Companies get involved in sustainability are providing more and more information on their activities through their websites, annual reports, and other communication means. This blog explains the complete Sustainability Report 2019.
However, even with all this information, many consumers are not convinced. So how can you distinguish a leading company from a laggard?
Unfortunately, this is not always easy. We often judge organizations as single entities, but they are made up of many separate parts, some good and some not so good. Here are some things you can look at to help you decide whether a company is serious about these issues:
Look at whether or not it makes sense. Can you understand their sustainability strategies? Do their products and messages make sense? Is their sustainability strategy consistent?
Are they seeing themselves within a larger system of the world? Are they focusing on the issues that you think are most important, or that their stakeholders think are important?
Look at their approach to sustainability. Is the company proactive or reactive when it comes to sustainability? Is the company going beyond minimizing the risk of exploring new opportunities?
When a problem occurs or the company is criticized for their actions/inactions, how does the company react? Do they take proactive measures to make sure it doesn’t happen again?
Look at how they engage. How do they engage with business and non-business partners, their suppliers, their peers, the community, their employees?
Are they actively involved in sustainability networks at the local, national, or international level? Are they fulfilling their membership requirements of these networks?
Look at the future. Although the past will tell you where the company has come from and what their record is, it is not necessarily a good guide to future activities.
Look at their current performance and published policies and future commitments. How quickly are they moving? How does this compare to their peers?
Are they focused on continuous improvements? Leading companies set goals that challenge and inspire. They also have clear steps that show how they will attain those goals.
Look at who is driving the change. The commitment of the board and the CEO is a good indicator of how seriously a company is taking these issues. Speak to employees working for a company.
Do they know about the company’s sustainability strategy? Are they involved? Is it part of their jobs? If sustainability strategy is part of the way that they speak about business then this is a good sign that management is committed.
Look at the resources allocated to sustainability. How many people are responsible for implementing sustainability strategies within a company?
How much power and influence do they have? What kind of budget do these activities have? How much time do people have to work on these issues?
Look at how they communicate. Do they make claims in their promotional materials? Are these backed up? Are they credible, or are they greenwashing? Do they seem to be genuinely engaged in these issues?
Don’t just base your opinion on what you hear. Just because a company is not vocal about its sustainability commitment, in no way means it is inactive. Some companies are very active in this area but just don’t have the budgets or choose not to communicate these efforts widely.
Look at how they report. Look at the quality, quantity, and transparency in the information they put in their annual reports.
Do they truly understand the issues affecting themselves and their stakeholders? Do they follow certain reporting guidelines such as the Global Reporting Initiative?
Look at the whole as well as the parts. It is often difficult to say whether a whole company is good or bad. All companies will have examples of successful projects in this area and parts of the business that need more work.
Leading companies are those that are proud of their successes and who acknowledge and are working on their weak spots. Look at what gets cut. When times get tough, are the sustainability policies the first to go?
Sustainability in financial statements
Although much of the emphasis regarding sustainability concerns disclosing information in separate sustainability reports (explored at the end of this blog), there is increased work being done on how to include sustainability information in annual financial reports.
Today, the majority of annual financial reports are still issued with little or no environmental or social information. However, more organizations themselves have been exploring ways to incorporate sustainability and financial information into their annual reports.
Within current standards, environmental issues are treated in more depth than social issues. Some examples of environmental issues currently covered by financial reports include:
Liabilities. These can include having to pay fines for non-compliance with laws, legal fees from court cases by shareholders against the company, or costs for cleaning up a polluted site. Liabilities can either be from events that happened in the past, or provision for events that may happen in the future.
Intangible assets. Those elements of a business that do not have a specific financial value, but which increasingly represent a significant part of the value of a company such as brand, intellectual property, and reputation.
Sustainability issues that impact a company’s financials can also be included in the narrative sections of the report.
This gives management the opportunity to provide contextual and non-financial information about how sustainability issues have impacted, or may impact, financial conditions and results (also referred to as operating and financial review, business review, management discussion, and analysis depending on the country).
Companies have several different ways to report on sustainability, including sustainability reports and reporting on sustainability issues directly in their financial reports. Increasingly, companies are choosing to integrate the two reports together into one.
The level of integration varies, ranging from including information on sustainability in the annual report to combining the two reports one after the other, or fully integrating the two sets of information together – also known as integrated reporting.
Integrated reporting is about exploring the interaction between financial and non-financial performance. According to the International Integrated Reporting Committee (IIRC), an integrated report is ‘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.’
It combines the different strands of reporting (financial, management commentary, governance and remuneration, and sustainability reporting) into a coherent whole that explains an organization’s ability to create and sustain value.
While sustainability reports are often aimed at engaging a range of stakeholders, they are often perceived to be of limited use to investors.
Integrated reports are intended for investors as well as for those stakeholders who want a more holistic view and insight into the company ’s strategy and performance. They aim to communicate the factors most important to the creation of value over time.
It is about improving the basis of capital allocation by enabling the capital markets to better understand a company’s strategy, align their models with business performance, and make the efficient and forward-looking investment and other key decisions.
The Integrated Reporting Committee of South Africa suggests that the following elements be included in an integrated report:
A description of the scope and boundary of the integrated report.
A concise overview of the organization and its activities, a statement of its business model describing the manner in which it currently creates value, and an overview of its governance structure. A description of the risks and opportunities that are material to the organization’s current and anticipated activities.
A description of the organization’s strategic objectives demonstrating how these have been informed by the risks and opportunities, including sustainability issues.
An account of the organization’s performance in terms of its strategic objectives, material social, environmental, economic, and financial impacts, and KPIs and KRIs.
A statement of the organization’s anticipated activities and future performance objectives, informed by its assessment of recent performance and understanding of societal trends and stakeholder expectations.
An overview of how the organization remunerates employees and senior executives, including factors that could influence future remuneration.
A brief analytical commentary that reflects the understanding of the organization’s governing structure and executive team regarding the nature of the organization’s current and anticipated performance in the context of the organization’s strategic objectives.
One of the challenges to integrated reporting is that many organizations’ ability to produce quality non-financial data is not as high as financial data, meaning it needs to be improved by improving the timeliness and robustness of the data.
At Novo Nordisk, who have been publishing integrated reports since 2004, financial and non-financial performance is reviewed by the Audit Committee of the Board at the same time.
The process for reviewing performance is therefore aligned throughout the company and this increases the robustness of data systems and confidence in data quality.
There is a push internationally to bring integrated reporting to the forefront and to develop standards and guidance in this area. The IIRC was established in 2010 to achieve a globally accepted integrated reporting framework.
Since 2011 all companies listed on the Johannesburg Stock Exchange are required to file their integrated reports on an ‘apply or explain why not’ basis, and most have.
The Corporate Sustainability Reporting Coalition urged UN member states at the Rio+20 conference in 2012 to require public and large private companies to integrate sustainability information in their annual financial reports.
Estimating the cost of inaction
One of the areas slowing down global action in sustainability is the perceived high cost of taking action. In response, there has been an increased effort to calculate the costs of not taking action in areas such as water and sanitation, clean air, and climate change.
A report submitted to a UN biodiversity conference in 2008 said mankind was causing US$68 billion of damage to the planet’s land areas every year, through factors including pollution and deforestation.
The UNEP Finance Initiative estimates that environmental costs from global human activity cost about US$6.6 trillion estimated annually, with US$2.25 trillion of that caused by the 3 000 largest publicly listed companies. The 2006 Stern Report put a £2.3 trillion price tag on the consequences of ignoring climate change.
It said, ‘The costs of action to the global economy would be roughly 1 percent of GDP, while the costs of inaction could be from 5–20 percent of GDP.’
The OECD also published a report that looked at the costs of inaction on a range of key environmental challenges such as air and water pollution, natural resource management, environment-related industrial accidents, and natural disasters.
For example, the costs of natural disasters (e.g., floods, hurricanes, earthquakes, etc.) to the poorest countries are estimated to be as much as 13% of annual GDP.
A KPMG study showed that environmental costs have risen 50% from 2002 to 2010 for 11 industry sectors. Although the cost of taking the required action today seems significant, many agree that the costs if we take action today are trivial compared to how much this will cost us in the future.
From free to fee
We’ve seen plastic shopping bags move from being a free handout to one that consumers are required to pay for in some countries. In the past, many naturally occurring resources were free (fish, water, and air to name a few).
Future generations will increasingly be living in an environment where these same resources will be priced. It is easy to imagine new housing developments that use clean air and water in their neighborhood as an important selling point.
The opposite is also starting to happen; sustainable products that were once more expensive to produce will become increasingly less expensive as the materials they use are more readily available and savings from reducing the use of chemicals, petroleum, and other expensive inputs start to show.
Annual financial statements are subject to an audit or assurance process, which is done by an accounting firm to ensure accuracy and enhance credibility.
This assurance statement is usually found within the first few pages of the report. Although no such regulatory requirements exist for sustainability reports, readers are increasingly looking for voluntary assurance that covers two areas:
Assurance of management and reporting systems and associated performance, which assesses the strengths and weaknesses of the company’s sustainability programs and initiatives.
Report content assurance that looks at the accuracy, completeness, reliability, balance, and fairness of the report, similar to the verification of financial statements on stand-alone sustainability reports and on integrated reports.
Companies that report on their environmental and social performance rely on accounting firms, consultancies, certification bodies, and CSR specialists for assurance of these reports to ensure credibility.
Some – such as Shell, GE, and Nike – have panels of independent advisers that provide expert views as an alternative avenue to enhance credibility.
Although companies are increasingly commissioning assurance statements (more than 70% of the 250 biggest global companies have some sort of assurance), there is no single international set of principles or standard for assurance of non-financial reports.
The leading international standards for assurance are the accounting standard ISAE 3000 and 3410, as well as the multi-stakeholder-created AA1000AS, which looks at both the verification of data and the underlying management and reporting systems.
Even with these emerging international standards, there are still inconsistencies and wide variations in the approach taken for sustainability assurance.
An assurance statement typically looks at the following:
Specific declarations in terms of what kind of audience the statement is aimed at, and whether or not it was made independently from the company, outlining the respective responsibilities in the audit process of the auditor and the company.
An outline of the methodology, how the assurance provider undertook the audit, such as conducting internal interviews, scrutinizing internal data systems, reviewing external documents, interviewing external stakeholders.
In the case of AA1000AS, assurors can provide high assurance or moderate assurance based on the amount of evidence obtained and assuror access to that evidence to support statements regarding the following three principles:
Inclusivity. Has the organization been inclusive in how they engage stakeholders in achieving an accountable and strategic response to sustainability?
Materiality. Have they identified what the material (most important) sustainability issues are to the organization and to its stakeholders?
Responsiveness. Have they responded to these and communicated appropriately (i.e., establishing policies, objectives, and targets, management systems, action plans)?
Recommendations and opinions, which offer insight in terms of performance, strengths and weaknesses, challenges, etc. In some instances, the reporting organization will also provide a report to management.
Such additional reports should not communicate different conclusions than those found in the publicly available assurance statement, but rather include any limitations in the scope of the disclosures on sustainability, the assurance engagement, or the evidence gathering.
The global economy is changing from one that was dominated primarily by a few countries, to one where there are a larger number of global economic powers coming from developing and emerging economies.
Developing world economies will account for nearly 60% of world GDP by 2030 according to the OECD. The big emerging markets include Brazil, China, Egypt, India, Indonesia, Mexico, Poland, the Philippines, Russia, South Africa, South Korea, and Turkey.
Emerging markets are crucial players in sustainability for many reasons:
Talent. People have become one of the most highly sought after and valuable resources on Earth, fought over by multiple competitors. Of the 438 million people to be added to the global workforce by 2050, 97% will come from developing countries.
Resources. With increased levels of business comes increased competition for resources such as energy, commodities, and raw materials. Since 2000, these economies have been responsible for 85% of the increase in world energy demand.
New consumers. With up to a billion new consumers in these emerging markets, there are plenty of opportunities to grow market share. Emerging economies will account for more than half of global consumption by 2025.
Because they are growing. From the emerging economies, there are now more than 70 companies in the Fortune Global 500 list of the world’s biggest companies, a number that is rapidly growing as these companies expand and acquire new businesses.
Many everyday brands in Western markets are owned by companies in the developing world (e.g., Tetley in the UK is owned by Tata in India).
Emerging market companies fit into the following categories:
Fully fledged globalizers tend to be older, more established companies that have attained a scale and geographic span on a par with big Western multinationals (e.g., CEMEX in Mexico, SABMiller in South Africa).
Regional players aim to break out of their domestic market in search of greater scale, often fixing their sights initially on neighboring markets (e.g., Vina Capital from Vietnam are expanding into Southeast Asia).
Global sources are interested principally in selling to their domestic market but, because of resource constraints at home, they source internationally.
Global sellers primarily manufacture or source at home, but are seeking new consumer markets abroad in order to increase sales.
Multi-regional niche players tend to be smaller companies operating across multiple regions in niche sectors, usually on the basis of innovative technology or processes.
Where traditionally communication was a one-way street, with help in the form of aid going from developed to developing countries, and developed countries holding the power in terms of business relations with developing nations, it is increasingly the other way around, in particular when it comes to sustainability.
There is a growing range of innovations coming from emerging markets, driven by two factors. First, the cumulative performance of these companies matters because emerging markets in total are set to contribute more than three-quarters of global growth by 2025.
Second, those very regions will increasingly be the ones feeling the pressure of resource depletion the most.
Companies in emerging markets are increasingly proving to be leaders in this field because:
1. They innovate continuously to turn constraints into opportunities. Rather than focusing on expensive research into new technologies they focus instead on making products cheaper, more widely available, or better suited to local production processes while also turning constraints in delivery channels into opportunities. They are doing this by:
Using fewer resources. Shree Cement in India which, when faced with limited access to low-cost energy, developed the world’s most energy-efficient manufacturing process and set a global benchmark in cement production.
Turning resource constraints into opportunity. Broad Group in China, a large producer of air chillers, uses alternative energy sources such as waste heat from buildings to power its range of non-electric air-conditioning units.
Educating customers. Jain Irrigation in India uses dance and song to explain the benefits of drip irrigation to local communities, which not only allows them to sell effectively but also to work collaboratively with local communities.
Giving access to financial assets. Kenya’s Equity Bank uses mobile phone technology to enable it to reach small farmers in rural Kenya by partnering with Safaricom to use the M-Pesa financial services platform.
2. They embed sustainability into their company cultures. Companies in these regions are also exploring how to make sustainability an integral part of how they do business. Define a bold vision.
In Egypt Sekem, an organic food producer uses organic farming as a way to reclaim desert land, producing food for the local market and reinvesting the profits into the community. Sekem also shares profits with the small-holder farmers in its network.
Integrate it into operations. Masisa, a wood products manufacturer in Chile, developed a balanced scorecard on sustainability. Engage their staff. Natura in Brazil invests heavily in staff training on identifying socio-environmental challenges and turning them into business opportunities.
3. They proactively shape their own business environments.
Companies in these regions recognize that in order to have a larger impact they need to engage the wider business system of regulators, competitors, suppliers, customers, and other stakeholders.
Influence policies and standards, especially those operating in weak regulatory regimes. Grupo Balbo, an organic sugar producer in Brazil, is working to turn the entire sugar industry in Brazil into an organic sector.
How can western firms compete in countries where bribes are seen as an ordinary cost of business?’ There are many other uncertainties about emerging markets, in particular, local governments and their attitude to the rule of law.
‘Will theft of intellectual property be punished? Will lax regulatory enforcement allow your company’s supply chain to be contaminated?’
Uncertainty. Uncertainty is present in how we value all environmental and social problems, as well as the policies that are being put in place to address these problems. Any analysis that fails to recognize this runs the risk of not only being incomplete but also misleading.
Free riders. Free riders are those who don’t take on their fair share of responsibilities, but who benefit from those that others take on. Free riders in the field of sustainability take the form, for example, of firms that sign up to international initiatives and use the logo but who fail to pay their dues or follow the requirements listed for membership.
Everyone needs to do their part. In order for sustainability to move forward, businesses need to do their part but so do consumers, buyers, government, and other actors.
Determining the tradeoffs. Although we would like to believe that all sustainability initiatives are win/win, the fact is that many are not in the short term. This leads us to have to make tradeoffs in our daily decisions and daily lives. How much are we willing to pay? What are we willing to do? How far are we willing to go?
Getting incentives right. Reportedly, only a small fraction of houses being rebuilt in New Orleans after the hurricane meet new stricter building codes. Better-built houses are more likely to survive a storm, but the builders and homeowners know the government will pay them to rebuild if it happens again.
This is referred to as moral hazard, ‘where people behave differently if they are insured against risk. In this case, you have a moral hazard when people choose to build in disaster proven areas because they don’t have to take on the full cost of their decisions.’
Determining what ‘optimum’ means. If you were to ask environmentalists, they would say that the optimum level of pollution is zero, but economists don’t necessarily see it that way.
Pollution is a byproduct of many things that we value and, therefore, some amount of pollution is warranted. For example, even renewable energy produces some quantity of pollution. The question, therefore, is, how much is optimum?
Different forms of reporting
Companies are experimenting with and exploring a range of alternative options for collecting and presenting their environmental and social data beyond sustainability and integrated reporting outlined in this blog.
Because of the importance that the company places on sustainability, Timberland reports their sustainability numbers on a quarterly basis rather than yearly. The information is presented online, comparing progress against the company’s sustainability goals.
Another example is Puma, who have created an environmental profit and loss statement (Environment P&L) that analyzes and puts a monetary value on key environmental impacts that arise due to Puma’s business from the production of raw materials through to the point of sale and even to the product level.
Their work in this area is inspiring a range of other companies and governments to explore how the Environment P&L could be mainstreamed and used across the business sector.
In 2010 Hershey released its first CSR report outlining all of the chocolate company’s sustainability-related successes. Shortly after, a group of activists and NGOs published their own version of Hershey’s CSR report which instead focused on the company’s human rights abuses in the production of its cocoa.
This kind of report also called a shadow report, is put together by NGOs to supplement or present alternative information to government and UN reports however there are several instances of NGOs presenting such reports about companies too.
Shadow reports aim to supplement or present alternative information to what the company is discussing, to highlight issues not raised by the original report that the shadow report is based on.
Friends of the Earth, a large international NGO has produced a few shadow reports, first in 2009 they released an alternative report for Shell called The Other Shell Report and in 2009 they did the same for BHP Billiton, both times focusing on the company’s exaggerated claims.
CSEAR has done some research in this area including creating shadow reports for Tesco, HSBC, and Ryan Air.
There are a growing number of sustainability-related issues, from water to climate change. No organization can be expected to respond to all of them, especially when the issues are not all seen as equally important to them.
In the world of finance, any issue that has (very) roughly a 5% impact on the net income has traditionally been considered to be material. However, when it comes to sustainability, it is not always so easy to tell because it isn’t as easy to put a price tag on the potential impacts.
So, organizations need to determine which issues are material – meaning which issues could make a major difference to an organization’s performance both in the short and long term.
According to assurance organization AccountAbility, ‘Materiality is determining the relevance and significance of an issue to an organization and its stakeholders. A material issue is an issue that will influence the decisions, actions, and performance of an organization or its stakeholders.’
The first step in determining which issues are material is to make a list of all the issues that are, or could be, relevant to the business and its stakeholders, and collect the information needed to assess their significance. This includes:
1. Issues that have a direct short-term financial impact. These are resulting from aspects of social and environmental performance that have short-term financial impacts. For example, carbon emissions have become financially significant for many companies over the past few years.
2. Issues where the company has made policy-related statements or commitments. Issues are material where a company has agreed to policy commitments of a strategic nature, including regulatory or voluntary requirements for non-financial disclosure.
Tesco in the UK, for example, has publicly set out the significance of its treatment of people to its core business strategy.
3. Issues which other comparable organizations consider to be material. To understand the materiality of a specific issue or aspect of performance, look at whether a company’s peers consider it material.
For example, in the pharmaceutical sector access to medicine in developing countries is an increasingly important issue.
4. Issues which stakeholders consider important. It might sound obvious, but a company should take into account the concerns of stakeholders, including employees and customers. If certain issues are important to your stakeholders, then they should be taken seriously.
5. Issues that are considered social norms. Areas that are covered by regulations or could be in the future, best practices and emerging norms should all be evaluated to determine which ones are material to a business. This includes international initiatives such as the Global Reporting Initiative and the Global Compact.
Companies differ dramatically, so what is material for one company may not be for another. Not all the issues a company identifies will end up being significant to its long-term success.
Therefore, once all the sustainability issues that could be material to an organization are identified and assessed, they should then be prioritized according to criteria determined by its management, such as whether they are of high, medium, or low materiality.
Many companies map this information into a materiality matrix, where the extent to which issues are deemed significant to stake-holders is mapped on one axis and significant to the company on the other.
Therefore, the issues that show up in the top right corner are significant to both groups while those issues in the bottom left corner are less significant for the particular company.
Once mapped, and the level of materiality determined for each issue, this information can be used:
To determine the scope of corporate reports and other communication so that they are more strategically aligned and useful to external stakeholders.
To promote internal understanding of the link between sustainable development issues and business strategy.
To feed into ongoing strategy development by highlighting rapidly emerging issues and enabling them to be factored into strategy development. Anglo American, a global mining company, has determined that their most material issue and number one priority is safety.
The company has created a list of targets around safety and regularly reports on progress made toward those targets. Based on their efforts, which have included engaging not just their employees but unions and government as well, they have seen a decline of around two-thirds in number of fatalities since 2007.