Written by Richard Hollins
This is the first in a series of posts that will help you explain your company’s sustainability approach in your annual report. This post considers the basics – why sustainability reporting is important and the areas of the strategic report where you should reflect your sustainability practices. Future posts will look in more detail at specific reporting issues.
Your peers are improving their sustainability reporting, so don’t get left behind
The first question to answer when considering your sustainability reporting is: why bother? What are the advantages for your business of doing this well?
The answer is that sustainability reporting covers key areas of your business: your people, the environment, health and safety, communities, your customers and suppliers. Managing these areas successfully delivers real business benefits, in which your investors are increasingly interested.
In fact, the University of Oxford and fund managers Arabesque Partners recently reviewed 190 research papers that considered the business impact of sustainable practices. They found that good environmental, social and governance standards:
- reduced companies’ cost of capital
- improved their operational performance, and
- enhanced their share price performance.
The paper also noted that $13.5 trillion of investors’ assets are now managed sustainably and responsibly.
At the same time, UK reporting regulations continue to expand companies’ disclosure obligations, most recently with new rules on greenhouse gas reporting, gender diversity and human rights.
With the opportunity to deliver real business benefits, rising investor demand and broader disclosure rules, it’s not surprising that companies are looking to effectively explain their sustainability approach to investors and that the annual report is one of the main channels for doing so. Failing to keep up will damage your credibility in the eyes of investors.
If sustainability is part of your business, then show it
Despite this, far too many companies still treat sustainability as a separate subject in their strategic reports. This is particularly – but not exclusively – the case among smaller and medium-sized businesses.
A much better approach is to show how sustainability fits into your business, long before you get to the sustainability section. The diagram shows our suggested structure for a typical strategic report. Each element flows from the previous one, creating a clear and logical story.
When you’re drafting each of these sections, consider whether sustainability is relevant to it. Also bear in mind the FRC’s guidance, which says that the strategic report’s content should be material to investors. Broadly, this means information that could influence someone’s investment decision, so you should only refer to sustainability where it really matters.
Below we go through each of the strategic report building blocks and look at how sustainability might fit there. This will vary from company to company, so always consider the specifics of your situation.
This section explains what you do and where you do it, as well as other key facts about your business. Some of these can be sustainability related. For example, does your business have exceptional people or an outstanding health and safety record? Bring that out here.
This should include your competitive advantages, which help you to create value in the long term. For example, do your excellent customer and supplier relationships help you to compete? If so, then they’re part of your business model.
Market and trends
Here you should explain the key factors that influence demand for your products. In some industries, customers increasingly want suppliers with strong environmental credentials, which help them to achieve their own sustainability goals. Ensure you cover the significant sustainability influences on your market.
Few companies explicitly set realistic and measurable strategic objectives but these are invaluable for telling investors what you think you can achieve. If sustainability issues are significant for your business, then you should reflect that in your objectives.
It’s remarkable how often companies with well-developed sustainability strategies fail to reflect them in their corporate strategy descriptions. If people really are key to your business, for example, then your corporate strategy should reflect that. The same goes for any other aspect of sustainability that’s significant at a group level.
Key performance indicators
These should show how well you’re implementing your strategy. Many companies have basic non-financial KPIs, typically relating to health and safety and carbon emissions. But should you be providing other, equally significant metrics? For example, how are you measuring your performance against your people or customer service strategies?
These metrics need thought. Rising employee numbers may indicate that your people strategy is working or they could reflect poor controls. Choose measures that show what you want them to show.
Many companies cover sustainability risks in their reporting, often around areas such as retaining key people or suffering a major environmental or safety incident. Even if you’re addressing all your principal sustainability risks in your report, make sure you describe the specific impact on your business if these risks come to pass, and explain whether the risks are becoming more or less significant over time.
While a separate sustainability section is the most common way to report performance, there’s no requirement to have one. A minority of companies work sustainability into their operational performance discussion, reflecting the fact that it’s integral to their business.
If you do retain a separate sustainability section, then consider materiality. It’s tempting to describe every module in your new training course or to detail all the employee volunteering days in your local communities, but the strategic report should focus only on the most significant matters. Everything else can go on your website, in a separate sustainability report – or, if you really want it in the annual report – in a separate section outside the strategic report.
There’s also merit in referencing sustainability in the chairman’s and chief executive’s statements. If sustainability is genuinely important to your business, then it’s a natural area for your management to cover.
There’s a lot more to effective sustainability reporting than a double page spread at the end of your strategic report. At least some aspects of sustainability will be relevant throughout the document and you should ensure you properly reflect them, so investors can understand the issues and opportunities you face and how well you’re addressing them.
About Richard Hollins & Associates
Richard Hollins & Associates provides business and financial copywriting, with specialism in annual reports and investor communications. Our background in investor relations and accountancy makes us the UK’s best-qualified annual report writers.
Find out more at www.richardhollins.com.