For people, a sustainable life is all about reducing clutter, lessening your carbon footprint, recycling, conserving energy and water, and the like. For corporations, the quest for sustainability usually starts with a business transformation that not only will benefit the planet but also can reduce costs and improve competitiveness and reputation. Indeed, studies such as PwC’s 2011 Carbon Disclosure Project Global 500 report suggest a strong correlation between financial and sustainability performance.
Increasingly, macro forces such as technology innovation, globalization, resource constraints, climate change, regulation and biodiversity issues are exerting pressure on companies and their stakeholders. As a result, we are witnessing a paradigm shift in sustainability, from an environmental and social program to an integrated core business strategy and culture that looks beyond the single bottom line of profit to include key stakeholder requirements—often characterized as the “triple bottom line” of people, planet and profit. In this model, a company’s success is assessed and measured in the eyes of its beholders: suppliers, vendors, consumers and the community.
Integrated reporting: adding the triple bottom line
The future of corporate reporting is integrated reporting, which links the single bottom line of financial results to the triple bottom line of environmental, social and governance performance (ESG). The International Integrated Reporting Council (IIRC) is addressing those challenges, as is the brand-new Sustainability Accounting Standards Board (SASB). Integrated reporting is also being addressed by the Global Reporting Initiative (GRI), which provides the industry-standard Sustainability Reporting Framework that guides companies on how to identify material sustainability measurements.
Until recently, sustainability reporting has been voluntary, covering ESG performance measures such as reduction of energy, water and waste use, supply chain management, workplace safety, human and labor rights, and environmental practices. Now there is increasing demand from stock exchanges, regulators and investors to deliver transparent metrics and integrate sustainability practices into their core business strategy. For example, the NASDAQ recommends reporting on greenhouse gas emissions, water use and gender equality, and the London Stock Exchange will mandate reporting on greenhouse gas emissions effective April 1, 2013. Recently, the SEC mandated the disclosure of conflict minerals beginning in 2014. California has enacted legislation requiring disclosure of a company’s efforts to address risks related to slavery and human trafficking in its supply chains. According to Ernst & Young’s report on leading corporate sustainability issues in the 2012 proxy season, environmental and social proposals continue to dominate compared to other shareholder resolutions on U.S. proxy ballots. In April 2012, the GRI and Deloitte launched a new XBRL taxonomy that will help reveal sustainability data more quickly and easily.
CFOs add sustainability to their plate
The CFO’s responsibilities are ever increasing, from overseeing IT, facilities and procurement to corporate counsel, investor relations, HR and now sustainability. “Traditionally, sustainability issues have fallen outside the jurisdiction of the CFO. CFOs ran the numbers, letting others handle soft issues such as social responsibility and corporate citizenship,” notes a report on “How sustainability has expanded the CFO’s role” from Ernst & Young. “Sustainability issues and financial performance have begun to intertwine,” the report observes. “CFOs are getting involved in the management, measurement and reporting of the companies’ sustainability activities. This involvement has expanded the CFO’s role in ways that would have been hard to imagine even a few years ago.”
The bottom line: sustainability is here to stay. The E&Y report recommends a few actions CFO can take now to enhance their companies’ value through social and environmental programs. Companies that do not report sustainability data should consider how to measure and report on ESG performance. Companies who do should consider third-party assurance to enhance disclosures and their reputation with key stakeholders. The CFO’s organization should leverage and build its accounting system to measure and report sustainability metrics, align tax and risk management initiatives to incorporate sustainability, develop communication strategies, monitor the regulatory and risk compliance landscape and collaborate with their stakeholders: executives, employees, suppliers, customers and investors. CFOs might also consider using performance goals and other nonfinancial metrics to link company goals and social/environmental strategy.
CFOs and corporate boards, take note: it won’t be long before sustainability key performance indicators are incorporated into the Form 10-K. Take action and don’t be left in the dark.
We hope to continue exploring these issues in future posts.