Over the last decade, public awareness of climate change, population growth, energy security, water scarcity, natural disasters, and the use of natural resources has grown.
As these issues have increased in prominence a wider stakeholder group, including investors, credit unions, analysts, clients and the media have begun to more closely monitor progress made by companies on ensuring their long sustainability and the sustainability of the environment and communities in which they operate.
Previously some way down the corporate agenda, over the past few years corporate reporting in this area has entered the mainstream; with companies in sectors such as energy and retail to technology and construction offering their stakeholders regular progress reports on their environmental, social and financial performance.
Across all sectors such reporting is growing in importance, recognisable through the amount of time spent discussing it a board meetings, formal policies and the simple recognition of its importance. And this focus has driven, and continues to drive, the embedding of environmental and social considerations in the strategies and business models of many companies.
While the issue continues to gain momentum there is a divergence between embracers, cautious adopters and outright opponents (including climate change deniers).
There is a growing understanding amongst larger corporates that effective management of sustainability issues can have a significant impact on corporate profitability and value, as well as “the right thing to do”. For many larger corporates it is a long-term focus that could directly affect them and their profits, particularly in light of legislation on waste reduction targets, carbon taxes and other related regulatory measures
Small and medium sized companies (SMEs) may be out of the spotlight, but attention will start to focus in their direction as larger corporates start to exert pressure on their supply chain.
Until recently this has been seen as an area with less relevance to SMEs. But the sheer scale of numbers of SMEs means that, although individual businesses may have only a small environmental impact, the whole SME sector has a hugely significant impact. SMEs are starting to change, as more businesses are asked to supply their environmental policy to clients, and they are also realising the bottom line benefit and competitive advantage of good sustainability practice.
A recent survey by ICAS of 600 business leaders and advisers across the UK highlighted that only 13% of smaller organisations currently have a sustainability policy compared to 69% of those larger businesses with a turnover greater than £6.5 million.
A wide diversity of views was evident, including from those who feel “too small to matter” and those who have lost work because of their environmental record. Many though, are minimising the use of energy, fuel, travel, water and paper, re-using and recycling wherever possible, with consequent beneficial impact on the bottom line profit.
With 70% of the survey respondents stating that sustainability is important to their organisations, there is a recognition that corporate reporting will need to reflect a company’s environmental performance as well as the financial aspects which are currently reported.
Approaches and attitudes to sustainable reporting issues are evolving – marking a transition from a mindset dominated by compliance with regulations, risk mitigation and liability assessment, to an approach that seeks longer-term strategic advantage and sustainable value creation. However, many respondents recognised the current growing burden of disclosure and the inability to “see the wood for the trees”, suggesting that a wholesale review of disclosures was necessary, so as to focus on what is really important.
In today’s era of globalisation any UK company looking to do business abroad could have a competitive edge by embracing sustainability. Almost half of the world’s top 250 companies report gaining financial value from their sustainability initiatives and sustainability reporting is now a routine process for 95% of these companies. Developing nation companies are also fast opting in.
Global momentum is shifting rapidly toward mandatory reporting requirements. Denmark, Sweden, France and South Africa now require some form of sustainability or integrated reporting. In August, 2010, the International Integrated Reporting Committee was formed, to create a globally accepted integrated financial and social reporting framework, and a Discussion Paper was issued for comment in September 2011.
The challenge for Governments is to encourage environmentally sustainable behaviour across the whole business sector without being seen as imposing new red tape burdens. To a large extent this will be achieved through requiring disclosures. But the survey showed that 31% opposed any new legal obligation to report, with only 16% supporting mandatory disclosure by all companies. 44% thought that only larger companies (with turnover over £6.5m) should be required to make environmental disclosures. Encouragement to disclose rather than compulsion was certainly the preference of those who commented.
ICAS is currently undertaking a ‘where to start’ initiative to help SMEs start to consider what environmental reporting and what changes to behaviour they can easily and effectively pursue. Our hope is that through encouragement and the provision of helpful guidance, SMEs will change their behaviour and reap the financial and reputational benefits, and that a mandatory approach will not be needed.
David Wood is Executive Director, Technical and Members Services, at the Institute of Chartered Accountants of Scotland (ICAS)