Environmental verification: less mechanical, more collaborative
With the simultaneous advent of the Task Force on Climate-related Financial Disclosures (TCFD) and the EU Non-Financial Reporting Directive (EU NFR) over the course of the last 18 months, environmental reporting is being driven into the limelight in boardrooms in a manner it has seldom seen before.
Whilst the Mandatory Greenhouse Gas regulation in 2013 went some way to enhancing engagement on non-financial issues with top management, the latest changes to the reporting landscape feel like a more emphatic game changer. We are already seeing in-house sustainability teams gain heightened profile for their work and establish firmer communication channels with top management ensue of the newest industry developments. We have also seen extra attention paid to 2017 environmental disclosures by those working in legal and risk departments; with more questions being asked about the validity and verifiability of environmental data by these gatekeepers to annual report and accounts content.
CDP analytics show that that third-party verification of scope 1 emissions increased to 64% (+7%) and scope 2 to 53% (+11%) in 2017 disclosures from the UK registered organisations. At Carbon Smart, we are forecasting that, whilst neither the TCFD nor the transposition of the EU NFR regulation in the UK mandates third-party assurance of non-financial data (although they both recommended it), demand for verification will increase over the course of the coming years.
So what is stopping so many organisations from having their sustainability data audited with similar rigour to financial data? In our view the benefits of external verification are clear, and with the right verification approach clients should be using verification to their strategic advantage; rather than it being an annual burden.
Principal benefits of third-party verification for organisations
Organisations can gain considerable value from verification, we have listed some of the key benefits below:
- Enable investor and internal confidence – independent confirmation of the validity of disclosure builds credibility and instils confidence in decision making on this basis amongst investors. Stakeholders in internal governance teams (legal, risk) can also be rest assured that the information that is disclosed is reliable – this is particularly useful given the language and currency of sustainability information (such as carbon emissions, and energy intensity) may be unfamiliar to them
- Mitigate reputational risk – although a slightly different case, in the wake of environmental reporting scandals such as VW Group’s, the reputational costs of getting environmental disclosures wrong can have significant impact on the brand image and consumer confidence as well as the inherent financial implications
- Score better in sustainability indices – the right type of verification can score additional marks in the CDP and meet the requirements of the Dow Jones Sustainability Index (DJSI); once more instilling investor confidence in public reporting, but also providing the opportunity to outstrip competitors in these indices. To learn more about the CDP reproing process in 2018 read our latest guide: Boost you 2018 CDP score in 3 steps here.
- Act like a leader to become a leader – a skim read of the CDP A list, packed full of the reports of sustainability leaders (Croda, Diageo, Sainsbury’s) will quickly reveal that those who have sustainability embedded into their overarching business strategy are more likely to have third-party verification. Auditing sustainability data and applying the same gravitas and governance process to it as financial disclosures is indeed the hallmark of a sustainability leader
So why don’t all organisations do it?
In our experience there are a number of key reasons why nearly half of CDP respondents from the UK don’t verify their data; many of which have persisted for the past 10 years and which we have been working hard to dispel:
- Too long and costly – its commonly perceived that verification engagements have a rigid timetable, take a whole year to complete and are extremely costly
- Lead time to gaining verification is too short – it’s often through that there’s not enough time to achieve verification between the end of the GHG calculation process and the public disclosure of final results
- Risk of failure – organisations remain nervous about the rigour of verification and don’t wish to take the plunge in case they fail in year one
Make verification work for your organisation rather than the other way around
In our view – whilst verification must remain standards lead, independent verifiers need to be more creative with their offerings to clients. This means adding additional value outside of the verification process rather than ceding to a strict standards-only based approach and making the engagements seem onerous and a tick in the box. In addition; businesses need to be more demanding of their verifiers – not only seeking third-party sign-off but insisting on a clear verification strategy that will evolve their reporting over the coming years. The best verification outcomes, based on our knowledge include the following approaches:
- Insist on a critical methodological review to avoid an echo chamber – having reviewed carbon footprints conducted by in-house teams, external consultants; those that have been previously verified and those not; it is clear that most organisations do not have enough resource to digest every methodological amendment in the environmental reporting landscape. By insisting that your verifier appraises your approach against the newest techniques is vital. Key areas to challenge are anywhere the phrase ‘we’ve always done it this way’ is mentioned; and/or where a method has been applied by a software provider without a full view of the reporting organisation
- Make the verification process a part of your day to day reporting – many organisations expect verifiers to decree a verification sample approach each year; however, this can be better managed as a part of an ongoing dialogue between verifier and client. Whilst the sample must be representative; there is no reason why wider reporting goals cannot be discussed and accommodated as part of the process. For instance, it is possible to simultaneously verify data whilst enabling the following:
- Addressing a training need to be uncovered as part of the verification process by demonstrating the roll out of coaching, training and corrective action for those that need more data collection support
- Integrating a new acquisition or divesting a part of your estate and rebaselining in view of your verifier
Whilst having a verifier in attendance at either of the above may appear as high risk to an organisation, we would caution the opposite; material methodological decisions and/or data updates are best checked and ratified at the point of decision rather than later in the process
- Take a practical view on timing – if planned correctly, verification providers should be able to provide a timetable that fits business’ needs in spite of the tight end of year deadlines. To relieve pressure, organisations should also consider phase shifting their environmental reporting year by a quarter to give more time for data collection and the verification process – we find this of particular benefit to organisations based in offices where service charges can be considerably delayed
- Request that your verifier’s report sets the direction for next years’ engagement and includes horizon scanning for new developments – we believe that a good verifier report will include the latest market intel; signposting organisation to methodological developments for their attention during the course of the year. This shouldn’t be an opportunity to attract more fees for a consultant; rather more it should reduce surprises for both parties in subsequent reporting rounds and the risk of verification failure.
Our firm view is that verification can be extremely beneficial to businesses; however, both verifiers and their clients should step beyond the execution of the mechanics of the verification process and take a more collaborative approach; laying out a roadmap to future best in class reporting and sculpting verification engagements to support this.
Julie Craig is a director at Carbon Smart
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