Sustainability strategies are kind of like exercise regimes. Both require an approach aligned to specific goals, a clear plan of action, and a long-term view. Whether prompted by external pressure or an internal decision to change, one sets out with targets and works to achieve them, growing faster and leaner along the way. But as any fitness buff will tell you, failing to set new targets after reaching the initial milestones will only lead to plateau, and later, decline.
As we enter the 'second generation' of sustainability reporting, companies that have made and met their targets around energy and emissions are now looking for further ways to improve efficiency. By identifying additional areas for potential savings, such as water and the supply chain, these corporates are driving innovation and embedding sustainability deeper into the heart of the business.
Hugh Tyrrell, director of consulting firm GreenEdge, says this is leading to more detailed, comprehensive reporting. “The first wave of sustainability-oriented businesses set their benchmarks early on, and are now looking to deepen the sustainability of their operations. This means more metrics will go into their reports as there will also be more to report on.”
This shift is also being reflected in additions to industry initiatives like the Carbon Disclosure Project, which has added water disclosure and a supply chain programme in recent years. Members of the supply chain programme include big tech names like Acer, Dell, Microsoft, Nokia Siemens Networks, Phillips Electronics and Vodafone Group, which all ask their suppliers to disclose climate risk and emissions data. These and other major companies in the group have evolved beyond simply reporting: 94% have incorporated climate change into their company-wide risk management process, and 90% have a formal approach to climate change in procurement.
Tyrrell adds that he's seen an increase in companies adhering to the Global Reporting Initiative (GRI) guidelines, a set of sustainability reporting principles used by the majority of reporting companies worldwide. Studies show 95% of the world's 250 largest companies report on their corporate sustainability activities, with 80% of these using the GRI as a basis.
“People aren't exactly rushing through, but at least the doors are open.”
Hugh Tyrrell, GreenEdge
At present, the GRI is working on the next version of its reporting guidelines (G4), and has released a draft text for public feedback. While it's widely used, the GRI remains a voluntary standard, and has no regulatory mandate.
The evolving corporate sustainability landscape was also a hot topic at the recent Rio+20 conference on sustainable development, where a broad range of business leaders committed to more decisive action on environmental and social responsibility.
The Corporate Sustainability Forum resulted in more than 200 pledges by companies and individuals, in areas of social, economic and environmental sustainability. This included 86 CEOs agreeing to develop accounting systems that factored in natural resources; 45 CEOs making pledges around water sustainability; and 70 businesses, governments and international organisations endorsing the Green Industry Platform, an initiative to mainstream environmental and social considerations into corporate operations.
In fact, emphasis on corporate sustainability reporting emerged as one of the more promising outcomes of what many viewed as a disappointing conference. Governments and private sector alike recognised the importance of corporate transparency and accountability, and business' role in driving sustainable development was included in paragraph 47 of the final outcome document. It calls on listed and large companies in particular to “consider integrating sustainability information into their reporting”. It does, however, fail to enforce any of its suggestions, falling back on vague terms such as “acknowledge”, “encourage” and “where appropriate”.
SA forms part of a new group called 'Friends of Paragraph 47', along with the governments of Brazil, Denmark, and France, to advance corporate social responsibility reporting. The country is considered a leader in this regard, with the Johannesburg Stock Exchange (JSE) being the first in the world to require listed companies to produce a report integrating their financial and sustainability performance.
Tyrell says business and civil society activity at Rio offered hope for a conference which mainly demonstrated the failings of the UN process, which appears to have reached a stalemate as governments battle to reach consensus. “The wider population - business, consumers, society - are far more ready to embrace action on sustainability. The drive for change must shift to business.
“With COP 17 and Rio filtering through, there simply is much more widespread acceptance of sustainability as an inevitable part of business. The doors are open. People aren't exactly rushing through, but at least the doors are open.”
Long live the King
In SA, the journey towards sustainability and integrated reporting is progressing as companies begin to implement the King III recommendations, which became a requirement in 2010 for all JSE-listed companies, on a “comply or explain” basis. These entities have to report on the financial, social and environmental sustainability of their operations in an integrated annual report, or explain their failure to comply.
According to the South African Institute of Chartered Accountants, integrated reporting combines the business' social and environmental into its broader strategy and processes. "The aim is to create a single report telling stakeholders how the company impacts on the environment and community in which it operates, and how the environment and community impact the company's business."
In a joint report on the future of sustainability reporting by the United Nations Environment Programme, Deloitte, and the Centre for Corporate Governance in SA (Making Investment Grade) the authors note there is an increasing drive towards integrated reporting of financial and ESG (environment, society and governance)-related issues.
“The weaknesses in reporting shown up by the financial crisis, as well as an increasing awareness of the impact of business on the natural environment and the long-term availability of resources, have created the right environment for the advent of integrated reporting.”
In Deloitte's update on integrated reporting released in February, it found a marked improvement in the overall quality of integrated reports submitted by the JSE's companies between March and May 2011 (period one), and those submitted between June and September 2011 (period two). However, there is no definitive overall “best practice”, but rather pockets of excellence in various firms.
“Companies are increasingly starting to engage with sustainability issues as it affects their businesses, but have not yet adequately embedded this into their business strategy and processes,” says Deloitte. Of all the subjects examined, addressing the sustainability agenda still remains the lowest scored area.
It adds that the response to King III is not as strong as many boards believe. Deloitte's research showed an average disclosure score of 51% for listed companies with year-ends commencing on or after 1 March 2010. “Responsible boards should pay attention to this in anticipation of institutional investors adopting the recently-released Code for Responsible Investing in South Africa (CRISA) from February 2012 onwards.
“Companies are getting used to the format and level of transparency required but companies are still reluctant to set measurable non-financial targets,” says Deloitte. Tyrrell agrees that it's a slow process. “It's partly corporate culture - some cultures just aren't focused on the broader environment they operate in, and management is more concerned with growing market share and profits.”
Regardless of how the timing plays out, says Deloitte, forward-thinking companies are putting integrated reporting on their agendas now, as the benefits of being ahead of the curve may be significant.
“The pioneers and leaders have taken up their positions and are charging ahead, because they have the investment and management backing to achieve greater efficiencies,” says Tyrrell. “As their achievements filter down and become more widespread, corporate minds will become more open to the bottom line benefits.”
Case in point
Illustrating the importance of innovation in driving the sustainability agenda, several companies' recent reports reflect a move to thinking beyond the obvious. British Telecoms (BT), for example, in its 'Better Future' report, outlines how it has integrated long-term sustainability planning into its overall business strategy. “A year ago, BT made being a 'responsible and sustainable business leader' one of its strategic priorities. We have been reducing our impacts on climate change since the 1990s. We've already done a lot to reduce our carbon footprint, so our approach now requires us to be more innovative - thinking beyond our direct emissions by increasing engagement with suppliers and customers to produce lower-carbon solutions for all,” states the report.
The company has found that looking to areas like waste management and green tech can bring both savings and new avenues for revenue. Recycling activities reduced BT's costs by over £2 million in 2011, and in Belgium and The Netherlands it sends zero waste to landfill, with all non-recyclable material being sent to plants that produce energy from waste.
It adds that government regulations are spurring the uptake of new solutions. The UK's Carbon Reduction Commitment, for example, has prompted an increase in the use of smart metering technology, to help organisations understand real-time energy use. “In BT, we are equipping 150 new buildings each month in this way. However, it's not all been straightforward; payback on such investments can take longer than average, making it challenging to prioritise these over shorter-term opportunities.”
In another example of looking beyond its own operations, Woolworths has identified the importance of working with partners and understanding product life cycles in ensuring a sustainable business model. In the company's latest update to its combined social and environmental responsibility programme, called the 'Good Business Journey', it set new targets through to 2015, with the key shift being the impact of product life cycles.
“Experience has shown, for example, that the major consumption of water is in growing food, while more energy is used by our customers in the care of our clothing (washing, ironing, drying) than in its production. This is why we have shifted the focus from our own operations to include customers and our suppliers.”
Woolworths head of sustainability, Justin Smith, says there are many challenges on the supply chain side, but that it has a good relationship with suppliers in the country, as 95% of its food suppliers are based in SA. Its Farming for the Future initiative has been driving progress in this regard, as it approaches the farming process systematically, starting right down at soil level. From here it follows through to chemical and pesticide use, irrigation, biodiversity, packaging, transport and finally how consumers dispose of products.
The retailer's 2015 targets on the supply side include a 30% reduction in fresh water used in irrigation, 12% of fibres used in clothing being sustainable, and improving biodiversity management through palm oil, fish, wine and Farming for the Future initiatives. It also aims to ensure that 100% of Woolworths' products have at least one sustainability attribute by 2020.
It's a clich'e, but information really is power.
Justin Smith, Woolworths
Smith adds that while these programmes are good for its corporate reputation, they're also “worth their weight in gold”. The company has saved R80 million through its sustainability initiatives and plans to save a further R100 million by 2015. “The business case is quite important. We've saved R80 million in the past four years by reducing energy consumption, fuel, water and packaging. Often we do something for environmental reasons that then also results in cost savings.”
In terms of monitoring and reporting, Smith says the smarter measurement of energy in facilities has enabled a lot of cost recoveries. “Five years ago, we used to wait for the bill, now we can monitor it and pick up mistakes and put in targets to reduce relative energy use.
“It's a clich'e, but information really is power. That system paid itself off over and over again.”
The company has also adopted a sustainable transport strategy, partnering with logistics company Imperial and Mercedes Benz to reduce fuel consumption, introducing measures like route optimisation, and even using recycled cooking oil as fuel in its fleet.
“A lot of the initiatives around the supply chain work whether you're big or small, so we're making sustainability and efficiency an important part of procurement,” says Smith. He adds that international retailers continue coming up with innovations in the sustainability space, making it vital to keep strategies up to date. “There are new issues all the time and we have to respond to the broadening reach of what we can do.”
With environmental concerns growing more pressing, Tyrrell believes leading companies will continue working with regulators to improve sustainability reporting, and engage partners in the value chain. “As the world's pioneers move forward and draw the broader mainstream businesses with them, they'll want their suppliers to comply and then to go beyond, to come up with innovative practices that can drive the green agenda.” In playing this role, it looks like companies with experience in the sustainability fitness game are making the move from prot'eg'ee to personal trainer.
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