Firms advised to engage CFOs in environmental issues
Sustainability efforts seem now well integrated at many global companies. Reporting and employee awareness are on the rise. Interest is growing in emissions, water and conservation of business resources.
What action steps then should enterprises take to move sustainability initiatives forward even further?
Ernst & Young, in cooperation with GreenBiz Group, conducted a survey in late 2011 and analyzed the opinions from 272 sustainability executives in 24 industry sectors, who are working with companies generating revenue greater than $1 billion.
As the survey covered a wide range of topics related to corporate sustainability and reporting, results show that interest in these areas continues to rise (although the tools are still developing). Chief financial officers (CFOs) are emerging as key players in sustainability and employees are too.
Despite the decreasing likelihood of regulation to address climate change, greenhouse gas reporting and reduction efforts remain strong, and interest in water usage, efficiency and stewardship is on the rise. Also rising is stakeholder interest in the sustainable sourcing and availability of raw materials intrinsic to a company’s ability to operate. And sustainability-focused surveys and questionnaires from customers, non-governmental organizations (NGOs), investor groups, analysts, media organizations and others continue to grow in importance.
What do these trends suggest? Sustainability efforts now may be well integrated into the corporate fabric of a growing number of large- and mid-sized companies. But the effectiveness of such efforts may be limited by internal systems that do not allow companies to effectively measure, track and optimize their sustainability impacts, or to understand and manage the risks of insufficient action.
To do so will require new levels of engagement by the C-suite executives, and more sophisticated methods of sustainability reporting and assurance. In the comprehensive survey, there are additional statistics that illuminate six key trends, from which six action steps could be drawn.
Trend 1: Sustainability reporting is growing, but the tools are still developing.
As sustainability continues to rise in importance inside companies around the world, demands for accountability are growing louder. They come from diverse players, varying by sector and geography, but generally include: customers, employees, investors, shareholders, policymakers, activists, analysts and suppliers.
Each group has its own set of interests regarding the topics that concern them and the level of depth and detail they want to know about company activities and impacts. Respondents to the Ernst & Young survey cited continued strong interest in sustainability from key constituencies.
Sixty-six percent reported an increase of inquiries over the past 12 months from shareholders and investors about sustainability-related issues. Just over half of those citing an increase in sustainability-related inquiries said that investors or shareholders wanted to know about the company’s publication of a sustainability report.
In order to meet these growing demands for disclosure and transparency, companies are publishing reports, mostly annually. While reports once focused primarily on operations, they now also look at products from a lifecycle perspective, from raw materials and resources to the final disposition of goods at the end of their useful lives.
But the growth of reporting is limited by the tools companies are using to produce them. Based on the survey responses, those tools remain rudimentary compared with those used for reporting on financial measures.
Trend 2: The CFO’s role in sustainability is on the rise.
Historically, CFOs were not deeply or directly engaged in sustainability efforts, viewing them as too soft or not in their purview. But that is changing.
The report focused on three key areas where CFOs are playing an increasing role: investor relations; external reporting and assurance; and operational controllership and financial risk management.
Nearly two-thirds of respondents stated their CFO has become involved in sustainability. Respondents cited cost reductions (74 percent) and managing risks (61 percent) as two of the three key drivers of their company’s sustainability agenda -- both of which are of keen interest to CFOs.
One key reason for growing CFO involvement is the growing scrutiny of company sustainability issues by equity analysts.
While 80 percent said new revenue opportunities will be driving sustainability initiatives, 66 percent have seen an increase in inquiries about sustainability-related issues in the past 12 months from investors and shareholders.
This is a relatively new trend, facilitated in part by the growing presence of sustainability data readily available on analysts’ computer terminals from the traditional financial reporting services. Already, 38 percent believe equity analysts who cover their company consider sustainability performance in their evaluations, and 23 percent believe this will happen within five years.
Another emerging trend in business will further engage CFOs in sustainability: the growth of the so-called ``one report,’’ or integrated corporate reports in which sustainability data is reported alongside traditional financial reporting data.
Already, a handful of companies have created integrated reports, and a Europe-based group, the International Integrated Reporting Committee (IIRC) is actively promoting the idea. It is supported by the Prince of Wales’ Accounting for Sustainability Project, the Global Reporting Initiative, the American Institute of Certified Public Accountants and other groups.
Trend 3: Employees emerge as a key stakeholder group for sustainability programs and reporting.
Conventional wisdom is that company sustainability initiatives are driven principally by customers or investors and shareholders, and sometimes by NGO activist groups or regulatory agencies. But the survey found that employees are a key driver in a significant number of companies.
When asked to rank the top three stakeholder groups in driving their company’s sustainability initiatives, employees ranked second (cited by 22 percent of respondents), behind customers (37 percent) and ahead of shareholders (15 percent), policymakers (7 percent) and NGOs (7 percent).
The practice of employee education and engagement on sustainability has spread rapidly and evolved into a more institutionalized element of companies’ broad sustainability strategies. Companies now use a wide range of tools to engage employees on sustainability, for example encouraging employees to create personal sustainability plans or otherwise incorporate sustainability into their everyday lives.
While the tools and techniques for employee engagement vary widely, they enhance employee attraction and retention, improve operational efficiencies, strengthen customer relations, increase innovation and strengthen community ties.
Moreover, companies that distribute their sustainability reports broadly among employees find that they often share this information with their families, friends and neighbors, as well as with customers and suppliers.
Employees can become a powerful voice in support of company sustainability messages.
Trend 4: Despite regulatory uncertainty, greenhouse gas reporting remains strong, with growing interest in water.
Climate change has become a strategic concern at many companies, despite a lack of U.S. regulatory requirements to measure, manage or report emissions.
Three-fourths of respondents have set greenhouse gas reduction goals; 60 percent report these publicly. Seventy-six percent publicly report their greenhouse gas emissions; another 16 percent said they plan to do so within five years.
Company interest in the greenhouse gas emissions of their operations and supply chains is driven less by regulatory concern than by three other factors: reputation management, customer expectations and efficiency goals.
Reputation issues arise when independent organizations rate or rank companies on climate emissions and goals, either separately or as part of a larger corporate rating or ranking scheme.
Many companies recognize that greenhouse gas emissions are a form of waste -- a byproduct that has no value to the company or its customers, a proxy for inefficiency. In that light, reducing greenhouse gas emissions is an efficiency measure. Moreover, emissions are increasingly seen as a risk factor -- a liability to a company and its shareholders should public and political climate concerns rekindle.
Interest in reporting on water is also on the rise, especially in water-intensive industries such as metals and mining, oil and gas, chemicals, agriculture, power and utilities, and food and beverage. Sixty-two percent of respondents publicly report their water usage. About one in six of those have their ``water footprint’’ verified by an independent third party; 22 percent said they plan to do so within five years.
In its 2011 Water Disclosure Global Report, the nonprofit Carbon Disclosure Project found that more companies view water issues as a business opportunity (63 percent) than a risk (59 percent). The opportunities range from the savings realized by using less water to potential new products and services.
Nearly 80 percent see those opportunities affecting business in the next five years.
Trend 5: Awareness is on the rise regarding the scarcity of business resources.
As markets grow, the strain on natural resources can lead to critical shortages and significant business risks.
Some resource constraints are already happening, whether due to limited supplies, geopolitics, price rises or sustainability concerns. And 76 percent of survey respondents said that they anticipate their company’s core business objectives to be affected by natural resource shortages in the next three to five years.
Resource availability is rapidly becoming a de facto reporting requirement for some companies. A significant number of survey respondents said they are being asked by key constituencies about sustainable sourcing and procurement of raw materials, such or forest products (34 percent of respondents), business risks associated with scarcity of water (33 percent) and the use of rare earth minerals and metals (20 percent).
Another concern is ``conflict minerals’’ -- those mined in conditions of armed conflict and human rights abuses.
Still another concern is palm oil which has affected food processors. The oil - common in the commercial food industry due to its lower cost and the high stability of the refined product when used for frying - is seen as a cause of substantial and often irreversible environmental damage, including deforestation, habitat loss of critically endangered species and climate change.
Faced with activist and customer scrutiny, large companies have had to better define and certify palm oil harvested sustainably.
And then there are ``rare earths,’’ a collection of 17 chemical elements in the periodic table that are used extensively in technologies such as: wind turbine generators, electric vehicle motors, batteries, fuel cells and energy-efficient lighting.
Nearly all (97 percent) of these materials come from China -- creating economic, environmental and national security challenges. Companies relying on rare earths have found themselves seeking means to mitigate these risks.
Such transparency and disclosure requirements offer a peek into a growing future, where the availability and access to strategic resources and materials become a concern to investors and others. Whether driven by regulatory mandates or customer or activist concerns, the rise of such issues in reporting underscores that these materials are intrinsic to a company’s ability to operate.
Trend 6: Rankings and ratings matter to company executives.
Companies today face a barrage of labor-intensive sustainability-focused surveys and questionnaires from customers, NGOs, investor groups, analysts and media organizations.
Some companies privately complain about the time and expense of fulfilling these requests, considering the difficulties they face in pulling together diverse information from all over the company, and the data requested may vary from one questionnaire to another. However, the value is clear: 55 percent of respondents say that actively responding to sustainability ratings questionnaires is a primary means of communicating with investors about their sustainability performance and initiatives.
Ratings and rankings serve a purpose for sustainability professionals inside companies, too: they can help bring C-suite attention to key sustainability issues. Several ratings and rankings are particularly well-regarded by respondents: the Dow Jones Sustainability Index, the Carbon Disclosure Project’s leadership rankings, Fortune magazine’s `Most Admired Companies’ list and The 100 Best Corporate Citizens, named by Corporate Responsibility magazine.
Not included in the survey, but frequently named as a write-in by respondents, was Newsweek magazine’s Green Rankings, the only one in the survey from a mainstream media organization.
It’s worth noting that several of these ratings and rankings don’t require company participation, instead relying on information provided by investment research firms, NGOs, media clips or companies’ own sustainability reports.
That places the burden on companies to ensure that the information about them is accurate, balanced and up to date. It’s also an important reason why companies should seek to tell their story before others do.
This article was provided by Ernst & Young.
6 action steps for ensuring sustainability
● Actively pursue a sustainability and reporting system that exemplifies a similar transparency and rigor as the system used for financial reporting.
●Engage CFOs in sustainability efforts, such as choosing appropriate tools to measure, monitor and report on environmental and sustainability issues in a way that can measure progress, create value and enhance investor confidence. Additionally, encourage them to embed the sustainability strategy into the core strategy of the business.
● Recognize that employees are a key stakeholder and a vital source of sustainability engagement and ideas to enhance the company’s sustainability journey. Employee involvement is needed to embed sustainability into the corporate culture.
● Understand that greenhouse gas disclosure has value outside of the regulatory arena due to its utility for stakeholders, investors, customers and suppliers. Independent verification of GHG emissions is important, not only for accuracy, but also for its usefulness by both internal and external stakeholders.
●Assess the availability and reliability of strategic business materials and resources from a sustainability perspective. Develop a risk management plan addressing contingencies for disruptions in access to key resources, and integrate risk assessments and plans in sustainability reporting.
● Understand the value of sustainability reporting to ranking and ratings organizations, particularly those of interest to investors. Consider third-party assurance to enhance the value of such reporting by shareholders and others.