In today’s complex business landscape, companies are expected to focus on improving their non-financial performance in response to a variety of stakeholders. This non-financial performance may cover a range of Environmental, Social and Governance (ESG) factors depending, on company operations, from addressing modern slavery in the supply chain to managing water use in production.
One of these factors is assessing the risk of climate change to the business and planning for future scenarios. How does a business address this without jeopardizing achievement of its commercial goals?
One of the questions that was asked in our launch event for the 2017 Sustainability Reporting Performance Report of the FTSE 100 was whether the top performers in our ranking were also the most successful financial performers. Whereas short-term profit is increasingly becoming one of the outcomes of more sustainable practices, the ultimate goal of aligning sustainability and business strategies in a company is to be able to future proof business operations to ensure profits in the long term. It is for this reason that forward-looking businesses have begun actively incorporating ESG reporting and sustainability into their wider business strategies, emphasising non-financial performance.
Setting a strategy is not merely writing a list of projects and activities you think may work, as it must also consider the views of those it will impact on and what others in your marketplace are doing.
However, creating a sustainability strategy which is not aligned with the company’s overall objectives is unlikely to lead to the organisational changes required to properly future-proof a business. This is where sustainability metrics come in: regardless of what method and framework is chosen to create the annual and sustainability reports, research suggests that these efforts are indeed conducive to better financial results.
One such method is the Global Reporting Initiative. From its origins in 1997, the main objective of the tool is the creation of a common framework for integrated sustainability reporting. By following the GRI Standards, companies improve the quality of information disclosed, and reporting performance between organisations becomes easier to compare for investors and other interested stakeholders.
94% of IBEX companies report according to GRI guidelines.
Our Sustainability Reporting Performance of the IBEX 35 research suggests that adhering to the GRI Standards is also likely to improve companies’ overall sustainability performance. For instance, if we are to compare the performance of the IBEX 35 with that of the FTSE 100, where only 42% of the companies report using GRI guidelines, the latter seems go hand in hand with a higher overall score for sustainability reporting. Companies that used the GRI framework scored on average 16% higher than those who didn’t, clearly showing that a robust structure does help improve a company’s sustainability reporting performance.
Aligning sustainability metrics with business strategy can also prepare companies for future legislative changes. For instance, this year the CDP included a new question on the Task Force on Climate-related Financial Disclosures (TCFD). Chaired by Michael Bloomberg, the TCFD encourages organisations to disclose the impact climate change is likely to have on their business. This includes physical and transition risks, opportunities from the transition to a low-carbon economy and financial impacts. With time, the TCFD recommendations may be legislated in G20 countries and businesses that have already considered these matters will be well equipped to adapt.
Collecting data and reporting on sustainability metrics is undoubtedly the first step towards a robust environmental strategy and aligning these metrics with business performance ensures that the company is addressing the most important factors for the business and responding to stakeholder demand. Once the information is gathered, companies will be able to use it as a lens through which to take decisions on future business strategy and targets to ensure continuity, understand how to integrate the management of climate risks, and to explore possible opportunities arising from climate change.