Held to account

30th January 2018

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Colleen Theron gives an overview of mandatory and voluntary sustainability reporting.

The heightened emphasis on transparency and accountability through corporate governance and disclosure has renewed the focus on the ‘triple bottom line’ – environmental, social and governance (ESG) performance. Meanwhile, mandatory and non-financial reporting are converging. Companies are increasingly required by regulation – such as the 2013 reform of the Companies Act 2006, and the UK Modern Slavery Act 2015 – to report on environmental and social issues.

The Financial Reporting Council has published its annual Corporate Reporting Review for 2016/17. It highlights that expectations of corporate reporting are rising, flagging up two areas. First, companies are required to be more transparent about relationships with employees, customers, suppliers and stakeholders, and how they engage with them to ensure long-term success. Second, companies need to be explicit about how they generate and preserve values.

What is sustainability reporting?

International standards body the Global Reporting Initiative (GRI) describes a sustainability report as one published by an organisation about “the economic, environmental and social impacts caused by its everyday activities”. It will also present the organisation’s values and governance model, and “demonstrate the link between its strategy and its commitment to a sustainable global economy”.

Why do companies report?

Companies choose to report on environmental and social issues for numerous reasons – perhaps to reflect their corporate social responsibility (CSR) commitments or to show good business practice. It is a driver for improved performance. They may want to join an ethical index, or shareholders or investors may be pressing for more transparency on ESG performance.

What are the trends in reporting?

The 2016 Carrots & Sticks report, produced by KPMG, GRI, the United Nations Environment Programme and The Centre for Corporate Governance in Africa, shows that there has been a 65% increase in mandatory reporting from 2013-2016. Use of voluntary reporting instruments has also risen by 35%. In many OECD countries, early voluntary efforts to measure and report on CSR or sustainability performance have been followed by mandatory disclosure requirements.

Voluntary reporting frameworks

There is a growing number of voluntary reporting frameworks that companies can adopt. The most common and widely adopted global voluntary framework for sustainability reporting is GRI. Other key frameworks for report-ing on non-financial matters include: the International Integrated Reporting Framework; the Carbon Disclosure Project; the Sustainability Accounting Standards Board; the Climate Disclosure Standards Board. In addition, the United Nations (UN) sustainable development goals (SDGs) were adopted by world leaders in 2015. There are 17 goals, aimed at ending poverty, ensuring equality, protection of the environment and fighting climate change. Increasingly, companies are using the SDGs to report on their strategic objectives.

Integrated Reporting Framework

A voluntary reporting approach that links an organisation’s strategy, governance, and financial performance with the social, environmental, and economic context in which it operates. The non-financial information has to be integrated in the annual report, applicable organisation-wide.

The Carbon Disclosure Project (CDP)

A not-for-profit organisation that asks companies, cities, states and regions for data on their environmental performance. It holds the world’s largest collection of self-reported climate change, water and forest-risk data. Affiliated organisations measure and disclose their emissions and climate change strategies to the CDP through annual questionnaires.

UN Global Compact

A policy initiative that seeks to align business strategies to 10 universal principles covering human rights and labour, anti-corruption and the environment. It is a membership scheme, and affiliated companies report on implementation of these 10 principles. In 2013, UNGC and GRI renewed their memorandum of understanding to align GRI’s new G4 Sustainability Reporting Guidelines with UNGC’s 10 universal principles.

Stock exchanges are increasingly encouraging voluntary disclosure on ESG criteria and influencing how companies report this. Some, such as the Singapore Exchange SGX, are already requiring listed companies to disclose on sustainability issues. In February 2017, the London Stock Exchange issued guidance on ESG reporting. Financial indices, such as the Dow Jones Sustainability Index and the FTSE4Good, also outline benchmarks to measure the sustainability.

UN Guiding Principles on Business and Human Rights

These apply to all states and business enterprises. They seek to provide an authoritative global standard for preventing and addressing adverse effects on human rights triggered by business activity.

Mandatory disclosure

There are a number of mandatory reporting requirements that companies have to adhere to within the UK:

  • The Companies Act 2006
  • The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013
  • The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016/1245
  • The Modern Slavery Act 2015

Current reporting requirements in the UK

Companies Act 2006

Mandatory reporting obligation on all companies (except small companies) to include a review in the strategic report “to the extent necessary for an understanding of the development, performance or position” of the company, giving information about employees and environmental matters.

Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013

Requirement to produce a strategic report, approved by the board of directors, as part of the annual report. Quoted companies must report on human rights and greenhouse gas.

Modern Slavery Act 2015

Section 54 (the transparency in supply chains clause) requires commercial organisations with a turnover of £36m and above to produce an annual statement detailing the steps taken (if any) to ensure that slavery and human trafficking are not taking place in either its own operations or its supply chains. The statement has to be published on the homepage of the company’s website. There is no limitation on the nature of goods or services supplied or sector of operation.

EU Non-Financial Reporting Directive [Directive 2013/34/EU]

Requirement for the disclosure of non-financial information by certain large undertakings and groups, applying to large public-interest entities with more than 500 employees. Small and medium-sized companies will be exempted. The UK has transposed the requirements of the directive.

What barriers are there to reporting?

  • Lack of internal mechanisms to value environmental impacts
  • Lack of alignment between sustainability and financial teams
  • Failure to fully integrate environmental factors such as water scarcity into long-term strategy
  • Lack of metrics to recognise the real costs of climate change.

It is apparent from this overview that there are a number of frameworks available to companies that decide to report on non-financial issues, although there isn’t a single, globally accepted version. It is key that sustainability practitioners get to know these frameworks and how they relate to one another so that they can benchmark performance.

Colleen Theron is director at Ardea International

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