The recommendations of the Financial Stability Board's report Task Force on Climate-related Financial Disclosures (TCFD) may be a game changer for sustainability reporting in 2018. The TCFD aims to bring consistent, comparable and reliable greenhouse gas disclosures into mainstream corporate reporting internationally.
A key recommendation is to integrate greenhouse gas and climate-related reporting into mainstream financial reports. This is because there is a growing appreciation among important stakeholders such as investors and regulators that climate change could impact businesses, and therefore they will need to disclose how their operations may be impacted.
Sustainability reporting is the information a firm discloses about its social and environmental impacts and governance.
Although the TCFD is voluntary, it is backed by the Financial Stability Board (FSB), so businesses take the recommendations seriously. The FSB is a group of national banks and regulators controlled by the G20 group of countries.
The European Union's Non-Financial Reporting Directive (NFRD) is also shining a spotlight on sustainability reporting. At the same time, many businesses are considering how they can adopt the UN's Sustainable Development Goals (SDGs) in their operations.
Considering the global regulatory push around sustainability reporting, Alex McKay, Principal Consultant with the Anthesis Group, says CFOs need to be prepared.
“Due to initiatives such as the NFRD, many more companies will now have to report their material sustainability issues, either in their annual report or in a separate sustainability report," says McKay.
“The more advanced companies are starting to set science-based carbon targets – setting out the emissions reductions they need to make to play their part in the Paris Climate Agreement to keep the global temperature rise below two degrees Celsius," she adds.
There are several challenges for CFOs to consider on the path to developing a robust sustainability reporting capability. McKay says a key preliminary action is conducting a sustainability materiality assessment.
“This is essential, it is the foundation on which all the other elements in the report are built. This will identify issues that will have an impact on the business's sustainability and where action needs to be focused – whether it is climate change, water stress, modern slavery or commodity stability," she says.
Materiality also informs what a company should be disclosing, taking into consideration the regulatory requirements the business must meet around its sustainability reporting obligations.
“It's important to gain a thorough understanding of the TCFD recommendations and ensure the right governance, risk management and strategic planning processes are in place," McKay advises, adding that it's also important for CFOs to analyse the applicability of the NFRD to their European operations, if the business has a presence on the continent.
McKay suggests CFOs might consider integrated reporting as an option for their annual reporting activities. “Integrated reporting brings financial and non-financial performance together in the same report – and this kind of reporting is increasingly common. One approach is to use the International Integrated Reporting Council's framework based on the 'six capitals' model," she explains.
It may be important for an organisation's sustainability report to be intrinsically linked to the company's business strategy. Almost every element in the business should be represented in the sustainability report.
Unlike the annual report, the format of a sustainability report is not fixed. This gives CFOs a certain amount of flexibility. McKay says this can be both liberating and perplexing in equal measure.
She notes it can be easy to become frustrated with the reporting process as sustainability reporting is time consuming and involves a lot of people.
“Generally, the reporting process isn't as slick as financial reporting because it juggles lots of data, topics and roles. But it's important to remember that reporting is a great opportunity to engage lots of people from across the business in things they care about, so the process can be as important as the finished report," she advises.
McKay says it's important to think carefully through the information gathering processes and evaluation system.
“Don't make the mistake of thinking Excel is enough. Collecting data on non-financial performance – from energy consumption to ethnic diversity to community investment - can be a time consuming and difficult task," she says.
If collected, managed and analysed correctly, this information might also offer valuable insights and help to guide business strategy.
“For most businesses a dedicated data management tool can really help collect, manage and interpret data consistently. With stakeholders increasingly demanding data that is easy to segment and understand, a good option is to build interactive features in sustainability reporting to bring the information to life," McKay adds.
The UN's 17 Sustainable Development Goals could also offer extra cause for finance chiefs feeling overwhelmed. These are deliberately high-level to ensure they are broadly applicable and adaptable and are further refined through relevant business themes and by 169 mid-level targets.
“Tools like the SDG Compass offer hundreds of relevant business measures and indicators which relate to each target or goal," she advises.
McKay says it's also important for CFOs to appreciate that it takes time to develop good internal skills for collecting sustainability information.
“Don't think you have to produce the perfect report. Businesses are often concerned about disclosing information that shows they haven't hit targets or that an indicator is heading in the wrong direction," says McKay.
“But transparent reporting reassures readers that what you are saying is accurate. No business can hit all their targets all the time and firms often receive praise for their honesty," she adds.
However, it's also important to dedicate appropriate resources to the sustainability report and give it the prominence it deserves in the business.
Says McKay: “it's a mistake to write sustainability reporting off as an aside. As initiatives like the TCFD show, it is moving to the mainstream and matters to customers, employees, regulators and shareholders."
A key focus for CFOs is to build systems to collect sustainability information over time and to refine the process along the way. Ongoing consultation with stakeholders can help ensure the information the business produces about its sustainability is both useful and reliable.
- A range of new public policy initiatives brings sustainability reporting into the mainstream.
- Businesses are finding more sophisticated ways to report and measure sustainability information.
- Clever companies are taking a science-based approach to the way they report sustainability information.