Gone are the days when it was enough to report on the financial health of a company once a year. Sustainability reporting is now not just an optional extra; it is increasingly becoming a legal requirement.
In April 2022, the UK became the first G20 country to make reporting aligned to the Task Force on Climate-related Financial Disclosures (TCFD) mandatory. TCFD reports are designed to help companies reassure investors of their commitment to tackling climate change, specifically their plan to meet the Paris Climate Agreement’s target of limiting global temperature rise to under 2C.
Hot on the heels of the TCFD is the Taskforce on Nature-related Financial Disclosures (TNFD). Very much aligned to the TCFD, it is designed to help organisations report and act on evolving nature-related risks. The taskforce was only established in 2021 and is still collecting feedback from the market on how it should work. Its overarching aim is to shift capital away from nature-negative outcomes but, unlike the TCFD, it is voluntary.
THE BIGGER PICTURE
When it comes to reporting on sustainability performance, the options can be overwhelming. While some companies report only on their greenhouse gas emissions, others produce reports on their corporate social responsibility (CSR) initiatives and their environment, social and governance (ESG) ratings. Over the past decade, the choices have spiralled, and the legal requirements continue to stack up.
In November 2022, the European Union adopted the Corporate Sustainability Reporting Directive (CSRD), requiring companies to disclose their impact on people and the planet. And the US Securities and Exchange Commission has proposed new climate and ESG disclosure requirements.
Attempting to make sense of the recent explosion of both voluntary and mandatory rules is the International Sustainability Standards Board (ISSB). Founded in November 2021, its job is to come up with a comprehensive global baseline of sustainability-related disclosure standards and is expected to issue its first two finalised frameworks by June 2023.
THE CHANGING FACE OF SUSTAINABILITY REPORTING
Sustainability reporting has changed remarkably over the years. KPMG has tracked it since 1993, when only 12 per cent of companies globally published sustainability reports. By 2020, that figure had risen to 80 per cent and even higher (90 per cent) for the largest companies in the world. In the report’s introduction, KPMG’s Adrian King said: “Sustainability reporting is now so nearly universal that the small minority of companies not yet reporting will find themselves seriously out of step with global norms.”
For the past 13 years, PwC has reviewed sustainability reporting across the FTSE 350, public interest entities and inbound companies – 450 organisations in total. It found that just over half of them indicated that ESG matters were integral to strategy or underpinned their strategy and 48% included a KPI on carbon reduction.
SEVEN TOP TIPS FOR A GOOD SUSTAINABILITY REPORT
- Where a good sustainability report sets itself apart from the rest is in transparency. That means two things: proof, and honesty. Acknowledge bad results and explain how improvements will be made. No organisation is going to be perfect from the get-go, but with a sustainability strategy in place, measurement procedures, and regular reporting on the results, the journey to a more sustainable future will be faster and smoother.
- Proof of impact should be non-negotiable for all sustainability reports. Policies and strategies show good intention, but good intention is not enough. Any policy implemented should have clear metrics against it and be measured regularly (quarterly or monthly) to understand progress. Measuring should not be just for the sake of reporting; it will also allow a company to identify where a policy is or isn’t working and address it quickly. Some areas of reporting might require more qualitative evidence of impact. Case studies are the most frequently used tool to qualitatively show impact and tell the story behind the numbers. Opening and closing notes, often penned by the CEO or the Chief Sustainability Officer, should also be used as an opportunity for storytelling.
- Don’t forget ‘social’: While much of the current regulation discussed in this article looks at climate and environmental reporting, this is only one part of the story. Social impact is frequently overlooked and underreported, with many organisations only including the bare minimum – diversity and workforce data – and most struggling to do even that. Social viewed through the lens of workforce issues is only half the picture. Reporting on impact on the local and wider community, or in your entire value chain, will give a far fuller view of your social impact.
- Clarity around Governance, ie how the organisation is managed, and how the board and management attend to the interests of employees, supplies, stakeholders, and customers, is also a key essential component to sustainability reporting.
- Underpinning a good sustainability report is the financial component. How has your sustainability strategy impacted the bottom line? And can you quantify your economic and environmental impact in monetary terms?
- Most sustainability reports are published in the spring and cover the work done over the previous year. It is not so much the date of publication which matters, but more that reports are brought out in a consistent fashion so that year-on-year comparisons of data and progress can be easily made.
- There is no set length for a sustainability report, but it is recommended that 30-40 pages is sufficient to cover the critical components in the right level of detail. Depending on your sector and business requirements, this might need to be longer.
WHAT IS NEXT FOR SUSTAINABILITY REPORTING?
While most companies now publish sustainability reports, they are rarely independently verified by a third party. This is beginning to change as new laws, such as reporting aligned to TCFD, come into force. Standardised rules and regulations, similar to those which apply to financial reporting, will give sustainability reporting the transparency and credibility it needs.
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