From the July/August 2011 issue of Treasury & Risk magazine

Spotlighting Sustainability

More companies report environmental and social performance. (PWC's Kathy Nieland)

KneilandMore and more, companies are reporting corporate environmental and social performance in addition to traditional financial results. This year investors filed 68 climate- and energy-related disclosure resolutions. Roughly 12% of the $25 trillion in total U.S. assets is managed under some form of socially responsible investing. Companies are disclosing an unprecedented amount of sustainability data and are emphasizing their corporate responsibility goals and commitments.

T&R: Why promote corporate responsibility efforts?
Nieland: Most companies today make significant investments in corporate responsibility and sustainability efforts (let’s refer to these as CR), such as reducing greenhouse gas (GhG) emissions and making communities better places to live and work. Investors have begun to use such efforts as a proxy for determining whether a company can effectively manage and respond to changes in the marketplace. So when companies track and report their CR efforts, they are speaking in the language that a growing number of investors want to hear.

Investors may be onto something. The more companies focus on CR, the more cost savings and revenue growth they seem to uncover. This is especially true when it comes to developing green products and expanding into new markets. Other companies have found ways to reduce risk and enhance their brand images.

T&R: How does CR help achieve cost savings?
Nieland: When you reduce GhG emissions, you tend to reduce waste. That reduces the cost of developing or delivering a product or service. The most basic way to reduce emissions is to turn down thermostats and turn off lights, cutting energy usage and cost. The next level up might be to reduce the amount of packaging used to ship products, cutting packaging costs and potentially, package weight, which could lower shipping costs. It’s fairly easy to pick off this kind of low-hanging fruit. But real cost savings require analyzing how your business operates and then thinking through the opportunities for change.

T&R: How do CR efforts reduce risk?
Nieland: It depends on the company. By reducing their environmental impact, some companies reduce the need for future remediation, regulation and litigation. That has a savings component, too. For other companies, working to ensure local schools have strong math and science programs can reduce the risk of a future shortage of qualified local engineers.

T&R: Are companies pursuing these benefits on their own?
Nieland: Some companies have embraced this trend. One excellent example was GE’s 2005 launch of the ecomagination product line. At the time, the capital markets didn’t consider it a green company. Four years later, ecomagination product sales reached $18 billion. The Dow Jones Sustainability World Index now recognizes GE as one of the world’s leaders in environmental, social and economic programs.

T&R: How can improving CR tracking and reporting increase enterprise value?
Nieland: The more relevant, reliable and timely your CR information, the better you can squeeze enterprise value out of it. At a minimum, external CR reporting should indicate the sustainability efforts in which the company participates and how it executes on those efforts. The reporting should also show how these efforts impact enterprise value, such as cost savings, risk mitigation, brand enhancement, new product development or employee satisfaction.

T&R: Why should companies go beyond their financial reporting requirements?
Nieland: Companies are already required to disclose non-financial information. In the U.S., the Securities and Exchange Commission requires public companies to report information pertinent to a shareholder’s decision to buy, sell or hold that security. If management believes these efforts are material, SEC guidance indicates these issues should be disclosed.

T&R: What are the challenges in tracking CR efforts?
Nieland: Corporate sustainability efforts today tend to be decentralized. The knowledge of, and records for, these efforts may exist in different jurisdictions and different company functions. In many cases, programs and records are ad hoc. The activity may have originated as a pet project of a local business unit leader or in response to a particular circumstance in a particular location. The information could be on different spreadsheets or exist only as handwritten notes.

T&R: Can data collection be standardized?
Nieland: Reporting practices are still evolving. Many people developed recordkeeping practices as they went. Unfortunately, unique tracking systems do not lend themselves to standardization across a global company or an industry. In fact, corporate attempts to gather more CR data have often resulted in a larger and larger volume of information being tracked on a multitude of platforms. Some software vendors have developed products to ease the burden, but the processes that feed data into these systems and the controls over the reporting are not yet mature.

T&R: Is there a right way to go about tracking?
Nieland: Part of the answer is to aggregate all of the programs into more consistent formats. That generally requires putting programs and processes in place to capture information in a consistent, reliable and timely fashion. Management should also consider the kind of reports it wants and how results will be reported, both internally and externally. They should also consider integrating the review process of CR data with the financial review process.

T&R: Who should have responsibility for tracking and reporting CR efforts?
Nieland: The best results usually occur when the role is entrusted to someone fairly high up in the organization who is comfortable overseeing implementation of the programs, processes, and controls necessary. It could be a chief sustainability officer with responsibilities similar to the CFO’s, but reporting into the operational side of the business or with a direct reporting relationship to the COO or CEO.  I suggest finance have a role in reviewing the data.

T&R: How can management ensure good sustainability data? 
Nieland: The first step is to look at the processes and procedures. Are they effective and complete, or are there gaps and weaknesses? Are the processes, procedures, and controls around the gathering and reporting of that information robust enough to produce credible and consistent information?

T&R: PwC recently called for “investment-grade” sustainability information. Please explain.
Nieland: You want to get the best information you can to make the best business decisions possible. The processes, programs and controls companies have in place to deliver financial information are very mature and robust, as are those to record non-financial operational data. Investors have come to expect that level of investment-grade reporting, but the current systems for reporting sustainability data are far less sophisticated than they could be.

T&R: If sustainability data should be investment-grade, does that mean the data should be audited?
Nieland: Ultimately, yes. An independent audit of CR data gives management a comfort level that experts reviewed the processes, procedures and data, and can also uncover ways to generate the data in a faster, cheaper way. Externally, the market looks to an independent third party to assess and verify the information being reported.

 

Kathy Nieland is PWC's U.S. leader of the sustainable business solution practice, a cross-disciplinary team with expertise in strategy, supply chain, reporting and assurance, and finance.

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