How are demands for sustainability reporting affecting the CFO and how is software helping?

11th September 2014

FSN writer Lesley Meall explores the triple bottom line connecting a company’s environmental, social and governance performance with its financial performance

Traditionally, sustainability issues have fallen outside the jurisdiction of finance. The CFO has focussed on the numbers while others have handled softer issues such as corporate citizenship and social responsibility. But traditional job silos are crumbling and the roles and responsibilities of the CFO are expanding. There is a growing desire from investors, business customers and other stakeholders, for companies to connect financial performance to non-financial value drivers, such as social and environmental impact and to report on this in a meaningful manner, and the CFO is increasingly at the head of the sustainability reporting chain. 

 

 

 

“We have more and more investors who are interested in sustainability, and use it as an investment criterion. So this is something we have to take into account,” says Gilles Bogaert, CFO, Pernod Ricard. In 2012, it piloted an experimental French standard, XP X 30-027, designed to enable organisations to evaluate and report on the credibility of their corporate social responsibility (CSR) initiatives in accordance with ISO 26000, and this led to Pernod Ricard’s first credibility report

Changes to both the CFO role and perspectives on sustainability are reflected in lines of reporting. At SAP, the sustainability reporting officer used to report to the CEO, but recent appointment, Daniel Schmid, reports to global head of finance infrastructure, Peter Rasper. “In the past, people thought you were either profitable or sustainable,” says Schmid, but with finance in the driving seat, SAP reports in a way that “considers the top and the bottom line” (as you can see from its impressive 2013 integrated report). 

At the Austrian energy company Kaerntner Elektrizitaets (Kelag) the finance team is leading the process of collecting the company’s sustainability-related data from various sources across the business, as outlined in Accenture’s 2013 report The Sustainable Organisation: the Chief Financial Officer’s Perspective. Kelag CFO Armin Wiersma explains: “We provide the platform, and guide our colleagues in other departments on data collection and calculation.” 

The sustainability reporting chain is almost always long and complex. Its main components include: identifying the right set of material issues; data collection, analysis, and validation; reporting; and publication. Each of these bring their own challenges. Workiva (previously WebFilings), which provides Wdesk, a tool that helps people to collaborate on a wide range of compliance, risk, management, and sustainability reports, considers these challenges and some approaches to solving them in its useful (though sometimes partisan) report The CFO and the Sustainability Reporting Chain. 

Identifying the right material issues may be your first challenge, but pales by comparison with the data collection, comparison and validation challenges. Once the right material issues have been identified, supporting information will come from a wide variety of sources including operational facilities, subsidiaries, affiliates, plus customers and suppliers that provide information regarding their sustainability policies and performance. Structured and unstructured data may need to be collected (from inside and outside the company), and relate to areas ranging from health and safety to waste and water, via greenhouse gas emissions levels, philanthropic activities, and relationships with local communities. 

Clearly, you will need to think long and hard about where the information you need will be sourced – and how – before you even start thinking about its analysis and validation. Many organisations are characterised by disparate and disconnected software and data repositories, before you even get out into the extended supply chain, so just locating the required information can be challenging, even if it is being collected. But there are many software tools with the potential to help. 

They range from enterprise risk management solutions that offer audit, compliance, document management and other types of functionality for a broad range of risks including sustainability; through enterprise performance management tools that unify business continuity, governance, performance and policy management (and more) and streamline internal control over financial reporting and (to varying degrees) non-financial reporting; to a host of much more niche tools, which focus on areas such as tracking and measuring greenhouse gas emissions, or measure manage carbon emissions and reduce your carbon footprint; and some providers of ERP software also provide sustainability functionality.

Microsoft Dynamics AX, for example, includes an Environmental Sustainability Dashboard which companies can use to collect auditable data on key environmental performance indicators relating to matters such as water usage and waste management. The dashboard can be used to track the raw materials and energy that their organisation consumes, then calculate and record the flow of finished products to customers, and the flow of hazardous emissions out into the environment. It can also be used to monitor the results of any changes to consumption or increased adoption of more sustainable business practices.

SAP goes further and offers a Sustainability Performance Management solution. Despite the ‘big data’ company flag SAP now likes to wave, it began as a developer of accounting software and this shows in this performance management tool. It includes features such as ad hoc unstructured data reporting, with drill down into details and export options to Excel and dashboards. But as well as making it  easier for organisations to collect and analyse sustainability-related data, this tool aims to minimise data collection costs and errors, reduce the risks associated with making voluntary sustainability disclosures, and enable organisations to use their sustainability information as a lever for profitability.   

With specialist providers such as Enablon, Intelex and MetricStream, the focus tends to swing towards the functionality needed for governance and compliance. MetricStream, for example, integrates internal audit, risk management, quality management, supply chain governance, IT governance and policy management, and other similar functionality. It also includes a sustainability management solution that covers environmental health and safety, intelligent buildings, smart cities, and software and services that focus on more specific sustainability challenges, such as managing the risks associated with conflict minerals and carbon management. 

Frameworks and standards

The next big challenge is reporting. Just in case you don’t get around to looking at the reports from Pernod Ricard and SAP or you miss the metaphorical small print, it is worth noting that the usefulness of these reports (and similar efforts) is hampered by lack of comparability. There are many competing and overlapping frameworks and standards for ‘measuring and reporting’ on sustainability, and many types of ‘assurance service’ that can be (bought and sold) to verify and build confidence in these (and other non-financial) disclosures. So it can be a challenge deciding how to frame your CSR and sustainability reports 

Between them, Pernod Ricard and SAP have used: the AA1000 Accountability Principle Standard (2008); the Sustainability Reporting Guidelines G4 of the Global Reporting Initiative (GRI); the Corporate Accounting and Reporting Standard (Scope 1 and 2) and the Corporate Value Chain (Scope 3) Standard of the World Resources Institute and World Business Council for Sustainable Development; and the XP X 30-027 (or to give the standard its full title the ‘Enhance credibility of an ISO 26000-based social responsibility approach’). So you probably will not be surprised to discover that the software development community has shown a distinct reluctance to describe their products as compliant with any of the myriad frameworks, so far. 

For sustainability reporting to be as meaningful as financial reporting it must provide real insight, comparability and visibility to organisations and their stakeholders. The SAP integrated report hints at what’s possible. But we are some way from a globally accepted reporting framework that the CFO (or anyone else) can use to demonstrate the connections between financial and non-financial risk and relate this to corporate performance. The International Integrated Reporting Framework that was recently released by the International Integrated Reporting Council (see FSN coverage) could become this, eventually: but the development and adoption of International Financial Reporting Standards has taken eons – so don’t hold your breath while you are waiting.

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