Corporate social responsibility (CSR) and environmental, social and governance (ESG) concepts are increasingly important for all businesses. Environmental matters are one element of these concepts, but CSR and ESG itself is much broader and can incorporate a wide variety of things including social issues, employment practices, product safety, data security, board diversity and business ethics.
This article is looking only at environmental reporting as a limb of ESG.
Reporting on environmental matters, in the annual accounts, is mandatory for large companies, (medium and large) quoted companies, traded companies, banking companies and certain insurance companies. For most small and medium sized private companies there is no legal obligation to report, but a growing number of these organisations are choosing to voluntarily report on environmental matters as a matter of good corporate governance.
As a company you may choose to voluntarily report because:
- You've made certain commitments on internal policy documents or public announcements – or perhaps your own investors and shareholders require you to publish this information.
- You see it as good practice and good business to do so – it can generate brand goodwill internally with employees and stakeholders and externally with customers and suppliers.
- You are under pressure from your supply chain and customers to demonstrate your credentials in this area - sustainable procurement requirements form a key part of public sector tenders and so will need to be addressed by businesses looking to trade with the public sector.
- You want to establish a benchmark of environmental performance and strive to improve that performance – undertaking the data gathering and analysis will also identify areas for improvement, potential changes that could result in cost savings and help to identify any particular risk areas in terms of future compliance.
When and where do companies report?
Environmental reporting is a developing area however and, for companies that don't have a legal obligation to report (where the scope and format of reporting is dictated by legislation), there are an array of differing frameworks and guidelines that the company could adopt and currently no single "best practice" approach.
We are expecting to see greater clarity on reporting standards coming through, as a number of reporting bodies are working on aligning their frameworks with the recommendations made by the Financial Stability Board's task force on climate-related financial disclosures (TCFD) – a copy of which can be found here.
What do companies report?
A company's environmental report will generally comment on the company's environmental policy, data about the company's current performance and how the environmental policy has been implemented, and then any specific targets or commitments for future improvements.
This might include:
- Energy use and sources of sustainable energy
- Carbon and other greenhouse gas emissions
- Waste generated and how much is recycled vs sent to landfill
- What type of materials it uses in its production and whether these are sustainably sourced
- How much water is consumed
- Whether it has significant air emissions and how this impacts air quality
- Any impact of the business on biodiversity and habitats
- Any risk from hazardous substances used
Defra has published guidelines that can be downloaded here for UK businesses on measuring and reporting environmental impacts and, even if a company is not subject to mandatory reporting, this guidance can still be a good starting point for those companies voluntarily reporting.
What else should the company consider?
If a company is taking its first steps into voluntarily reporting in this area there are a number of other factors that it should consider, alongside the scope and format of any report itself:
It will be critical to the success of any initiatives in this area that there is senior level involvement - ESG criteria should be a standing agenda item at all senior board meetings and there should be top-down implementation of any initiatives.
The company should consider to what extent the report is going to be published - is the report being produced only for review by the board, or for internal distribution or is it intended to be published externally – and consider how the report will be received in this context.
Undertaking this type of review and gathering the environmental data can identify risks and even future opportunities for the business, so companies should be prepared to assess these and the impact they may have on the business.
A company will need to choose whether, in its report, to make a comment on any environmental criteria applied by its suppliers – a business may therefore consider introducing appropriate clauses into its supply agreements, or introducing specific ESG questions and criteria as part of any tendering process, to ensure that those that the company is doing business with are aligned in terms of their ESG objectives.
Companies that voluntarily report typically do so annually, at the same time as publishing their corporate reports and accounts. As reporting is done voluntarily by those companies, the company has flexibility as to whether it produces a stand alone report or includes the information as part of a wider CSR/ESG report that it is producing.
Conclusion
As market practice in this area continues to develop and increasing weight is put on this by businesses, consumers, investors and funders alike, it is important that companies have a good story to tell in terms of their environmental credentials. We expect to see greater levels of voluntary reporting and an increasing emphasis on ESG in the board room in the future.
