Towards integrated reporting

by | Jun 23, 2021 | Blog

You’re thinking of including more sustainability information in your annual report. Given that universal standards for fully integrated reporting are some way off, what do you do? 

It’s a good time to make a start, for three reasons:

  1. Integrated reporting will be the norm within a few years
  2. Work on reporting standards is advancing fast and you can make reasonably accurate assumptions of what investors and regulators will want in the near future
  3. Starting early – as early adopters have shown – keeps you in control as you voluntarily broaden your disclosures, learning as you go.

But where and how do you start? And can you abandon your sustainability reporting?

Other than disclosures legally required by some countries and stock exchanges, you’re still free to choose your own reporting path. Your choice should be influenced by the needs of your audiences (those you are reporting to) and what’s important to them and your business (materiality).

Audience

With the dramatic increase in demand for environmental, social and governance (ESG) information, your reporting audience is now made up of two distinct groups:

  • Financial community (investors and other players in the capital markets)
  • A broad group of stakeholders that include employees, potential recruits, policy makers, sustainability professionals, engaged consumers, NGOs and other influencers.

This marks a change from the early days of reporting where it was difficult to decide on the relative importance of different stakeholder groups. Targeting priority audiences has become a little easier with investors clearly in the crosshairs.   

Investors want clarity on ESG risks and how the business plans to deliver robust ESG performance, with data to back up assertions. The remaining stakeholders are primarily interested in understanding corporate purpose, tone and approach (stories). Of course, there is an overlap of needs, but the data/story difference is helpful in planning how and what to report to the different audiences. And where to locate the information.

Most of the work underway in developing ESG reporting standards is to satisfy the needs of investors. Given that it has taken well over a century to produce standards on financial reporting, it’s not surprising that investors, regulators and companies are taking a while to agree on the detail.

Standalone no more?

As integrated reporting progresses, we see the standalone sustainability report morphing into story telling on the company website. This means the performance data will be consolidated in the integrated report and what used to be the standalone sustainability performance report will become an evergreen section on the website. The level of detail on the site will be defined by the sector and the company’s impact. For example, companies in the extractive industries will have to provide a lot more detail compared with, say, those in software services.

It’s this sectoral difference that makes materiality so crucial. An honest analysis of what’s important to whom will define the level of sustainability information demanded by the two audiences. It is the materiality analysis that will determine what goes into the integrated report and how much detail is needed on the evergreen web pages.

Of course, the urge to gild the corporate message will prevail. There is a danger that those evergreen pages will be awash with green assertions and images of happy, diverse faces. If the forthcoming reporting standards are any good, they will ensure that integrated reports avoid greenwashing.    

Standards landscape

It’s certainly a busy time for standard setters. After early, sleepy years with only the GRI doing anything significant, the standards landscape is now a frenzy of activity. Here is a quick updated summary of the current mix of existing and expected standards that apply to integrated reporting, and the organisations working on them (alphabetical).

  • Carbon Disclosure Standards Board (CDSB), which has produced a framework used to disclose environmental and natural capital information in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). 
  • CDP (formerly known as Carbon Disclosure Project), which against all expectations has been highly successful in getting companies to disclose their carbon emissions voluntarily.
  • EU’s Corporate Sustainability Reporting Directive (CSRD). The EU wants to make sustainability reporting by large companies more consistent and comparable. It says it will work with existing standard setters to ensure corporate reporting supports the European Green Deal and the flow of capital bolsters sustainability. The CSRD is part of a package of sustainable finance initiatives, defined by the EU’s Taxonomy, a classification system of environmentally sustainable economic activities. 
  • Global Reporting Initiative (GRI). The grandaddy of the pack which produces standards to satisfy multi-stakeholders and which investors find woolly. The GRI will publish its “universal” standards this year. It has promised greater cooperation with the different standard-setting groups, although its promises to do so in the past have not come to much.
  • International Financial Reporting Standards (IFRS) Foundation is working towards the creation of an international sustainability standards board and will decide if this is feasible by November, 2021. This is potentially the most significant standards initiative because IFRS rules on financial disclosure are required in 140 jurisdictions around the world. This includes the EU but not the USA, which follows the US Generally Accepted Accountancy Principles (GAAP). If the IFRS goes ahead with its plans, it will split the ESG reporting standards world in two: USA – probably using the SASB standards (below); and the rest of the world, using IFRS. 
  • Task Force on Nature-related Financial Disclosures (TCFN) is hoping to do for biodiversity what the TCFD (above) has done for climate change reporting. It was founded by Global Canopy, the United Nations Development Programme (UNDP), the United Nations Environment Programme Finance Initiative (UNEP FI), and the WWF. It’s at the very beginning of its work.    
  • Value Reporting Foundation. This is the name of the recently merged Sustainable Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC). The Foundation’s standards are known as the SASB standards. It remains to be seen how the IIRC’s standards will be integrated by the Foundation, if at all.   
  • World Economic Forum’s (WEF) efforts to set ESG standards, instigated by the big four accountancy firms, is underway. WEF has emphasised the need for collaboration and endorses the efforts of the IFRS.

Another significant push for ESG reporting standards is coming from the US Securities and Exchange Commission (SEC) which is preparing tougher disclosure rules on carbon emissions. This is supported by the Biden administration and is creating the inevitable political resistance from Republicans who complain that the metrics are not yet mature enough to avoid misinterpretation by investors.

Next steps

While it will take a few years for integrated reporting standards to become the norm, it’s rewarding to see the positive impact of early initiatives to engage the financial community, such as the UN-supported Principles for Responsible Investment.

Many companies have been experimenting with integrated reporting for some time. They are about to be joined by many more. Soon, we hope, you will have a clear roadmap to follow.

Sales pitch: hear more about how we can help you build a future-proof sustainability reporting eco-system. (peter.knight@contexteurope.com).

Inching towards one set of ESG reporting standards

by | Feb 8, 2021 | Blog

Straight road ahead for ESG reporting standards?

After decades of deliberation, cat fights and false starts, the various sustainability reporting standards could soon be harmonised.   

The driving force is the financial community’s belated interest in all things Environment, Social and Governance (ESG), especially climate change.  Investors want to see believable and comparable carbon emissions data – something lacking from the great outpourings in sustainability reports.  

Standard setters are consolidating to tackle the issue. But their efforts could be too late if the International Financial Reporting Standards (IFRS) Foundation decides to set its ESG reporting standards.

Global

The IFRS standards on financial disclosure are required in 140 jurisdictions around the world.  This includes the EU but not the USA, which follows the US Generally Accepted Accountancy Principles (GAAP).

The Foundation is considering feedback on its proposal to set ESG standards, starting with climate change reporting. Speculation is that these could be ready in time for the UK hosting of COP26, the UN’s annual climate change jamboree in November.

If this comes to pass, it will split the reporting standards world in two:  USA – using the Sustainability Accountancy Standards Board (SASB) guidelines; and the rest of the world, using IFRS.  While not totally unified, at least such an outcome will be better than the current mish mash of standards and metrics.   

Quick landscape summary

Here is a quick summary of the current mix of existing and expected standards.

Five leading ESG standards organisations have said they are to collaborate.  These are:

  • The Global Reporting Initiative.  This is the grandaddy of the pack which produces standards to satisfy multi-stakeholders and which investors find woolly.
  • SASB − the US-focused newcomer which has made quick progress, supported by Michael Bloomberg.  SASB standards and metrics are designed for investors.   
  • CDP (formerly known as Carbon Disclosure Project), which against all expectations has been highly successful in getting companies to disclose their emissions voluntarily.  But these self-declarations are not necessarily robust enough for investors.  
  • The Carbon Disclosure Standards Board (CDSB), which has produced a framework used to disclose environmental and natural capital information in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).  
  • The International Integrated Reporting Council (IIRC) whose rather loopy definition of capital has left it an outlier in the pack.

Not part of the mix (or not yet) is the World Economic Forum’s efforts to set ESG standards, instigated by the big four accountancy firms (self-interest loosely declared).  

Because of different world views and massive egos involved, cooperation between the different standard setters has been somewhat fractious in the past.  It seems unlikely that the collaborating group’s deliberations will be swift enough to outrun the IFRS Foundation if it decides to set ESG reporting standards.

Report Smart to keep connected and save money

by | May 28, 2020 | Blog, Publications

Does C-19 give you a reason to skip a year in your sustainability reporting?

It’s a fair question, given that most companies will be short of resources and looking to save a few pennies.

We have a solution that saves money and time. More important, it helps you maintain your sustainability reporting record and keeps you connected to those stakeholders who need and want your information. This is especially true for the environment, social and governance (ESG) investors who are enjoying a boost from the commercial ravages of C-19.

Beyond legal

As my colleague Francesca Ward has pointed out, an increasing number of countries have legal requirements for non-financial reporting. The law will not be altered by C-19 and companies should be aware of the minimum statutory demands.

Voluntary reporting has become an onerous task for those who think it wise to tick all the boxes, among them standards and guidelines from the Global Reporting Initiative (GRI), the Sustainable Accounting Standards Board (SASB), the CDP and the Task Force for Climate-related Financial Disclosures. 

If one has the resources and the ambition to satisfy all stakeholders – including the burgeoning ESG sector – then there is nothing wrong with offering a gold-plated report.  Indeed, it sets you apart as a good corporate citizen pursuing a transparent relationship with all those who have a legitimate interest in the 360º performance of your business.

Feeling the pinch

But if your resources are limited, then we argue that our highly-targeted approach − Smart Reporting™ − is a legitimate and, well, a smart way to ensure you keep connected with those organisations and individuals who influence your prosperity.

What is Smart Reporting?

Here’s an example, from the innovative speaker company Sonos.

For its first sustainability report, the company was determined to create something its employees and leadership would read. It had to be short and sharp. Most important, it needed to share progress accurately and transparently on the Sonos sustainability key performance indicators.

With less than 200 words a page, in a concise 30 pages, Sonos shares its sustainability progress and ambitions. The report’s showpiece is the one-page KPI dashboard which tracks its performance and goals. The format resonates with the company’s leadership and can easily be updated quarterly to share progress with employees and other stakeholders throughout the year.

Smart principles

Small, big or gigantic, the Smart Report™ principles apply to all companies:

  • Brevity − keep it short
  • Clarity − make sure it’s easily understood
  • Relevancy − ensure it concentrates on what matters to the audience
  • Transparency − it’s OK to push your core messages, but not to obscure the truth

Keep those principles in mind in your planning.  Then take these four steps to success.

Smart Steps to Success:

  1. Define the audience.  Understanding the needs of your audience helps you decide on the extent of the content and how you want to present it. Plot the information needs of different stakeholders on a matrix.  If you’ve done a materiality assessment in recent past, cross check with that and fill any obvious gaps.
  2. Focus on what’s important to the audience. Collect the relevant and essential information.  Feel free to ignore nice-to-haves and the gold plating.
  3. Choose a format. Does your audience want a web report or a simple downloadable PDF? The Smart Report lends itself to both. Remember, investors and raters/rankers prefer a time-bound document.
  4. Present the content clearly. Use good design, infographics and simple writing.

Job done for another year. Here’s hoping for a more prosperous 2021.

If you’re unsure about the future of your sustainability reporting during C-19, we’re here to help. Our Smart Report™ will keep you connected to your key stakeholders while saving time and resources compared with conventional reporting.  

Reach out to our Smart Report™ expert Lisa for more information.

Sustainability reporting in the EU: What’s the law?

by | May 6, 2020 | Blog

Gone are the days of optional CSR reporting. Indeed, they disappeared a couple of years ago for large companies in Europe – all thanks to the catchily-named EU Non-Financial Reporting Directive.

With this directive now under review, we look at sustainability reporting laws across the European Union to see where things stand for business.

The background

The European Commission adopted the EU Non-Financial Reporting Directive 2014/95 – to use its full name – back in December 2014. Its roots stem from a realization around 2011 that greater attention needed to be paid to corporate sustainability risks and impacts. EU member states wrote the Directive into national law, with large listed companies (among others) expected to report first, in 2018.

Under the Directive, companies with over 500 employees must publish annual reports detailing risks and policies concerning: environmental protection, social responsibility and working conditions, respect for human rights, anti-corruption and bribery, and diversity on company boards. This non-financial reporting supplements financial figures, providing better insight into a company’s risks.

The Directive is principles-based and does not dictate the format of the reporting – only that companies should make the required information available or provide reasons why not.  

What of the present?

As part of the Green Deal, the EU’s new growth strategy announced in 2019, the Commission states companies and financial institutions need to increase disclosure of climate and environmental data. Only with more data, it is argued, can investors properly understand the long-term health of their investments. This announcement kickstarted the review of the Directive. It’s now under public consultation until 14 May 2020.

So how have the different member states implemented the Directive? And have any introduced stricter reporting requirements that go beyond the Directive? We looked at ten EU member states to find out.

A note on methods

Specifically, we researched Austria, Denmark, France, Germany, Ireland, Italy, Netherlands, Spain, Sweden and the United Kingdom – some of the EU’s largest economic hubs. We focused on statutory reporting provisions, requiring disclosure of environmental and social information to shareholders or directly to the public. Note, we excluded corporate governance reporting requirements.

What must business report?

All ten EU member states reviewed had, unsurprisingly, transposed the Directive into national law. But national variations abound. Governments have tailored policy applicability to suit national contexts, with Denmark and Sweden requiring companies with over 250 employees to report – half that required under the EU Directive.

Variations in the timings permitted for releasing information are also plentiful. For example, companies in Austria must disclose information at the same time as their management report, while companies in Ireland have six months to publish non-financial information. Other variations include where information must be available, how long it must be available for, and the level of guidance on what disclosures should cover.

Some member states have gone beyond the content of the Directive. In terms of mandatory public reporting requirements, France, the UK, and Germany are of note. The topics covered by further legislation break into three camps:

  • Gender pay gap reporting: France, the UK and Germany all require companies to report on metrics related to equalizing differences between genders in the workplace. Requirements vary. For example, following a phased introduction of the provision, French law necessitates companies with over 50 employees to report. Meanwhile UK regulations require reporting from companies with over 250 employees and German law requires status reports from those with over 500 employees. Reporting is required every 3-5 years in Germany, but it’s expected annually in France and the UK.

  • Human rights reporting: Companies must release statements disclosing human rights due diligence measures and their implementation. The UK Modern Slavery Act requires companies to publish an annual statement, available from their website’s homepage, while the French Duty of Vigilance Law obliges companies to report on implementation of due diligence procedures in their annual management report.

  • Greenhouse gas (GHG) reporting: Some member states have more detailed requirements concerning disclosure of GHG emissions. France, for instance, requires certain companies to publish a GHG inventory every 3-4 years, while in the UK companies of a certain size are expected to report carbon dioxide emissions in their annual director’s report.

Into the future

There’s broad consistency in the types of information EU member states (or former member states as in the UK’s case) seek companies to disclose, with the most regulatory detail currently focused on social issues including human rights and gender equality. It’s clear we’re likely to see stronger requirements – and that these requirements will probably focus in on broader issues such as climate change, all through the lens of making information more accessible to investors.

Companies should examine the recommendations of the Task Force for Climate-related Financial Disclosures and be ready to link reporting on environmental and social risks more clearly to financial accounting. This might sound daunting, but leading businesses are already making the connections.

Now’s the time to future proof by ensuring a sound sustainability strategy, supported by information and data that complies with the law and underlines the authenticity of your commitments.

What’s your carbon: negative, neutral or positive?

by | Apr 17, 2020 | Blog

IKEA and H&M Group are striving to be climate positive. Microsoft is committed to be carbon negative. BP says it will help its customers become carbon neutral, while its corporate ambition is to become a net zero company.

Well, that’s all crystal clear then. 

When carbon counting meets public relations, it’s inevitable that confusion follows. By trying to keep a sunny view of a gloomy situation, the word mongers in the climate change debate have produced a range of terms that don’t make a lot of sense without a lot of explanation. 

As BP says in the notes to its net zero announcement: “Such terminology and related methodologies may evolve over time…”

Understanding evolving terms

A cursory knowledge of double-entry booking is handy because it helps you understanding the frequent and important use of the word “net”, as in net profit when there is nothing else to be taken away (such as taxes). Because the carbon cycle involves carbon being emitted (e.g. airplane exhaust fumes) and simultaneously removed from the atmosphere by natural processes (e.g. growing trees), carbon accountants are interested in the carbon left over, the net carbon. It’s that carbon which contributes to climate change.

Here’s a quick guide to the four terms currently used by business to describe their climate ambitions. 

  • Net Zero. This refers to greenhouse gas (GHG) emissions. It means your total GHG emissions amount to zero after you have deducted those emissions that are stored in natural sinks (plants, soil, sea) or removed in other ways, such as carbon capture. Methods of measuring the deductions are evolving too, and it’s inevitable that this will encourage some creative accounting when approaching the distant deadlines to achieve net zero.   
  • Carbon Neutral. The old-fashioned way of saying Net Zero. The term went out of favour because companies achieved neutrality mainly through offsetting, which is frowned upon by the cognoscenti because of dubious practices associated with it. Some offsetting activities, such as paying to conserve existing forests, are considered negative because you’re paying not to do something, such as cutting down a forest.  
  • Climate Positive. By going beyond net zero you can claim to be climate positive. This means you will be removing more GHG emissions than all the GHG you emit. This makes little sense until the concept is explained. Once you get to net zero emissions (energy efficiency, using renewables etc) you must help others, such as suppliers and customers, reduce their emissions that also contribute to your carbon footprint. Achieving climate positive status is really, really difficult. But it is seen to be very good thing because it removes additional carbon from the atmosphere, creating a positive outcome for the environment.   
  • Carbon Negative. This means the same as climate positive. Companies who prefer this term, such as Microsoft, would argue that it is scientifically more precise because success takes you below zero and into the negative. Users of climate positive say why use a frowny face (negative) when you can emote with a smiley? 

Despite the confusing and “evolving” terminology, the good news is that many companies are taking climate change extremely seriously and have developed robust plans to do something about it. Of course, this all happened before the coronavirus meltdown. But we trust and hope that once we emerge from the dark days of lockdown, the good work on combatting climate change will continue. 

Till then, it’s worth looking at BP’s argument and commitments to be a net zero company by 2030. The oil major has gone much further than its competitors. Essential reading is Microsoft’s well-written blog on its plans to be carbon negative by 2030, and by 2050 to have removed all the carbon it has emitted since its founding in 1975.

Let’s hope someone’s around in 2050 to check.