Why does sustainability reporting matter?

BITCI News - Apr 02, 2019

AUTHOR: Bernadette Phelan

Business in the Community IrelandOur Head of Advisory Services Bernadette Phelan recently addressed the CSR Stakeholder Forum, these that follow are her remarks:

Responsible businesses know that building and keeping trust with its many stakeholders (be it employees, customers, suppliers, government, local communities) is a necessary condition for business success.  Trust is fostered through openness and transparency by the business, and reporting is a component of this trust process between business and its stakeholders. Companies understand the importance of communicating and reporting on their sustainability and CSR practice, and engage stakeholders through many different communication formats & channels.

In recent years, a vital business stakeholder has taken a significantly expanded interest in sustainability reports – and that is the investor community.  There is a growing market demand for more information on Environmental, Social and Governance (ESG) issues and considerations.  Internationally, sustainability and integrated reporting is increasing due to market drivers and investor expectations rather than through regulatory requirements.  It is an increasingly important theme in the asset management sector, with many predicting that it will soon become a default approach for most funds, not just for those with specialist ESG products.

Much media coverage has been given to the statements’ by Larry Fink, Chairman and CEO of Blackrock Investments (the worlds’ largest asset manager) on the importance of ESG reporting, and he predicts that sustainable investment will be a core component of how everyone invests in the future – however we are only starting.  Another vital driver of change has been the work delivered by the Task Force on Climate Related Financial Disclosure, whose mission is to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.  These changes make sustainability a priority issue for Board rooms and the C-suite.  Ireland is an open economy dependent on attracting international investment – success in the future will be dependent on businesses and our economic systems understanding, and accounting for, the risks due to sustainability challenges.

At an EU level, the Sustainable Finance Action Plan is working to deliver on three clear objectives, and these will influence both the business risks and opportunities open to Ireland.  The Action Plan is focused on:

  • reorienting capital flows towards sustainable investment and to achieve sustainable and inclusive growth,
  • managing financial risks stemming from climate change, environmental degradation and social issues, and
  • fostering transparency and long-termism in financial and economic activity.

The EU’s Directive on non-financial reporting was transposed in Ireland, and while focused on specific categories of company, it is an important signal to demonstrate the changes and maturing of the reporting landscape for companies.

As we are at an early stage of development, investors are struggling to find the information they need to compare companies on ESG.  However, the trajectory is set, and a lot of work is happening to overcome current barriers. Initiatives such as the Corporate Reporting Dialogue and the Reporting Exchange  are working to support companies, investors, and financiers to bring to market consistent and comparable ESG reporting standards.

Presently reporting is challenging for companies due to a number of factors – there are many reporting frameworks, there is a range of KPIs to potentially select and defining social KPIs is difficult, there can be a lack of consistency in internal processes, it is difficult to define scope and subject matter (i.e. what to include, what are the boundaries), understanding what is materially critical to your business.  However over time it is anticipated that these difficulties will reduce and reporting will mature; for instance work is on-going with Accountancy Europe and the World Business Council for Sustainable Development on how to overcome such issues and upskill the sector to support companies.

And we are seeing these changes with our member companies in Ireland.  Sustainability and investor relation (IR) teams are starting to work and engage with each other but given their different expertise and function, they are talking different languages – for now!  This disjoint between Sustainability teams and IR & finance teams is grounded in a number of factors, and were concisely defining by a research study conducted by SustainAbility.  The factors relate to:

  • language & definitions – using differing terminology to describe, and different indicators to measure company performance
  • timeframe – companies and their IR teams are pressured by investors to report on short term results while Sustainability teams often focus on issues that play out over the medium to long term
  • expertise – inadequate levels of mutual comprehension and technical capacity in the respective disciplines of IR or Sustainability
  • relationships – lack of strong internal relationships between IR and Sustainability departments and team members
  • resources – not enough staff time or other resources dedicated by Sustainability and/or IR departments to integrate sustainability issues and sustainability performance data into investor communications

Reporting on sustainability is a technical and challenging discipline, and we know that in many respects (given the asks of investors) we are at an early stage of development.  But big changes are ahead and Irish companies need to consider their reporting on CSR and sustainability, for all their stakeholders, and the investors will bring very specific requirements.  Companies will need to be equipped to better integrate sustainability in financial and investment discussions – this will be a challenge so it is important that our learning curve starts now.  By doing this, business will benefit from have a better understanding of risks, and critically business opportunities.

For your company, applying the management tool of the Business Working Responsibly mark is a concrete way to guide on reporting your strategy, and to understand your strengths and areas of improvement.