The ICSA policy team and judges of the Excellence in Governance Awards identify the best features of corporate reporting in FTSE 350 companies
Good sustainability and stakeholder disclosure clearly and concisely explains what a company is doing to ensure the long-term viability of its business, and how it manages its relationships with those affected by it. Sustainability is a high profile corporate issue, with focus from legislators and investors – a company disregards such issues at its peril.
There are two types of integrated reporting that we are beginning to see develop: those which follow the clearly defined ‘four pillar’ framework promoted by the International Integrated Reporting Committee (IIRC) and those which have sought to follow the principles of integrated reporting without necessarily following the framework.
The best reports we reviewed show a real sense of integration which enable the company to tell its story effectively. These reports address issues such as the supply chain, risk, people and the business model, and treat the company as one wholly thought through entity. Paul Druckman, the CEO of the IIRC, has said that it is impossible to have integrated reporting without integrated thinking and it is this bringing together of social and natural capital, as well as financial considerations into corporate decision making and strategy, that lies at the heart of good sustainability and stakeholder reporting. The Prince’s Accounting for Sustainability Project, which can be found at www.accountingforsustainability.org, also outlines how an organisation can ensure that sustainability is successfully embedded. Examples of good practice:
- Johnson Matthey provide a great example of a company committing to integrated reporting and continuing to think about how external issues affect the business. The sustainability and governance section stands out from all the other reports, with its use of three different values – direct value, indirect value and underlying value.
- Mondi demonstrate that the company is really thinking about the future challenges it may face.
- Unilever: as one of the world’s largest consumer goods companies it is hard to cover all the activities Unilever is undertaking, but there is no other FTSE 100 company as vocal in committing to sustainability activities and admitting its impact on the planet.
Turning policy into action
Many organisations have a sustainability policy – and there are plenty of consultants out there who will help define one – however, it is much harder to successfully embed such a policy into the DNA of a business. It is essential that the policy identifies the key sustainability issues for the company and recognises them both within the business model and the corporate strategy. Even if a company has completed both these stages, it must report effectively on what is being done and how it promotes ‘the success of the company for the benefit of its members as a whole’ – the fundamental duty of the directors outlined in the Companies Act.
There is an old maxim that ‘what gets measured gets done’. One of the challenges with reporting sustainability and stakeholder issues is that many of the measures, for example around carbon emissions, are not readily understandable to the casual reader of a report. To comply with the requirement that reporting be fair, balanced and understandable, it is therefore essential that sustainability measures are reported in a way that clearly explains exactly what they are for. Example of good practice:
- Johnson Matthey is particularly strong in this area. Its KPIs include safety, global warming potential and health management. There are also clear links to the risk register in terms of operational health and safety and the availability of strategic materials.
This is critical to the success of any initiative but it is remarkable that relatively few companies include any direct reference to sustainability or stakeholder issues in the chairman or CEO statement. This may have been because there is a more detailed sustainability section on the company website – which is of course a green way of reporting. However the absence of any real reference ‘from the top’ suggests that the company is ticking a box, rather than demonstrating commitment. Examples of good practice:
- The Lonmin chairman’s letter talks about the industrial relations issues and its commitment to helping improve the lives of employees and communities surrounding operations, as well as his belief that employee relations and issues of sustainability are key to success.
- Mondi include a commitment in the CEO letter and a statement that the company does not want business to profit at the expense of the environment and society.
- The Pennon chairman’s letter talks about commitment to ESG matters at board level and there is a clear link to KPIs, with strategic sustainability objectives and good links to risk.
- The Rathbone Brothers CEO chairs a social and environmental committee, which is formed by members of staff.
- Both the chairman and CEO of Unilever make references to the importance of sustainability, with the sustainability plan particularly prominent throughout the CEOs review, and it is clearly linked to their strategy and KPIs.
Sustainability in the business model
A company must understand the sustainability of its business model in order to predict the future of the business and take steps to ensure its success. Identifying the key sustainability issues and recognising them within the business model and the corporate strategy will enable the company to include these in its risk analysis, KPIs and, where appropriate, including sustainability and stakeholder relationship criteria in the objectives for business units and individuals. This is easier for some companies than for others, owing to the nature of their activities, but if this can be done in a meaningful way, it will be taken into account in day-to-day operational decision making. Example of good practice:
- At first sight, the Catlin report does not demonstrate the extent to which it is thinking about the future. However, when reading its support for the Catlin Global Reef Record and the Seaview Survey, it enforces that it is lending its risk modelling skills to issues that affect the world’s seas. Sustainability is always difficult to demonstrate for companies in the insurance sector, but this is an innovative approach linked to their own business model. The company is helping to collect better, impartial data about the changes occurring to coral reefs and oceans to help the scientific community understand the risks posed to the sea and impacts on planet’s environment.
- Lonmin’s strategic priorities explicitly include a number of sustainability issues. For example employee relations, engagement, empowerment and equity participation, exploring alternatives to migrant labour and improved working arrangements, living conditions and use of capital.
- Mondi include good examples of sustainability risks and state that investing in green energy is important to its ongoing success. There is a good overview of most material issues and commitments to addressing issues, such as: mitigating contribution to climate change with ‘active stewardship of biodiversity’; sustainable forest management; eco-efficiency of products; and people development. There is a ‘sustainable development’ paragraph about each business division and some innovative KPIs.
- Randgold impressed with their description of stakeholder engagement activities and a thorough listing of materiality assessments, with clear explanation of sustainability governance structure. The judges commended how specific this report is, recognising the challenges of operating in the countries in which they do, with malaria and AIDS programmes. There are clear links between sustainability, KPIs and risks. Each mine discusses health and safety, the environment, the community, human resources and industrial relations, with a section on grievance mechanism across mines.
- Rathbone Brothers present a good overview of activities that a financial institution can and should be doing in terms of sustainability, clearly linking it with strategy and risks. CO2 intensity is measured under a variety of metrics and there is good coverage of how environmental concerns are addressed in its day-to-day operations – building, energy use, travel, paper, waste, refrigerants, carbon footprint etc.
Most businesses say their employees are their most important asset but relatively few provide details of how they work to develop this asset. Example of good practice:
- The judges noted Johnson Matthey’s focus on people. It has built a sustainable workforce through talent management, global recruitment, strategic resource planning and fair rewards for sustained performance. There are clear case studies on workforce globally, and employee turnover by region with good information on training days and spend on training.
- Lonmin endured a difficult year but also has a clear focus on employee well-being.
The ‘four pillar’ framework can be found on the IIRC website at www.theiirc.org
Peter Swabey is Policy and Research Director at ICSA