Making the grade
Peter Wilson, director of WSP Environmental, explains whether existing systems will ease the requirements of the OFR
Not too many years ago environmental performance within a business was a largely private matter. Provided businesses steered clear of legal prosecution and/or adversarial relationships with regulatory agencies or NGOs, their environmental affairs were their own concern. However, all that has changed: Responsible Care, BS7750, The Eco Management and Audit Scheme, Public Reporting, ISO 14001, the Global Reporting Initiative, FTSE4Good, Business in the Community, the Turnbull Guidance and a host of other voluntary and mandatory standards and initiatives have made the environmental performance of businesses much more transparent.
We are now facing the deployment of yet another tool - this time a regulatory instrument - designed to ensure that environmental information which might be of value to investors in FTSE-listed companies is available as part of their statutory reporting requirements. Many businesses are just beginning to assess what the implementation of the Operating and Financial Review will mean for them.
This article does not attempt to address in detail these requirements. To attempt to do so in such a short article would be foolish and would simply retrace ground that others have covered in detail. Rather I want to look at whether existing risk-based environmental management systems, in particular ISO 14001, can support compliance with the requirements of the OFR.
Wider OFR compliance
While officially the OFR applies only to FTSE-listed companies, in practice, its reach will be much broader. Many non-listed companies will comply with OFR requirements in order to ensure that organisations such as credit rating agencies, business-to-business customers and other key stakeholders have the same information about their non-financial performance and regard them in the same way they regard the OFR's target audience.
ISO 14001 and the OFR share many of the same process components. Each requires issue identification, evaluation and - for those issues deemed significant - a process of performance measures, indicators and targets for improvement and/or maintenance. In addition, the OFR requires that the report reflects the finding of these processes (ISO has no reporting requirement).
It is clear from the available guidance on OFR implementation that auditors of the report component will focus on confirming the robustness and rigour of the processes which informed the report, rather than solely on the figures contained therein. Companies producing OFR reports need therefore to ensure the identification procedures, evaluation protocols and the measurement techniques and management plans applied to issues of concern can withstand auditor scrutiny.
Companies implementing ISO 14001 compliant management systems will be familiar with this structured approach to identifying and managing issues of concern and development of protocols and procedures to meet the audit needs of such management systems. In addition, those organisations who have chosen to adopt the European Eco Management and Audit Scheme will have the additional benefit of experience in producing environmental reports based on such structured systems. It would seem the potential - at the very least - exists to base an OFR-compliant system on ISO management system principles. In broad terms the author believes this to be the case. It is clear that ISO systems can identify, filter, manage and report on environmental issues: in many ambitious management systems implementations this process will extend to quality, health and safety and social issues. Such systems routinely withstand the scrutiny of auditors.
However, before basing an OFR report on the output of a certified ISO 14001 (or 9000) system, companies should consider carefully whether the fit is good. While the model for delivery of compliance with ISO 14001 and OFR may be seen as similar the design intent for the systems may be different. The design intent of the OFR is clear it is to provide investors with information, including information of a non-financial nature, which may be material to their investment decisions. In simple terms this means that in order to be considered significant the issues identified need to have the potential to materially influence the value, profitability or viability of the investment.
Different intentFor ISO 14001 systems the design intent is different. What constitutes significance in such systems varies from organisation to organisation but typically would include environmental impact, stakeholder concerns, legal requirements, and issues such as economic impacts. These systems are intended to identify issues which should be subject to management control, not just those which can impact on market value. For example an ISO 14001 system may identify potential waste and/or energy savings of £1million per annum, with a related investment of £500K in the first year and £100K per year thereafter. In most ISO14001 systems this would be considered significant and a programme of work would be put in place to realise the savings.
However, for a company with a market capitalisation of many hundreds of millions and profits in excess of £100 million, this may well not be considered material information for the OFR. It rather depends on scale of the organisation and the associated impact on the business. It is true that a good ISO 14001 management system should identify the environmental issues which are of interest in the context of OFR but it should also identify many that are not.
Focus on environmental issuesIt should also be noted that ISO 14001 focuses in its standard form on environmental issues. While other standards focus on other areas such as health and safety, quality and so on, none deals with the full range of issues which may be of concern within the OFR. In conclusion, those responsible for OFR compliance in companies could learn much from ISO-compliant systems. However, if they choose to rely on existing systems such systems are likely to need careful review and redesign in order to ensure that they meet the design intent and have a range of coverage required to deliver reliable robust compliance with the new regulation.