CFOs watch out! Ignoring sustainability reporting is not a sustainable strategy

16th February 2012

Sustainability reporting may not be high on ever company’s agenda but few quoted companies or large public sector entities can afford to ignore the growing clamour by employees, suppliers, customers and investors for more accountability and disclosure.  To add to the pressure there are increasing signs that governmental agencies and stock exchanges will force the pace.  Responsibility for reporting is likely to fall on the CFO says Gary Simon, FSN’s managing editor.

According to a Deloitte report (The Sustainable Board) issued earlier this year, sustainability has been called the next “Megatrend” – having an impact as profound as past megatrends such as mass production and the IT revolution. So what exactly is sustainability?  According to Deloitte it is “ensuring that the negative social and environmental impacts of business activities are reduced so as to be consistent with development in a finite planet”.

And it’s not too difficult to see how great that impact can be.  Take for example the US federal government occupying approximately 500,000 buildings, operating over 600,000 vehicles, employing more than 1.8 million civilians, and spending more than $500 billion on products every year.  Agencies such as the US Postal Service, Army, Airforce and General Services Administration (GSA) can have a big impact on sustainability in the US. They also face some complex decision making when it comes to reporting.

In October 2009, President Obama created a landmark for sustainability in the US, with an Executive Order that required Federal agencies to “set a 2020 greenhouse gas emissions reduction target within 90 days; increase energy efficiency; and leverage Federal purchasing power to promote environmentally-responsible products and technologies”.

Following this Executive Order, Federal agencies started to track their sustainability performance using the Global Reporting Initiative (GRI) Framework, and agencies have since sought to reduce their petroleum use by 30 percent and to improve water efficiency by 26 percent by 2020. By using the GRI Guidelines, Federal agencies can measure, track and report these achievements.  Furthermore, the Executive Order also required 95 percent of all contracts to meet sustainability requirements:

But the demands of sustainability stretch well beyond the public sector; stock exchanges in developing nations are about to mandate sustainability reporting.  For example, The São Paulo stock exchange and the Securities and Exchange Board of India (SEBI), have both announced new requirements for companies in their jurisdiction.

In November 2011, SEBI mandated that listed entities must submit Business Responsibility Reports, as a part of their Annual Reports. This requirement is initially only applicable to the top 100 companies in terms of market capitalization, and will be extended to other companies in phases.

In a similar move, the São Paulo stock exchange, BM&FBOVESPA, has announced that it will be adopting a “report or explain” sustainability reporting model for listed companies in 2012. (GRI promotes a “report or explain” approach to sustainability reporting, where companies report their sustainability performance or explain why if they do not.)

So the drive for increased visibility of sustainability looks unstoppable.  But this is not merely compliance for its own sake.  Many consider that active policies around sustainability enable companies to save considerable sums of money while at the same time increasing their attractiveness to investors and enhancing their reputation with employees, customers and providers of capital.  Fund managers increasingly take account of sustainable policies as part of their share valuations.

Companies in certain sectors with a direct impact on the environment such as energy, minerals and manufacturing are acquainted with the GRI Guidelines.  Others with close contact with customers, for example, food, fashion and retail are also familiar with the demands of sustainability reporting.  However, for the rest of commerce, sustainability reporting will come as something of a shock, with no clear accountability within the organization about who should take responsibility for overseeing sustainability initiatives and reporting.  For the time being it is likely to fall on the shoulders of the CFO.

And what about measurement?  Few organisations have formalised an approach to implementing systems and processes that facilitate sustainability reporting although software suppliers are beginning to turn their attention to this growing need.  In November 2011, Oracle announced the availability of a “Sustainability Reporting Starter Kit” for the popular Oracle Hyperion Financial Management consolidation package. 

The starter kit provides a GRI-based chart of accounts, pre-built web data entry forms and direct integration with a variety of source systems.  The latter point reflects the reality that non-financial data such as petrol and energy consumption is likely to be drawn from a wide variety of informal and ad-hoc systems - depending on the industry. Pre-built conversion rules will allow, say, the conversion of electricity in megawatts into metric tonnes of CO2 emissions.  Pre-built report templates will address some of the reporting needs of GRI.

Other suppliers may follow suit with similar capability but the Oracle release highlights the fact that GRI reporting is far from trivial.  Data collection, validation and reporting all need to be taken into account.  Of course the CFO is well used to these concepts which are the ‘bread and butter’ of financial and non-financial reporting.  Indeed the consolidation tools (such as HFM) are already firmly embedded in the finance function as are the statutory disclosures which accompany them.  It therefore seems highly probable that for the foreseeable future the unsuspecting CFO will be the person picking up responsibility for sustainability reporting.