.
Sasol appears to see the fight as being with regulators. “Risk of climate change and related policies impacting Sasol’s operations growth strategy and earnings” is identified as a regulatory risk (page 47) with possible regulatory interventions identified as carbon taxes, product carbon labelling, carbon budgets and carbon-related border tax adjustments linked to bilateral agreements.Sasol discusses efforts to reduce Greenhouse Gas emissions, but also notes it is engaging in “co-ordinated regulatory intervention”(page 47). In the context of its concern about the cost of such interventions, this would appear to mean trying to stop them, a move unlikely to be in the interests of protecting natural capital.
The report has been ranked highly (see EY, 2013) and indeed, I did get the feeling that there had been some considerable ‘integrated thinking’, demonstrated by the discussion on value, strategy and the business model. But I was left wondering if all the reported activity around reducing carbon emissions was an attempt to hide the elephant in the room (the carbon bubble) and delay regulation. Of course, I should not be surprised by this (see Adams, 2004 and Adams and Whelan, 2009), but I am disappointed to see integrated reporting used in this way.
On the positive side, Sasol has identified how each stakeholder contributes to value creation (pages 38-9) along with more commonly provided information on how they engage with each stakeholder group, what their expectations are etc. The process of determining materiality set out at the front of the report involved consulting stakeholders amongst other steps.
The Standard Bank Group (SBG) does not suffer the same perception that the nature of its business is fundamentally unsustainable, as some would have of Sasol, but banks come up against scrutiny with regard to the nature of the projects they fund, and they are generally mistrusted by many. Demonstrating a contribution to creating value for the societies they depend on and diligence with regard to the environmental impacts of the projects they fund is therefore critical for their long term success. The Standard Bank Group appears to do this better than many. The real proof of course comes in information about the nature of loans made.
The reader of SBG’s annual integrated report is left with the feeling that the bank sees its success as inextricably linked with its relationship to society. For example, socioeconomic development and provision of sustainable and responsible financial services are identified as material issues.
“The bank aims to embed sustainability thinking into its business processes there are a number of determinants of materiality, including the bank’s values and accountability and responsibility for sustainable development rests with the board” -SBG’s annual integrated report p 46.
The report includes a value added statement (page 49), information on stakeholder engagement processes and explains its approach to environmental and social risk screening. Sustainability risk is explicitly mentioned alongside other operational risks (page 90).
Another strength of the SBG report is its disclosure on remuneration of it executives. Some are not so bold. One of the Guiding Principles of the International <IR> Framework is ‘conciseness’.
At around 130 (Sasol) and 180 (SBG) pages, neither report examined here can be said to fulfil that, but they contain information including financial and governance information which goes beyond the Framework’s content elements.
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Even though more investors worldwide, particularly institutional investors, now say they assess corporate environmental and social performance in their investment decisions, most companies are still unsure exactly what these key stakeholders want to know and therefore what and how to report.
Similarly, while leading banks increasingly apply environmental and social risk management in their lending practices, it remains unclear how this translates into competitive advantage for their corporate clients who boldly adopt innovative solutions to environmental and social problems.
The importance of risk management remains high in the conversation about corporate sustainability. It will likely continue to be the key focus of sustainability-driven investor activism at shareholder meetings for some time to come. Major accidents, fatalities and environmental pollution are common causes for concern. And with shareholder activism on the rise, companies are seeing more shareholders requesting special meetings with the board on the issues that concern them most. Governance and executive remuneration currently top the lists of responsible shareholder concerns, but environmental and social issues are growing in visibility.
According to Ceres, 110 sustainability- focused shareholder resolutions were filed with 94 US companies during 2013. Many called for board oversight of sustainability and comprehensive disclosure of data through sustainability reports. Issues of interest were climate change, greenhouse gas emissions, supply chain issues and water-related risks.Investors withdrew more than 40 of the 110 resolutions after the companies responded affirmatively to their specific requests.
That said, investor activism on sustainability issues inevitably clashes with two entrenched business realities: firstly, the majority of shareholders still want to see superior financial returns, preferably on a quarterly basis; and, secondly, company executives manage a multitude of shifting priorities to maintain their companies’ competitiveness and profitability – with environmental and social responsibility being relatively new arrivals.
Consequently, there is still resistance on the part of companies when it comes to really innovating in the sustainability space, even though the massive rise in integrated reporting has brought more firmly to the foreground the real risks and costs of not doing so. Part of the problem may be that the stakeholders with the most leverage, namely investors and financial institutions, don’t yet systematically demand such innovation.
It’s not surprising then that the really interesting conversation between companies and investors – the one about sustainability and business value creation – still needs to get off the ground. For instance, first-movers in this space are testing if they can improve investment returns by focusing on sustainability leaders – companies with a track record of good environmental and social management, high-level commitment, and proactive stakeholder engagement. Research by RobecoSAM, covering a ten-year period, revealed superior long-term results. This confirms academic findings which tie sustainability leadership to good management, innovation and financial outperformance.
So why isn’t sustainability being adopted more systematically as a lens to identify well-managed, innovative companies with lower business risk? Fortunately, several major shifts in the financial ecosystems of emerging markets indicate this situation may be set to change.
Banks getting serious about sustainability
Currently 79 financial institutions in 35 countries have officially adopted the Equator Principles, a financial industry benchmark for determining, assessing and managing environmental and social risk in projects. It is estimated the Principles now apply to over 70 percent of international project finance debt in emerging markets. Ten African banks have adopted the Principles, including Nedbank, Standard bank, and FirstRand.
While the Principles apply to project finance above US$10 million, the community of Equator Banks are increasingly exploring ways to integrate sustainability into all aspects of how they do business, including green finance products and managing their own corporate footprints as a way to build brand visibility.
Nedbank’s journey is a powerful example. In 2005 Nedbank became the first African bank to adopt the Equator Principles. Since then, Nedbank has rolled out a green affinity program with WWF, funded projects under South Africa‘s Renewable Energy IPP programme, actively manages its own carbon footprint, launched South Africa’s first Green Index in 2011, created the Nedbank Capital Green Mining Awards, and most recently held the first Nedbank Capital Sustainable Business Awards.
Businesses can see this trend as a signal that banks are building capacity to take a market-based approach to sustainability. New products and screening tools will offer incentives as well as penalties to stimulate better sustainability performance by loan recipients.
Transparency is a first requirement to make this engagement between banks and companies work. So anticipate more interest from banks in the quality and details of integrated reports. As banks become more astute in assessing particular aspects of performance – such as energy, water use, waste management, and labour practices, for instance – expect to see more specific requirements in these areas. Bigger picture questions about license to operate and stakeholder support will no doubt take centre stage and quickly mature as a discourse.
Pension funds join the conversation
South Africa was one of the first countries to introduce a regulatory requirement for pension funds in 2012 to actively consider environmental and social risks and opportunities in their investment strategies.
New regulation 28 of the Pension Fund Act, in conjunction with the Code for Responsible Investing in South Africa (CRISA), triggered an industry wide response over the past two years to design a practical approach for pension funds.
Sustainable Returns for Pensions and Society, an initiative led by the Principal Officers Association of South Africa, the IFC, major pension funds, the Institute of Directors of South Africa, the Financial Services Board, Labour, and other key stakeholders, resulted in the publication in September 2013 of “Responsible Invesment and Ownership: a Guide for Pension Funds in South Africa”.
The guide provides a roadmap to introduce policies and systems that anticipate risk and inform proactive investment strategies.
As major investors in companies listed on the Johannesburg Stock Exchange, pension funds could therefore be set to play a much bigger role in moving South Africa’s private sector towards more responsible business practices.
South Africa’s Government Employees Pension Fund (GEPF), with 1.2 million active members and assets worth R1 trillion, already has a responsible investment policy in place and engages directly with major listed companies on ways to improve environmental, social and governance performance. South Africa’s example is being closely watched by other emerging markets, and could signal a global trend. Other parts of the financial ecosystem are also likely to follow suit.
For the most part, pension funds are still in the early stages of incorporating sustainability issues into decision making. With policies and priorities in place, they will hand implementation to asset managers who invest on their behalf.
Businesses can therefore expect to see an increase in interest from the asset management community in a wide range of environmental and social issues prioritised by their clients.
Thanks to the naturally long-term view of institutional investors, the emphasis will be on issues that have a medium and long-term impact on investor returns, while still seeking to avoid any significant short- term losses. As pension fund beneficiaries become more aware of sustainability, special interests may lead pension funds to seek out specific types of investments that have social and environmental benefits, such as renewable energy and affordable housing.
Companies’ integrated reports should therefore reflect a mix of:
- appropriate sustainability risk management,
- resource efficiency to reduce costs and dependencies; and
- quantifiable positive impacts on people and the environment that can be shown to reinforce strong financial performance over the medium and long term.
Green building practices are one such example. With pension funds able to invest up to 25 percent of their assets in property, implementation of green building standards can reduce energy and water costs, improve the health and well being of occupants, enhance the urban environment, and increase property value and rent premiums . From a portfolio perspective the value proposition is clear.
A major role for regulators
Another strong signal that sustainability has taken root in the financial landscape is the move by banking regulators in emerging markets to introduce national policies and incentives that promote sustainable banking.
A key factor is the creation of a level playing field to ensure banks retain their competitiveness when taking innovative steps towards a green and inclusive economy.
China introduced a national green credit policy in 2008 and technical guidelines in 2012 which now apply to all Chinese banks and include requirements related to international lendin. Bangladesh introduced a similar policy in 2011 and provides incentives to proactive banks who the meet the new standards.
In 2012, Nigerian banks collaborated with the Central Bank of Nigeria to introduce voluntary principles for sustainable banking, focusing in particular on financial inclusion and supporting women entrepreneurs. These leading countries are part of a community of regulators who now meet annually to share their experiences in creating enabling frameworks for sustainable banking. Member countries are learning from each other and replicating successful models.
Still in early stages of testing and implementation for many countries, this trend is moving quickly. South Africa’s example in the pension fund industry and the presence of three leading Equator banks locally, make it well suited to adopt similar policies. Businesses can therefore expect more active participation by regulators in establishing monitoring and incentive structures to track and promote private sector sustainability. Rating agencies will assist this process by making data more easily available. Eco-labels and industry standards will become more common and nuanced to measure performance on specific aspects and help businesses position themselves in the marketplace.
Shifting the conversation
With these various trends taking shape, conversations between companies and their financial stakeholders are likely to get much more interesting in the near future. While this may mean an additional reporting headache for companies initially, it may also quickly evolve into a more collaborative partnership between companies and their investors or lending institutions.
There is a growing spectrum of business benefits from improved sustainability, such as reducing resource costs, improving employee productivity, reducing absenteeism and staff turnover, avoiding business interruptions, strengthening relationships with suppliers, adding market share, and protecting license to operate.
The main problem is that for too long these aspects haven’t been measured and the business case hasn’t be clear.
South Africa’s adoption of comprehensive integrated reporting opens the door to a much more informed conversation about the different ways sustainability adds value. While comparability and consistency of data are important, the links with value creation are going to be as diverse as the companies that implement them.
Consequently, it remains for companies to tell their story of sustainability well, to articulate what they have tried and what the results have been, to explain how sustainability is a driver of their future business success, and how they are preparing for a changing climate and shifting social and economic conditions.
As more success stories of value creation surface, there’s a good chance investors and banks will be first to promote replication within and across industries and to seek out clients that demonstrate sustainability potential. Some of the questions already front of mind for conscious investors include: • Are water or energy costs significant contributors to business overheads and how is the company managing them?
• Is the company getting left behind in terms of new technology that could dramatically increase efficiencies or even change the game in terms of market position?
• Is the company treating workers fairly, maintaining high standards of health and safety, and offering fair pay?
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Is sustainability reporting sustainable?
There are some that think it is. The practice is now more widespread than ever before, and legislation in different parts of the world is supporting increased non-financial disclosure. This would indicate that reporting is here to stay.
On the other hand, there are some that think it isn’t. There are those who subordinate sustainability reporting to the new financial reporting trend called integrated reporting, while others advocate online interactive disclosures instead of reports.
As we move into 2015 and face another year of corporate efforts to improve impacts, manage risk and engage with the new opportunities that sustainability brings, amid a flurry of surveys and reports that support the case for or against sustainability reporting, what can companies do to embed reporting practice in a sustainable manner? In addition to the predictable list of things we already know — focus, clarity, materiality, relevance, balance, frameworks, etc. — here are some more creative approaches that companies might like to consider.
Excite your board of directors about reporting
Reporting has often been considered an add-on, a project for the corporate social responsibility (CSR)manager, something that exists alongside the “real” reporting processes. Sustainability reporting has not really hooked the attention of the highest level of leadership and, in most cases, does not find its way onto the board agenda.
In order to make reporting more sustainable, directors must be excited about sustainability reporting. They must see it as an advantage, a benefit, a value-adding activity — and not something they tolerate.
Let’s be honest, how many company directors actually read the sustainability reports of the companies they are engaged to be accountable for? How many directors are actually consulted in the process of preparing the report? As key stakeholders, company directors surely deserve some acknowledgement, recognition and even voice in the annual sustainability report.
In order to excite your board of directors, engage them in the reporting process and have them approve the output, here are some things you can do:
- Empower your board members. This can be done, for example, through board workshops to build awareness, knowledge and engagement around relevant issues for each company. In 2014, the United Nations Global Compact launched an interesting Board Program to help align the board on sustainability matters and help directors demonstrate leadership on board adoption of sustainability principles. As board members engage in deep consideration of sustainability issues, they become empowered to embrace leadership and guide the company along the sustainability journey. This program looks like a good start, but it must result in something more than discussion in order to truly deliver change. Therefore, after education, comes action.
- Engage company directors in the reporting process. Help your board of directors own your sustainability report by asking them to contribute. Interview them individually or as a group, and include their pictures and their commentaries in the sustainability report. Stakeholders will be gratified by evidence of greater board commitment, and board members will be energized by their own involvement and declaration of what is important to them. Involving them may also help reinforce their accountability for the sustainability report and its contents. This kind of involvement is positive, but it is not enough. Involvement must be formalized.
- Establish and publish a formal board policy for sustainability reporting. This should describe board accountability for sustainability reporting. The policy should define board actions prior to report publication, including a board discussion and concurrence of the report content and agreement to publish. Following the report publication, the policy could require the board to conduct a review of whether the report has met its objectives and agree on new objectives for the next reporting cycle.
Make your reporting process cool
I maintain that sustainability reporting as a process is incredibly cool. The right process empowers people, challenges people, gets people listening to one another, sometimes even talking to one another, occasionally even agreeing with one another. This applies to both employees as well as external partners, organizations, suppliers, local authorities and consumers.
Rather than inviting people to a meeting about the sustainability report (yaaaaaaawn!), there are many ways you can involve people in activities that both interest and engage them, while at the same time, getting the information you need for your report. This includes competitions (send us a video of how your job contributes to improving the environment) or prizes (weekend for two for the first complete set of sustainability reporting information sent back to corporate) or ice cream meetings (roundtable discussions with internal and/or external stakeholders on sustainability issues, where the meeting leader brings [lots of] ice cream for consumption during the meeting). There are a million ways to make the reporting process fun, even if, at some point, there is a certain amount of actual hard work to be done.
Engage your employees around the published report
So, many reports go unnoticed by the very employees whose hard work made the report possible. That means all the employees in the company.
The minute the report is published is the signal to start the work of engaging employees around the report. Rather than just broadcasting an email announcement — we published our report (yaaaaaaawn!) — there are many ways to get your employees to sit up and take notice.
This may include quizzes with prizes (Who is quoted on page 34 of our last report? By how much did our GHG emissions reduce last year?), games (How far can you throw our sustainability report?) and feedback (cross-functional discussion groups — can be Web-meetings — each focusing on a single section of the report and analyzing the content together, with recommendations for the next report). You might even involve your employees’ children in preparing a poster about how your company makes a positive contribution to the world — requiring employees to explain the essence of the report messages to their kids. Prizes, of course, for the best contributions.
Each company can find its own way to be creative in developing an engagement process which both informs and interests employees. You might find employees actually enjoy reading the report and discover things about the company — and their colleagues — that they didn’t know. More importantly, they will be able to talk to stakeholders about the issues that matter in an informed way.
Drive your reporting throughout the supply chain
How many companies ask their suppliers to contribute to their reporting and engage suppliers once the report is published? More and more, the report of one company is both the start-point and the endpoint of the reports of other companies.
I am not aware of anyone trying to track a product through all the sustainability reports of the companies involved in producing it from raw materials to end-of-life — that could be an interesting exercise. However, suppliers are big enablers of any business, and their influence on the direct impacts of an organization may be quite significant.
Perhaps suppliers should have a bigger place in sustainability reports — strategic suppliers can contribute data, case studies and specialist perspectives — and may be grateful for the recognition their customers’ reporting offers them, thereby reinforcing the relationship with them. Once the report is published, reverting to suppliers, emphasizing the key messages, acknowledging their role and encouraging them to adopt sustainable practices in their own businesses is a critical step in maintaining the reporting momentum.
It’s so easy to criticize reports. It’s so easy to say that reports are full of irrelevant information. It’s so easy to dismiss reporting as some sort of activity that apparently everyone has been duped into doing for the wrong reasons and producing the wrong results. It’s much harder to stand up for reporting and talk about what it really is: a business process that adds value, engages people and empowers employees.
The folks that lead reporting in organizations have to address not only the hard work of reporting — and it is hard work — but they also have to overcome these notions that are bandied around saying reporting is worthless.
Reporting leaders in organizations should be celebrated. They have one of the hardest jobs around. Reporters play a critical role in helping organizations move forward sustainably and help shape the future of business. I have often said that reporting is a catalyst for performance, and great reporters know how to use the reporting process to drive change. Make sure the reporting leader in your organization gets the respect s/he deserves, has the resources s/he needs and gains the attention of management as and when needed. Ringfence your reporter and ensure s/he has enough ice cream to last through the entire reporting cycle.
Good luck to all companies starting reporting cycles about now. Let me know how you got on with this list!
Source: Triple Pundit
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