Stakeholders expect corporations to be responsible global citizens and want proof of effort. Sustainability reporting, or non-financial factor reporting, demonstrates performance and assists with strategic decision-making.
By Robin Byrd
As stakeholders insist on more transparency in corporate performance, reporting practices are changing. Businesses are increasingly reporting on financial and non-financial factors to build trust and improve business performance. Non-financial information includes measures and reporting on environmental, social and economic indicators, which also embrace human rights and ethics. Linking the non-financial factors to operations and financial performance enhances risk management and increases competitiveness by positioning the business as the company of choice for customers, suppliers, domestic and global business partners, and investors. This is an evolving practice that comes with challenges. For example, how does a business quantify bribery supply chain risks, or climate change impacts?
Sustainability Reporting Applies to All
The International Integrated Reporting Council (IIRC) defines integrated reporting as “a process that results in communication by an organization, most visibly a periodic integrated report, about how an organization’s strategy, governance, performance, and prospects lead to the creation of value over the short, medium and long-term.” Non-financial disclosures can be made in traditional annual reports, which is integrated reporting. Some companies still publish an annual financial report and also publish separate non-financial reports monthly, quarterly, or annually.
Sustainability reporting is growing around the world. In the “Carrots and Sticks” 2016 edition, research found that government regulation accounted for most sustainability instruments, but from 2013-2016 there has been a large increase in voluntary reporting of social information. In fact, social reporting is growing faster than environmental reporting. Currently, most required reporting applies to large listed companies which also are doing voluntary reporting, but there is a definite trend toward SMEs incorporating non-voluntary financial information also for the same reasons. These reasons include risk management, building a positive reputation, and meting stakeholder needs. SMEs make up a large portion of global supply chains so corporate and customer scrutiny is increasingly directed at these businesses.
Value Proposition of Sustainability Reporting
A lot more is expected in terms of reporting in recognition of the range of challenges and opportunities that impact business value and are not recognized in traditional financial reporting. Integrated reporting blends required financial and voluntary reporting which includes strategic disclosure. Strategic disclosures refer to the trends and other factors that impact long-term value generation, performance, direction, growth, capacity, and volumes. Each country is at a different stage in terms of regulatory (required) initiatives and voluntary reporting. However, as Naveen Kalia, partner audit for KPMG, says in “Audit Trends 2016,” “Even those regulatory initiatives that have yet to be implemented in Canada are important, as our regulators are closely monitoring global change and do not want to lag on key measures.”
The factors to include in sustainability reporting depend on the business and industry. A Canadian manufacturing company could report on air, soil and water pollution; wastes; employment figures; and impact on biodiversity. A multinational Canadian company could disclose the same type of information while also adding social factors such as community impact through procurement or urbanization and subsequent pollution. The Prince’s Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) research found that information on governance, social and community, and the environment are most relevant for investors and analysts. There is a large set of potential non-financial factors that businesses can choose from. They include governance, human rights, innovation, human capital practices, occupational health and safety, climate change, R&D, community impacts, environmental impacts, natural resources management, intellectual capital, and meeting customer needs.
Embedding Sustainability into Decision-Making
CPAs and global financial experts are working to standardize non-financial reporting, and they are creating tools to assist businesses. The A4S Chief Financial Officer Leadership Network was formed in 2013 to bring large businesses together that are seeking to embed the management of environmental and social issues into business processes and strategy. CPA Canada supports the effort and offers links to four guides developed by A4S CFO Leadership Network. These guides are focused on turning sustainability indicators into actionable information for decision-making about things like investor capital allocations and investments, business investments, and risk management which is disruption planning.
The effort to standardize reflects the challenges inherent in non-financial reporting. One major issue is determining how to measure non-financial factors. Another is the difficulty in comparing non-financial factors between companies, especially social and environmental factors. Without standardization, methods of measurement and reporting will vary from company to company. In addition, the large variety of non-mandatory non-financial factors that companies can choose to report on will also make it very difficult to compare information because it is unlikely that similar factors will appear across the board.
Setting High Reporting Standards
A number of Canadian companies conduct non-financial reporting. They include Cameco, Teck Resources, Enbridge, TELUS, Toronto-Dominion Bank, WSP Global, Sun Life Financial, Celestica, and Bank of Montreal. Looking at Enbridge’s online 2015 CSR & Sustainability Report as an example, there are multiple categories that include maintaining the fitness of systems and leak detection; Aboriginal and Native American rights and engagement; customer relations; renewable and alternative energy; economic impact and benefits; community investment; human health and safety; environment and land management; emergency preparedness and response; stakeholder engagement; employee relations; sustainable supply chain and procurement; and business conduct and ethics.
Click on the supply chain and procurement option, and readers find a description of the supply chain and numerous sections with details about topics like the Supply Chain Management structure and governance; risk mitigation; labor practices; human rights; child labor; integration of the environmental, social, and governance factors; and forced and compulsory labor. There is also a description of strategic priorities and 2015 performance statistics and descriptions.
Enbridge is one of the more advanced companies reporting non-financial factors but gives an excellent idea of the many factors that could be included in reporting. One of the challenges is deciding which factors are most relevant to stakeholders. It is important to not lose sight of the reason for moving toward non-financial factor reporting. It is to identify, track, and manage the factors that can have the most impact on business value and to report on corporate responsibility performance in a globally connected world.