Integrated and innovated: What's next for the sustainability report?
Against a backdrop of changing environmental science and disclosure legislation, compounded by changing public sentiment, the corporate sustainability conversation is evolving rapidly. After strings of new social and environmental targets were set over the past 12 months, many firms are also evolving ways of reporting progress.
When edie launched in the 1990s, sustainability or CSR departments at businesses were often siloed and tasked only with delivering ‘add-on’ projects – usually centring around philanthropy in communities and supply chains rather than managing issues like energy and waste in-house.
Fast-forward to today and businesses are increasingly realising that environmental issues are business-critical in the short and medium-term. Of course, there are still laggards – and the world is, ultimately, still off-track to deliver the Paris Agreement. But the environmental profession and conversation is growing, and many working in this space say the board is now coming to them rather than them having to fight to gain buy-in.
The drivers of this transition have been multiple, from changing legislation on climate action and disclosure; to the effects of temperature increase, resource overconsumption and poor worker protections materialising across supply chains; to increasingly mindful investors and consumers. And, of course, the Covid-19 pandemic has prompted businesses and nations to recognise the interconnected nature of risks across environmental, social, public health and financial axes.
Some business changes have been clear to see, such as changes to department titles (ESG is now the term of choice for the likes of Kraft Heinz and Kao Corporation), sustainability bond and loan issuance and the announcement of new targets and strategies. But, more than 12 months after Covid-19 was first declared a global pandemic, trends in reporting against these changes are still emerging.
Integrated reporting – in which disclosures on financial and environmental and/or social results – was becoming increasingly popular even before Covid-19. Proponents claim that it helps businesses ensure that sustainability targets are properly prioritised in capital allocation and frame action on ESG issues as beneficial to the bottom line, rather than a bothersome added cost.
Integrated reporting has become so popular in recent times that a dedicated organisation, the International Integrated Reporting Council (IIRC), has been set up. Around one in ten FTSE100 firms were using some form of integrated reporting in 2019 and many believe the proportion will rise post-Covid-19.
Momentum towards a comprehensive, simplified corporate reporting landscape continues to build. In our May newsletter, we share some of the latest news developments and the work we are doing to progress integrated thinking and integrated reporting.https://t.co/W3p7lhCj5S pic.twitter.com/YN2SE9t2Dd— Integrated Reporting (@theiirc) May 14, 2021
One of the early adopters of this approach – and a company renowned for just how integrated the reporting is – is Philip Morris International (PMI). PMI released its first integrated report last spring, outlining how it will address two business transformations simultaneously: the journey to net-zero and becoming a smoke-free company. A key feature of the integrated reports from PMI, of which the second annual iteration was released this week, is space dedicated to tracking progress on new ‘Business Transformation Metrics’. These track how skills, funding, technologies, processes and other business issues are being shifted to transform the business.
PMI’s chief sustainability officer Jennifer Motles says the journey to integrated reporting was a “deeply collaborative, cross functional process” that has “further embedded integrated thinking” within the tobacco giant.
“It fostered greater internal alignment by highlighting the connectivity of priority issues managed by different departments,” Motles explains. “The approach was also valuable in translating PMI’s Statement of Purpose, into the various undertakings and daily project management in the company.
“Understanding an integrated report as a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term is key.”
Aside from preparing for a months-long process, Motles’s advice to others looking to adopt integrated reporting is to “define company purpose with clarity, have a solid materiality analysis with metrics, enact cross-functional collaboration and gain strong support from senior management”. In short, an integrated sustainability report will only be as strong as an organisation’s embedded sustainability culture.
“It showcases how every individual in this company is driving sustainability and integrating it into their day-to-day job.”— Philip Morris International (@InsidePMI) May 18, 2021
Our Chief Sustainability Officer, @MsChiefSustain, explains why you should read our recently released 2020 Integrated Report ➡️ https://t.co/SRS6nwD2Em pic.twitter.com/1LHE7ygF7W
Enhancing engagement and accessibility
Not every reader is going to take the time to read a business’s full integrated report. PMI has, therefore, also published an accompanying ESG Highlights document, standalone sustainability materiality report and supplement further detailing its sustainability approach.
Motles says this approach ensures the reporting is more accessible, dynamic and interactive. A similar line of argument on this approach was raised by Arriva’s strategic engagement and communities lead Lucy Dormandy during edie’s recent Sustainability Reporting & Communications webinars, and by Carlsberg Group’s sustainability manager Pete Statham, who spoke on the accompanying episode of the edie podcast.
Carlsberg Group produces a summary sustainability report, annual report and website alongside its main sustainability report. Statham says this approach “ensures a targeted approach for the relevant audiences”, allowing the brewer to “adapt the level of detail and information that we include in each document and encourage cross-referencing where relevant”.
While the main sustainability report is a hefty 92 pages and intended for readers looking for detailed information, such as ESG analysts, the summary report, Statham elaborates, is more suited to most customers and colleagues. The website, meanwhile, can be updated more regularly – for example, with new case studies and updated qualitative data – and can be easily linked in social media posts.
Aside from the trends towards integrated reporting, digital reporting and multiple documents (sometimes referred to as a ‘reporting suite’), the adoption of international recommendations on climate risks and sustainable development – the Task Force on Climate-Related Financial Disclosures framework and UN Sustainable Development Goals (SDGs) respectively.
KPMG’s 2020 report revealed that 40% of companies now report climate risks, with the TCFD being the most common framework. The same report found that 70% of companies now acknowledge their contributions to SDG progress in reporting.
As with integrated reporting, the TCFD and SDGs provide businesses with opportunities to prove they are going beyond a ‘tick-box’ approach and embedding sustainability. Done well, they can show that sustainability is a board-level priority and is considered in decisions on investments and business models.
But not all reporting is created equal. While 1,500+ businesses have said they will report using the TCFD framework, reporting quality has only improved by 6% since 2017. Trends could soon change as nations including the UK begin to mandate TCFD-aligned disclosures, however.
SDG-related reporting quality is also mixed. KPMG found that many businesses are keen to report on Goals relating to economic success but avoid goals about nature and climate – even when their sector is high-risk. UN Global Compact calls the process of choosing goals without a proper materiality assessment “cherry-picking” and the process of using SDG logos without aligning targets “SDG-washing” Both practices are believed to be widespread.
Carlsberg’s Statham said it was important for the business to use SDGs to develop its sustainability strategy, before using them in the report, to avoid these pitfalls. The brewer’s report also includes an ‘SDG Index’, outlining which targets are material and what they entail; what direct actions are being taken
All in all, while sustainability reports are evolving, it is important that they reflect an evolution in business as well as in disclosure. Otherwise, greenwashing accusations may well occur.
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