By Joyce Khoh
‘Sustainability’, ‘Sustainability Reporting’ and ‘EESG’ have become key buzzwords in recent years, as an increasing number of companies and investors recognise the impacts of climate change as a material financial risk to business continuity.
As factors that threaten society, the economy and the environment are increasingly understood and start to dominate political, business and activist agendas, demand is growing for information about how corporate activity jeopardises or contributes to long-term sustainability goals. Investors are also slowly moving beyond simply looking at financial metrics, incorporating Economic, Environmental, Social and Governance (EESG) factors into their investment and decision-making processes. As such, sustainability reporting has greatly evolved and has never been more relevant.
However, with the growing number of frameworks and terminology surrounding it, it is often easy to get lost in the sea of information that companies publish. EESG, CSR, SRI, TCFD… many investors and corporates alike struggle to navigate their way through this ‘alphabet soup’.
Regulatory Landscape in Malaysia, Singapore and Globally
In Malaysia, listed companies are required to disclose their sustainability activities in their integrated reports and similarly, sustainability reporting has been made mandatory in Singapore as of 2017. Globally, there has also been a shift towards voluntary or mandatory sustainability reporting, with 90 per cent of the largest companies in the world coming on board. For countries such as the UK, the Stewardship Code also requires companies to take into account material EESG factors, including climate change, in order to enhance the quality of reporting.
A Costly and Time-consuming Fad?
With multiple channels and varied news, literature and opinions flooding the Internet, companies and investors alike grapple with the importance of sustainability, much less that of reporting on it, and it is often perceived as a measure to boost a company’s reputation. However, what often goes unnoticed is its intrinsic value which lies in ensuring that organisations thoroughly consider their impacts on sustainability issues, and are transparent about the risks and opportunities that they face, in turn building stakeholder trust. With unapparent benefits and many misconceptions surrounding it, it is unsurprising that many companies approach sustainability reporting as an annual compliance-based exercise.
What’s Real and What’s Not
Sustainability Reporting has no financial impact
Often coined as ‘tree hugger’ language and associated with the environment at first instance, sustainability reporting has a reputation of being a ‘softer’ priority, with no direct impact on financial performance. However, this is untrue as sustainability reporting helps companies build trust with customers and stakeholders, which in turn directly impacts their bottom lines. It is also a useful risk management tool and can help generate savings through greater operational efficiency. Amongst Asian companies, although an increased awareness of sustainability as a strategic risk has been observed, Boards are still largely focused on financial performance, KPIs and traditional risks. With so much emerging in the EESG space at the moment, it is also a challenge for Board members to keep up with the fast-changing requirements and to act accordingly.
What can be done?
Sustainability Reporting should be inbuilt into the Board’s agenda, with the Board taking the lead and having oversight over reporting. This can be done through a calendaring approach and getting subject matter experts to educate the Board, to help members understand how sustainability issues impact the organisation. Without the Board driving the process, reporting will not be effective and authentic.
No Difference Between CSR and EESG
Corporate Social Responsibility (CSR), a self-regulatory practice that helps companies to be socially accountable, is often thought of to be the same as EESG. However, they are largely different. While the former describes a company’s commitment and efforts to be socially responsible and is often also utilised as a public relations measure, the latter represents material business issues that are strategic and would directly affect financial performance. In addition to providing investors with an accurate glimpse of the company’s actions, evidence of EESG activity is used as a key assessment marker for investors and seen as vital to understanding corporate purpose, strategy and management quality of companies. Therefore, a company that has a great CSR programme but does not identify its material EESG issues can be likened to a house with an exquisitely polished exterior, but a cluttered and disorganised interior, which would affect its operations and ability to create value in the long run.
What can be done?
Companies should conduct a materiality assessment from an EESG perspective once every few years. This helps identify the critical issues affecting the business and enables them to respond efficiently and effectively.
The More the Merrier
With the rise of a plethora of different sustainability frameworks, indices and methodologies, companies often have the mindset that the more frameworks they adopt, the better their report will be. This, however, leads to an overload of information and ‘framework spaghetti’, which leaves investors struggling to understand their key messages and how value is created. Companies should therefore seek to understand the different frameworks and adopt those which are most relevant to their organisation and stakeholder groups. Taking an integrated approach could also help companies engage with their stakeholders, while ensuring that they meet compliance requirements. For example, using (IR) to tell the value creation story, SASB for its performance matrix and TCFD for its principles and guidelines. The challenge surrounding this is that certain information required to be disclosed could be seen as commercially sensitive and companies are often unsure of what investors want to know.
What can be done?
Companies should identify their key stakeholders groups, understand their information needs and select appropriate framework(s) to report against. In their ‘About the Report’ section, they should briefly explain the frameworks chosen and the rationale behind choosing them.
With sustainability issues dominating corporate and political agendas and shaping our world today, sustainability reporting has never been more crucial and relevant. Understanding the importance of sustainability reporting and its role in engaging and building trust with stakeholders is a critical first step that companies need to take, as they embark on their individual reporting journeys. Despite being a mandated annual exercise, companies should regard sustainability reporting as an invaluable opportunity for them to review their long-term strategies regularly and propel their brand value and competitive advantages. Ultimately, it should be viewed as a marathon and not a sprint – a process which takes time, effort and resources, but one which reaps rewarding results.
Joyce Khoh is Research Executive, Black Sun Asia Pacific.