SUSTAINABILITY STRATEGY AND NON-FINANCIAL REPORTING

Justyna Biernacka

12/06/2019

Why build a sustainability strategy?

A sustainable development strategy is a tool which complements a company’s business strategy with ESG (Environmental, Social, Corporate Governance) issues. Companies which report non-financial information have data on their achievements in these areas. A sustainability strategy will dictate what should be done with such data, how such data should be changed, and how we want to use it in the context of the company’s operations. It should be noted that such a strategy is not a CSR strategy. A sustainability strategy is an undertaking that is deeply embedded in the essence of the company’s activities, it gives an additional perspective that allows us to see our business in the context of global challenges, e.g., climate, economic, and social.

What benefit does it bring to shareholders and stakeholders?

Survival and protection of life on our planet is a benefit in the long run, although it is commonly known that for investors it is the profit which matters the most. Well selected indicators and strategy goals should show shareholders that the management board recognizes and properly addresses development potentials and risks, both in the short- and long-term perspective. This enables the company to make better use of its opportunities and makes it more resilient to threats. Properly selected key performance indicators allow for monitoring of the company’s progress year on year, which facilitates investment decision making.

Is the European Commission planning on regulatory actions that will make it obligatory to implement a sustainability strategy?

The European Commission has an integrated approach to it. Sustainability issues are embedded in the documents which the EC is currently working on. The term sustainability strategy is not present there but the EC in many places refers to a business strategy that should include issues related to, for example, climate. It is clearly visible in the EC guidelines on climate and recommendations of the Task Force on Climate-related Financial Disclosures. These recommendations form guidance on what companies should write about in their financial statements(!) when it comes to the impact of climate change on the corporate strategy, financial plans and business model.

Nonetheless, there is no obligation to create a sustainability strategy.

What should the process of preparing a sustainability strategy at a company look like?

Building such a strategy is basically similar to building a business strategy. We should determine the main objectives, specific targets, the way of their implementation and key metrics, and then implement them and monitor the implementation process. There are many companies that have not yet prepared such a strategy, and if they have, they usually prepared CSR strategies which, in many cases, do not refer to issues that are material to their business activities.

A baseline study should embrace the company’s business strategy and the collected non-financial data. It would be good to conduct materiality assessment which points out non-financial matters which are key to the operations of a given company. It is also worth to investigate competitors’ actions to check what goals they set and with what time frame, what aspects they discuss, what policies they have in place. Additionally, we need to consider the regulatory environment. The global context is a novelty in the regulatory aspects as we all need to engage in actions to combat the climate crisis as well as environmental and social challenges. The activities of organizations such as the UN, EU will thus have an influence on the shape and nature of such a strategy.

How do we know that a sustainability strategy is adjusted to the company's needs and that it is well prepared?

First of all, it is worth to pay particular attention to the above-mentioned materiality assessment. If a company conducts energy-intensive operations but does not report on emissions and does not collect data on energy consumption, yet it boasts about its charitable activities, there is a clear rift between the created image and actual problems such a company may face. We should consider how the company’s business activity impacts and how it is impacted by its environment – communities, natural environment, regional economy. If the impact perspective is not included in the strategy, this means that the strategy is not properly designed. Materiality is specific to each business; we cannot apply a universal pattern here. It is also worth to conduct materiality assessment once every few years to set goals in the strategy in the areas that are material to the business. Second of all, the strategy should set goals to be implemented within a specified timeframe. Some goals are easily defined and measured and can be quick to be implemented. In such cases they could be set within a short-term timeframe – up to two years. Other goals require prior preparation, research, data, cost estimation, introduction of necessary modifications; their implementation depends on a number of factors which must appear in advance; thus, their implementation can be possible within 4-5 years’ perspective. Lastly, targets need to be measurable and that is why we need to prepare relevant metrics and indicators related to their implementation.

In 2015, the United Nations created the Sustainable Development Goals (SDGs) which we should co-create. Can these goals help companies to set their own goals?

The 17 sustainable development goals (SDGs) are global goals. Each of them is complemented with detailed tasks which more specifically describe the ways of implementing these goals. All SDGs fall within aspects related to 3 areas: social, environmental and economic, and they interpermeate internally. For example, goal 11, focused on sustainable cities, intertwines with goals related to energy and water consumption, equality, decent work. It is, of course, impossible for a single company to implement all these goals, thus there is a need to select key goals for each company, depending on the nature of its business activity.

Is the selection of goals a specific commitment? Should it be reported and monitored if the goal has actually been supported?

The sustainable development goals serve the purpose of communication and education. It is an image-related issue and a declaration to enter into community actions that aim to improve the environmental, economic and social situation. If we want to be perceived as a responsible company, we have to select our goals, implement them and communicate about it.

Who should approve a sustainability strategy at a listed company?

The management board is responsible for approving the strategy. The implementation should be conducted through employees and the very approval should take place in line with the rules that are applied at the company.

What if a company has approved a strategy but noticed that in practice it does not meet the nature of the company?

We would have to investigate where the mistake has been made. Maybe the strategy was not prepared with consultation with employees who then boycotted it. Maybe the selected goals were not relevant for the company’s activities or the business environment has changed drastically. In order to avoid at least some mistakes, when drafting our first strategy, it is good to set a preparatory period which will serve to determine more specific goals. For example, if we do not have detailed data on energy consumption and we do not know the cost of implementing energy-efficient solutions, we could first introduce a goal to collect such data and gain knowledge. Only once we establish such a solid foundation will we be able to declare reduction targets in our next strategy. We should remember that we create a sustainable development strategy with a 3 to 5 years’ time horizon and before we move on to create a new strategy, we will verify the implementation of the previous one. This is a good moment for introducing improvements.

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