Poor link between environmental risk and corporate strategies

29th January 2016


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  • Business & Industry ,
  • Mitigation ,
  • Reporting ,
  • Management

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IEMA

Environmental matters need to be better integrated into overall corporate strategies, an analysis of annual reports of FTSE 350 companies has found.

Although environmental factors were identified as principal business risks by 41% of reports studied, only 27% of companies reflected these in their key performance indicators (KPIs), which are used by management to monitor the company’s progress, according to a report of the findings.

The analysis was carried out by the Climate Disclosure Standards Board (CDSB), a consortium of international NGOs and businesses working to make reporting of environmental risk and impacts mainstream.

Most companies (90%) report the environmental impact of their business, but the lack of environmental KPIs is at odds with guidance from the environment department (Defra), which recommends that companies should report at least three KPIs associated with their key environmental impacts.

The report also notes that international integrated reporting (<IR>) framework and guidance from the Financial Reporting Council also promote the importance of linking KPIs with an organisation’s wider goals and objectives.

“It is clear from our analysis that companies often struggle with the challenge of finding and presenting a clear, coherent and connected picture of their business, particularly with regard to linking strategy with relevant KPIs,” the report states.

Where environmental matters are defined as KPIs, the research found a wide range used. This is unhelpful, according to Richard Barker, professor of accounting at Saïd Business School in Oxford: ‘It’s actually quite difficult to make sense of a whole host of KPIs from different organisations. The whole point of reporting is to enable resource allocation, investment and decisions that require the comparison of one organisation with another.’

But Stephen Haddrill, chief executive of the Financial Reporting Council, said that standardisation of reporting could lead to ‘boilerplate’ or merely compliant disclosure.

By sector, environmental matters are identified as a principal risk by 91% of companies in the materials sector, 38% of discretionary consumer firms (retail, clothing, media); 73% of energy companies, 54% of industrial and 37% of IT businesses, the CDSB found. However, they are represented in KPIs in 82%, 29%, 20%, 39% and 21% of companies in each of these respective sectors.

Other findings from the report include:

  • A wide range of KPIs are used to monitor and report on performance. Consistency and comparability of disclosures could be enhanced through the development of performance indicators with common characteristics that still link to the objective of disclosure and the circumstances of the organisation.
  • 87% of companies disclosed environmental policies, and 78% provided an indication of the effectiveness of those policies.
  • 77% of companies included a breakdown of direct emissions under scope one and scope two. A quarter (26%) disclosed indirect emissions under scope three.
  • 23% of companies reported independent assurance for their GHG emissions and further environmental information.

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