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Sustainability

By Patrick Crawford, corporate engagement, Climate Disclosure Standards Board (CDSB)

At the recent non-financial reporting conference in London, in association with ACCA and Deloitte, commentators including Richard Howitt MEP, noted that 80% of shareholder value is now from intangible rather than physical and financial assets.

Coincident with this conference, Eurosif and ACCA launched their investor survey on non-financial reporting. The key findings from 90 investors support the need for integrating non-financial and financial reporting:

  • Non-financial reporting must be comparable across companies.
  • Non-financial information should be better integrated with financial information
  • Quantitative key performance indicators (KPIs) are essential and Qualitative policy statements are very important to assess financial materiality.

Rather than information that simply complies with reporting requirements, investors are seeking reports that communicate performance, including clear insights into issues that have a material impact on a company’s current and future performance. Communicating performance is of value to investor decision-making but equally to businesses as the integration of non-financial and financial information opens up new avenues of communication within the company, providing additional perspectives to their Boards.

My clear sense on leaving the non-financial conference was that investors are using this non-financial information now but they need more help in understanding the impacts on the business. A company’s response to these issues adds value by reducing risks and creating opportunities for the future. Placing ‘sustainability’ into its own report has been a useful first step for companies but there are still many people who say they do not know what ‘sustainability’ means. However, they all have views on what is needed for a business to be ‘sustainable’ in the long-term. Connecting these material issues with financial results requires integrated thinking as much as integrated reporting.

We know that many companies are taking these issues seriously, but until now there has been no structured means of communicating performance in mainstream reports in a consistent and compatible way with financial accounting standards.

The Climate Disclosure Standards Board (CDSB) was created at the World Economic Forum at Davos in 2007 by a group of international business organisations in response to the absence of a structured means of providing climate change-related information in mainstream reports. CDSB’s Technical Working Group drives its work and includes representatives from key global institutions including the main accountancy firms, professional accountancy institutions, investors, report preparers and governments. CDSB’s Reporting Framework is designed to integrate non-financial and financial information in a credible and standardised way.

As the CDSB Framework adopts relevant principles from existing financial standards, companies, accountants and corporate report preparers will find the Framework familiar and useable. CDSB works closely and collaboratively with other global sustainability bodies such as World Business Council for Sustainable Development (WBCSD) and World Resource Institute (WRI). In addition CDSB and CDP (formerly Carbon Disclosure Project) have MoUs with the International Integrated Reporting Council (IIRC), Global Reporting Initiative (GRI) and the US Sustainability Accounting Standards Board (SASB).

CDSB is managed as a special project of CDP. More than 4,200 companies who report their climate change emissions using the CDP process are already ahead of the game. By using CDSB’s Framework they can apply the lens of materiality to their CDP response, incorporating the risks and opportunities from climate change and the growing scarcity of natural resources in their annual reports in a transparent, consistent and comparable way.

The Framework is designed to be ‘Standards Ready’, ready to be adopted by governments in support of the introduction of national regulation on disclosure of climate change and other non-financial impacts. DEFRA’s official guidance cites CDSB’s Reporting Framework as one mean of compliance with UK mandatory requirements to report GHG emissions. Using the Framework provides a means of preparing a company for the increasing amount of regulation that is being discussed and drafted around the world.

To assist companies and report preparers in using the Framework CDSB, with the support of ACCA, has produced a guidance document available here. The CDSB website includes other resources, including recordings of recent webinars introducing the Framework.

  • If you would like any further information about integrating non-financial with financial information using CDSB’s Framework, please contact Patrick.crawford@cdsb.net, or visit www.CDSB.net to download CDSB’s Framework and Guidance.

ACCA heads-6084

By Gordon Hewitt, sustainability advisor, ACCA

“We use our Earth as if we have a planet and a half; we have a deficit relation with our natural resources. The biggest challenge facing not just business, society and government, but humanity is the question of our sustainability. And business as usual will do nothing to solve it.”

These are the words of the Global Reporting Initiative’s (GRI) chief executive Ernst Ligteringen at its global conference in Amsterdam last month, underlining the raison d’etre of the sustainability reporting standard-setting body’s work as he unveiled the latest generation of reporting guidelines, known as G4, to a 1,500-strong audience of business leaders and finance professionals.

The launch of the G4 guidelines marks the culmination of two years of consultation involving 120 specialists and two consultation periods to which more than 2,500 responses were received. The new guidelines demand greater transparency from the organisations that use them. It is about creating better companies, a better market, a better world with more social justice and business managed in a responsible way.

Key features of G4

The G4 guidelines aim to help companies produce clear, concise sustainability reports that are of high relevance to an organisation’s stakeholders. The guidelines aim to be more user friendly than previous versions, helping reporters to focus on and manage what really matters.

Some key features of the new guidelines are as follows:

  • Materiality: This is certainly not a new concept to the GRI, but the G4 places greater emphasis on the subject. The new guidelines aim to help organisations to produce reports that are concise and include information and KPIs on material impacts only. Reporters must define materiality and provide full disclosure on the topics that are material to them.
  • Value chain: A major difference between the G4 and previous iterations of the GRI guidelines is the focus on an organization’s value chain. Reporters must assess their complete value chain, and disclose where their impacts are most material. This will present significant challenges to many companies, as such supply chain transparency is complicated and expensive to attain, and will often involve the impacts of suppliers over which they have little control.
  • Application levels: The G4 no longer has a system of application levels (A, B, C), which many believed drove companies to take a checklist approach to sustainability reporting. The GRI have introduced an “in accordance” system, with two tracks – core and comprehensive – for reporters.
  • Disclosure on management approach: The new guidelines will require organisations to report on how they identify and manage their actual or potentially material impacts. This kind of narrative disclosure will provide report users with a better idea of how companies are managing their impacts, which will provide greater context to the KPIs included within a report.
  • Assurance: In previous iterations of the GRI guidelines, reporters would indicate whether they had some form of external assurance over their reports by adding a + after their application level (e.g. A+). This did not provide any information over how much of the report was assured, which was clearly an issue. This has been removed from the G4 guidelines, which instead has an additional column in the organisation’s GRI index table where reporters can indicate which elements of the report has been assured, thus providing greater transparency on the extent of external assurance.

GRI and Integrated Reporting

A recurrent question that emerged from the GRI conference was how the G4 guidelines will fit in with the integrated reporting. The International Integrated Reporting Council (IIRC) recently published a Consultation Draft of the International <IR> Framework, and is due to launch its framework later on this year. The IIRC draft framework aims to allow companies to report on material information about an organisation’s strategy, governance and performance that reflects the commercial, social and environmental context within which it operates.

According to the IIRC, integrated reporting is not simply about combining existing financial and non-financial disclosure, but will certainly draw on elements of a company’s financial and sustainability reports to the extent that the information is material to how an organisation’s strategy creates and preserves value.  With this in mind, the GRI will be looking to offer guidance on how to link the sustainability reporting process to the preparation of an integrated report.

Whilst there is still an element of uncertainty of the future of corporate reporting, the G4 guidelines are certainly a step in the right direction.

Sustainability

By Gordon Hewitt, sustainability advisor, ACCA

UN climate talks opened in Doha this week, marking the 18th Conference of the parties (COP18) to the UN Framework Convention on Climate Change (UNFCCC). The Convention came into force in 1994 with the ultimate objective of ‘stabilising greenhouse gas (GHG) concentrations at a level that will prevent dangerous human interference with the climate system.’ Since 1995, parties to the Convention have met annually to assess progress in dealing with climate change. The meetings have made limited progress over the years and have been fraught with challenges. The most significant challenges are arguably the dynamic between developed and developing counties, and how climate change can be addressed is a manner that is equitable. This is an important point, considering that much of the CO2 that is causing global warming was emitted by developed countries over the past 150 years and that the impacts of climate change are hitting developing countries hardest. Other major challenges include getting governments to turn the reduction targets set at climate negotiations into concrete actions and streamline the fragmented approach to this global issue by national governments.

Progress towards a legally binding agreement on GHG emissions has been slow, but made a step in the right direction last year in South Africa. COP17 ended with 195 countries pledging to negotiate a new international climate treaty by 2015, known as the ‘Durban Platform’. Whilst this does put governments on track to reach a legally binding deal, some argue that the timeframe is too long and that much more urgency is needed if we are going to limit global warming to 2oC (the commonly regarded limit to avoid dangerous climate change).

This point has been demonstrated well by a recent report by the accountancy firm, Pricewaterhouse Coopers, which concluded that current governments’ ambitions to limit warming to 2oC appear highly unrealistic. The 2012 Low Carbon Economy Index has demonstrated that global carbon intensity (the average emission rate per unit of output) decreased between 2000 and 2011 by around 0.8% per year. Such a level of reduction has meant that governments need to cut carbon intensity by 5.1% every year, from now until 2050 to avoid dangerous climate change – a rate that seems unattainable considering the lack of commitment made by governments to date. The current rate of emissions cuts has put the world on track for an estimated 6oC of warming, a level that would have unthinkable implications for humanity.

The slow progress demonstrated by governments is also reflected by the corporate sector. In 2012, 81% of corporations from the Global 500 responded to the Carbon Disclosure Project (CDP) questionnaire. Their responses have provided a valuable insight into how companies are addressing the risks and opportunities associated with climate change. It is clear that some companies are aware of the need to act on climate change, but only a few leading companies are setting the necessary targets and required to ensure long term resilience against the negative impacts of climate change.

Accountants and finance professionals are very important stakeholders when looking to increase corporate action on climate change. This is due to their role within corporate risk assessment, as well as within corporate reporting. There is evidence that CFOs are becoming more aware of the need for greater action on the part of corporates. The accountancy firm, Deloitte Touche Tohmatsu, surveyed 250 CFOs of large companies (firms with annual revenues of at least $1 billion), and found that 49% saw a significant link between sustainability performance and financial performance. The greatest risks highlighted by the CFOs surveys related to energy prices, commodity prices and carbon regulations, so it is clear that climate related issues are rising up the corporate agenda. Accountants and finance professionals need to ensure that the risks posed by climate change are addressed with concrete actions.

As the effects of climate change are becoming ever more apparent, such as the increased incidence of extreme weather events, both governments and corporates need to switch on to the urgent need for action. In October this year, Hurricane Sandy swept up through the Caribbean, causing devastation across a number of island nations, before heading west into the US and Canada. The storm resulted in an estimated $71 billion worth of damage. Images of scores of people left homeless in Haiti – as well as flooded subway stations and blackouts across Lower Manhattan – show how vulnerable both rich and poor nations are to the effects of such massive storms, and provide a glimpse of the future if action is not taken soon.