Sustainability - the value of integrated reporting
Sustainability – the value of integrated reporting
Sustainability is more than just an over-used term or business practice for global organisations. It is a business practice important to all businesses of all sizes – globally.
Sustainability is the ability for companies to cut the umbilical dependency on ever increasing environmental resource demands and cut costs delivering ethical, sustainable, economic growth over the longer term. This business practice is founded on sound business sense delivering improved value to all stakeholders – the company, employees, customers and wider societal groups.
In order to be effective and deliver the desirable value generating results it is essential to report both the strategy and the policy actions, creating meaning and credibility to the outcomes. Sustainability mitigates against future risks and creates a continued licence to do business. Without the passport of sustainability, companies tread the boards of high risk through the contagion of poor business practice, leading ultimately to business exclusion.
How so? In the recent Carbon Disclosure Project 2011 Carbon Disclosure Project Supply Chain report, the numbers of companies who will de-select suppliers now for not having sustainable credentials has doubled over the 2010 report. This has been further buttressed by the recently released report ‘Green Supply Chain: from awareness to action’, from the consultancy BearingPoint Ireland, which indicates: ‘two thirds of companies surveyed in Europe believe that a green supply chain is a strategic priority.’ Furthermore, over half of the respondents in the survey said they did not renew contracts with suppliers who did not respect their green charter.
Moreover, throughout the great recession of 2007 – 2010, there has been a dislocation of trust between companies and the global communities they serve. Emerging from the recession – any company wanting to repair such dislocation has used sustainability as the model to achieve best results.
Notwithstanding this disconnect, the financial crisis in the main was brought about by short-term demand on profits (UNPRI) and a lack of focus on long-term value creation. Compounding these issues further was short term and inadequate structures to monitor the environmental and social impact of the company, financial structuring and management practices.
Therefore, whether it is customers, companies want to engage, or investors through the reduction of risk, or employees to improve team cohesion, drive innovation and attract best talent from the ascendant eco-boomers; sustainability connects all the interdependent functional areas in a more holistic manner, driving down costs - delivering on-going value through the introduction of a continuous cycle of improvement.
And, the pressure being applied to the supply chain now is the result of large corporate bodies needing to realign on sustainable best practices and controlling the risk of the supply chain by removing companies demonstrating poor environmental and social practices. Furthermore, the momentum for these moves has been caused in part by the pressure being applied, from society, on the licence to do business and part through the momentum of mandatory reporting. Examples of such mandatory acts are: Climate Change Act and the Carbon Reduction Commitment Energy Efficiency Scheme in the UK, Grenelle Act in France, Sustainability reporting law in Finland, King Code III in South Africa as well as many others across the globe.
Indeed, for global companies to survive and prosper, they need to ‘green’ their businesses to compete in an ultra competitive world, and this includes their supply chain, as exposure to a sustainably poor supplier will damage reputation and deliver the message to society, that for all the apparent sustainability efforts, ultimately there was no control.
However, sustainability is not just about mitigating risk, it is about opportunity. As stated earlier, reporting on sustainability forces actions and meets the needs of achieving cost cutting and value creation over the long term. Learning to deliver higher quality, more efficient products and services from a more efficient and optimised base of resource utilisation.
So, sustainability addresses the triple bottom line of: Environmental, Social and Economic:
Environmental – reducing emissions and bio-diversity impact
Social – training and improved team cohesion of the human capital; further combined with societal improvement through investment in communities.
Economic – extended competitive advantage and value, long-term economic growth through improved trust, ethicises, operational optimisation and innovation.
Credibility of the company takes place particularly after the publication of the first report – detailing the sustainability base line, the actions, goals and intended outcomes. Once reported, it forces the enforcement of the policy. Reporting forces the company to set robust and meaningful KPIs and forces a behaviour change with the resulting environmental improvements illustrating a sustainable development reality of sagacious leadership.
In contrast, companies believing they can develop a green mirage by ticking a few boxes and communicating efforts in the vaguest terms without proof of delivery, execution and the continuous cycle of improvement will fall prey to the more sophisticated buyers who are keen in identifying ‘window dressing’. The practice of half-hearted commitment will be a danger to reputation - eroding trust and competitive advantage. Notwithstanding this, poor reporting, or no reporting, will show over time, words do not equal actions and results, leaving perceptions to adjust downward, showing the underlying reality of a sustainably poor company with poor governance.
Additionally, the EU over a number of years has consistently emphasised sustainable development to build trust between businesses and society to improve competitiveness. Following this lead, managers from companies in the vanguard of sustainability use their reports as tools to build better and more effective networks and communications across stakeholder groups. The reports become effective business tools as they deliver against market demand and expectation for transparency and make the companies more accessible. In response, the report providing companies gain a reputation for responsible corporate behaviour.
What we see here is the evolution of sustainability creating an evolving and improving cycle of competitive advantage as sustainability has been shown to retain and attract best employees as, experience has shown, highly qualified eco-boomers come to the work market from university, they are choosing whom to work for with more consideration as to the values of the employer, making sustainability a major factor in decision-making. Business is going to have to adapt to the changing requirements and needs of the workforce and its ability to attract best talent as people revise their goals, priorities and expectations as they look to make efficiencies in how and where to live and work – as, commuting is less attractive with the associated impacts of time, cost and emissions being factored. Moreover, with best talent there is a natural progression toward evolving products and services reducing customer impact and building further the bonds of trust and legitimacy to operate, delivering long term value creation and, moving away from the corrosive past economic and business models.
Whilst market forces are driving the reporting agenda, this has been in part lead by regulation, and it would be naive to think the regulation imperatives are going to melt away. On the contrary, they are on a sharp curve to engage all businesses quickly – each nation needing to meet challenging and agreed emission reduction targets. The quickest way to meet these targets is through operational excellence – reducing energy, water and waste whilst benefiting communities in reducing poverty and poor health. To decouple economic growth from current emissions growth curves is not a difficult concept, just one that needs embracing. The winners are embracing sustainability now and inoculating their businesses from investment and market exclusion. The losers will be the ones who just don’t get it.
Furthermore, pervasive market and Governmental demands on sustainable development ensures the metrics needed to create meaningful and robust reports are being elevated to the same rigour as financial reporting. This in its self is leading to, and causing, new requirements for company law and accountancy rules. With reports being used as business tools, it is further leading towards managerial creativity around new ways of building brand and reputation to meet with the new customer and other stakeholder demands and expectations.
These market forced actions underpinned in 2010 by the establishment of the International Integrated Reporting Committee (IIRC). The objective: to establish a global reporting framework for ESG (Environmental Social and Governance) information in a clear, concise, consistent and comparable manner. “Integrated Reporting demonstrates the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, Integrated Reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organization is really performing.” IIRC.
For example: Ernst and Young recently issued a report indicating an increase in the number of shareholder resolutions focussed on sustainability. The report: ‘Shareholders Press Boards on Social, Environmental Risks’ claims shareholders are paying closer attention to environmental and social matters as they bear closely upon the risk companies are exposed and therefore ultimately on financial performance of these companies. In short: shareholder resolutions that garnered at least 30% support (30% being seen as critical mass) on social and environmental issues rose from just 2.6% in 2005 to 26.8% in 2010.
Naturally, this momentum is also found in the investment market place where ESG issues are gaining critical importance in determining investment funds – understanding fully the risks to future income, trust and reputation. It has been shown; intermediaries in capital markets are increasingly integrating ESG data into valuation models. And, evidence suggests that sell-side analysts generate more positive recommendations for firms that score high in ESG credentials. (See Sustainable Growth through Sustainable Business – Christopher Gleadle).
In conclusion, sustainability is not restricted to companies valued through stock markets. Their supply chains are part of that valuation, and so all companies are involved. Society is demanding a repair of the dislocation of trust. And this is a wonderful opportunity for business, the environment and society to benefit.
Sustainability and its reporting will increase the transparency of the company, highlighting the issues and the impacts towards governance and structure. It acts as a catalyst for positive change to internal management practices and creates incentives to better manage relationships with employees, investors, customers, suppliers, regulators and society.
Whilst sustainability highlights risks, it also by default spotlights the opportunities – to increase efficiency, reduce energy, water and waste through operational optimisation; within the boundaries of the company as well as the supply chain – whilst also exposing any human rights violations.
Sustainability inoculates a business from market exclusion as customers have already shown to be turning their backs on socially and environmentally irresponsible companies.
Sustainability is about building long-term relationships and long-term economic growth, for the company engaged in sustainable behaviour and the eco-system in which the company is embedded.
Copyright © Christopher Gleadle 2011