2013 - integrated and sustainability reporting

Next Generation Consultants

Sustainability and Integrated Reporting2013 – A Review

25/02/20131

Next Generation Consultants2

The Headlines Sustainability has moved into the main

stream Sustainability boosts the bottom line The financial fraternity is taking notice Companies commit to though goals Companies reap the benefit from

sustainability and integrated reporting Reporting contributes to increased

internal efficiencies and become management tools

Companies report on increased competitiveness brought about by sustainability strategies

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An idea whose time has come Both companies and countries are at different levels of

understanding and implementing sustainability strategies, processes, plans, and policies

Emerging markets are increasingly engaging with the agenda and, in some instances, leading

There is a need for developing appropriate skills and leadership across all sectors to embed sustainability issues into strategy and operations

Global regulations, standards and initiatives are increasing in influence

Regulation and reporting alone cannot ensure a sustainable future for all - culture and leadership is key

Engagement is critically important to ensure priority and focus on the right drivers

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After Round One

Silo reporting is still evident in financial, sustainability, governance and operations sections

A lot of information still has no context

Key performance indicators are not always relevant to strategies

Issues arising from stakeholder engagement are not always adequately dealt with

Challenges that will need to be addressed include the efficient gathering of non-financial information

South African companies already see clear benefits in adopting the principles of Integrated Reporting

Full implementation could take three to five years for many organizations

Many companies feel the principles of Integrated Reporting have helped them better understand and manage their business

Implementation requires organisational change at all levels, and is not a single event

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Companies are taking stock of natural capital Natural capital creates value through ecosystem services,

the “free” deliverables provided to business and society by A healthy planet, including clean water, breathable air,

pollination, recreation, habitat, soil formation, pest control, a liveable climate, and other things we generally take for granted because we don’t directly pay for them. Companies are under increasing pressure to measure, if not manage,

their impacts on and dependence to natural capital.

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Sustainability becomes a matter of risk and resilience

Companies in a world of constraints relates to the availability of energy, water, and other resources; where the toxicity of products or manufacturing processes present perils all the way up the supply chain; and where climate shifts can disrupt the availability of raw materials and threaten the well-being of employees and customers.

Understanding risk and sustainability meant learning a new language and translating it into their companies’ far-flung operations.

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Corporate Reporting gets integrated Integrated reporting – i.e.

combining conventional financial information along with key sustainability data, in a much more investor-friendly way. Sustainability reporting is not

likely to go away — companies have invested too much reputational capital in telling stories and providing detailed information, and stakeholders have come to view them as a minimum requirement of a company’s sustainability commitment.

But as integrated reporting ramps up, sustainability reports will need to provide more detailed performance data relevant to broader stakeholders, insight into what is driving changes in metrics, and deeper explanations of management responses to social, resource, and pollution challenges

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Materiality becomes material for investors For more than 20 years, the Holy Grail for sustainable

business has been to engage investors NOW investors are voting with their dollars and companies have no choice but to adjust their strategy and operations to align with investor interests. In 2010, the U.S. Securities & Exchange Commission (SEC) issued

guidance regarding disclosure material risks related to climate change. With the global push toward standardising information relevant to

investors, and the growing interest in ESG disclosure by regulatory bodies companies will find themselves exposed to new questions and concerns on the part of shareholders and stakeholders

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Companies look past their goals An interesting challenge has emerged for companies that

have been focusing on sustainability for a half decade or more: What do they do after they’ve met their goals? Of course, no company of any size has yet claimed to be

sustainable, and is therefore “done.” As more companies look at their current and next set of goals

and commitments, they would do well to consider a mix of goals that lead not just to reducing environmental harm, but to creating solutions that help customers reach their sustainability goals, too.

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The Reset Button Budgets Shrink, Teams Grow

While budgets have stayed relatively small, the size of sustainability teams at large companies continues to grow.

The New Convergence The evolution toward a broader executive role to manage a

combined EHS and ESG function is elevating the strategic nature of the role of sustainability within corporations. More and more environmental and social issues overlap across a company’s extended supply chain, from raw materials through to end-of-life responsibilities for products. This increasingly requires a single point of responsibility to coordinate these important activities.

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Challenges Ahead In the drive for greater transparency, companies

are losing sight of the bigger sustainability picture Companies are increasingly providing reliable accounts of their

sustainability programmes. However, on a global scale they are far from delivering solutions to the most pressing sustainability problems.

Companies are increasingly aware of sustainability issues and actively integrate sustainability into core business strategy and decision-making. They are opening up and describing in detail how they define material issues, engage stakeholders and join multi-stakeholder initiatives. However, as they become more responsive to the sustainability reporting guidelines and other reporting frameworks, they are failing to adequately put their performance into context.

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How can we become better? Innovation is the key

A common theme of successful sustainability programmes is innovation. These are specific business innovation approaches: embedding sustainability into systematic innovation, applied company-wide, disseminated to supply chains and throughout product lifecycles, based on internal and external stakeholder feedback.

We can learn from the high-risk industries The most robust management and governance arrangements continue

to be demonstrated by the traditional ‘high-risk’ industries. In these sectors – petroleum, mining, heavy manufacturing – the primary corporate responsibility is to deliver the building blocks of society and growth in a manner that is, put simply, less bad. Although companies in these sectors are rarely invoked as models of sustainability, many have pioneered in some of the most important areas.

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Leadership challenges The largest companies fall short of sustainability

leadership: A lack of balance still pervades reporting

Many large companies, including those who demonstrate some advanced sustainability practices, still tend to gloss over some significant negative social and environmental impacts.

The most important leadership challenge facing business today is the integration of sustainability into core business functions. And integrating sustainability into business is perceived to be the most important focus for business in order to fast-forward progress on sustainability.

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How far we have come Stakeholder engagement basics are in place

Most companies now engage stakeholders across a variety of channels – in particular, surveys, materiality workshops and NGO/multi-stakeholder initiatives. Even so, genuine two-way engagement at board level is rare.

There is a trend towards the use and reporting of indicators and targets One of the key trends last year has been the growth in indicators and

targets. Most companies continue to expand the number of indicators against which they report. While target-setting isn’t quite as impressive, we have seen an increase in the number of companies committing to sustainability targets.

Take-up of web-based and interactive reports continues to grow Most leading reporters provide content duplicated across both their

website(s) and downloadable reports. Websites themselves are becoming more interactive and even some downloadable PDF format reports are interactive.

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Global Research – Reporting Progress What the best reporters did best in 2012

Focused on real important stuff - presenting strategy, marketplace, KPIs, risk – in a joined-up way

Explained their business model and how sustainability contribute to and support value creation

Supported strategic discussion with information about the key resources and relationships necessary to successfully deliver their objectives

Discussed key trends across their markets, backed up with relevant data Updated their risk disclosures to reflect developments in 2011/2011.

And discussed risk management frameworks and processes. Gave equal billing to financial and non-financial KPIs – and integrated

both through the business review Explained the business case for sustainability. The very best linked

sustainability to strategy Reconsidered how governance is communicated 25/02/2013


Reporting Progress – Some challenges Telling a story - the overall quality of reporting has improved across

sectors, with more companies using reporting as an opportunity to tell their sustainability story, rather than a compliance exercise

Progressive disclosure - the use of digital channels to provide detail that sits outside 'the report' is becoming more routine

Targets - more reports feature sustainability targets, though these are frequently too qualitative

Assurance and standards - there's been more extensive use of external assurance and compliance with GRI guidelines

Stakeholder engagement - remains weak in terms of evidence of impact and dialogue

KPIs - clearly defined KPIs are still largely absent, and data remains patchy Interactivity - there's plenty of room for improvement in online reporting,

with baffling user journeys being common practice, signposting leaving a lot to be desired, and limited usage of online dialogue and interactivity

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Where to place the focus?

Integrated reporting is still in its infancy An increasing number of companies are moving towards the

integrated reporting of sustainability and financial issues. However, this continues to be challenging for the largest companies. The first major hurdle is comparability. Sustainability impacts, when they

can be measured in financial terms, tend to pale in comparison to the fiscal impacts of more traditional business drivers. More often than not, it is difficult to determine quantitative metrics for sustainability aspects, let alone monetary figures.

The second hurdle is that obtaining meaningful data on non-financial performance at the scale needed remains elusive

Some companies have simply combined financial and non-financial issues into one report without consideration of how these issue areas compare in significance. Others have moved toward summary reports and highlights of sustainability to supplement the annual financial report. There is little consensus yet on the future shape of integrated reporting.

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Challenges in specific areas Significant progress is perceived to have been made over

the past 20 years on sustainability reporting Health and safety has made the most significant progress over

the past 20 years. Water is one of the issues in which business has made the

least progress on over the past 20 years. Two other areas in which business has made the least

progress, is sustainable consumption and public policy, and these are areas that appear to be the greatest challenges for future progress.

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Going Forward Human rights, workers’ rights, and climate change seems

to be the priority focus of organisation’s sustainability efforts over the next year.

Energy management in operations is overwhelmingly seen as the main priority in carbon reduction strategies.

Other areas requiring focus: The challenges of establishing an impactful strategy, scaling up

projects globally, and gaining resource commitments from senior management are seen as significant challenges.

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What stakeholders want More balanced reporting – reports are not a reflection of reality More information on employee diversity and equality Not enough long term targets set Not enough focus on most material issues Approach to sustainability not clear Lack of accessibility of information Lack of satisfactory explanations for poor performance More information on specific sustainability programs Inaccuracy in reporting information More local information – business opportunities and impacts More benchmarking/comparability/explaining of data

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Some constraints remain - Organisational Time and resource (financial and human) constraints Lack of organisational buy-in and commitment Difficulties in evaluating and measuring performance Managing impact and risk – risk aversion Difficulty integrating sustainability with organisational values

and priorities Understanding and managing regulatory impacts Developing new products and services that consider / mitigate

/ reduce environmental and social impact Improving supply chain practices and policies New themes – corruption, collusion, bribery, ethics, carbon

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Contact Reana Rossouw Next Generation Consultants Specialists in Corporate Sustainability and Integrated Sustainability as well Social

Investment and Development Tel: (011) 2750315 E-mail: [email protected] Web: www.nextgeneration.co.za

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2013 - integrated and sustainability reporting

Investor Relations