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Are you an organisation that needs to report on its environmental and social performance? And is this exercise simply another regulatory burden or does it help you succeed in the marketplace?

This post looks at the state of sustainability reporting in the world and what needs to be done to make sure that the value created by sustainable companies is fully recognized by investors and financial markets.

Assessments of corporate sustainability have been around for decades. RobecoSAM, a leading investment specialist, questions over 3,400 companies every year on the economic, environmental and social factors that contribute to their success.

The Dow Jones sustainability indices are based on RobecoSAM’s methodology. So, how well does the sustainable index do when compared to the rest of the market?

Not that well, it turns out. Since 2012 the S&P 500 index is up 85% while the Dow Jones sustainability world index composite is up 30%.

It might not just be about performance, but you could have gained almost 3 times as much by not worrying about sustainability.

Not everyone is interested just in financial returns.

Some organisations such as churches and environmental groups may not want to invest in anything that they see as “bad”. This might include alcohol, tobacco and guns. Some may include or exclude nuclear power depending on how good or bad they see that technology.

Some investors see a future where companies that have sustainable practices will do better than those that don’t. For example, socially responsible retailers might be expected to take market share from those that don’t demonstrate such behaviour.

Other investors might see certain sectors as being more exposed to risks from climate change. For example, they might want to avoid banks that hold stranded coal plants or insurers that have flood risk liabilities.

Still other investors may simply prefer sustainable companies to non-sustainable companies as long as the returns don’t diverge too much from expected market performance.

Sustainability is increasingly mainstream

1300 organisations controlling over $59 trillion in assets have signed up to the United Nations Principles for Sustainable Investment.

Some of the largest companies in the world including Google, Walmart and Apple are taking significant steps to make their operations and supply chains more sustainable.

A crucial element of sustainable development is the use of robust sustainability reporting frameworks.

In the United Kingdom and Europe some companies and many public sector bodies have a mandatory requirement to report on the environmental and social impact of their organisations.

The legislation is designed to not be onerous, using existing systems and data collection where possible and leaving it to the discretion of the companies to choose what they include in their annual reports.

Internationally the number reporting standards is increasing

The Global Reporting Initiative (GRI) is the oldest such standard and tries to bring in a common language so organisations can communicate their economic, environmental and social impact and help stakeholders understand more about them.

The GRI standards are interrelated documents that help companies prepare a sustainability report focused on material topics in a form that follows the reporting principles set out by the GRI.

There are three main problems with existing sustainability reporting.

First, there is confusion over what is meant by sustainability. Does it cover just the carbon impact of an organisation’s operations or should include its supply chain? Should larger organisations be held to a more stringent standard?

Secondly, what are investors looking for? Not all investors are the same and is it possible for one single report to meet the needs of different types of investors?

Thirdly, the way in which metrics are calculated have methodological weaknesses. Given this, is it appropriate to compare companies on the basis of the metrics reported or do investors need to carry out more investigation?

It is worth understanding the types of investors out there in more detail

Socially responsible investors will invest in sustainable companies and exclude “bad actors” from their portfolio on principle, even if they have to accept worse returns.

Investors looking for a social return on their investment will take factors such as the community benefit of projects into account in addition to the financial return on investment.

Investors looking to avoid risk will tilt their portfolio towards companies that they feel will not be disadvantaged by the impact of climate change.

Investors looking to green their portfolio will choose, all else being equal, sustainable companies instead of non-sustainable companies.

Finally, investors looking to profit from a decarbonised economy want to select sustainable companies that they feel will outperform the market.

How should organisations appeal to these different kinds of investors?

Many ESG metrics are based on reputational measures such as feedback questionnaires or social media research. Could organisations use more operational measures that allow for better comparisons?

Most companies focus on the impact of their operations measured in terms of their carbon emissions. It may be better, however, to focus on whether products and services contribute to sustainability. In other words, is their carbon handprint bigger than their carbon footprint.

ESG metrics are almost invariably backward looking. This might mean some companies are excluded because of their history.

For example, Volkswagen is currently under pressure for its role in diesel emissions fraud. The company, however, will have to radically transform itself in order to recover from the scandal and may actually be a good choice from a sustainability point of view in the future.

It is still hard to see any clear links between the sustainability metrics collected by organisations and their success in the marketplace. Are organisations collecting the right information?

There is still much research that needs to be carried out to determine which metrics are material and will link sustainability and organisational performance.

Finally, investors may need to select metrics that are appropriate for the kind of investing philosophy that they follow. A broad approach may be less effective than a narrow one where a set of robust comparable metrics are used to evaluate similar companies.

Make sure the data is good

Effective data collection underpins good sustainability reporting. Wherever possible data needs to be based on measurements rather than assumptions, and should be verified.

To be useful, data needs to cover a long enough time frame so that patterns and trends can be identified.

Where there is missing data, as is often the case, methods used to fill gaps must be transparent and robust.

It may be necessary to normalise data before it can be compared. Once again, the method used to transform the dataset must be robust and transparent.

Finally, updating information once a year may not be sufficient for investors. It may be necessary to provide guidance and enter information sooner, for example using quarterly reporting.

Summary

In summary, as more companies commit to becoming more sustainable there will be a greater need for good quality sustainability reporting.

Investors and financial markets will pay more attention to good reports and should reward companies with greater success in the market.

References

The irreversible momentum of clean energy (sketchnote)How can President-elect Trump make the right policy decisions on clean energy? An article by a sitting President may help.

President Obama is thought to be the first sitting US president to author an article in the high profile peer reviewed journal Science.

In the article, President Obama argues that the global momentum towards taking action on climate change is now irreversible.

The science is clear but opinion is still divided

Carbon dioxide and other greenhouses cause higher surface air temperatures, disrupting weather patterns and acidifying oceans.

Some policy makers and influential stakeholders still do not agree, however, and in the short term that continues to be a problem for a  number of economies, not least the United States.

Climate change policy could slow down or be reversed under a new administration if staffed by climate change skeptics.

This is not a good economic move. Taking action on climate change is good for business.

Cleaner economies benefit from increased:

• Efficiency
• Production
• Innovation

The United States has grown its GDP by 10% since 2008 while emissions from the energy sector have fallen by 9.5%.

Ignoring carbon pollution, on the other hand, could result in economic damages annually of 4% of GDP, or between $340 – $690 billion lost in federal revenue every year.

This is without taking into consideration the impact of catastrophic events or the impact of climate change on economic growth.

Policies that encourage investment and innovation in clean energy are delivering results

President Obama’s administration has encouraged fuel economy, appliance standards and building standards that will cut over 10 billion tons of carbon by 2030.

Major corporations are setting challenging targets. Alcoa and General Motors are working to reduce their energy intensity by 30% and 20% respectively by 2020.

Clean energy creates jobs. 2.2 million Americans now work in clean energy, compared with 1.1 million in the fossil fuel supply chain.

The energy supply system is being transformed

Coal is being replaced by natural gas as the primary method of generation. Low cost gas is displacing coal and, despite problems with methane leakage, is a cleaner generation technology.

Plummeting renewables costs are ramping up the capital inflows into projects supporting wind, rooftop solar and utility scale solar, supported by public policy measures.

Battery technology could help squeeze even more power out of existing and new installations.

Major companies such as Google and Walmart are committing to sourcing 100% of their energy from renewable sources by as soon as 2017.

110 countries making up 75% of global emissions agreed to take action at Paris in 2016

For the first time the United States and China, along with other major economies, agreed to set out ambitious climate policies that would be transparent and accountable.

Delivering on this commitment would increase the changes of limiting temperature increases to under 2 degrees by 50%.

Countries will set national policies and companies will respond by innovating, creating new technologies, jobs and export markets for clean products and services.

Over $1bn has been committed by investors to support clean energy breakthroughs.

Countries that pull out now are going to miss out economically.

What will happen next?

A new policy direction will emerge under a new administration.

Will it be science based, building on the global consensus on the evidence for climate change and the need for action?

Or will it roll back policy and stop funding for clean energy and technology?

We will know more over the next year.

The long term trend, however, for global policy over the next few decades is unlikely to reverse as countries move to creating low carbon economies in order to reap the benefits and avoid the damages from climate change.

Pressure to cut transport energy emissions will only increase

Vehicle emissions make headline news, with Volkswagen pleading guilty to criminal charges in the US and agreeing to pay fines of $4.3 billion (£3.5 billion) as a result of committing vehicle emissions measurement fraud.

The company may end up paying more than $20 billion in the US alone. It still doesn’t know how much it will pay in Europe or elsewhere.

Pressure to cut transport emissions will continue to grow as a result of the Paris agreement.

The need to stop climate change will mean governments continue to use policy, regulation and the tax system to improve air quality and cut emissions, especially in large cities and metropolitan areas.

London’s congestion charge zone has been in place for nearly 14 years, raising over £2.6 billion and reducing traffic volumes by 10%.

The Mayor of Paris, Anne Hidalgo, wants to cut the number of cars in the capital by half.

Six city-wide clean air zones are due to be in force by 2020 in the UK in Birmingham, Leeds, Southampton, Nottingham, Derby and London but could be extended to another 10 cities.

The tax system in the UK already favours low emission vehicles. Tax rates are based on engine size, fuel type and carbon emissions.

The lower the emissions, the lower the rate of income tax paid by the owner or driver.

Fleet managers are in a unique position to cut costs by improving the energy efficiency of their fleet, avoiding both external charges such as taxes and congestion charging and lowering operating costs of their cars, vans and heavy goods vehicles.

Start with an audit

Many organisations still don’t have a good record of the number of vehicles they have and how they are being used.

Some of the information should be in recent ESOS audits although the data may be getting stale a year on from the compliance deadline.

You need to collect data that lets you understand how your transport energy emissions are distributed among:

• company owned or leased cars,
• cars where the drivers receive a cash allowance to operate a car,
• grey fleet cars, where drivers receive mileage payments for using their cars for business use.
• Vans
• Heavy goods vehicles

The data you need will include vehicle details, fuel receipts and mileage logs.

If you don’t have a system to collect this information already, the data is likely to be patchy and require cleansing before being analysed.

Understand how you use transport in your organisation

How do vehicles help you carry out your company business?

Do you have a large number of staff commuting to work in central offices?

Do you have a large number of small deliveries, or a small number of large deliveries?

Do you operate a just-in-time system or a milk round?

Understanding this requires analysing the transport data you have in your organisation and have collected during the audit.

You may see patterns in how mileage is racked up. You may see where the opportunities are in reducing or eliminating mileage.

You may also start to see where the barriers are in your organisation.

Departments may not want you messing about with their journey planning and vehicle purchases.

Individuals may be concerned about how your data will affect their own positions.

In many organizations vehicles are a seen as a symbol of status, with increasing vehicle allowances as people progress upwards in the organization.

The key thing is being able to see where the opportunities might be for changes in fleet composition and usage that could lead to cost savings for the organization.

You will not be able to get leadership buy in without being able to show the cost savings that are available from increasing fleet energy efficiency.

Get the leadership team to set and commit to targets

The leaders in the organization need to see cutting transport emissions and costs as a strategic imperative, setting and committing to targets.

Marks and Spencer, for example, has a goal to improve its own efficiency by 50% by 2020.

It set a challenging target in 2007 of improving fuel efficiency in the UK and Ireland by 35% by 2015.

It nearly got there, reporting a 33% reduction in 2014/15, but where would it be without a target to aim for?

Once you have targets in place, the very next step is to set up a robust monitoring and verification system, including telematics and tracking.

Without an easy to use data collection system that can be updated quickly an energy efficiency campaign can lose momentum and start to slow down.

You need to communicate and keep people informed

Transport policy in companies can be a very sensitive issue.

The top people in the organization often have the biggest and least efficient vehicles.

Asking them to support you in reducing fleet emissions is going to be a personal issue for some of them and the people that report to them.

But cutting transport emissions is good business for the organization and will cut costs in taxes, congestion charges and expenses.

The impact needs to be managed fairly so people can see the need and reasons for changes in policy.

Fleet energy managers need to be good marketers, communicating and informing the people in their organization of how the work they are doing will impact and improve conditions for colleagues, suppliers and customers.

Get on with implementation

Make it easy for people to decide when and how to travel by putting a travel hierarchy decision tree in place. Could you do any of the following:

• Make it easier to work remotely and from home?
• Cut the payments you make that incentivise people to drive instead of sharing cars or using public transport?
• Make pool cars available?
• Improve route planning and schedule trips for when congestion is light as idling is a major source of emissions.
• Encourage audio and video conferencing instead of travelling to meetings?

Major changes such as buying a transport monitoring system or investing in telematics will need you to pull together a business case.

Are you making sure that all the costs of transport are covered in these cases and not just the operating and fuel costs?

A full business case may include a life cycle analysis that means low emission vehicles become a more sustainable option for your business.

As you go forward, buying the right vehicles and using them more efficiently will help you transform your fleet and reduce emissions, eliminating unnecessary mileage, making the most of public transport and conferencing solutions, and cutting costs for your business.

Summary

The pressure to improve transport energy emissions will be a particular challenge for fleet managers who need to think about the carbon impact of their operations in addition to fleet purchases and journey planning.

Improved data and analytics will help make the case, guided by a clear strategy from the leadership team, with fleet managers in a position to make real and lasting cost savings for their organizations.

This image from NASA has been put together from over 400 satellite images and shows the Earth at night.

It’s one of my favourite pictures – because it tells you something about the world that you know instantly is true.

You can’t fake where the lights are. The satellites are taking pictures of where there is light, and you see darkness where there is none.

Why is this significant?

We are surrounded by data. We use this data to make inferences and come to views on what is going on in the world.

We use GDP to figure out which countries are doing well and which ones are doing badly.

We use international trade to talk about which counties have the most economic power.

We talk about human rights, standards of living and happiness indices to demonstrate our support for countries and their policies.

All these things are conclusions and opinions we come to based on what we read and the data we select to support our conclusions.

What I like about this picture is that you can use it to sense check your conclusions.

For example, take this image from Freedom House that shows a map of freedom in the world, from where people are least free to most free.

The parts of the map in green are the most free – and make up most of the world’s main democracies.

You may disagree with the map and its makers, but I think you will see something quite interesting when you compare this map and NASA’s image.

Countries that are free tend to have the lights on.