Beyond basics: Hygiene & impact factors in sustainability reports
The last decade saw a remarkable increase of interest in companies’ sustainability or environmental, social and governance (ESG) performance by investors, regulators, and consumers. The charts below show the increasing demand from investors and regulators alike for companies to report on their ESG issues.
Number of signatories to the UN Principle of Responsible Investment (UN PRI). Image from UN PRI
Image from 10 Years of Impact and Progress, SSE (2019)
When the impacts of the pandemic first made waves through the global economy, many questioned if the momentum for sustainability will be put to a halt as societies and economies move into crisis survival mode and focus on rebuilding economies. However, with COVID-19 dubbed a “stress-test” on business resilience, ESG and sustainability practices have become evermore crucial for companies to manage their non-financial risks. BlackRock also noted that sustainable funds have been able to weather the pandemic storm and financial returns outperformed peers in the first quarter of 2020. Specifically, global sustainable mutual funds and ETFs had inflows of $40.5 billion in the first quarter, up 41% from the same year-earlier period[1].
“These inflows during a period of extraordinary market drawdown suggests a persistence in investor preferences toward sustainability,” BlackRock said. “They upend an oft-cited concern pre-Covid crisis that during sharp market downturns, investors will de-prioritize sustainability.”
Even in such extraordinary times, ESG issues and sustainability has proven yet again to be here to stay.
As sustainability / ESG reporting evolves and is now more mainstream than ever before, how can companies take this opportunity to go beyond ticking boxes, meeting regulatory requirements, and on to creating more meaningful impact?
Based on several reports and upcoming trends, we have identified disclosures that companies today should be reporting on (Hygiene Factors), and other metrics that shows a company is creating wider impact (Impact Factors).
Hygiene Factors (“must-haves”)
The International Business Council (IBC) along with the World Economic Forum (WEF) launched an initiative to “identify a core set of material ESG metrics and recommended disclosures that could be reflected in the mainstream annual reports of companies on a consistent basis across industry sectors and countries”. In January 2020, WEF prepared a report[2] proposing a set of 22 well-established, quantitative core metrics and reporting requirements. These factors were defined as “core” based on information currently popularly being reported on or information which should be easily obtainable by companies.
Adapted from Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, WEF (2020)
The metrics and disclosures proposed here have been organized in four pillars that are aligned with the SDGs and principal ESG domains: Principles of governance, Planet, People and Prosperity. They are drawn wherever possible from existing standards and disclosures (such as the Global Reporting Initiative, Sustainability Accounting Standards Board, Task Force on Climate‑related Financial Disclosures etc.)
More details on the 22 metrics can be expected by the end of 2020.
In Singapore, the top 10 most disclosed Material ESG Factors by listed issuers also mirrors the 22 metrics proposed by the WEF[3].
Image from Sustainability Reporting – Progress and Challenges, SGX & CGIO (2019)
Globally, these are the top material issues reported on by member companies of the World Business Council for Sustainable Development (WBCSD)[4].
Image from Reporting matters, WBCSD (2019)
From the observations above, robust disclosures on issues such as good governance and ethics, climate change management (TCFD-aligned), ecosystem impacts, employee health, safety and wellbeing, and an organisations’ wider contributions to community/social development have become common practice. As investors and regulators increasingly look for comparability between companies and as quality of reports improve, basic disclosures on these “hygiene factors” will be expected of companies within their reports.
Additionally, in the COVID-era, we can also expect increased focus on social disclosures, particularly on expansion of employee workplace safety.
Impact Factors
Besides these “must-have” factors, there are other issues organisations can look at within their sustainability strategy to strengthen impact. These Impact Factors may not necessarily be separate material topics. In most cases, these are a strengthening of disclosures around similar material issues.
In the same report by the WEF, further 30 “Expanded Metrics” were proposed[5]. These metrics have “wider value chain scope or convey impact in a more sophisticated or tangible way, such as in monetary terms. They represent a more advanced way of measuring and communicating sustainable value creation, and companies are encouraged to report against them as well, when material and appropriate.”
Some notable metrics and disclosures include,
Adapted from Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, WEF (2020)
For the full list of “Expanded metrics”, please see refer to the report.
Other key disclosures could stem from emerging trends in sustainability, particularly in the expected role of business within these trends. These include technology breakthroughs for climate mitigation, inevitable climate change adaptation, circular solutions, sustainable consumption, supply chain transparency and sustainability, biodiversity protection, and sustainable finance[6], among others.
Leadership
Ultimately, what defines leadership is not reporting on a large laundry-list of material factors, but rather, in doing it well. Many reports, publications and studies[7],[8],[9],[10] have emphasised the importance of key principles and aspects of best-practice sustainability reporting. They include clearly stating the purpose of the organisation, defining material issues from stakeholder engagement and operating context, balanced reporting, strengthening alignment with global reporting and sustainability frameworks (GRI, SASB, TCFD, SBT, SDGs etc.), articulation of board responsibility, and integrating ESG risks and opportunities within the wider business model. Paia specailises in applying these principles to individual client circumstances, and working with clients to produce leading edge reports with impact.
Paia has a long track record of helping companies with their sustainability strategy and reporting. Do take a look at our areas of expertise here, or reach out to us if your organisation is looking for support on your sustainability journey.
[1] https://www.bloomberg.com/news/articles/2020-05-18/blackrock-joins-allianz-invesco-saying-esg-funds-outperformed
[2] https://www.weforum.org/whitepapers/toward-common-metrics-and-consistent-reporting-of-sustainable-value-creation
[3] https://api2.sgx.com/sites/default/files/2019-12/Sustainability%20Reporting%20-%20Progress%20and%20Challenges.pdf
[4] https://www.wbcsd.org/Programs/Redefining-Value/External-Disclosure/Reporting-matters/Resources/Reporting-matters-2019
[5] https://www.weforum.org/whitepapers/toward-common-metrics-and-consistent-reporting-of-sustainable-value-creation
[6] https://sustainability.com/wp-content/uploads/2020/01/sustainability-annual-trends-2020-1.pdf
[7] https://www.forbes.com/sites/deloitte/2020/01/21/why-doing-good-is-good-for-business/#3c1698416b29
[8] https://globescan.com/wp-content/uploads/2019/07/GlobeScan-SustainAbility-Leaders-Survey-2019-Report.pdf
[9] https://www.wbcsd.org/Programs/Redefining-Value/External-Disclosure/Reporting-matters/Resources/Reporting-matters-strategy-targets
[10] https://api2.sgx.com/sites/default/files/2019-12/Sustainability%20Reporting%20-%20Progress%20and%20Challenges.pdf