Shaping the future of sustainability reporting
Edward Butt, Head of Environment, Social & Governance at British American Tobacco looks at the ever-evolving world of sustainability reporting and what the future holds as more investors wake up to the risks of the climate crisis.
At first glance it might seem like much of the work around sustainability is well underway. More and more organisations are embracing sustainability as a core part of their purpose. An ever-growing number of global standards, certifications and bodies help organisations to assess, compare and ‘badge’ activities and products. ESG considerations and emerging regulations for funds and financial institutions have never been so high on the agenda.
Despite these positive developments, there remains a significant challenge to materially progress society’s and businesses’ paths towards sustainability. There is also a need to simplify the plethora of sustainability reporting approaches and requirements, so that actual performance is not lost among different metrics, targets and reporting practices.
Here are three key trends that I believe will shape the future of sustainability reporting. These trends will support companies and institutions to effectively track and report on how they are performing against their commitments.
The advent of double materiality assessments is a fundamental shift. Double materiality considers and reports on not only the material impacts of an organisation on the environment and society, but also the material impacts of sustainability and accompanying requirements and regulations on that organisation.
While the concept of double materiality assessments is not new, the European Commission’s proposed Corporate Sustainability Reporting Directive (CSRD) will make it compulsory. Investors now expect to be able to assess both how a company impacts on sustainability issues, as well as how those issues and associated requirements impact upon the company and its value. Double materiality is the new materiality assessment gold standard.
There are some recognised frameworks, such as the GRI (Global Reporting Initiative) standards, against which organisations can align or gain external certification. However, significant discrepancies between application and interpretation, and a lack of universal metrics and methodologies, mean it is difficult to compare across companies and sectors. Therefore, standardisation and simplification of reporting frameworks is critical to measuring and benchmarking actual sustainability performance.
Internal and external stakeholders, including investors, need to be able to make decisions based on a clear understanding of an organisations’ sustainability impacts, strategy and performance.
Universal standards will support efficient and effective sustainability reporting and, more importantly, help establish a level playing field that assesses impact rather than activity. They will help organisations themselves identify and track performance internally, for example to shape sustainable transformation, as well as in communicating this to external stakeholders, including investors.
The new reporting frameworks coming into play include the:
- Task Force on Climate-related Financial Disclosures (TCFD), created to improve and increase reporting of financial information about climate change risks and opportunities.
- Task Force on Nature-Related Financial Disclosures (TNFD), similar to the TCFD but concerned with nature-related risks and opportunities such biodiversity and deforestation.
- EU and UK Taxonomies, establishing systems to assess the sustainability of economic activities.
- EU CSRD, requiring companies to report specific sustainability data using defined methodologies.
- EU Sustainable Finance Disclosure Regulation (SFDR), requiring asset managers to provide information on the sustainability impact of the companies in their portfolios, using the Principal Adverse Indicators (PAIs).
- US Securities & Exchange Commission (SEC) proposed Enhanced and Standardisation of Climate-Related Disclosures for Investors.
This is a complex mix, particularly for companies with business units and legal entities across multiple jurisdictions. It requires an understanding of what is either legally applicable or otherwise important to that business. As yet, it is neither simple nor easy for international companies to assess which frameworks to follow.
Nonetheless, the adoption and application of new, regulated standards with clearly defined, common metrics will make it easier to compare sustainability results and performance.
Accessible reports tailored to stakeholders
As reporting standards become more granular and universally applied, businesses may feel the need to be more creative to distinguish their sustainability credentials in a crowded space. This is particularly true for UK-based companies, many of which have had to include TCFD-aligned reporting in their Annual Report and Accounts since April 2022. This may have the effect of freeing up sustainability reporting to be shorter, clearer and more engaging.
I predict a rise in easily digestible case study approaches and communications tailored to specific stakeholder groups. This would complement the more prescriptive and comparable regulatory reporting that is being introduced.
At BAT, we currently use and provide indexes for several reporting standards, and we have an extensive independent third-party assurance of our data and disclosures.
Our aim is to produce robust and informative data together with a narrative that captures our progress across important topics such as tobacco harm reduction, climate change, biodiversity, socioeconomic issues, women’s empowerment and human rights.
First and foremost, we work hard to ensure that our sustainability reporting is easy to read and accessible. Complying with relevant reporting requirements, using universal, comparable and externally assured metrics and data methodologies is another priority.
Ultimately, our aim is to bring all our stakeholders with us on our journey towards a sustainable future and A Better Tomorrow.
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