Is it time to kill off the standalone sustainability report?
This week's Smarter Sustainability Reporting conference saw a number of industry experts discuss the evolution of the sustainability report, with some going so far as to argue that an individual annual report no longer carries the necessary impetus to drive change. So, is the age of the standalone sustainability report finally over?
Depending on what side of the fence you sit, sustainability reports are either synonymous with a siloed approach to working – in which corporate responsibility is viewed as an ‘add-on’ – or the documents are an essential vehicle that captures business-critical information.
With investors and consumers placing a greater emphasis on business responsibilities, analytical proof that companies are taking sustainability seriously is, of course, vital. But, as reporting experts at edie’s Smarter Sustainability Reporting conference discussed in London this week, it might finally be time to make the annual CSR report “disappear” completely.
According to the World Business Council for Sustainable Development (WBCSD) Reporting Exchange programme, there is now a total of 182 frameworks across 60 major nations that sustainability professionals can follow when creating a sustainability report. Of these, 81% are ‘mandatory’ in some form.
Imagine a financial expert attempting to navigate such a complex labyrinth. There would simply be no way to benchmark performance across global markets. Fortunately, the International Financial Reporting Standards (IFRS) creates a common language in the finance world so that company accounts are not only understandable across different countries, but are also comparable for stakeholder examination.
That is the ultimate goal of a sustainability report; or at least it is the ideal goal envisioned by our conference speakers, who were seemingly in agreement that reporting (with an emphasis on the ‘ing’) and sustainability needed to become a much more integral part of a business strategy.
Compass Group’s director of health, safety and environment Nicki Crayfourd discussed the need to move sustainability into the heart of the business. A key to achieving this vision is overcoming the complexities of the sustainability report, Crayfourd said.
“Some of the frameworks are helpful. But a lot add a degree of complexity that we cannot accommodate as a global organisation. Rather than reinventing the wheel, we’ve chosen the frameworks that work for us.
“My vision for the next couple of years is to have a truly integrated corporate strategy. At the moment we have the sustainability bracket strategy which should be one whole. We’ve got quite a bit of work to be able to get there, but it will enable us to have a more compelling narrative that is simpler and more reportable.”
With more than 60,000 workers, Compass is the UK’s largest foodservice company with a presence at sports events, military bases, schools and care homes across 15,000 locations in the UK. The Group became the first major food foodservice company to join the Sustainable Seafood Coalition (SSC), committing to voluntary codes of conduct regarding the sourcing and labelling of all seafood products. Crayfourd hopes that an integrated strategy and way of reporting will help expand the firm’s sustainability initiatives.
The stars seem to be aligning to make this happen for more companies. The Paris Agreement saw 195 nations agree to push for a two-degree world, while the Task Force on Climate-related Financial Disclosure (TCFD) has, or at least should have, moved the sustainability agenda beyond its individual department and into boardrooms and finance departments across the globe. While this gives sustainability professionals a bolstered platform to recite the importance of sustainability, especially given its newfound relationship with economics, its also adds an extra layer of complexity for professionals to overcome.
The solution, then, appears simple: make the sustainability report “disappear”. WBCSD’s Reporting Exchange not only highlights the sheer scale of complexity regarding reporting frameworks, but also offers users a way to navigate it. According to the Council’s director of redefining value Mario Abela, the traditional sustainability report should be ditched, and replaced by an integrated report spearheaded by financial and ESG considerations that are backed up with purpose-driven specialist reports that provide stakeholders with data relevant to their concerns and needs.
“We want sustainability to be pushed into the mainstream,” Abela told conference delegates. “We don’t think sustainability can afford to be a separate silo of an organisation. We’ve seen that for too long and we think it’s part of the complexity that is currently around.
“We would argue that sustainability reporting should disappear, and it should become much more holistic. It’s not possible to cram every possible thing into a report. You need a top-slice integrated report and then specialist reports for select stakeholders. Trying to do it all in one report just isn’t manageable. At the moment, its hundreds of pages that require huge amounts of effort with a very confused voice because you’re trying to speak too many people at once.”
The concept of integrated reporting is built on a notion that the impact and outcomes of a sustainability report are more important than the report itself. There has been notable growth in the number of companies reporting on sustainability, but as it becomes a ‘business-as-usual’ approach to disclosure, the chances of it becoming a tick-box exercise also increase. This is evident in the number of companies supposedly contributing to the United Nations Sustainable Development Goals (SDGs). WBCSD’s Reporting Matters report notes that 79% of members currently mention the SDGs in reports, but only 6% have highlighted tangible action against a target. Mentioning the SDGs is itself at danger of becoming a new tick-box activity, and Abela wants more companies to “add more than just a logo”.
One way of ensuring that reports are filled with values rather than logos is through integrated reporting. The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, accountants and NGOs, aiming to promote “value creation “as the next evolution of corporate reporting. According to the IIRC’s policy and communications manager Juliet Markham, utilising the SDGs as part of a reporting framework should also entail any detrimental contributions to the goals as well.
Markham argued at the conference that some businesses are “reporting for reporting’s sake”, and that, if companies actually want to create change and drive interaction with reporting from within, a more holistic approach will be needed.
“This is just as much about the process of reporting as the actual report,” Markham said. “If reporting is to change behaviour and make markets more resilient, then it needs to be part of the way board and management thinks. The report should reflect the combined thinking of the board and management.
“You’re also going to be negatively impacting on some of the SDGs, and in terms of a business model and resource allocation if you really make the SDGs a part of your business, then you’ll need to report the negatives.”
Markham hopes integrated reporting will combat the “convoluted, backward thinking, box-ticking” approach to traditional reports. She noted that change will likely be on the horizon, with the European Commission introducing a “fitness test” of current reporting requirements later this year. The Commission will consult on whether current financial reporting frameworks meet objectives, whether ESG frameworks are fit for purpose, whether to experiment with integrated reporting and how to make the best use of technology (blockchain is an exciting development here) to drive better reporting.
The creation of the consultation was born out of the recommendations of the TCFD, which developed a voluntary framework for companies to align climate-related risks with financial filings, to give investors greater transparency when backing businesses financially.
With more than 100 businesses, including Unilever, Barclays and HSBC, all committing to implement the TCFD’s recommendations to disclose climate information as part of mainstream financial statements, the way businesses report on sustainability progress is changing. Whereas traditional sustainability reports focus on the previous actions to decarbonise operations and move away from linear economies, the recommendations from the TCFD look set to transform reports from collations of historical data, to essential, climate-driven and forward-thinking strategies.
One of the key recommendations of the Taskforce is that of “scenario analysis”. The concept of scenario analysis is that it encourages businesses to explore uncertainty to create a “well-established method for developing strategic plans that are more flexible or robust to a range of future states”. Through the analysis, businesses should evaluate a range of climate-related scenarios, including a 2C scenario to explore physical, strategic and financial risks and opportunities that could emerge. Scenarios should act as a hypothetical construct, rather than a forecast, but should be plausible, relevant, consistent and distinctive examinations of risks that challenge current consumptions on the future.
Barclays’ managing director of research, and TCFD member, Mark Lewis, notes that one of the aims of the Taskforce is to “create a market for a 2C world”, and that companies would only realise this transformation if climate mitigation was accelerated by a top down approach.
“We really need accountability at a board level for who is determining the policies around climate change, how the people at the top are being reviewed for the actions,” Lewis said. “If you don’t have that you don’t have accountability at the top of your business and it won’t filter down into the business and become a day-to-day part of the organisation.
“This doesn’t happen overnight, but the TCFD would like to see disclosures for strategies and metrics and targets, but governance and risk management need to be in mainstream financial reports. It’s a guide to how seriously the key decision makers in the organisation are taking this.”
If the recommendations become mandatory, which many predict they will, then scenario analysis needs to become a reality. According to Lewis, the energy industry is operating, and being valued by capital markets, on the assumption that they can burn fossil fuels on a “business as usual basis that does not reflect the targets of governments”. Subsequently, utilities has been the worst-performing sector in the Morgan Stanley global shares index since 2008.
Just a few months ago, Barclays highlighted the shift in focus that is transforming the financial sector. The bank launched a set of green finance products that will help promote sustainability in the UK and across the globe. If businesses want to capture these revenues, reporting data must be able to link climate resilience to financial profiles.
The TCFD’s recommendations can bridge the discrepancy between market actions and an ideal 2C world. But, this will only be achieved if reporting uses scenario analysis that gives investors insight on strategy, rather than a 100-page report filled with irrelevant data for the specific stakeholder.
Even GRI, the largest reporting framework used by companies, is in agreement that sustainability reports should be formed as an output of a holistic strategy where sustainability is embedded in the heart of the company. The organisation’s head of corporate and stakeholder relations Sabine Content recently told edie that GRI Standards are “uniquely suited” for creating both standalone sustainability reports, as well as showcasing data that can be combined into an annual report, as recommended by the TCFD.
According to the latest KPMG survey of corporate responsibility reporting, 75% of the world’s 250 largest companies that report on their sustainability performances use the GRI framework to do so. GRI pioneered the practice of sustainability reporting back in 1997 and it has continued to evolve reporting frameworks throughout the years, as a collective understanding of sustainability issues has evolved. Content believes the evolution of reporting will continue to create a more central strategy for companies to develop.
“Sustainability should not be a separate silo in an organisation,” Content added. “In a world where we are reaching planetary boundaries and critical tipping points where available resources, the environment, and the climate are threatening human security, sustainability should be a full-fledged and integral part of the strategy of the organisation as a whole.
“We live in an interconnected world where we are dependent on each other for survival – we cannot afford to keep sustainability separate. Sustainability is key not only to our continued survival as a global community, but it is key to successful business now and in the future.”
Reporting requirements are changing to a point where a standalone sustainability report may not be the best way to capture the interests of numerous stakeholders. Killing off the report doesn’t mean abandoning its importance, however, as from the ashes a new communications tool can emerge – one that injects sustainability into the lifeblood of an organisation.
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