Sustainability and Reporting are too often treated as synonyms. They are not. Since Exsulting’s mission is to support companies in their journey to sustainability we must clarify the point. Because it is by prioritizing them correctly that an organization can get the most out of them.
Many reporting standards: one approach
There are many sustainability reporting standards nowadays. The most widely used is the GRI /Global Reporting Initiative). Following are the IR (Integrated Reporting) and others more specific like the SASB, the CDP (Carbon Disclosure Project), the CDSB (Climate Disclosure Standards Board). Other minor exist too.
Before you get lost in this paraphernalia of acronyms and standards, there is good and bad news to consider. The good news is that they all have the same approach. The bad news is that all of them look backwards. It’s not their fault: reporting is about what happened in the past. It is obvious that reporting standards look at the past to document and disclose what has happened in a certain period of time.
There is nothing wrong in disclosing to stakeholders about the performance of an organization in the past. However, the indicators that such reporting frameworks propose are generally what we call “lagging indicators”. They tell us what has happened in the past, very little, if any, about why it happened, nothing about how to perform differently in the future. This is the big problem.
Sustainability lies ahead
This is why we say that sustainability and reporting are not one and the same thing. Sustainability is a journey, a continuous improvement of performance along its three pillars: economic, environmental and social. It is about why a company exists and how (& better) it wants to be in the future. Let’s say that you are on a journey from Boston to New York. Would you describe how you will get to NY by just telling that yesterday you arrived in Boston?
In order to give to your own people, and to your stakeholders, a reliable indication of how you plan to get to NY, you must use “leading indicators”. Such are indicators that tell how your organization is prepared to drive its performance in the future on specific issues. You would say, for example, that you will start at 8am, drive at an average of 60 Mph and get there by 11,45am. You might also say that you plan to need 15 litres of fuel, two cups of coffee along the way and one stop by a restroom. Another important information for your stakeholders could be that you have been driving for 23 years and plan to take a “safe-drive” course before leaving. Something about how you plan to drive to reduce (of how much) fuel consumption and emissions along the journey would be relevant too.
Targets for the future are paramount
In the example above you have noticed the setting of objectives, hints at how people involved will be trained, what is the strategy to achieve which results etc. By setting objectives and declaring them, an organization commits to precise targets and engages energetically into the pursuit of the desired outcome. A sustainability strategy is first and foremost a tool to engage the internal stakeholders in the pursuit of the company’s objectives. It gives a clear indication of the directions in which the company is heading and a profound sense of purpose. (Provided the organization’s leadership is clear in its commitment too!)
Such is the reason why setting targets is so important: beyond other outcomes, it spurs performance and motivates the organization’s people. This notoriously happens, provided targets are achievable albeit ambitious. Otherwise, as it is well known, they are demotivating. But this is another issue. “Leading indicators” are measures of how fit the organization is to achieve the objectives that it has set.
Just to give you a hint about how we at Exsulting consider that looking forward is the most relevant part of a sustainability strategy, you must know that a good 50% of the ESIndex® factors are “Leading Indicators”. The rest is mostly an assessment of the context.
Evolution in the reporting world: the WEF initiative
There is indeed a lively evolution movement in the world of ESG reporting going on. The WEF (World Economic Forum), is bringing forward a strong proposal to change the way in which ESG issues are communicated and reported in business annual disclosures. Some people see this development as a positive one, since it will likely simplify the reporting landscape and make reports more widely understandable. Perhaps it will be so.
However, from the point of view of the direction of the gaze, the new approach still looks backwards. This is inherent in the idea of reporting, or disclosing: it is about the past. Besides, the proposed guidelines look from a a prevailing “investor point of view”, which is not very useful to set up an industrial management strategy.
How sustainability and reporting relate: Materiality
Well, reporting guidelines usually firstly aim to help organizations define which issues are “material” for them. Materiality is a technical term that defines what is relevant for the capacity of the organization to achieve or even surpass its objectives. Companies should disclose to their stakeholders all information that is relevant to that end. Relevancy can be direct, i.e. issues which regard the intrinsic capacity of the organization to perform, e.g. the H&S performance or the innovation capacity, or indirect. The latter are those pertaining to the interest of stakeholders which could influence the capacity of the organization to achieve: e.g. environmental aspects which could arouse opposition and threaten the license to operate.
The concept of Materiality should first be applied to the design of a company’s strategy and to the setting of its objectives: both overarching and sustainability ones, which should be integrated. A baseline of performance on the material issues should be established and future, desirable performances should be determined. Priority objectives should be defined according to the company’s resources. Subsequent action plans should be designed together with relevant KPIs to follow the progress along the year. The objectives set for each year should be publicly announced so that it is clear to all stakeholders where the organization is heading and what it aims to achieve. Sharing the objectives makes also more easy to engage some stakeholders into joint efforts to achieve them.
A final word on Materiality
It has to be said that Materiality is NOT defined by surveys of preferences of an organization’s stakeholders. Some companies do it that way: they compile e list of relevant stakeholders and survey them by asking which of a list of issues they deem more relevant, or are more interested in. This is not a materiality analysis and it has not to influence the strategic decisions of an organization.
The outcome of such a kind of survey can certainly give clues about the sensitivity of the stakeholders to the various issues. But it cannot provide the whole picture about the factors that can influence the capacity of the company to achieve or surpass its objectives. Having said this let’s continue about the right priority order between sustainability and reporting.
Setting the right order
At the end of the year, a transparent disclosure should inform stakeholders about the objectives
that have been achieved, those which have not been and the reasons why. Projects to improve the performance and achieve in the future should also be communicated. This is the order of priority between sustainability and reporting: there is no i
nterest in the second alone. Some interest there is instead in sustainability, even without any reporting, although it would be silly to engage seriously into sustainability without telling anyone about it.
Unfortunately, there are still too many organizations which start their engagement in sustainability by hiring a consultant for writing their “sustainability report” and… just stop there. In other cases, reporting is a PR exercise aimed at making the company look “good”, sometimes better than it is. In such cases the opportunity is wasted to improve the performance by reflecting on what has not worked so well in the past and how to make it work better in the future.
A mature approach to sustainability and reporting sees the two go hand in hand, prioritizing the strategy and the execution on the subsequent disclosure. And making the latter an engagement tool for the shared effort of improving the organization’s performance for the benefit of all of its stakeholders.
Where does ESIndex® kick in
Esindex® is a tool that helps the integration of sustainability and reporting. ESIndex® helps a company to establish and address the Materiality that is present in its operations and context. The analysis that comes with the Preliminary Report gives clear indications of the priorities of a sustainability strategy and of the first actions that are suggested to be taken.
ESIndex®’s 36 factors of the Index can also be used as KPIs for measuring the progress from one year to another.
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