Why your next sustainability report is the most important yet
Survive. Explain. Look Forward
by Gus MacFarlane and Sam Rogers,
In the wake of COVID-19, it is clear that stakeholder expectations – and perceptions – of business have shifted immeasurably. In other words, the rules have changed. In this context, it is vital for companies to report effectively how they have been impacted, what the implications are, and how they are addressing them. Below, we examine some of the immediate and longer-term issues that sustainability reporting teams should be considering as they prepare for the next reporting cycle.
The immediate priority for companies (beyond securing the health of their workforces) should be on delivering assurance to stakeholders that they have the financial resilience to come out the other side of the crisis intact. This needs to be reflected in sustainability reporting, even if financial issues typically fall outside of ‘traditional’ ESG boundaries.
In particular, companies need to deliver value-adding insight into their financial resilience. This includes:
- Cashflow and cash holdings – such as how easily you can cover your debt interest and how flexible your costs are
- Debt level, capacity and conditions – including what proportion of your debt is fixed or variable, and relevant covenants that you will need to navigate
- Fixed versus variable costs, and your broader cost base – plus the pros and cons of shuttering / restarting projects versus maintaining them
- Hedging arrangements – including your proportion of hedged production / purchases, not just now but for the future
- Ability to reduce dividends, in the context of the anticipated reaction of your investor base
In a situation like this, such financial indicators become sustainability indicators – whether or not they are included in frameworks such as the GRI Standards or the SASB framework.
Companies will face high levels of scrutiny over their ethical conduct during the pandemic – a period in which the usual rules around corporate responsibility do not apply.
All sectors will be under the spotlight, although scrutiny will be particularly acute for companies that received taxpayer-backed bailouts, or those that benefited from the unique supply / demand dynamics created by the pandemic. And investors will be at the forefront of this trend.
Legal & General Investment Management (LGIM), one of the world’s largest fund managers, has already warned that it plans to take action against businesses that mistreated employees or suppliers during the crisis.
In this context, sustainability reporting provides a valuable platform for organisations to build hard-won (and easily lost) stakeholder trust. The obvious area of focus will be on how your company managed the immediate health and financial impacts. Beyond this, stakeholder focus is likely to settle on broader issues of concern, including:
- Impact distribution: How evenly was the financial impact of the outbreak distributed across your company? For example, what was the impact on C-suite and Board-level salaries and bonuses relative to those of the wider workforce?
- Sustainability strategy: Have you managed to stick to your long-term sustainability strategy and related targets? If any sustainability activities were cut, how were these prioritised – and what are you doing to minimise the impacts on relevant stakeholders?
- Value chain: How resilient were your supply chains – and what measures have you implemented to strengthen future resiliency, given the prospect of a second wave? In addition, did you put in place adequate measures to mitigate the financial and / or health impacts in your wider value chain?
- Society: Did you receive any financial assistance from your host governments – and did you allocate these resources responsibly? Will your tax policies withstand scrutiny in this context? Similarly, what assistance did you offer to host governments and society more broadly?
Finally, it is vital to report what your organisation learned from this crisis and how you are integrating this into your long-term strategic planning.
And then there is the aftermath. Looking beyond the obvious – such as workplace safety, deeper digital integration, new working patterns and consumer lifestyle changes – there are broader, tectonic issues that will define the future of business. It is going to be more vital than ever for companies to communicate a forward-looking vision explaining what scenarios they see ahead, the implications for the business, and what they are doing now to prepare.
For example, ‘resilience’ will be the defining word for the future. Hyper-efficient business models will need to integrate innovative new approaches to system redundancy, while winning and maintaining stakeholder trust will become even more valuable.
Furthermore, massive state intervention to save both large and small companies around the world will have major implications for the boundary between the public and private spheres. This will affect perceptions of the obligations that companies owe to their host societies. And in this environment, simply pointing to your commitment to maximising stakeholder value, while offering PR-friendly CSR initiatives, will look thin.
Likewise, will globalisation continue in its current form? The further souring of Sino-American relations, the global curtailment of travel, as well as increased official emphasis on national economic capabilities and more localised supply chains, suggests not.
Finally, while the pandemic is currently society’s top priority, many sustainability professionals predict that it will ultimately boost the climate change agenda. However, the immediate focus will be on the economic wellbeing of families, businesses and indeed states. The climate change agenda needs to be pursued in a way that supports these efforts. Otherwise, in an era of historically cheap hydrocarbons, the prospects of a ‘green recovery’ appear bleak.
In conclusion, the latest crisis has shown that siloed concepts of ESG and sustainability are too narrow for the situation that business currently finds itself in. Now is the time for more integrated, forward-looking thinking – and reporting.