Whether preparing for a sustainability-linked financing or detailing environmental, social and governance (ESG) measures in the annual report, companies face a number of common reporting challenges and potential pitfalls, which can be grouped in the following three major areas that need to be addressed:
- Identifying key stakeholders and their specific information needs
- Aligning sustainability disclosures with broader business strategy
- Moving towards measurable and impact-focussed reporting
Below we look at each area in detail:
1. Identifying key stakeholders and their specific information needs
Companies typically embark on their sustainability reporting-journey with an “outward-looking” perspective – mainly focussing on the impact of their business activities on the environment and society. Stakeholders, however, are also increasingly interested in “inward-looking” reporting that demonstrates how prepared a company is to address external sustainability risks and how its performance could be impacted by these.
To help address this need, many companies are looking at sustainability reporting standards for guidance. However, the sustainability reporting landscape is constantly evolving with new and competing reporting frameworks and benchmarks striving for dominance. The resulting “alphabet soup” of standards and frameworks – such as the the GRI, IIRC, SASB, TCFD and CDP – has created some confusion among publishers and users of reports as each standard can have different objectives and focus areas. Hence companies need to think carefully about which of these frameworks best suits their reporting objectives and the information needs of their various stakeholders.
But there’s also good news for companies: efforts are underway to help achieve greater coherence, consistency and comparability between financial and corporate sustainability reporting frameworks and standards, mainly driven by the initiative “The Corporate Reporting Dialogue”. What’s more, two of the most recognised standards, GRI and SASB, announced a strategic collaboration in July this year. This could help many issuers, including those companies who are just starting their reporting journey.
At the same time, companies should understand that standardised industry reporting guidelines are exactly just that: guidelines. As such, companies should not lose sight of tailoring their reporting to ensure they tell their full “sustainability story”. Once agreed on the key sustainability narrative, firms need to be aware that a “one size fits all” approach will not usually address the varied information needs of their stakeholders (investors and many others).
Therefore, sustainability reporting needs to happen with each stakeholder in mind. A PwC survey amongst corporates and investors showed that there’s still some work to be done: While 60% of companies believed their sustainability disclosures facilitate investors’ comparison of companies, 92% of investors didn’t agree. To help with this task, corporate sustainability reporting teams have formed stakeholder panels to stay abreast of changing information needs as well as continuously evaluate the most efficient mediums and channels for disseminating this information.
2. Aligning sustainability disclosures with the broader business strategy
Aligning the sustainability reporting with the broader business strategy isn’t always as straightforward as it first may seem, because often there isn’t just one business strategy but a strategy for each business division, geography, product or service. Each of those may well require a different sustainability approach and hence a different narrative with regard to its transformation to a sustainable business. This can present major challenges in particular for global corporations operating in multiple lines of business.
What makes a strong sustainability story? A strong sustainability disclosure isn’t necessarily one that can showcase the best performance but can evidence that a company fully understands its material issues and actively develops responsible business strategies that are aligned with its corporate purpose and strategy. This needs to encompass a clear articulation of the firm’s broader societal purpose, beyond maximising financial returns for shareholders.
At the same time, companies should be open about dilemmas they face on their sustainability journey and be transparent about, for example, future resource constraints potentially affecting their operations and positive and negative aspects within their value chain in terms of environmental, social and economic impacts. Many companies now address this by publishing clear position statements and reporting extensively on specific sustainability issues, risks and mitigating factors/actions.
3. Moving towards measurable and impact-focussed reporting
During its infancy, sustainability reporting was often characterised by bold yet broad missions, commitments and selective sustainability measures. However, this is changing in the light of information users demanding access to more reliable, comprehensive and comparable data, as well as a clear and transparent articulation of a company’s value creation story and related risks.
Companies are recognising that their sustainability disclosures are crucial in helping investors, rating agencies and other stakeholders to understand and assess the future risks and opportunities of their business activities as well as how these activities are aligned with market standards and taxonomies (such as the EU Taxonomy, and, in time, a social taxonomy). Furthermore, delivering comprehensive sustainability disclosures can also give companies a unique advantage in differentiating themselves and in turn access broader capital pools at more favourable pricing.
Equally, companies have started to acknowledge that sustainable business practices not only satisfy investor demands but also improve staff satisfaction and retention as well as attract the fast growing number of customers, who are seeking to do business more responsibly. As such, CEOs increasingly declare sustainability to be their personal responsibility, aiming to embed ESG thinking into their company’s DNA and corporate language and setting the agenda from the top. However, challenges remain in how this is delivered internally within an organisation. Any investor relations, finance, marketing or sustainability team having to get input and agree on corporate messaging will appreciate the difficulty in ingraining sustainability considerations across multiple diverse functions.
Finally, looking at whether – and how – to combine financial and sustainability data, the direction of travel is clearly moving towards merging financial with sustainability reports with some finance teams taking more ownership over sustainability reporting. However, sustainability metrics, which by their nature can be more aspirational, stretching and sometimes “softer” than traditional financial metrics, don’t always align well with traditional financial targets and reporting. Hence some firms are choosing to produce a sustainability supplement as part of their annual report with cross-references between the two.
Understanding sustainability as a company-wide project, which requires a dedicated programme management team as well as project teams with representatives from all corporate functions, is the most effective approach. While some might be hesitant to invest in additional headcount, the interdependent financial, reputational and risk benefits of a transition to a sustainable business far outweigh the costs of a suitably staffed project management office, which also delivers on the sustainable reporting requirements.
Reporting and direct investor engagement should go hand in hand
While for some sustainability officers it can be tempting to “hide behind” ESG agencies and reporting standards, companies shouldn’t consider producing a sustainability report to be a substitute for proactive investor engagement. Ideally, they go hand in hand. Several companies, in fact, first spoke to their investors before determining their panel of ESG agencies and focus areas in their sustainability reporting.
There are multiple channels for engaging with investors on sustainability matters:
At NatWest, we are regularly organising one-to-one “ESG speed dating” sessions, either in the form of a single-company roadshow or as part of a conference for larger groups of companies and investors. One-to-one sessions not only offer privacy to tackle the more sensitive topics but can also be a good platform to deliver some “soft factors” to investors, the “body language” of the management so to speak, such as the enthusiasm and sustainability expertise of a firm’s senior decision makers.
For the “long tail” of smaller, ESG-focused investors sustainability webinars are a useful format for outlining particular aspects of a company’s sustainability strategy. While more time-efficient in set-up, they do require careful follow-up with individual attendees to obtain richer feedback.
Various companies have developed their own investor and stakeholder ESG surveys. These tend to centre on sustainability topics that are considered the most relevant to their company, and hence should be in the focus for external reporting. If conducted regularly (at least once a year), these are useful for companies to get a sense for the ESG aspects they should emphasise.
Equally, more advanced ESG investors have developed their own in-house questionnaires in order to ask portfolio companies about their sustainability approach. This allows them, at least partly, to dis-intermediate ESG information intermediaries. They link directly to the investment parameters of the investor as a whole or indeed a specific portfolio.