Trends in Sustainability Reporting ISSP Conference Denver November 2014
What s in store 1. Emerging Standards What s driving the need 2. 3. Achieving credible reporting Assurance readiness and assurance 4. 5. Developing trends in measurement
1. What s driving the need Page 2
What it takes to be a sustainability leader in 2015 2015 leaders Not adopted May perform some actions that are sustainable, but does not coordinate or communicate these actions Early stage Encourages and collects environmental or social activities for reporting externally Focus on public relations Limited or no stakeholder engagement Middle pack Operations-focused sustainability initiative improves efficiency, such as reduced energy consumption Sustainability initiative outcome reported publicly via metrics Cost savings from initiatives may be documented Early relationship with stakeholders Advanced Well-developed materiality process Beginning to integrate sustainability in business processes Sustainability linked to enterprise strategy Reporting on key metrics internally as well as externally Closely linked financial and nonfinancial reporting Limited assurance covers reported metric data, principles Enterprise-wide sustainability strategy ties to business objectives Sustainability engages the value chain to drive business objectives Sustainability principles embedded in key areas of business strategy, operations Key metrics reported internally and externally, tied to compensation Formal controls and processes for metric data management Reasonable assurance covers metric data, principles Leaders 1995 Leaders 2005 Leaders 2015+ Page 3
Wide variety of stakeholders are asking for increased transparency Customer surveys/ questionnaires Certifications Expectations for more sustainable products Climate change and sustainability lawsuits increasing SEC disclosure guidance EPA GHG reporting FTC green guides Global reporting initiative NGOs Customers Government Communities Permitting or expansion challenges CDP license to operate Human Rights Watch Dow Jones sustainability index, Bloomberg s ESG terminal Investors Shareholder resolutions Socially responsible investment (SRI) groups Supply chain and industry Corporate initiatives Employees Industry associations (ACC, NAIC, ICMM, AAFA) Recruiting and retention Employee engagement programs Page 4
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37 is A. The age of my oldest child B. The number of NGO s that are focused on carbon C. The current temperature outside D. The % of companies that say that their customers are the primary audience for their sustainability report Page 6
Who do you perceive to be the most important audiences for your sustainability report? Rank the top three stakeholder groups in order of importance in driving your sustainability initiatives: (weighted average) Customers 37% Employees 22% Shareholders 15% NGOs Policymakers Analysts 6% 7% 7% Suppliers 3% Source: EY, Six trends in corporate sustainability, 2013 Page 7
What s driving the need for credible reporting? Investors prefer to invest in a transparent enterprise Ocean Tomo study components of S&P 500 market value 100 20% 19% 80 32% Market value 100% Book value in % of market value 60 83% 68% Innovation and intellectual capital Human capital 40 20 32% 68% 80% 81% Risk management Brand management Carbon exposure, etc. 17% 0 1975 1985 1995 2005 2009 Physical and financial assets Other factors Source: Ocean Tomo (2010), Ocean Tomo s Intangible Asset Market Value Study Page 8
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33 is A. The number of companies that file an integrated report B. A reasonable water use ratio for a packaging company C. Number of global stock exchanges that require or highly recommend sustainability reporting D. % of water to bourbon in a mint julep Page 10
What s driving the need for credible reporting? Stock exchanges are encouraging or requiring ESG disclosure To date, the governments or stock exchanges of more than 33 countries have required or encouraged some level of sustainability reporting: Argentina Germany Mexico Australia Greece Netherlands Austria Hungary Norway Brazil India Saudi Arabia Canada Indonesia Singapore China Ireland South Africa Denmark Italy Spain Ecuador Japan Sweden Egypt Korea Turkey Finland Luxembourg United Kingdom France Malaysia United States On 16 April 2013, the European Commission issued a press release that announced proposals for a directive of the European parliaments and the Council of the European Union that would require large companies to disclose information on the major economic, environmental and social impacts of their business as part of their annual reporting cycle. Many indicators suggest that mandatory corporate reporting will be the future in both developed and emerging economies. Page 11
Stock exchanges are encouraging or requiring ESG disclosure: INCR proposal The Investors Network on Climate Risk (INCR) recommended a listing standard on corporate sustainability disclosure to include: ESG materiality assessment in financial disclosure ESG issues disclosure ESG disclosure index link to GRI Exchange monitoring of overall level of disclosure and quality Governance and ethical oversight Environmental impact Government relations and political involvement Climate change Diversity Employee relations Human rights Product and service impact and integrity Supply chain and subcontracting Communities and community relations Source: http://www.ceres.org/investor-network/incrsource: Page 12
Timeline: Regulatory bodies are driving reporting EU Directive disclosure of non-financial information Adoption Publication EU official Journal Transposition Transposition into national law Compliance Companies to start reporting on 2017 CSR activities EC non-binding guidelines on reporting Policy indication on Product Environmental Footprint (PEF) EU to release review report with possible new legislative proposals Scope: Company/group that is a large undertaking And And Balance sheet exceeds 20 mln EUR or Net turnover (revenue) exceeds 40 mln EUR Average number of employees exceeds 500 during the year Company is a public interest entity Content: Environmental matters Social and employee related matters Human rights, anti-corruption and bribery Diversity Additional information Page 13
Increasing shareholder proposals focusing on ESG drive reporting Proposals focusing on E+S topics account for 60% of shareholder proposals submitted as a broad category compared to 45% in 2013. 1 Three of the top 10 most common shareholder proposal topics in 2014 to date focused on ESG matters: review/report on GHG (#2), issue sustainability report (#4), review/report global labor practices/human rights (#8). A growing number of these proposals are reaching the threshold level of 30% support, the level at which many boards take note. 2014 top E+S proposal topic areas Support for shareholder environmental and social (E+S) proposals by threshold in the past six years 2008 2009 2010 2011 2012 2013 > 30% support 15% 18% 27% 31% 23% 30% > 20% support 30% 38% 44% 52% 45% 54% > 10% support 40% 48% 52% 59% 62% 65% Source: Taking flight: Environmental sustainability proposals gain more attention, Ernst & Young LLP, 2013 1 Other major proposal categories are board-focused, compensation and anti-takeover/strategic proposals. Page 14
Information is disclosed even without reporting Plethora of sustainability indices ASSET4ESG data MSCI ESC research Vigeo ratings CR Magazine s 100 best corporate citizens list Bloomberg ESG data The global 100 most sustainable corporations in the world Oekom corporate ratings Sustainalytics company profiles and ratings Fortune s most admired Dow Jones Sustainability Index (DJSI) Carbon Disclosure Project (CDP) Climate counts Good guide FTSE4Good GS SUSTAIN Page 15
Information is disclosed even without reporting Bloomberg is including ESG information on its terminals Number of customers using ESG data 41.5% average annual growth 2009 2,415 Unique users 2010 4,704 2011 5,747 2012 7,779 2013 9,669 Source: http://www.bloomberg.com/bsustainable/#customers-popup Bloomberg collects ESG data from published company material and integrates it into the Equities, Bloomberg Industries and Fixed Income platforms. Bloomberg covers more than 10,000 companies with ESG data and more than 16,000 companies with executive compensation data in 52 countries. ESG data is fully integrated with all of Bloomberg s analytics. 4% 4% 4% 5% ESG Data Distribution User Type 2% 2% 2% 26% 32% Analyst Portfolio Manager Investor Relations Trader Risk/Mid/Back Office Salesperson Page 16
Information is disclosed even without reporting Impact of social media and proactive response What is being said about your company and its products? By who? Why? Where do your customers go to validate information about you? Page 17
2. Emerging Reporting Standards Page 18
Sustainability reporting standards and frameworks Many standards are emerging, driving the need for credible reporting, and facilitating the preparation of this information most of which focus on reporting information that is material to the stakeholders, including investors. Standard Sustainability Accounting Standards Board (SASB) International Integrated Reporting Council (IIRC) Global Reporting Initiative (GRI) guidelines CDP (formerly Carbon Disclosure Project) Other standards/frameworks Description Sector- and industry-specific sustainability disclosure standards for reporting non-financial information, which may be included in mandatory US filings to the SEC A reporting standard designed to demonstrate the linkages between an organization s strategy, governance and financial performance and the social, environmental and economic context within which it operates Global reporting standard designed to provide organizations guidance on reporting non-financial information to a broad group of stakeholders Investor and customer requests drive reporting on climate, water, supply chain and forest Accountability AA1000, International Standards Organization 26000, industry-specific standards Page 19
Sustainability reporting standards and frameworks Key differences: geography, stakeholders, scope Stakeholders Legend: Global Reporting Initiative (GRI) Sustainability Accounting Standards Board (SASB) International Integrated Reporting Council (IIRC) CDP (formerly Carbon Disclosure Project) Page 20
Materiality is the common thread among reporting frameworks An effective materiality assessment provides a structured framework to identify the most relevant aspects balancing stakeholder concerns and business value drivers. Sustainability frameworks are converging on materiality: Framework SASB GRI G4 IIRC Definition SASB adheres to the US Supreme Court definition of materiality, defined as presented a substantial likelihood that the disclosure of the omitted fact would have been viewed as having significantly altered the total mix of information made available. Aspects that reflect the organization s significant economic, environmental, or social impacts [in terms of whether they positively or negatively influence the organization s ability to deliver its vision and strategy], and substantially influence the assessments and decisions of stakeholders Aspects that are material to assessing the organization s ability to create value [for the providers of financial capital] in the short, medium, and long term. Page 21
Materiality can drive strategy and reporting Customize to meet your company s needs Example 1: Example 2: Source: Nestle Source: The Coca-Cola Company Page 22
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72 is A. A reasonable lost days number for a manufacturing company B. My age in dog years C. % of global 50 that have a focus on water D. % of S&P 500 companies published a sustainability report in 2013 Page 24
Current reporting trends 72% of S&P 500 companies published a sustainability report in 2013, compared with 20% in 2011 90% of the world s largest 250 companies issued a Corporate Responsibility report, 82% of which refer to the GRI guidelines The number of US companies reporting with GRI Guidelines has doubled in the past 5 years up to 266 reports in total In 2013, approximately 16% of US-based companies published a third-party assured, GRI-based sustainability report, as opposed to 10% in 2011 Source: GRI, Trends in External Assurance of Sustainability Reports: Update on the USA, July 2014 Page 25
3. Achieving Credible Reporting Page 26
Achieving credible data and reporting Key elements Many leading companies follow this sustainability reporting life cycle to produce credible data that truly drives business value. Establishing strong governance Involvement of board Performance-based incentives Defining what is material Process improvement Governance Engaging with stakeholders Consider business strategy, risks and opportunities Determining the appropriate metrics and goals Obtaining assurance Materiality Defining suitable criteria Leveraging reporting frameworks Standardizing data collection Data collection Defining metrics Formalizing processes and controls Obtaining internal and external assurance Improving processes and controls Page 27
Achieving credible data and reporting Common pitfalls Process improvement Obtaining assurance Data collection Governance Materiality Defining metrics Common pitfall Reliance on one individual No documented processes or controls Making commitments without clearly defining how you will measure them Deficiencies in the internal control environment Data errors (omitted data, duplicate data) Misrepresentation of information in report Inaccurate estimation methodologies applied Lack of baselines Use of unexplained jargon (terms that are not well-known, introduced, etc.) Boundaries that are unclear and/or inconsistent with financial reporting Undisclosed uncertainties in data Suggested approach Establish segregation of duties, document processes and controls; establish data retention protocol to house data in secure location Conduct walk-throughs and document data collection processes in process flows and standard operating procedures Follow SMART framework for goal-setting; define and use suitable criteria Leverage internal audit to review control environment Leverage internal audit to conduct review of data accuracy and completeness Conduct assurance readiness to assess reported data to underlying data Follow generally accepted methodologies for estimations Where applicable, measure baseline performance to inform progress over time Use terms that are objective Define reporting boundary Establish and document data uncertainties and basis for uncertainty level Page 28
Achieving credible data and reporting Assurance readiness Process improvement Obtaining assurance Data collection Governance Materiality Defining metrics As you drive toward preparing credible data, consider conducting assurance readiness to understand the level of assurance and completeness in the existing data, as well as potential process and control gaps that are causing material misstatements. Walk-through of data collection process Site visits Tracing information to supporting documents Analytical procedures (e.g., year-overyear fluctuations) Inquiry about the nature of significant judgments and estimates made by management Inquiry about any uncertainties regarding measurements Evaluation of whether assumptions have a reasonable basis Page 29
Achieving credible data and reporting External assurance Assurance can provide the following value: Provide comfort to management Avoid the trust crisis by building reputational capital Prepare for accountability requirements in evolving standards Keep pace with your peers Mitigate risk Obtain higher sustainability ratings or rankings The GRI and the CDP encourage respondents to seek third-party verification or assurance and provide additional recognition to the companies that do. Page 30
Level of assurance expressed Achieving credible data and reporting Assurance levels Process improvement Obtaining assurance Data collection Governance Materiality Defining metrics High Examinations Moderate Reviews No Assurance-readiness assessment Effort/time/cost Page 31
Achieving credible data and reporting Assurance levels Process improvement Obtaining assurance Data collection Governance Materiality Defining metrics Professional standards Consulting standards: AICPA Standards for Consulting Services CS 100 Attestation standards for accounting firms: AICPA AT 101: US country-specific standard (or ISAE3000 in EU) Level of assurance Subject matter (assertions) Assurance-readiness assessment Review Examination Key performance indicators (data) of the company, or services, products and tools Progress against action plans (claims, commitments, goals, objectives, actions, etc.) Reporting procedures (GRI s Discussion on Management Approach, etc.) Content (affirmations, other assertions, etc.) Criteria examples Greenhouse gas protocol Global reporting guidelines (G3, G3.1 or G4 and appropriate sector supplements) Industry standards (e.g., International Council on Mining and Metals) Law and application texts Policies or internal procedures Product or service labels Work products Findings and recommendations report (internal) Assurance report (conclusion in a negative form) plus management letter Assurance report (conclusion as a positive opinion) plus management letter Page 32
Characteristics of a credible report A credible report: Follows an established framework Presents transparent and balanced disclosure Offers context-based reporting Focuses on material topics Aligns with stakeholder expectations and significant impacts by and to the business Shows how goals and commitments significantly influence and drive the strategy and operations of the business Includes content that has been externally assured to build both internal and external confidence and credibility Page 33
4. Trends in measurement Page 34
What s developing in measurement and reporting Outcome vs. input or output measures More expansive social impact measurement Natural Capital Valuation 3BL (triple bottom line) capital allocation and decision making Page 35
Let s talk: sustainability A new point of view for business leaders Visit ey.com/us/sustainability to download the report Sustainability on the go Access our thought leadership anywhere with EY Insights, our new mobile app. Page 36
Continue the conversation Chris Hagler SE Leader, Climate Change and Sustainability ISSP member and certificate holder Atlanta, GA +1 404 817 5799 Chris.hagler@ey.com Page 37
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Sustainability reporting standards SASB sectors and industries SASB is developing sustainability accounting standards for more than 80 industries in 10 sectors. To date, SASB has started/completed work on 50 industries (61% of SICS) No. SASB sector IWG start date Delta series event Public comment period Target public release date 1 Health care November 7, 2012 February 21, 2013 March 1, 2013 July 31, 2013 2 Financials February 1, 2013 April 16, 2013 November 15, 2013 February 25, 2014 3 Technology and communications* May 7, 2013 July 16, 2013 October 2, 2013 March 18, 2014 4 Non renewable resources August 6, 2013 October 11, 2013 January 14, 2014 June 5, 2014 5 Transportation November 5, 2013 January 30, 2014 April 17, 2014 September 4, 2014 6 Services* February 12, 2014 April 24, 2014 July 16, 2014 December 3, 2014 7 Resource transformation* May 6, 2014 July 16, 2014 October 7, 2014 February 25, 2015 8 Consumption II August 5, 2014 October 16, 2014 January 13, 2015 June 1, 2015 Consumption II October 29, 2014 January 16, 2015 April 8, 2015 August 1, 2015 9 Renewable resources and alternative energy February 4, 2015 April 15, 2015 July 7, 2015 November 1, 2015 10 Infrastructure June 10, 2015 August 25, 2015 December 1, 2015 April 1, 2016 Page 39
Sustainability reporting standards Integrated reporting links ESG performance to investor value Integrated reporting demonstrates the linkages between an organization s strategy, governance and financial performance and the social, environmental and economic context within which it operates. -The International Integrated Reporting Committee Past performance Breaking down the silos Environment, health and safety Human resources Integrated Reporting should communicate the capabilities of management to monitor, manage and communicate the full complexity of the value-creation process, and how this contributes to success over time. Integrated Reporting is targeted to help investors, and other stakeholders, understand an organization s: Past performance Current performance Sustainability Public relations Governance and legal Operations Finance Internal audit Future resilience Current performance Future resilience Page 40