5 questions to enhance your next sustainability report
What do corporate responsibility practitioners do during July and August? Vacation? We hope, for a couple of weeks, anyway.
But for many, summer is also the ideal time of year to step back and evaluate current and best practices for environmental, social and governance (ESG) disclosures. If your organization is considering reporting non-financial information next year, the summer months are prime time to begin planning.
Given major marketplace shifts within corporate reporting, evaluating your approach to reporting is particularly important this year. Organizations currently face transparency demands from multiple angles, including increasing requests for information from customers and investors, and the growing need to incorporate ESG principles into supplier management.
Deciding how to proceed may feel daunting. Fortunately, the leading reporting frameworks are converging on the same core principles: Materiality (as defined by the relevant framework); stakeholder engagement; and governance.
What you may not realize is that preparing for the Global Reporting Initiative’s (GRI) G4 guidelines overlaps naturally with preparing for the International Integrated Reporting (IR) Framework developed by the International Integrated Reporting Council.
Both frameworks request that organizations disclose their approach to managing significant risks and opportunities through the core principles noted above. How will you know which approach is right for your organization? To begin, ask yourself five key questions:
1. What are your biggest areas of impact?
Identifying, and then prioritizing, your company's environmental and social impacts are key.
By completing an assessment of your most significant impacts, you will be able to set a guiding strategy and demonstrate your commitment to responsible business through subsequent annual reporting.
Start by evaluating your corporate responsibility landscape through research and benchmarking. Next, consider the constructs and impacts of your entire value chain, as this will inform your application of boundary for each of your significant impacts.
The GRI G4 guidelines request disclosure of the boundary associated with each significant impact (or material aspect) so that organizations explore impacts both within and outside their controlled entities.
Map your value chain to reveal potential impacts and identify stakeholders to engage in other phases of the assessment. Mapping impacts along your value chain enables you to develop a targeted management approach.
For example, you can determine whether water is a significant impact within your direct operations, with your suppliers and/or for the end user of your product. Many companies, including BrownFlynn, offer materiality assessment tools to identify and prioritize impacts through a multi-step approach.
The key is to design this process with the intention of communicating your impacts to multiple stakeholder groups, including investors.
When communicating with investors, third parties such as the Sustainability Accounting Standards Board (SASB) offer tools to help. SASB has developed sector-specific standards in determining material issues for public companies to include in the Form 10-K. Consider these standards when determining inputs for your assessment, even if you do not intend to include them in your 10-K.
2. Have you successfully engaged stakeholders — both internally and externally?
Stakeholder engagement is perhaps the most important element of identifying and prioritizing your significant ESG impacts. While many excellent research sources exist, these resources are no substitute for hearing directly from the individuals and organizations most crucial to your business.
Begin by prioritizing your stakeholder groups, and be sure to record why certain groups are more important than others. When choosing which specific stakeholders to engage, ensure you have a diverse group but higher representation for those deemed most important.
During interviews and surveys, learn about the issues most important to their organizations and gain an understanding of their expectations of your corporate responsibility performance. Use their feedback as evidence to prioritize certain issues over others.
For example, if a large customer states it will be launching new supplier training to address human trafficking, that statement should make your human rights and labor practices a higher priority. These conversations and interactions also can reveal opportunities for future collaboration.
From a transparency standpoint, GRI G4 stipulates detailed disclosure of your stakeholder engagement, including your citation of which stakeholder group raised which concern. Completing a thorough engagement process will lead to more straightforward and comprehensive disclosures for your organization.
3. Is sustainability overseen from top to bottom?
Establishing accountability at the board and executive levels is essential to successful management of your significant ESG impacts.
Many companies have oversight of ESG impacts assigned to a committee of the board, typically the nominating and governance group. However, companies can strengthen governance by demonstrating how their board oversight is connected to other internal decision-makers.
One way to link to decision-makers is to develop a council of cross-functional leaders who engage with the corporate responsibility team to set goals and measure progress.
Transparent disclosure regarding delegation of authority is a best practice. For GRI G4 reporting, answering additional governance (G4-35 through G4-55) and ethics (G4-57 through G4-58) disclosures is the main difference between delivering a comprehensive-level report rather than a core-level report.
4. Does your corporate culture value environmental and social impact?
Many publicly traded organizations are making decisions about whether to integrate their financial reporting with their non-financial reporting.
According to Mike Krzus, an integrated reporting expert and a senior adviser to BrownFlynn, evaluating whether your organization is prepared for integrated reporting begins with an assessment of your corporate culture.
“Companies who use integrated reporting consider an environmental and social ROI just as important as financial ROI," Krzus explained. "Their corporate cultures set the tone that there is a connection between value creation for shareholders and value creation for society as a whole.”
If your company takes this approach, then you may consider the transition to integrated reporting — a shift that requires your executives to demonstrate support for this approach and alignment on the important ESG issues facing the company. Next, you will need to streamline your content.
“Integrated reporting does not mean stapling your sustainability report to your 10-K," Krzus said. "Companies should carefully consider the overlapping content that they already produce and then make decisions about how to meld this information in a way that demonstrates accountability and value creation.”
As a first step toward achieving that goal, he recommends pairing your sustainability team — perhaps your chief sustainability officer — with one of your financial controllers. Together, compare the disclosures of GRI, IIRC and SASB with your financial reporting disclosures and then filter the content for each.
5. Is sustainability part of your core strategy?
To create a high-quality integrated report, you must answer this question affirmatively.
Moreover, an affirmative answer means you have performed the prerequisite assessment of significant impacts, prioritized and engaged stakeholders and established both board and executive-level accountability for performance.
For an article in the spring 2015 issue of The Journal of Applied Corporate Finance, Krzus and co-authors Robert Eccles and Sydney Ribot analyzed 25 reports from multinational companies that participated in the IIRC Pilot Programme Business Network, which concluded in September.
Among the best integrated reports, “the companies left no question about the reason for including non-financial variables in their discussion of business strategy: The measurement and reporting of non-financial factors were essential to a fuller understanding of the businesses’ continued ability to operate in its context.”
Krzus and his co-authors further emphasized the need to address both the risks and opportunities presented by material impacts.
High-quality reports “provide clear explanations of the potential impacts of material financial, environmental, and social risks on corporate performance and value, and their efforts to manage such risks.”
Discussing ESG risks in conjunction with business strategy is essential to demonstrating true integration. As Krzus told us, “connectivity of information” — or explaining how financial and non-financial performances relate to each other — is one of the most important concepts for companies to demonstrate within an integrated report.
One simple way to get started with the concept of connectivity is to consider building an online report and linking to relevant disclosures across your public outlets in order to enhance accessibility for your many stakeholders.
Overwhelmed yet? Remind yourself that answering these questions applies to both the GRI G4 guidelines and IIRC IR Framework. Your efforts will inform communication with multiple stakeholders, including the growing number of requests from your customers and investors, and help you better set expectations for suppliers.
Additionally, bear in mind that building a strong foundation makes subsequent reporting much easier. Use these questions to guide you and remember to leverage all that you learn. Whether you are a veteran or a beginner, the value of reporting is in the quality of your process.