30 posts categorized "Corporate Services"

28 March 2012

Common and not so common sustainability themes

How can companies and stakeholders easily identify those sustainability issues that are hot and those that are not? Fronesys offers a materiality hit parade. Materiality Futures cog image

The sustainability press today is filled with coverage of a wide range of non-economic issues and impacts that companies have to pay attention to.  But which of these issues do companies believe to be material to their performance, and which are not?   

To answer this question, Fronesys analysed sustainability reports from 31 different companies, as published in Materiality Futures, our coverage of where the art and science of materiality reporting has got to.  In this report, authored by Chris Tuppen, we found that the 31 companies in our study referenced nearly 140 sustainability issues between them, covering economic, governance, environmental, social and global trends. 

Before we examine the sustainability issues in question, we should lay out how we chose which companies to include in our analysis. Remember, the study was about materiality reporting, and so our goal was to identify all those companies that met the following criteria:

  • they published a materiality matrix of the sort laid out AccountAbility's Materiality Report, a methodology subsequently adopted as the basis of the related Global Reporting Initiative (GRI) technical protocol on report content.
  • their materiality matrix had at least three degrees of granularity per axis ( the way most companies present their materiality matrix, the vertical axis usually represents the stakeholder, and the horizontal axis the company)
  • individual issues are identified and positioned on the matrix

As a result of sifting through sustainability reports via corporateregister.com, Framework:CR materiality analysis, and internet search engines, we found only 31 companies actually met our criteria. Although many companies respond to GRI indicator 3.5 and say they use a materiality determination process, relatively few disclose much detail on either the process or the determined level of materiality for individual sustainability issues. Note that this analysis covers sustainability reports published before August 1, 2011.  A full list of the 31 companies is available on the Fronesys website.

Although we could simply list the 140 or so issues that crop up via the reports of these 31 companies, we can understand their significance better if we explore some metrics:

  • number of companies covering the issue
  • average, minimum and maximum scores on the company axis
  • average, minimum and maximum scores on the stakeholder axis

To prevent the analysis from being clouded by issues that are important to just one or two companies, we did a further sift to exclude issues that were not featured by at least five different companies, and found that 50 issues met this additional filter. 

Hit parade

So which are the top sustainability issues? 

Here's a table that lays out the top six sustainability issues, based on a sum of the average score from a company perspective and the average score from a stakeholder perspective:

Top Sustainability Issues
Source: Fronesys Materiality Futures report, 2011

So if the top sustainability issues in company materiality reporting are sustainable products, carbon footprints, economic development / emerging markets, etc, etc, which are the ones that are bottom of the pile? Well, here's the bottom six, using exactly the same methodology as above:

  • Work/life balance
  • economic contributions, including tax
  • volunteering
  • freedom of association
  • biodiversity
  • senior executive remuneration

It is not that these are unimportant issues. After all, biodiversity, for example, featured on the materiality matrix in 19 separate companies, the most commonly cited issue after climate change and diversity.  Yet it is not rated highly as a material issue, either by companies or stakeholders. It is almost like they don't know what to do with the issue - but that would be the topic of another blog altogether.

 Overall, it is very useful to get a view of what issues are actually making their mark on corporate managers - one has to assume that the more public the statements about materiality get, the more companies need to act (and be seen to be acting) to manage these impacts.

Maintaining such a Top 50 list could be a useful service to the players in the market: companies can compare their own analyses with those of their peers, while stakeholders get a list of which issues are cooking and which need more attention. 

Here's to more material number-crunching. 

21 February 2012

Knowledge is power: the case for a new reporting model

Company reports often fail to take into account the key issues that are now crucial for future business success, write Cary Krosinsky & Jyoti Banerjee.  Cary book pic

Today's corporate reporting model is no longer fit for purpose. It is dominated by a compliance mindset, with an inordinate focus on technical matters rather than the strategy of the business. 
It is so separated from internal reporting that boards are unable to engage with it for their own work and the accompanying governance model is more about lists and tick-boxes, according to Paul Druckman, chief executive of the International Integrated Reporting Committee (IIRC), which is tasked with creating the integrated reporting framework. 

At the same time, increasing numbers of investors are concerned about the risks to their portfolios from sustainability factors. These include environmental issues, starkly illustrated by the Gulf of Mexico oil leak’s impact on BP and the current woes of Tepco, operator of the earthquake and tsunami-hit Fukushima nuclear plant. Elsewhere, governance questions have had serious impacts on companies such as the now-defunct investment bank Bear Stearns and scandal-hit forestry group Sino Forest, while social risks have caused companies such as Apple to suddenly feel compelled to publish their complete lists of suppliers. 

“Currently there is sole focus on the financial aspects of a business, both in reporting and in investment methods,” says the IIRC’s Druckman. “There is a lack of strategic focus in corporate reporting, even though boards and investors are strategic in their own thinking and activities – clearly, the current reporting model serves neither.”

Investors plough on without information

Yet despite being not fit for purpose, corporate reporting is not holding back investors. How could it when some 60 per cent of financial trades in the US are made by computers, according to Leon Kamhi, executive director of the fund manager Hermes. It seems unlikely that these trades are made with reference to what the annual reports of the companies involved are saying.  This prompts Ralf Frank, head of DVFA, the society of investment professionals in Germany, to ask "Who reads financial reports in this day of Bloomberg terminals?"

Information is a key driver of change. Environmental realities are staring us in the face, social risks are increasing as inequity fuels global unrest and trust is emerging as a central issue to any investor.  Information providers such as Bloomberg, Reuters, Trucost and MSCI are providing more information on these environmental, social and governance (ESG) issues, and though gaps remain, availability of data is increasing.  Despite this, many investors, asset owners, as well as corporate leaders do not factor in climate change, peak oil, ocean acidification, human rights in the developing world, conflict minerals, or the growing human population to their strategic planning. 

Or, at least, they didn’t do so until recently. We now see all large global public and private companies applying some focus in these areas, helped by the fact that fully 60 per cent of institutional investors in Europe look at sustainability factors within their decision making. Interest has historically been much lower in the US, but with serious resource constraints emerging, the interests of the mainstream and socially responsible investment communities are starting to blend.

Socially responsible investing (SRI) is also on the rise, increasing demands for good data on these subjects.  As our new book Evolutions in Sustainable Investing points out in a chapter by Daniel C. Esty, and David Lubin, a Sustainability Imperative has emerged and companies have an opportunity to be winners or losers. We see three categories of opportunity and risk management that all companies should now be proactive on.

Risk and opportunity

The first area is resource efficiency. Many people see a world rapidly running out of key resources at a time when population trends are moving in the other direction. This inevitably creates a supply/demand equation that will put pressure on costs, and eventually much more. Companies have to understand material issues in their operations and supply chains in order to manage these impacts going forward. Those that fail to do this are being seen as laggards by stakeholders, internal and external, including investors who have already seen, for example, Coca-Cola take an $800m hit on commodity costs in 2011. 

It’s a cliché to say it but innovation, our second opportunity category, is a key driver of business success, as seen by those aforementioned 2011 performance figures. We see the opportunity for large companies to scale up innovation, either by investing in start-ups via research and development as well as through acquisition strategies. The cases of getting this right have been clear. For example, Toyota managed to create an image of a sustainable product via the Prius, even if the company has a whole has a less efficient footprint than BMW or Ford.  

The third category of risk and opportunity is communications. A 2011 Harvard study found that sustainability reporting is a good tool for building better and more effective channels of communication between the firm and its stakeholders. This is particularly important in investor relations, as companies that disclose more enjoy a competitive advantage in capital markets, though the communications benefits apply in labour and product markets as well.

One important reason why this gap in communications continues is that sustainability reporting does not have wider currency among investors, as it can be difficult to discern which of the dozens of non-financial issues on which a company reports are actually material to performance. 
A report from Fronesys, Materiality Futures, found that as of August 2011 less than 5 per cent of the 2,000 or so companies producing sustainability reports actually publish the process by which they decide which issues are most important to their business operations.  Even with these companies, there is a lack of transparency about how this “materiality determination” process works. This Fronesys report found that over 140 different sustainability issues are analysed across the 31 companies in the study. Of these, 50 issues figure prominently for a number of companies, including corporate governance, carbon, water use, human rights and privacy.  

And so it is not surprising that it remains difficult for investors to know which sustainability issues could have an impact on the future value of their investments. Ultimately, these are all either practical risks that any investor should consider or they are unimportant, and working out which is which will be essential to being able to pick the winners and losers going forward.

This materiality is the link between sustainability and business strategy, and it is where the Integrated Reporting initiative is concentrating its efforts. Integrated reporting is not about combined reporting, such as adding the text of CSR reports into the body of a mainstream financial report – rather it represents a move away from “stakeholder-driven reporting to the mainstreaming of what is strategic,” according to Paul Druckman.   

Integrated reporting has the opportunity to bridge a number of disconnects that currently exist in corporate reporting, including: 

  • Integration - in many organisations, the people preparing the financial reports have no idea where the sustainability reporting teams are even located, let alone how they might integrate the two reports
  • Strategy - External reporting versus board strategy: if external reporting is not focused on what boards are focused on, then it is neither strategic nor material
  • External impacts -  Very few internal processes today, nor the accompanying business application software, track the external impacts of the company in a data-driven way (for example, within corporate supply chains) let alone report on them, even as these become increasingly material to bottom lines

Increasingly, evidence shows that there is a growing correlation between stock price & attention to sustainability as a category of opportunity. A recent Harvard Business Review study showed that companies that act first to deal with ESG issues outperform in the long term. It seems inevitable that more investors will find an advantage in getting ahead of these curves compared with strategies that look only to the past, where resource shortages for example, were not a factor.

Note that this report is an expanded version of an article that featured in The Times in January 2012

Cary Krosinsky is senior vice president, North America, at Trucost, a Fronesys partner company. Jyoti Banerjee is a partner at Fronesys.

24 January 2012

Times article references Fronesys materiality report

Raconteur Sustainable Investments coverIn today's Times supplement on Sustainable Investments, Cary Krosinsky and Jyoti Banerjee have analysed how company reports often fail to take into account the key issues that are now crucial for future business success. 

Here's an excerpt from the article, which references the research work Fronesys has done on the materiality of sustainabilityissues in corporate reporting:

One important reason why this gap in communications [between the firm and its stakeholders] continues is that sustainability reporting does not have wider currency among investors, as it can be difficult to discern which of the dozens of non-financial issues on which a company reports are actually material to performance.

A report from Fronesys on Materiality Futures found that as of August 2011 less than 5 per cent of the 2,000 or so companies producing sustainability reports actually publish the process by which they decide which issues are most important to their business operations.  Even with these companies, there is a lack of transparency about how this “materiality determination” process works. This Fronesys report found that over 140 different sustainability issues are analysed across the 31 companies in the study. Of these, 50 issues figure prominently for a number of companies, including corporate governance, carbon, water use, human rights and privacy. 

And so it is not surprising that it remains difficult for investors to know which sustainability issues could have an impact on the future value of their investments. Ultimately, these are all either practical risks that any investor should consider or they are unimportant, and working out which is which will be essential to being able to pick the winners and losers going forward.

To read the article in its entirety, check out Page 12 on the Sustainable Investments supplement from Raconteur: http://np.netpublicator.com/netpublication/n39150548

Fronesys supports Aviva stance on sustainability reporting

Aviva investorsFronesys has joined the initiative led by Aviva Investors to convene a Corporate Sustainability Reporting Coalition (CSRC), which is calling on United Nations (UN) member states to commit to develop a policy framework on corporate sustainability reporting.

The focus of the initiative is the Rio +20 Earth Summit on sustainable development, which has its 20th anniversary in June 2012. Aviva's initiative is inviting heads of state and heads of government to take action.

The convention is proposing (see attached PDF) that UN member states at Rio +20 commit to develop national regulations mandating the integration of material sustainability issues in companies’ Annual Report & Accounts. We are also advocating effective mechanisms for investors to hold companies to account on the quality of their disclosures – eg through an advisory vote at the AGM.

The production of a report and accounts that integrates sustainability throughout will help create the right kind of discussions within boardrooms, throughout firms and encourage investors to think about the sustainability of the firm. We believe this will help capital to be allocated to more sustainable, responsible companies and strengthen the long term sustainability of the financial system.

Already countries like India and Brazil are exploring mandatory sustainability reporting and this initiative will be encouraging other countries to embark on the same journey. Clearly, the introduction of integrated reporting offers one key mechanism for bringing sustainability into the mainstream of corporate reporting.

 

29 November 2011

Fronesys collaborates on ICT sustainability with ITU

Fronesys is collaborating with a group of information and communications technology companies under the auspices of the ITU (The International Telecommunication Union) to help communicate the importance of sustainability.  ITU

The major thrust of the effort is in creating guidelines for corporate companies on sustainability issues relating to ICT, and confirming the vital role that standards play in this regard. Fronesys is very pleased to be involved in this work. 

To find out more , check out http://www.itu.int/ITU-T/climatechange/ess/index.html

01 November 2011

Materiality: what does everybody else think?

The publication of the Fronesys report Materiality Futures has created a fair amount of coverage and interest in the press and blogging community. Here's a flavour of some of the things we heard:

Guardian Sustainable Business Blog

Seeing the wood for the trees: how materiality helps companies focus on their key issues

2 degrees webinar

Webinar on Integrated Reporting and Materiality featuring Chris Tuppen and Jessica Fries

Accountancy Age

Make finance less opaque to your business

Elaine Cohen's csr-reporting blog

31 ways of looking at materiality

Financial Times

Environmental analytics: Numbers game is hard to play

So is materiality getting more material? Let us know what you think. 

08 October 2011

Fronesys to conduct deep-dive study on materiality determination

Having recently launched Materiality Futures, a report based on publicly available sustainability impact information from 31 companies, Fronesys is announcing a "deep-dive" shared learning process on the current state-of-the-art in materiality determination. Fronesys globe

The objectives of the study are to:

  • assess the main processes for materiality determination in a company
  • compare materiality rankings from participating companies against published data for 50 separate sustainability issues
  • analyse what sort of metrics can be tracked to improve the process of materiality determination in a company
  • explore how externalities can be measured and incorporated into the risk and materiality determination processes of a business
  • define the state-of-the-art in materiality determination

Interested? Want to talk further about this? Do get in touch: info@fronesys.com

Leading companies need to disclose more about their materiality determination processes

Fronesys launches Materiality Futures: joining sustainability to strategy. Materiality Futtures cog image

As the marketplace applies an increasing focus on sustainability factors, a number of the world’s leading companies are seeking to establish which of their sustainability impacts are material to their business.

The thirty-one companies covered in Materiality Futures, the latest sustainability report from Fronesys, are some of the most transparent, but even with them there is often a real lack of transparency regarding how the materiality process actually works. In particular, the report finds that companies are much more likely to be open about their stakeholders’ understanding of sustainability impacts than their own.

The Materiality Futures report, released today by Fronesys, is authored by Chris Tuppen, partner, corporate services, and is the most comprehensive and detailed evaluation of the materiality determination  process to date. It investigates how materiality is currently used in the sustainability reporting of thirty one leading global companies (A full list of companies evaluated in the study is included in the press release). From the public disclosures of these companies, a total of 50 different sustainability issues are evaluated in the report in terms of importance to stakeholders and the 31 companies.  These cover a diverse range of issues, such as corporate governance, water use, human rights, executive remuneration, carbon and privacy.

Chris Tuppen, partner, corporate services, Fronesys, says: “The report is particularly timely as companies around the world prepare to tie together their financial and sustainability reporting processes into the draft integrated reporting model recently released by the IIRC. In our view, the key link between sustainability and business strategy is materiality, and it is surprising how opaque the processes are by which materiality is determined.”

Read the full press release on the launch of the Materiality Futures report

Check out more information on the Materiality Futures report.

03 October 2011

2degrees webinar on Integrated Reporting: Identifying material sustainability issues


CT1 pic Chris Tuppen will be discussing his new report Materiality Futures in a webinar with Jessica Fries of the International Integrated Reporting Committee (IIRC) on October 11. The new Fronesys report, which will launch on October 10, features an analysis of sustainability data from 31 leading companies, covering 50 different sustainability issues.

For more information, check out http://www.2degreesnetwork.com/all-activities/event/integrated-reporting-identifying-material-sustainability-issues-2011-10-11/.

05 September 2011

The CFO's role in sustainability: E&Y lays out five keys

Traditionally, CFOs ran the numbers and let others get on with the soft stuff, worrying about the environment or social performance. No longer, according to How Sustainability has Expanded the CFO's Role, a new report from consultant Ernst & Young. The job silos are crumbling, and the CFO's job scope just widened. 

 Fronesys feels there's some good material in the report for every CFO to consider in terms of their own performance, but here are five keys that stand out:

  • Actively pursue a sustainability reporting strategy, setting in place the means to measure, manage and report on your sustainability performance.
  • Integrate sustainability into the operational side of the business - unless this happens, the company's sustainability posture will be just that: words without deeds.
  • Enhance dialogue with shreholders and stakeholders, and improve disclosure in key sustainability areas. A recent Harvard study found that enhanced disclosure in environmental and social metrics made a bigger difference than enhanced governance disclosures.
  • Ensure the directors know what they they are doing and have the right skills in sustainability issues, particularly when it comes to risk management,
  • Consider using non-traditional performance metrics, such as tying compensation to non-financial risks, to ensure that sustainability strategies connect to real-world performance. 

Check out the full report here.