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Sustainable Activities – A Need for Transparent Reporting

Financial Reporting Brief March 2020

This month’s article 'Sustainable Activities – A Need for Transparent Reporting' looks at the increasing demand for more robust reporting and some recent developments to meet the challenge.

Sustainable Activities – A Need for Transparent Reporting

There is increasing demand from stakeholders for companies to improve the quality and transparency of the manner in which they present the sustainable nature of their activities and the presentation of adequate reliable information on associated risks and opportunities. Environmental and social risks have a direct bearing on the sustainability of an enterprise and its financial wellbeing. 

The momentum towards improved disclosure and reporting is continuously escalating in recent times with developments including:

  • The announcement by the EC that later this year it would present a renewed sustainable finance strategy, which would include a revision of the Non-Financial Reporting Directive
  • At the World Economic Forum (WEF), the chief executive officers of many of the largest global companies expressed support for aligning on a core set of metrics and disclosures in their annual reports on the non-financial aspects of business performance.
  • The International Integrated Reporting Council’s (IIRC’S) Integrated Thinking & Strategy Group has published a new report setting out how best to adopt integrated thinking and enhance strategy to achieve long-term value creation.
  • Continuing developments in relation to reporting on climate change.

We shall have a brief look at the above but first we shall take on board an even more recent development, the publication of a report by the Alliance for Corporate Transparency – ‘The State of Corporate Sustainability Reporting in the EU’ which assessed how 1,000 European companies disclose sustainability and other non-financial information.

Corporate Transparency in EU
Key findings of the Alliance Report are:

  • Less than 22% of the companies surveyed report climate-related key performance indicators in summarised statements
  • The TCFD criteria are not appropriately applied
  • Only 20-25% of companies describe risks specifically even though many more identify risks as relevant to the company in the first place, with outcomes reported in only 4% of cases and only 6% providing economic figures
  • Supply chain transparency is low with the apparel sector being better than others but still not exceeding 14%

At the event to launch the Report, some of the main messages emerging from the panel and the audience were:

  • While a lot of companies provide information, very few provide information useful for gaining an understanding of the business
  • Analysts don’t want more information, they want relevant information
  • Materiality is of the essence
  • There is a great tendency towards boiler plate information
  • Information needs to be comparable, yet companies must be allowed to report on what is relevant for them
  • There should be more connection between financial and non-financial information
  • Disclosure alone, even if mandatory, does not suffice to achieve a change in company behaviour
  • It is a mistake to try to use reporting legislation to manage a moral obligation

There is concern that the limitations in quality and comparability of corporate disclosures hinder efforts to scale up sustainable finance as investors do not have reliable information to inform their decisions. The Report expresses the belief that the existing EU legislation is not meeting its objectives and specific identification of what needs to be reported on may be the only solution.

Europe – Non-Financial Reporting
The European Green Deal commits to developing standardised natural capital accounting practices within the EU and internationally. The many overlapping standards currently in place confuse companies and investors. There is a big call to address the inadequacy of publicly available information about how companies impact society and the environment, in particular:

  • Reported non-financial information is not sufficiently comparable or reliable
  • Companies do not report all non-financial information that users think is necessary, and many companies report information that users do not think is relevant
  • Some companies from which investors and other users want non-financial information do not report such information
  • It is hard for investors and other users to find non-financial information even when it is reported

Uncertainty and complexity have to be dealt with by companies in deciding on what information to report and how and where to report such information, with certain sectors having to cope with numerous pieces of EU legislation.

The reporting requirements in the Non-Financial Reporting Directive 2014 are not particularly detailed, are difficult to enforce, leave a lot of discretion to reporting companies and do not apply to some companies from which users say they need information.

The initiative to revise the NFRD will have the objectives of:

  • Ensuring investors have access to adequate information to support their investment decisions
  • Ensuring that civil society organisations, trade unions and others have access to adequate non-financial information to hold companies accountable for their impacts on society and on the environment
  • To reduce unnecessary burden on business related to non-financial reporting and the decision about which policy option to retain

The Inception Impact Assessment on the European Commission website provides an information outline.

Common Metrics & Consistent Reporting
The International Business Council of the WEF discussed a proposal prepared in collaboration with the Big Four accounting firms titled ‘Toward Common Metrics and Consistent Reporting of Sustainable Value Creation’. The proposal recommends a set of core metrics and recommended disclosures, to be reflected in the mainstream annual reports of companies on a consistent basis across industry sectors and countries.

The proposed metrics and recommended disclosures have been organised into four pillars that are aligned with the UN Sustainable Development Goals and principal ESG domains. The Principles are:- Governance; Planet; People; Prosperity. They are intended to be a system-wide solution, such as a generally accepted international accounting or other reporting standards drawn from best practice.

Global accountancy bodies have called for improved UN Sustainable Development Goals (SDG) disclosures. The SDG Recommendations offer a new approach for businesses and other organisations to address sustainable development issues. They attempt to establish a best practice for corporate reporting on the SDGs and enable more effective and standardised reporting and transparency on climate change, social and other environmental impacts. This will require relevant and material disclosures about the factors that influence long term value creation (or destruction) for the organisation and society or that have an impact (positive or negative) on the achievement of the SDGs in the annual report.

Integrated Thinking
The IIRC has published ‘Integrated Thinking & Strategy – State of Play Report’ which represents renewed thought on how best to adopt integrated thinking and enhance strategy to achieve long-term value creation. Integrated thinking is a unifying concept and a strategic tool that helps management to bring order to the manifestly complex environment in which businesses must operate in the 21st century. The building blocks of integrated thinking are a collaborative management culture, a multicapital - mindset and a robust corporate governance process. When these are all brought together they lead to a platform from which an integrated report may be created. 

There are many learned articles and other information sources which point to the strong link between sustainability performance and financial performance. Today, leading companies are basing their decisions on interconnected information across multiple capitals, including natural, social and relationship, human, manufactured and intellectual. Financial capital is just one capital of many, and companies ask:

  • What are the strategic imperatives behind multi-capital value creation?
  • What multi-capital decision tools are credible in the boardroom and with investors?
  • How do we deal strategically with the interaction between governance and performance management?

The IIRC Thinking & Strategy Group brings together some of the world’s most innovative companies so that they collaborate, learn from each other, challenge each other’s thinking and share leading practices between themselves and those who follow them. The ‘State of Play’ report captures the initial thinking and ideas being developed in the group.

Climate – Related Disclosures
The Climate Disclosure Standards Board (CDSB) has launched a consultation to advance the disclosure of nature-related financial information in the mainstream report and explore the role of the CDSB Framework in this process. There is a growing imperative for environmental issues to be reported in an integrated way.

The European Reporting Lab has issued its report ‘How to improve climate-related reporting – a summary of good practices from Europe and Beyond’. The report provides an analysis of the current state of climate related reporting of approximately 150 European companies and focuses on identifying good reporting practices and assessing the level of maturity in the implementation of the TCFD recommendations while also taking into consideration the climate-related reporting elements of the NFRD.

Future articles will return to climate change and look at these and other recent developments.

Financial performance and the financial position continue to be a primary focus of attention for investors and other stakeholders. But they are not enough, as more and more, sustainable activity in the light of major economic, social and other broader risks are seen as hugely critical for long term survivability and prosperity.

Successful organisations will need to demonstrate their ability to adapt to change and evolution. They must have the ability where necessary to redefine their business models if they are to continue to prosper.

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