New CFO Challenge: People, Planet and Profit

If you are a CFO who has started producing a sustainability report for your company, congratulations. According to KPMG, the biggest and most recent surge in reporting has occurred in the Asia Pacific region, where the percentage of companies producing ESG (environmental, social and corporate governance) or sustainability reports has jumped from 49% in 2011 to 71% in 2013.
 
If you are not yet doing so, you will be under pressure to do it. The research is conclusive: there has been a marked increase in the number of countries with ESG reporting policies, more reporting guidance is available and more organizations are reporting.
 
And as many as 93% of the world’s biggest 250 companies – including Fuji Xerox – publish sustainability reports annually. Having emerged as a concept a couple of decades ago, reporting on the triple bottom line of ‘people, planet and profit’ has become business as usual among large corporations.
 
Since 2006 the GRI (Global Reporting Initiative), which sets standards for sustainability reporting, has monitored international transparency practices through a regular research series. This so-called ‘carrot and sticks’ research is conducted along with KPMG, the United Nations Environment Program (UNEP), and the Centre for Corporate Governance in Africa.
 
The third report released in 2013 reveals a threefold increase in mandatory and voluntary sustainability reporting initiatives to 180 programs spread across 45 countries and regions – from just 60 programs in 19 countries and regions.
 
Sustainability in Asia
What has driven this uptake in reporting? There has been a global rise in reporting policies and regulation, at least partly driven by the United Nations requesting governments to stimulate sustainability reporting. This has been accompanied by both a growth and an alignment of reporting frameworks.
 
A number of other forces have combined to drive corporate transparency: recognition that weak governance underpinned the 2008 financial crisis; obligations for carbon emissions measurement; as well as civil society organizations and social media highlighting the role of the corporate sector in both creating and resolving environmental social challenges. 
 
These developments have driven ESG reporting into mainstream activity, although the level of adoption from region to region still varies. The highest number of reporters per country is in the US, followed by Japan, South Africa, China, Brazil, Sweden, Australia, Korea and several EU member states.
 
In those countries larger companies and state owned enterprises most commonly report, with some progressive SMEs also participating.
 
In Asia, stock exchanges are playing a pivotal role by making sustainability disclosure a recommended or required practice. This has been particularly evident in China. Over 1,600 reports were published in 2012, around 20 times the number in 2007.
 
Half of these reports came from large state-owned enterprises and listed companies, and mostly from the financial and ICT sectors. The growing trend in ESG disclosure has also extended to hospitals, schools and universities in China.
 
Bursa Malaysia was the first in Asia to require listed companies to report on sustainability issues, with Indonesia recently following suit. In contrast, stock markets in Hong Kong and Singapore have adopted a voluntary approach. Both have issued guidance for ESG reporting with the intention of elevating this to a ‘report or explain’ policy in two years.
 
This hybrid between mandatory and voluntary measures is increasingly common and has been taken up by 12 countries worldwide. Report or explain policies provide companies with flexibility and space to develop their own disclosures, while encouraging the development of transparency and competency in sustainability reporting.
 
Challenges, however, still remain in terms of the quality of reporting. KPMG gave the top 250 companies an average score of 59 out of 100 in this area. This score was awarded on the basis of a company’s ability to demonstrate a superior understanding of the impact of social and environmental issues on their business and reporting on their strategy, performance and interactive with stakeholders.
 
Why should CFOs care?
Sustainability rarely features in the typical CFO job description. This is changing. A global Deloitte survey found that two-thirds of the 250 CFOs surveyed from 14 countries see the importance of managing ESG risks to the success of their business. The most common risks (and opportunities) gaining CFO attention have been largely related to carbon and ethical procurement.
 
In the United Kingdom, the Prince of Wales has recently announced a CFO leadership forum as part of the Accounting for Sustainability (A4S) initiative. A4S was instrumental in the instigation of the Integrated Reporting movement, which has now borne fruit with the release of an Integrated Reporting Framework.
Integrated Reporting explores and explains the link between financial performance and ESG indicators so that shareholders can make more informed investment decisions. 
 
Greater ESG disclosures and rising transparency will mean that the connections between the triple bottom line of people, planet and profit are increasingly well understood by the investment community. This puts sustainability issues at the heart of the business and explains why understanding ESG risks and opportunities is increasingly the job of the CFO.
 
CFOs will be turning to the sustainability specialists in their business so that ESG risks and opportunities can be better understood, prioritized and responded to as part of risk management, business planning and review.
 
Challenges
While there is clearly a growing momentum for sustainability disclosure in Asia, particularly following the launch of ESG guidance by Asian stock exchanges, there are challenges for first-time reporters.
 
One of the key obstacles is the perceived costs in terms of time and resource, particularly for small- to-mid-cap stocks in Asia. 
 
Another obstacle is the lack of in-house expertise. Many companies find the sheer volume of data they are required to gather and analyze daunting. They just don’t know where to begin.
 
The lack of a methodology in preparing for the report is another challenge, as is the lack of senior level support. In most cases, companies delegate sustainability reporting to the communications or human resources department.
 
Courses of action
While we forecast that ESG topic will increasingly move up the business leaders’ agenda, the pace will be set by how well these challenges are addressed. Stock exchanges are already active in providing companies with educational workshops about how to implement ESG reporting, as do third party providers, such as consulting firms and companies like Fuji Xerox, which provide services in the environmental aspect of ESG reporting.
 
  • The involvement of the leadership team, including the CFO, is crucial. This is because ESG requires companies to report on the material environmental, social and governance risks that may impact on the company’s ability to deliver strategy. These are the issues which will have an impact on not just shareholder perceptions of company performance, but also on stakeholders’ view of the brand image.
 
  • Companies should focus their reports on what is important to their stakeholders. This is an insight based on third party guidance and Fuji Xerox’s experience in voluntary sustainability reporting for years at a group level. This question of ‘materiality’ is key in producing a relevant sustainability report that will be meaningful to readers and deliver value to the company.
 
  • Companies should develop a reporting framework. A clear and defined framework will direct resources in collecting, analyzing and auditing key ESG data.
 
  • Companies need to define sustainability goals, KPIs and develop measurement systems to track them. Companies should start with baseline performance, set progressive KPIs and link them to the achievement of long-term goals. This gives the company’s leadership oversight of sustainability performance, enables stakeholders to understand how companies are holding themselves accountable. Measurement and verification are both important.
 
  • Companies need to track their maturity and progress with a solid monitoring system. It is preferable that the outcomes are validated by a third party resource. A good assurance provider will test leadership commitment, consistency of message and thereby demonstrate the credibility and quality of the report. This might sound like extra work but it’s key to ensuring that the company gets full value from the reporting process.
 
  • Last but not least, the report should demonstrate a connection between the business strategy and key performance indicators. It should not be a checklist of random CSR activities that may have no bearing to a company’s strategy and operation.  Hence, identifying company mission, growth plan, business strategy and how all these connect into the KPIs set out in the report is important.
 
Conclusion
Despite the challenges, companies have come to realize that the costs and efforts put into producing a quality ESG report are worthwhile. In an age of heightened stakeholder sensitivity to corporate environmental, social and governance transgressions, having a system for identifying, prioritizing and communicating ESG matters is a useful tool for proactive risk management.
 
Providing a clear and credible account of how these issues are managed and measured is also critical for protecting and even enhancing brand reputation. Let’s not forget the positive news that can be shared with employees, customers and shareholders when companies contribute to sustainable development.
 
About the Author

Amanda Keogh is Head of Sustainability at Fuji Xerox Asia Pacific and sits on the Stakeholder Council of the Global Reporting Initiative (GRI).  

 

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