Category Archives: Risk Management

SDG Goal 1 End Poverty – Businesses can get involved!

 

no-poverty

Sustainability Within Reach LLC supports the Sustainable Development Goals.

As promised in my last post, this post discusses how businesses can apply Goal 1 of the Sustainable Development Goals (SDG).

Goal 1. End poverty in all its forms everywhere

Here are the targets to achieve the goal.

Targets

1.1 By 2030, eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day

1.2 By 2030, reduce at least by half the proportion of men, women and children of all ages living in poverty in all its dimensions according to national definitions

1.3 Implement nationally appropriate social protection systems and measures for all, including floors, and by 2030 achieve substantial coverage of the poor and the
vulnerable

1.4 By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms of property, inheritance, natural resources, appropriate new technology and financial services, including microfinance

1.5 By 2030, build the resilience of the poor and those in vulnerable situations and reduce their exposure and vulnerability to climate-related extreme events and other economic, social and environmental shocks and disasters

1.a Ensure significant mobilization of resources from a variety of sources, including through enhanced development cooperation, in order to provide adequate and predictable means for developing countries, in particular least developed countries, to implement programmes and policies to end poverty in all its dimensions

1.b Create sound policy frameworks at the national, regional and international levels, based on pro-poor and gender-sensitive development strategies, to support
accelerated investment in poverty eradication actions

These targets are ambitious, and businesses have an important role to play in achieving them! Many businesses are already doing so, and there are many examples.

So your next questions are why and how would my business get involved?

A quote from Ban Ki-Moon, United Nations Secretary General (2008-2016), provides a big picture perspective.

…we must invest in people – in education, skills development, health care. This will help equip people for decent jobs and incomes. It will boost purchasing power. The virtuous cycle between human capital, jobs and income is central to building healthy local markets and a healthy world economy. It is good for people and good for business.

Evaluating your entire value chain (i.e., the full lifecycle of your products and services) can help identify areas that can reduce your negative impacts and improve your business simultaneously. Your business decisions about things such as employee wages, working conditions, product pricing, or raw material sources have impacts on people in poverty.

You can measure your direct impacts on the local economy. What proportion of your spending is on local suppliers at significant locations of operations? To illustrate how UPS affects the local economy, here is an excerpt from its 2015 sustainability report.

In 2015, UPS spent approximately US$943 million in procurement with small and diverse businesses in the United States.

A third-party study on the economic impact of our spending with small businesses, as well as minority-, women-, veteran-owned, and other diverse suppliers in 2015, found that UPS contributed more than US$2.3 billion to the U.S. economy (U.S. GDP) and sustained more than 14,200 jobs in the supply chain and local communities. A breakdown of that US$2.3 billion includes US$941 million in direct economic benefit from suppliers’ operations and activities; US$639 million in indirect impact from the economic benefit and employment supported in the suppliers’ respective supply chains from procuring goods and services; and US$743 million in community impact from the wider economic benefits that arise when the suppliers’ employees and those in their supply chains spend their earnings. Overall, for every million dollars that UPS spends with small and diverse suppliers, 15 jobs are created with those companies in their local communities.

If supply chains are a significant part of your business, evaluating them not only on economic criteria but also on social criteria can be an effective risk management tool. Do you have policies to screen for suppliers that adhere to international and your company-specific human rights and labor standards? You can have a positive influence by demanding adherence to these standards. This is a proactive approach that is much less costly than a reactive one.

How you are investing in the economic well being of your employees has a direct economic impact on poverty alleviation. Lower incomes reduce access to adequate housing, quality education, social networks, and social status among others. Evaluating the wages paid along with how they compare to the minimum wages in the local area puts a focus on a company’s economic impact on workers. For example, Abengoa, a Spanish company that applies technological solutions in the energy and environment sectors, disclosed in its 2015 sustainability report the percentage paid to its workers above the local minimum wage.

abengoa-ec5-2015

 

Another example where companies can assess their impacts on poverty is examining their significant positive and negative indirect economic impacts. In the Global Reporting Initiative (GRI) Sustainability Reporting Standards, there are several examples of indirect economic impacts that illustrate this idea.

  • How does your company change the productivity of organizations, sectors, or the whole economy?
  • Is your company involved in economic development in areas of high poverty?
  • Does your company’s economic impact in a particular location improve or deteriorate social or environmental conditions?
  • What is the availability of your products and services for those on low incomes?

What should you do with your answers to these questions and your evaluation of your business? You can incorporate these issues into your business strategy. You can set targets for improvement. You can publish a sustainability report to measure your progress.

Baxter International is an example of a company that has set targets and reported them its sustainability reports. In its 2015 report, Baxter pledged to increase it spending with diverse suppliers by 50%, from 4% of relevant spending in 2015 to 6% in 2020. These published targets are public commitments that reveal the company’s sustainability strategy and implementation plans.

To be a part of the solution to end poverty, your business can be involved; it can measure its impacts, set targets, and report its progress in a sustainability report.

The next blog will examine how your business can help achieve SDG Goal 2 Zero Hunger.

State of Sustainability Reporting – SEC Investor Advisory Committee

Washington Monument B&W

Washington Monument

It was great to see the “State of Sustainability Reporting” discussed at the SEC Investor Advisory Committee meeting  on July 14, 2016. You can view the discussion on the SEC’s archived webcast (click here for link). The sustainability reporting discussion starts around the 23-minute mark of the video.

This meeting is part of the SEC’s process to seek public comment on modernizing certain business and financial disclosure requirements in Regulation S-K. The SEC Concept Release document, Business and Financial Disclosure Required by Regulation S-K, was issued on April 13, 2016 (click here for link). The purpose of this release is to seek input to determine whether SEC business and financial disclosure requirements still provide important information for investors and how registrants can most effectively present this information.

This discussion is an important step as the SEC considers how sustainability information fits into its disclosure requirements. This meeting focused on information that investors receive and in particular sustainability reports or environmental, social, and governance (ESG) reports. In this video you will find a good overview of the history of SEC sustainability disclosures along with existing sustainability reporting frameworks. There are likely to be more discussions in the future. I highly recommend that you watch the video (click here for link). To give you a preview, I have summarized the discussion below.

Over the last several decades, many perspectives and practices on sustainability reporting have come about. Questions raised at the beginning of the discussion provided context for sustainability reporting and SEC disclosures. Some of the questions included:

  • How do report issuers engage with investors?
  • How are sustainability issues identified and reported?
  • What do investors consider important to decision making?
  • What methods are used by investors and report issuers to determine material issues?
  • What do investors want?
  • What should issuers provide?
  • How much information should be reported and in what format?
  • How much information should asset owners be demanding and using?
  • How much should public companies be reporting?

Although these questions were not intended to be answered in this meeting, they do raise relevant concerns regarding what and how sustainability disclosures will be required.

Presentations

Formal presentations were made by Daniel Goelzer, Senior Counsel and retired partner Baker & McKenzie, original member of PCAOB, Christianna Wood, Chairman of the GRI Board of Directors, Jean Rogers, CEO and Founder SASB, Lisa French, Chief Technical Officer IIRC and Christoph Pereira, Chief Corporate, Securities & Financial Counsel GE.

SEC’s Approach to Sustainability Reporting

Daniel Goelzer provided an excellent, concise overview of the SEC’s traditional approach to sustainability reporting. This approach, established in the 1970s, was in response to rulemaking petitions and litigation against the commission. The actions were sought to get the agency to adopt a comprehensive disclosure scheme for environmental and equal opportunity disclosures. After public proceedings to gather information, the SEC issued a release in 1975. Daniel Goelzer summarized the four conclusions from the release.

  1. Disclosure requirement must be necessary to protect investors or inform their investment decisions
  2. Disclosure requirement should have economic significance to investors
  3. A small fraction of investors in 1975 used or were motivated by corporate social responsibility so there was no basis to require public companies disclosure of corporate social practices
  4. Even without specific requirements ESG disclosures are sometimes necessary to make other disclosures materially complete or accurate

The National Environmental Protection Act (NEPA) had a major impact on what the SEC required in company disclosures; environmental protection became a consideration. The pertinent rules from the 1970s include:

  • In a company’s business description, the company has to disclose the material effects that compliance with environmental protection laws may have on capital expenditures, earnings and competitive position and on estimated expenditures for environmental control facilities.
  • The threshold for disclosing environmental litigation is less than for other types of cases.

Since 1975, the SEC has made required risk factor disclosures more tangible in a company’s Management’s Discussion & Analysis of Financial Condition and Results of Operations (MD&A). Sustainability trends and events have the potential to be material risk factors for a company’s business in terms of financial position (balance sheet) or results of operations (net income). For example, drought and water scarcity could be risk factors for a beverage company that depends on a dependable supply of clean water. After the 1970s, not much changed with regard to sustainability related disclosures for public companies until 2010. The SEC issued an interpretive release on disclosure requirements related to climate change issues. Companies must disclose the impacts of climate change on their business as a result of legislation and regulation, international agreements, and physical impacts. In addition, with the Dodd-Frank Act, Congress directed disclosures that involved conflict minerals, resource extraction payments, and CEO pay ratios.

Outside of the legal requirements, there has been a major increase in corporate voluntary reports that are not filed with the SEC. Stakeholders such as employees, consumers, NGOs and communities are often the intended report users. Across companies and industries, there is considerable variety in the information and formats used in these reports.

Mr. Goelzer had several recommendations for the SEC on how to proceed regarding ESG disclosure. The current focus on investment decision making of the reasonable investor should be maintained. Although the topics that are material to the reasonable investor have changed since 1975, the SEC should retain its definition of materiality (i.e., information significant to the reasonable investor). The SEC needs to take steps to adopt a disclosure framework that takes sustainability information into account. On that note, sustainability reporting should be principles based rather than prescriptive. To reduce its burden, rather than creating its own reporting framework, the SEC should look at existing frameworks available.

Existing Frameworks

Global Reporting Initiative (GRI)

Christianna Wood made a compelling presentation for the use of the GRI standards in SEC disclosures. She presented the history of GRI along with its current standing in the world as the leading sustainability reporting framework. Almost 20 years ago, Ceres (a national coalition of investors, environmental organizations and other public interest groups) created the GRI as the world’s first global sustainability reporting framework. According to a KPMG 2015 study, GRI is used by 74% of the Fortune G250 and by 72% of companies reporting on sustainability issues worldwide that publish stand-alone sustainability reports. In addition, there are thousands of organizations spanning all sectors in over 90 countries using the GRI standards. In response to the Commission’s Concept Release on Business and Financial Disclosure Required by Regulation S-K, the GRI outlined three points that would be in its formal response.

  1. The responsibility to determine material sustainability issues lies with the registrant
  2. GRI supports disclosure of all material issues whether they relate to financial or non-financial information
  3. The use of GRI as an existing robust reporting standard increases the utility and comparability of information

The GRI recommends the GRI Standards be used if the SEC requires companies to file sustainability reports given that 74 percent of the largest global companies use the GRI framework. A potential approach is for companies already preparing comprehensive GRI based reports to include these as an Exhibit in their SEC filings.

Sustainability Accounting Standards Board (SASB)

Jean Rogers provided a thorough presentation on the SASB perspective on disclosing companies’ sustainability matters in SEC filings. SASB, which is an independent 501(c)3 non-profit, issues standards for disclosure of sustainability topics. The purpose of this disclosure is to help public corporations disclose material, decision-useful information to investors in their mandatory filings such as the Forms 10-K or 20-F. Jean Rodgers covered four topics.

  1. Rising investor demand for sustainability information
  2. The current inadequacies of sustainability disclosure
  3. The need for a market standard for the disclosure of material sustainability information 4) SASB’s qualifications to fill this need

International Integrated Reporting Council (IIRC)

Lisa French made an excellent presentation covering the IIRC perspective. The IIRC is a coalition of some 70 organizations around the world representing businesses, investors, policy-makers, the accounting profession and civil society. Its concern is that traditional financial reporting is not providing capital markets the full range of information that could materially affect a company’s value creation in the long run. The IIRC perspective is that the Integrated Reporting Framework is complementary to the existing sustainability and financial reporting frameworks. Rather than issuing standards for performance metrics and methodologies, the IIRC’s focus is on encouraging discussion and connection of a company’s business model, strategy, governance, performance and prospects. The IIRC sees strong alignment between Integrated Reporting and the concepts supporting Management Discussion and Analysis. Lisa French discussed how the three pillar of integrated reporting drive their work. These pillars are

  1. Strategic focus and future orientation,
  2. Simplicity, conciseness and the use of plain language
  3. Connectivity of information Corporate Reporting Experience.

The GE Story

Christoph Pereira presented the GE experience with its Integrated Summary Report and approach to disclosure. The summary report has the CEO letter, summary of 10k, summary of its proxy statement and summarized at information from its sustainability website. Based on feedback to GE, the level of interest in sustainability in the US is focused on the risk factors. GE’s general philosophy for determining whether to disclose something is their consideration of its impact on investors’ ability to underwrite the risks and opportunities of owning GE stock. By including sustainability pages in its Integrated Summary Report, the company sought to answer the following four questions:

  1. How does sustainability relate to its overall business strategy?
  2. What is their governance process for sustainability?
  3. What are sustainability priorities and the process used to pick them?
  4. What is their progress on the stated sustainability priorities?

Their approach on reporting focuses on the process in order to provide flexibility as sustainability reporting evolves over time.

The discussion following the presentations is great as well.

Cities and Sustainability Reporting Revisited

24012774975_78cf3c0727_z-2Chicago ‘L’

Photo by Michael White

I advocate often for cities to prepare sustainability reports. In a previous blog, “GRI Reporting for Cities,”  I made the case for cities to use the GRI G4 Sustainability Reporting Guidelines so cities can manage their progress in achieving environmental, economic, and social goals.

So is there more can I say on this subject? You bet!

The focus on cities as a vehicle to sustainable development keeps gaining traction. City governments face daunting economic, environmental, and social challenges. SustainAbility has published reports that make the case for focusing on cities as a critical approach for improving the Earth’s sustainability. Cities may well be the key to addressing the planet’s many challenges, but they cannot solve them alone. In its report Citystates II The Case for Corporate Leadership in Urban Sustainability, SustainAbility encourages public private sector partnerships. It is a compelling argument.

There is an urgent need, and a huge opportunity, for local and international stakeholders to prioritize the sustainability requirements of cities, and with them, broader sustainable development. Chief among these stakeholders is business, which has both the opportunity and responsibility to take a leadership role (and the chance to reap substantial benefits in the process), and without which cities will be unable to innovate and scale their efforts at nearly the required pace. Though there are many leading examples of cities and companies working together to accelerate progress on urban sustainability, this agenda is only beginning to enter mainstream business thinking, and overall city-business collaboration remains underdeveloped in aggregate and challenging in practice.

The last comment strikes me as quite interesting, “…this agenda is only beginning to enter mainstream business thinking, and overall city-business collaboration remains underdeveloped in aggregate and challenging in practice.”

What can be done to bring this along?

Cities need to publish sustainability reports. By doing so they would be better able to communicate their sustainability strategy, risks, and opportunities. Cities need to be transparent so businesses can decide whether to engage in a private public partnership or to relocate to the city.

Businesses analyze a variety of information to make decisions. A city sustainability report would be an important piece of the analysis. If a business is interested in building a new plant in a city, it may have concerns about the environmental health of the city.  A sustainability report would provide  information about a city’s greenhouse gas emissions, waste management, water quality, effluents, and transportation. The environmental health of a city would have impacts on its workers or its production processes. For example, water availability and quality may be essential to a company’s production processes or delivery of services. In the hospitality industry, water for cleaning, bathing, and cooking is a key part of providing services. City water sources and quality are important to the hospitality industry. Companies may think twice about building a hotel that would require their own large capital investments to insure sufficient water quantity and quality.

In addition, a sustainability report would provide information about the economic health of a city. Information about economic resources generated and disbursed by a city can indicate major economic issues facing a city. For example, a trend of decreasing tax revenues may affect how a city seeks to fund its services. Other sources of revenues such as public private partnerships may be on the rise. The disclosure of successful partnerships may encourage more. Without a sustainability report that discloses relevant economic metrics, a city may miss opportunities.

Cities can also help themselves be more efficient and effective by reporting. For example, reporting energy, water, and fuel usage enables a city to provide benchmarks. Targets can then be established to reduce future usage and costs. Reporting on the quality of services delivered through customer satisfaction feedback can provide information about a city’s effectiveness. Customer satisfaction would be a metric under products and services in the social category of a sustainability report. Cities can identify areas that need improvement. A well-run city can communicate its progress and effectiveness by disclosing relevant metrics in a sustainability report.

How can we convince cities how important sustainability report is to their future? Let me know what you think.

Stranded Assets

Stranded Assets

Stranded Assets

Fossil fuel deposits are being called stranded assets. Bankers and investors consider them a high-risk source of energy. What happens when companies continue to make products that really do not have a future in a reduced fossil fuel economy? If they do not plan, companies themselves will face being stranded without viable alternatives.

Countries around the world are coming to grips with how to slow human caused climate change. Future legislation to control carbon emissions will dramatically affect fossil fuel dependent industries. This will not happen overnight, but companies need to prepare for this change.

Can sustainability reporting help? If used properly, it is a major risk management tool. It has to be more than a PR communication. If a company embeds sustainability goals into its mission and strategy, it can look at the longer-term risks facing its operations. If it is dependent on fossil fuels for raw materials or transportation, this is a major risk. Sustainability planning can assist a company as it seeks to make transitions to alternative raw materials or modes of transportation. Recognizing these risks and planning for them can help a company avoid the stranded asset problem.

For this to work, sustainability reporting needs to be transparent and integral to the operations of the business. Otherwise, this valuable tool does little to benefit the company in the long run. VW may have learned this lesson too late in the game. Their diesel engines are not performing as promised; this may well destroy the company. The strategy of making an engine with high environmental and power performance was a great one, but results were not real. Had they reported the actual performance early on, they would have been better positioned to develop alternative options. Now, they are in severe damage control mode. This will be far more costly than if they had scrapped the diesel engine that was too good to be true.

New Book Available Now!

Sustainability Reporting: Getting Started, 2015 (2nd edition). Gwendolen B. White

Sustainability Reporting: Getting Started, 2015 (2nd edition). Gwendolen B. White

My new book is now available at Business Expert Press! This latest edition presents the rationale for reporting along with a discussion of the major sustainability reporting frameworks such as the Global Reporting Initiative (GRI) G4 Sustainability Reporting Guidelines, the Integrated Reporting Framework, and the Sustainability Accounting Standards Board Standards. You will find detailed examples of the GRI G4 Guidelines from actual company reports such as UPS, Nestle, and Weyerhaeuser, to name a few. These examples show how major companies have applied the GRI guidelines. This book can help get your organization started on its reporting journey.