Why sustainability reporting is a key tool for savvy managers
Responding to the Dow Jones Sustainability Index (DJSI) can be a lengthy process. Addressing the breadth of economic, social and environmental issues covered requires the participation of subject matter experts from across your organization.
For some companies, the investment of time and resources may have their leadership team asking, "Is it worth it?"
For 2016, 3,450 companies are invited to participate in the DJSI Corporate Sustainability Assessment (CSA) globally. What many companies may not realize is that regardless whether you choose to respond, all invited companies are rated.
To find out whether your company is invited to participate, review the 2016 invitees available through the DJSI website. For some companies, the first hurdle is receiving the invitation. Perhaps your company chose to forgo responding. If not, it may be that RobecoSAM does not have an appropriate contact to initiate the process with your company.
"Connecting with the right person at invited companies is more challenging than many realize," said Robert Dornau, senior manager of sustainability services at RobecoSAM.
Although the organization dedicates an entire team to call eligible companies each year to find or update contact information, some companies do not have a clearly designated contact to receive the request. The invitation sometimes goes to a general address and is mistakenly ignored.
As with many reporting efforts, the value a company gains from going through the process correlates with the effort and rigor it puts into it. To maximize the benefits of your efforts — beyond getting acknowledgment from the raters of your sustainability governance and performance — use your DJSI response as a catalyst for internal conversations, building buy-in and identifying opportunities to strengthen management processes.
We see three key benefits to the DJSI process:
1. Enhanced credibility with investors
Mainstream investor activity regarding sustainability is increasing. Not receiving questions from analysts about ESG on your quarterly calls? That’s because investors are integrating ESG information as a passive activity, primarily behind the scenes.
According to the U.S. Social Investment Forum, "ESG incorporation" by institutional investors increased by more than 60 percent between 2012 and 2014. ESG incorporation is the systematic consideration of ESG risks and opportunities when making investment decisions.
This practice is gaining traction and largely occurs without direct engagement by the asset manager. Don’t wait to receive investor questions; the ESG disruption (PDF) is already underway.
The value a company gains from going through the process correlates with the effort and rigor it puts into it.
More than anything, institutional investors seek accountability for long-term value creation. In February, Larry Fink, CEO of BlackRock, sent a letter to CEOs of S&P 500 companies and large European corporations to emphasize the importance of long-term strategic planning.
Within the letter, Fink states management of ESG issues is a "signal of operational excellence" and that these issues have "real and quantifiable financial impacts" over the long term. Sustainability practitioners confirm the benefits of connecting financial and ESG issues for investors.
"We have seen an increase in investor engagement on our material sustainability issues," said David Tulauskas, director of sustainability for General Motors. "Through these interactions, we emphasize our long-term sustainability goals and the financial implications of our ESG impacts. We’ve seen interest from new investors and additional inclusion on other ESG-focused indices and funds."
2. Benchmarks for your performance
Companies that complete the DJSI CSA receive a customized benchmark report by topic. This report provides a basis of comparison for your company’s performance against peers in North America and globally within the universe of CSA respondents.
By having a benchmark against which to track your performance over time, you will gain insight into your company’s strengths and areas for improvement, especially those ESG topics which are priorities from an investor standpoint.
Invited participants receive the DJSI benchmark scorecard for free. That said, DJSI does offer this as a service to any company, including private companies, for a fee. It is important to point out that the benchmarking demonstrates relative performance versus other companies.
As performance improves across your industry and as expectations for performance increase, scoring historically has become more difficult year over year.
3. Reinforce and improve management of strategic priorities
As the management of environmental, social and governance topics become increasingly mainstream, the DJSI questionnaire continues to evolve to incorporate emerging best practices.
Keeping in step with the methodology changes and expectations can enhance your company’s sustainability program. A notable change to the assessment in 2016 is the way in which responders must address materiality. Each responder will be asked to prioritize three material issues of business significance and each issue’s reason for importance.
In conjunction with its answer, the responder will need to outline the business impacts of the issue, its strategy for managing the issue, associated long-term targets and links to executive compensation.
DJSI’s emphasis on long-term accountability echoes the letter by Fink, and further demonstrates the overlapping importance of ESG management practices and long-term value creation. DJSI’s emphasis on materiality constitutes higher stakes for inclusion.
The message is clear: demonstrate management and provide evidence of your commitments.
The message is clear: demonstrate management and provide evidence of your commitments in the areas that matter most.
While the DJSI questionnaire always has had the benefit of promoting internal collaboration, adequately addressing the materiality questions brings the response process to a new strategic level. Respondents must seek cross-functional and cross-divisional input to effectively prioritize material issues and describe their link to the business drivers, impact and long-term outcomes.
The process of gathering this input in and of itself can be highly valuable.
Bryan Hatchell, Reynolds American DJSI project manager, said the company has leveraged its DJSI response process to promote dialogue across the organization.
"Rather than starting the process when the questions are released, we began meeting with our data contributors in the fall as soon as last year’s results were released," he said. "This level of collaboration requires extra coordination but as a result, has provided our management team a platform to use sustainability to help us to reinforce corporate strategy both internally and externally."
If your company decides to respond, creating a plan for executing your response is crucial. Start by assembling your team and gaining the appropriate level of cross-functional support. Consider creating an internal road show to explain the benefits of the DJSI process and seek participation from subject matter experts.
Next, review the methodology changes and begin conversations to address the new criteria. Bear in mind that a good score last year does not guarantee a similar result in areas where the bar has been raised.
Finally, make sure you receive your invitation to participate. Does RobecoSAM know whom to contact at your company? Reach out to provide updated contact information.
The 2016 CSA will formally open April 5. Best of luck to all those participating and remember, the details of your process are as valuable as your completed questionnaire.