Creating a company’s first sustainability report
As sustainability initiatives become more of an imperative, companies preparing to go public are scrambling to devise a sustainability strategy and capture its essence in a report. Institutional investors and other stakeholders, as well as regulators, have expressed a keen interest in sustainability issues confronting public companies and related metrics.
As a result, companies’ efforts to create a more sustainable business in light of climate change and other pressing issues facing the world economy are paramount. Among the things companies have to consider before taking the plunge into the public markets, one of the most critical is the development and implementation of a sustainability strategy as part of the company’s long-term strategy. Once the sustainability strategy is in place, the company needs to focus its attention on how to report on this strategy to its key stakeholders.
Given the fragmented nature of the ESG landscape, it makes sense to consider taking steps toward the creation of a sustainability report even if it is not released until after the company completes its IPO. The creation of a sustainability report requires collaboration from the team or individual leading the company’s sustainability efforts, the corporate secretary and investor relations officer, as well as the finance team and key legal and business heads. Many companies also hire consultants to help lead and direct this process.
CREATING THE SUSTAINABILITY REPORT
A sustainability report articulates how a company currently operates, and details how it intends to modify its business and operations, to make them more sustainable in the future. The report will typically address strategy, mission, actions taken or to be taken, goals and progress with respect to such goals.
The purpose of this report is to provide a mechanism for reporting a company’s sustainability initiatives and progress to key stakeholders, including investors, and the outside world. The report is intended to create transparency and accountability related to these initiatives and enhance continuing ESG goals and strategies.
Such reporting is important not only because of stakeholder interest but also because the report is a precursor to obtaining the sought after long-term capital across ESG investors and receiving ‘coverage’ from rating agencies.
Although it is not critical for a company to issue a sustainability report before going public, it is important to consider what this report will include. Most companies issue a sustainability report within one year of going public.
CONTENTS OF A SUSTAINABILITY REPORT
The key elements companies should include in a sustainability report will vary by industry and sector and some will be unique to a company depending on its business plan and other issues. Many benchmark their report based on industry leaders and peers.
Sustainability reports can be quite expansive and consideration should be given as to what to include because, once included, the aim is for the same targets and other objectives to be included from year to year. Below there are several suggested items companies should consider including in such reports, although this is by no means an exhaustive list.
1. Vision and mission statement
The company’s sustainability vision and mission statement should be provided at the beginning of the report to set the stage for what is to be achieved by its sustainability initiatives and what will be reported in the future. This statement should be clear, concise and forward-looking and articulate the company’s sustainability philosophy as well as how the company intends to achieve a more sustainable future. The statement/vision should be realistic and in step with the company’s ability to achieve the goals it sets.
2. ESG risks and current status of sustainability initiatives
A sustainability report would be lacking if it didn’t include a statement identifying the risks or issues the company faces and intends to address through its sustainability strategy. The identification of risks requires input from across the company. These issues can include water and energy use, plastic or other waste products generated by the business, greenhouse gas emissions, governance shortcomings and diversity, equity and inclusion concerns. Typically, legal will weigh in on this disclosure to ensure it is consistent with disclosures included in other documents.
Another key component is a clear discussion of the status of the company’s ESG/sustainability initiatives. This discussion should provide transparency as to where the company is on its sustainable journey and set the stage for the description of the strategy and goals that are to follow. Important components of this section include a description of when the company began to focus on sustainability and integrate ESG components into its business strategy, critical milestones reached to date, the impact of these initiatives on the company and its key stakeholders particularly from a financial perspective, and key accomplishments and other lessons from this course of action.
3. Sustainability goals and strategy
The strategy section is at the heart of the report and requires a clear and concise step-by-step description of how the company plans to achieve its stated goals over the long term. Short-term goals can also be articulated here, if appropriate. The report should articulate the company’s goals with respect to sustainability initiatives in a clear and straightforward manner. One goal could be to increase recycling at the company or to use renewable energy resources across the business operations. The strategy creates a roadmap for the implementation; disclosure in this section should lend credibility to the plan and add transparency. When describing the strategy, attention should be given to details such as costs and timeframes. It is also important to indicate how the sustainability strategy is embedded in the company’s overall business strategy.
4. Metrics, metrics, metrics
Companies at the beginning of their ESG journey should consider disclosing some of the metrics from established frameworks. There are a myriad of these, such as those from the TCFD and SASB. The decision of what to disclose is, ultimately, likely to be out of the company’s hands as the SEC moves to set disclosure requirements, particularly around climate change. Until the SEC’s proposed rule in this area is final, it makes sense to use metrics addressed in the proposal.
Disclosure of financially material metrics, rather than a taking a checklist-like approach is what is required to access ESG capital. More important than the quantity of metrics disclosed is their quality in terms of materiality to the company and the level of interest in a particular metric by the company’s key stakeholders.
5. Consistent, accurate and transparent disclosure of data
Consistency and transparency in disclosure build trust and confidence with stakeholders. A company should consider providing ESG data in table format to assist investors and other stakeholders that review and compare such information.
This also facilitates reviewing multi-year information so that the company’s progress and any trends are clearly visible.When determining what to disclose in a sustainability report or other ESG disclosures, companies must have conducted a materiality assessment, and should consider including a materiality matrix to enable all stakeholders to better understand which ESG and sustainability issues are the companies’ priorities.
6. Enhanced scrutiny
It is also important that metrics be auditable and checked for accuracy, particularly if disclosure is also being made in SEC reports. If included in SEC filings, metrics should be subject to the same vetting process as other financial information. Companies should consider obtaining a third-party independent attestation that adds assurance with respect to the data’s accuracy and reliability. This is an area where the corporate secretary and finance teams need to collaborate to put a process in place for vetting these metrics so that they are auditable and can be calculated on a recurring basis, as stakeholders are looking to see progress made on a yearly basis.
7. Governance of ESG
Another section of critical importance to articulate is the governance strategy and infrastructure in place to support the company-wide sustainability initiatives and plan, which require resources and structure. This section of the report should identify the leadership for the initiative, its oversight by the board or board committee, the existence of a dedicated team reaching across the organization and procedures established to track and report progress, which the corporate secretary’s team typically sets up.
The report should indicate how the company intends to track its progress with respect to its goals and objectives, where this progress will be reported and the frequency of such reports. Some companies house updates to sustainability and ESG metrics on their IR website or a separate sustainability website. Investors and other key stakeholders will also want to see whether a company will use benchmarking analysis to compare its progress with that of its peers.
8. Setting the ‘tone at the top’
The report should also include a statement by the board or a quote from the chair or CEO that emphasizes the board and senior leadership’s commitment to the sustainability strategy and goals. This statement is intended to set the ‘tone at the top’ and signal the importance of its objectives to employees and other stakeholders.
AN INDIVIDUAL JOURNEY
Each company’s sustainability journey is individual. As such, its sustainability report should reflect, in addition to the general information described above, the factors and insights unique to the company. A focus on the company’s specific ESG issues and initiatives will provide transparency and highlight the company’s key attributes and what distinguishes it from peers. Careful consideration of these sustainability matters can help avoid problems when it comes to reporting and help prepare the company to confront its ESG challenges.
Shahnawaz Malik is head of sustainable investment strategies and Jane Storero is senior corporate governance counsel at LTSE Services