While companies may not talk about climate change per se, many are being buffeted by its effects. Similar issues, including deforestation and shrinking biodiversity, are affecting the availability of agricultural products. As a result, companies are increasingly connecting the dots between risk management and corporate sustainability. That, in turn, is making sustainability issues more prominent. Here are six trends, identified by Enrst & Young in collaboration with GreenBiz Group, that are affecting corporate sustainability efforts going into 2014.
The “tone from the top” for sustainability risks. The complexity of corporate sustainability issues, especially when viewed through the lens of risk management, has led companies to understand that sustainability needs to be more integrated throughout the organization. The result has been that the conversation inside companies is becoming more dispersed. How—and how much—companies disclose their sustainability-related risks provides a good barometer of top management’s engagement in these issues. Companies that have a greater level of engagement from the CEO, CFO and the board have much closer alignment between what they voluntarily disclose and what they’re mandated to disclose. C-suite involvement also underlines the growth of corporate sustainability as a strategic differentiator.
The public sector isn’t playing a key role. For several years now, the government’s role in promoting corporate sustainability has been, at best, neutral. But the uncertainty that comes from political stalemate is seen by many companies as detrimental to business planning, risk management, research and development agenda, and corporate sustainability strategy. Luckily, others have stepped in to fill the void.
Nongovernmental organizations (NGOs), for example, have stepped up to prod both companies and governments to take action. Some have pushed for transparency and accountability and implemented “name and shame” campaigns that rank companies on one or more issues. Corporate rankings are highly watched. Some executives also see NGOs serving as an early radar system, identifying issues likely to rise in public (and media) concern.
Stock exchanges are also slowly awakening to sustainability issues and, in some cases, viewing them as material to listed companies. This is on top of the substantial corps of institutional investors now screening investments using some sustainability or corporate responsibility criteria.
Increased risk and proximity of natural resource shortages. Company concern about resource shortages is nothing new, but only recently have companies started connecting the dots to sustainability-related issues. The inability of governments and transnational institutions to effectively broker international agreements to limit global environmental decline has exacerbated this concern. Yet these issues are often left to market forces, which often omit or underprice external costs to the environment and society for the resources’ exploration, extraction and use.
Water is an issue of particular concern. The World Economic Forum (WEF) calls water one of the most tangible and fastest-growing social, political and economic challenges faced today. WEF also rated “failure of climate change adaptation” and “rising greenhouse gas emissions” as among those global risks considered to be the most likely to materialize within a decade.
Corporate risk response isn’t adequate. Companies’ concern of the risks sustainability issues bring to their supply chains, reputation and even their right to operate hasn’t been matched by their appraisals of the costs and benefits of various responses. The growing interconnectedness of issues—what some are calling the “food-energy-water stress nexus”—requires a scenario-based approach that attempts to anticipate key tipping points that could quickly affect all three.
What happens if a tipping point leads to the rapid adoption of carbon pricing or other regulatory responses? Most companies don’t yet have answers to such questions. And by not doing scenario planning, they’re failing to integrate such risks.
Integrated reporting is slow to take hold. The idea of integrated reporting—melding traditional financial reports with key sustainability metrics (IR)—is compelling. But among the significant challenges to its growth is vocabulary. For example, how to bring concepts like “natural capital,” in which environmental impacts are assigned financial costs, to the CFO in a way that aligns with a company’s current understanding of risk and accounting. While it may be a while before IR is mandated by regulation, market forces may provide de facto regulatory pressures.
Investor and shareholder inquires on the rise. Institutional investors, customers, media, industry analysts, communities, regulatory and nonregulatory government bodies (at the local, national and international levels), activist groups and various others are all requesting sustainability data. But each seems to want more or different data than the others. The resulting tsunami has overwhelmed many companies’ ability to cope.
At the top of the list of shareholder proposals are those focusing on companies’ efforts to reduce energy consumption, an acknowledgment that energy efficiency increases competitiveness and also reduces risks associated with volatile energy prices, carbon taxes and other regulatory schemes. Second-highest on the list are proposals addressing greenhouse gas emissions reductions or adoption of quantitative greenhouse gas goals. Climate and energy will likely remain front and center for shareholders. At the institutional level, investors are getting increasingly organized around these topics.
This article contains excerpts from a study, conducted by Ernst & Young in cooperation with GreenBiz Group, summarizing results based primarily on responses from the GreenBiz Intelligence Panel, which consists of executives and thought leaders in the area of corporate environmental strategy and performance. You can view the entire study at www.ey.com/Publication/vwLUAssets/Six_growing_trends_in_corporate_sustainability_2013/$FILE/Six_growing_trends_in_corporate_sustainability_2013.pdf.
