Corporate sustainability reporting: the executive disconnect

Canada’s senior executives seem to be getting the message that sustainability issues are important to their businesses. But there’s a major gap between understanding and action, according to a survey released this week.

The study, conducted by PricewaterhouseCoopers LLP (PwC) and the Canadian Financial Executives Research Foundation, reveals that 90% of Canada’s senior financial executives believe their companies should be reporting on environmental and social impacts. However, only half said they have sustainability reporting systems in place, even though most also believe the average investor does not have enough information about the environmental and social performance of Canadian companies.

The survey suggests that most executives understood which sustainability issues were most relevant to achieving their business goals and felt it was important to communicate sustainability performance to senior managers and their boards of directors. But again, more than half admitted they did not have systems and processes in place to measure sustainability performance.

“Several forces may be working together to explain the disconnect,” says PcW partner Mike Harris. “First, a general framework does not exist for measuring and reporting, making comparisons between industries a challenge. Second, many companies have not developed robust data collection systems to make the reporting process efficient and reliable. Third, most finance executives continue to only focus on the mandatory financial disclosures and finally, the cost/benefit of optional sustainability reporting does not provide support for the types of systems and process required to effectively implement it.”

“Until sustainability reporting is mandatory, this is likely to remain the norm,” Harris concluded.

The survey found that larger companies were more likely to link the application of corporate sustainability practices to business goals. And public companies were more like to comply with external reporting standards such as the Global Reporting Initiative and the Greenhouse Gas Protocol.

Companies were also concerned about compiling data in a cost-effective manner that would accommodate a broad spectrum of stakeholders, such as employees, shareholders, customers, institutional investors, regulators and environmental activist groups. The costs associated with sustainability reporting were of particular concern to small- to medium-sized businesses.

The survey results indicate that the vast majority of financial executives believe that regulatory requirements pertaining to sustainability disclosure and reporting will increase in the years to come; nearly three-quarters said they believed that legislation relating to disclosure and reporting of sustainability performance will become more stringent over the next five years.

Nearly 350 senior executives from across Canada participated in the survey.

Ethical Funds maps out action plan for 2009

It looks to be another busy year for the research team at Vancouver-based Ethical Funds, with today’s release of the mutual fund company’s extensive sustainable investment program annual report.

Bob Walker, vice president, sustainability, says Ethical plans to focus on three key issues in 2009. “The first is investor risk in Canada’s oil sands. The second is how companies can assess the full range of their impacts on human rights and ensure that their activities benefit impacted communities. The third will address how investors can help restore integrity to capital markets and the publicly-traded companies that benefit from the ethical functioning of those markets.”

As well as engaging oil sands companies on climate change, Ethical will ask companies in other sectors to work on emissions reduction, including continued dialogue with real estate companies on implementing green building strategies. Oil sands companies will also be asked to address cumulative water use issues and forestry companies will be encouraged to adopt sustainable practices.

On the social side, Ethical will continue to work with companies to encourage the development and implementation of human rights policies and programs when operating in risky countries. The fund company will also work towards eliminating sweatshop conditions and make an effort to ensure companies are not inadvertently supporting the use of child or forced labour.

Respecting indigenous rights is also on the 2009 agenda, particularly in the mining sector, where Ethical will support the adoption of informed consent as the standard for project development.

Corporate governance will be Ethical’s third main focus, with the company asking companies to improve their corporate social responsibility reporting and overall quality of their disclosure. Curbing excessive compensation will remain a priority, with Ethical asking that compensation be linked to positive performance on both the financial and the non-financial side.

“We believe companies that proactively address environmental, social and governance challenges have a long-term competitive advantage over companies that choose to ignore these issues,” notes Walker.

The sustainability report also includes highlights from Ethical’s work in 2008, including encouraging more Canadian companies to participate in the Carbon Disclosure Project, encouraging Canadian banks to adopt and disclose procedures for evaluating climate change-related credit risk in their commercial lending policies and raising awareness of the risks investors face from the scale and pace of development in Alberta’s oil sands.

Private equity firms adopt responsible investment guidelines

The Private Equity Council, a group representing 13 heavy-hitters in the private equity world, has agreed to adopt a set of responsible investment guidelines that they will apply before investing in companies and during ownership.

The guidelines cover environmental, health, safety, labour, governance and social issues and follow a series of talks between council members and a group of the world’s major institutional investors, all under the umbrella of the United Nations-backed Principles for Responsible Investment (PRI).

“Private equity is all about investing for growth and maximizing returns to our investors. To accomplish that today requires considering a range of environmental, governance, human capital, and social issues,” said Private Equity Council president Douglas Lowenstein. “Today’s announcement explicitly and formally affirms PEC members’ commitment to fully integrating these responsible investment guidelines into both our pre-investment and post-investment processes.”

“We signed onto PRI because we believe that encouraging policies and practices that help create a better society for this and future generations is an excellent way to maximize our investment returns,” said Ted Eliopoulous, Interim Chief Investment Officer of the California Public Employees Retirement Systems, which is a limited partner in many PEC members’ funds.

Under the terms of the guidelines, PEC members will consider environmental, public health, safety and social issues associated with target companies when evaluating whether to invest, as well as during the period of ownership. Members will also seek to improve the companies in which they invest for long-term sustainability and to benefit multiple stakeholders on environmental and social governance issues.

Council members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; the Blackstone Group; the Carlyle Group; Hellman & Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake, THL Partners; and TPG Capital (formerly Texas Pacific Group).