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How to set, measure and report on your sustainability goals

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Grant Thornton LLP Growth through Sustainability seriesOnce the province of idealists, sustainability now sits high on the to-do list of companies, large and small. The switch to sustainable business practices is helping companies reduce expenses, lower taxes, get and keep customers, achieve premium pricing, attract and keep younger staff, and improve their investment profile.

Many of these positive outcomes are reflected in the results of The State of Sustainability at Food and Beverage Companies survey that Grant Thornton LLP conducted in 2014. When asked to identify benefits from sustainability efforts, respondents mentioned increased energy efficiency (65%), source reduction (46%), local green tax incentives (19%) and federal programs (8%).

Moving toward a culture of sustainability
Middle-market companies have distinct advantages over bigger firms in pursuing sustainability goals. “It’s sometimes easier for closely held companies to pursue sustainability initiatives than large corporations,” says Tony Perazzo, Grant Thornton audit partner. “Closely held businesses that don’t have to meet Wall Street or private equity expectations each quarter can take a 20-year view on sustainability without worrying about coming up with metrics right away.”

Perazzo adds that founders of many middle-market companies baked sustainability into their culture and brand simply because they thought it was the right thing to do — it was aligned with their values. But as these companies have matured with sustainability key to their business model, they are better positioned to measure their sustainability efforts and maximize their return.

What is material?

A sustainability program should start with an assessment of what aspects of sustainability are relevant to the company and important to its unique set of stakeholders. Before creating programs, information systems and reporting processes, careful consideration of what is material to the company’s specific sustainability is time well spent. Each company should consider individually what its investors, lenders, customers and employees believe are material sustainability issues for the business. And companies should consider whether and to what extent their sustainability goals ought to include the practices of vendors and other third parties. Then companies should validate their initial list against external sources such as the sustainability annual reports of peer companies and the industry-specific reporting guidelines offered by Global Resources International and the Sustainability Accounting Standards Board. Above all, each company should design goals and programs that fit their company, not someone else’s.

A push from regulation

Few companies welcome additional government reporting and scrutiny. But regulatory requirements for, say, reduced carbon emissions motivate companies to conceive strategies for meeting both the substantive demands (avoiding fines) and reporting needs (including data collection and measurement). The knowledge and techniques gained can be leveraged for other sustainability projects.

Moreover, regulation can offer unexpected opportunities and a competitive advantage for creative companies. Manufacturing Practice Leader Jeff French comments, “Companies that are good at managing regulation ask what other benefits can we gain from doing this? For example, consider the conflict minerals reporting mandated by Dodd-Frank [Wall Street Reform and Consumer Protection Act]. A burden to be sure, but it’s also helped companies gain a lot of transparency about their suppliers and the logistics in their supply chain. The smart firms are the ones taking the knowledge gained and using it to make improvements in their operations.”

Obstacles to sustainability measurement
As companies become more experienced and sophisticated in their sustainability efforts, they will build goals and measurement into their information systems and management dashboards. Partly because of their relative novelty, measuring sustainability efforts can face substantial obstacles. These include:
  • Gaining CFO support — Not surprisingly, financial executives tend to focus on financial reporting; sustainability is not high on their priority list. At the same time, the finance function’s deep knowledge of processes to gather data and report information is often key to successful measurement of sustainability efforts. The CFO’s understanding of the need for process consistency and internal controls adds tremendous value to companies’ sustainability efforts. The finance function can also assist in developing management accounting techniques to measure the inputs and outputs of sustainability projects (see the sidebar on using activity-based cost management, or ABC/M, for environmental sustainability).
  • Inadequate or nonexistent information systems — Does the company have the systems and people who can capture the necessary information? “Sustainability data doesn’t come easily out of the accounting system,” says French. “In fact, the data may not even be in any system at all. Sometimes you’ll need to start by tracking the information manually.” Building the IT function for sustainability and ensuring it is adequately resourced may require significant effort by the “sustainability champions” at the firm. 
  • Gathering data from diverse sources — Difficulties in data collection multiply for companies whose data resides in decentralized locations. Various departments, divisions, subsidiaries, vendors and others may be incorporated into sustainability reporting depending on the desired (or required) reporting boundary. Often the different IT systems are not under common control, so the cooperation amongst many parties will need to be enlisted for accurate and timely reporting.
Sustainability reporting regimes
Global Reporting Initiative: Well-established international framework used by thousands of companies to communicate with all stakeholders
Sustainability Accounting Standards Board: U.S.-based regime aimed at investors and conceived within the context of SEC Form 10-K and its MD&A
International Integrated Reporting Council: Published integrated reporting framework for reporting about value creation to investors
Carbon Disclosure Project: Supports a variety of programs for company reporting of greenhouse gas (GHG) emissions
ISO 14000, 26000: Standards for, respectively, environmental management and social responsibility
Dow Jones Sustainability Indexes: Family of indexes evaluating economic, environmental and social performance
FTSE4Good: Indexes for several stock bourses based on CSR criteria
AccountAbility: AA1000 Standards, including those for assurance

The nuts and bolts of sustainability reporting
Sustainability reporting is both internal and external:
  • Internal reporting centers on ROI from cost-cutting projects, primarily communicated to the board and management. As the company becomes more sophisticated in its sustainability program, executives will start thinking how its efforts can affect revenue, building sustainability into the company’s overall cost structure. Given the importance placed on sustainability programs by many employees, it’s important to keep staff informed of progress.
  • External reporting entails communicating the company’s sustainability efforts to customers, governments, nongovernmental organizations, job candidates, etc. External reporting has a dual role: It publicly promotes the company’s efforts and quantifies the progress about a specific initiative (i.e., reducing its carbon footprint) to their shareholders.
External reporting requirements
U.S. regulatory developments in sustainability reflect the trend toward more corporate social responsibility (CSR) disclosure, such as the conflict minerals reporting mandated by Dodd-Frank.

Nevertheless, U.S. companies have relatively few sustainability reporting requirements. The California Transparency in Supply Chains Act requirements for website reporting on labor practices is a notable exception. The relative scarcity of legal/regulatory reporting requirements in the United States is especially true when compared with those in Europe, where the EU will soon require disclosures — including information on environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues — for all companies with over 500 employees in any of its 28 member countries. The rule applies to companies listed on EU stock exchanges, so any U.S. company traded on these European bourses will need to meet these requirements as well.

Other nonregulatory, but important, external reporting demands include those related to investor interest (e.g., Bloomberg and Dow Jones), specific subject matters (e.g., the Carbon Disclosures Project) and customers that require reporting.

Activity-based costing management
ABC/M is a cost accounting technique based on the principle that it is activities performed in creating products or services that generate costs, rather than the products and services themselves. ABC/M provides information on the rate at which activities consume resources and why resources are being used; it provides a link between resources consumed and the organization’s outputs. “ABC/M helps you to identify overhead and hidden costs, which are difficult to attribute outside the context of activities,” says Mark Lemon, Grant Thornton manager.

Traditional ABC/M has been successfully modified to evaluate environmental issues, such as polluting emissions, water usage, energy usage and waste. Many organizations already use ABC/M in some form, so extending these models to account for sustainability measures is a relatively simple process. The so-called Consortium for Advanced Management (CAM-I) cross illustrates how costs “flow” through an ABC/M model.
Grant Thornton sustainability reporting: ABC/M chart
Notably, ABC/M can help management identify high GHG emission activities and processes and manage them to reduce emissions through more efficient techniques, greener sources of energy, or buying or selling emission permits. A detailed description of using ABC/M to measure GHG emissions is provided in the paper, sponsored by CAM-I and co-authored by Grant Thornton’s Anthony Pember, senior manager, and Mark Lemon, manager.

Image source: Consortium for Advanced Management – International
Sustainability reporting standards
The current state of sustainability reporting standards for external reporting has been compared to the Wild West. There are several players trying to promote comparability among companies — the Global Reporting Initiative perhaps most notable among them (see the accompanying chart for a list of the various standards). But no single organization has the stature or regulatory authority of a FASB or IASB. The lack of consistency of reported information extends to variations in what companies report from year to year, and across companies within an industry.

“Ultimately, we’re going to be moving to a common platform for reporting, Generally Accepted Sustainability Principles if you will,” says Dexter Manning, Food and Beverage practice leader. “That’s not here yet. But the lack of standards should not be paramount in the decision-making of middle-market managers, and it shouldn’t deter them from pursuing sustainability projects. What’s important is that sustainability is something that consumers are increasingly demanding; that companies continue to move down the sustainability path; and that they effectively communicate their progress to customers.”

Assurance
As sustainability reports spread, the demand for assurance on them grows. Innovative Services Development Managing Partner Dorsey Baskin comments: “A major issue with sustainability reporting is the lack of credibility (both within companies and externally) because the reported information hasn’t been audited. We’ve seen this rob XBRL [eXtensible Business Reporting Language] information of much of its momentum and potential value, and I don’t want to see it happen to sustainability reporting.” In the United States auditors have the AICPA’s Attestation Standards available to guide examinations and reviews of sustainability information and controls over such.

Internal control
The spotlight on the integrity of sustainable reports has been raised with the adoption of COSO Framework 2013. Effective Dec. 15, 2014, the updated framework emphasizes that its scope extends to nonfinancial reporting generally, and sustainability reporting specifically. Principle 8 lists the areas organizations typically consider for fraud potential and specifically mentions nonfinancial reporting, including sustainability reporting. The raised profile of nonfinancial reporting in COSO may spur CFOs to take an enhanced interest in its quality and accuracy.

Integrated reporting
Integrated reporting is a different approach to providing investors with information. It involves reporting on the creation (or destruction) of value, typically focused on certain capitals — intellectual capital, human capital, financial capital, etc. Currently, few middle-market companies are doing integrated reporting. Whether they adopt it will depend on the company’s culture, tone and direction of senior management. It will also be driven by the company’s branding and how “public” it is (i.e., it’s more likely that an admired, publicly traded company with a very well-known brand will consider integrated reporting).

Measure to succeed
Over the past few decades a shift in business culture has occurred — from a sole emphasis on financial returns to stockholders to recognition of a company’s obligations to stakeholders as well. The heightened interest in sustainability at middle-market firms also reflects its many benefits, not merely for ROI but for the firm’s reputation among customers and employees. Embracing sustainability at a deep level requires not only strong execution, but also accurately and effectively measuring performance and communicating results to both internal and external audiences.