Contents Introduction 2 Purpose of this Guide 6 Why reporting on ESG is important 10 Best Practice Recommendations 14 Appendix: Sustainability Reporting Initiatives 20
01 Introduction Environmental, social and governance (ESG) factors are increasingly outlined by global investors as vital determinants of investment decisions. 2 Communicating Sustainability: Six Recommendations for listed Companies Introduction 3 Communicating Sustainability: Six Recommendations for listed Companies Introduction
Introduction Over the years a large and increasing number of investors around the globe have considered well beyond the traditional financial fundamentals of companies. Many asset managers and asset owners are considering a wide range of sustainability issues on their investment selection & management decisions. According to the World Federation of Exchanges (WFE), the term sustainable investment covers a range of concepts and niche asset classes, from carbon trading and clean-tech investment to the use of environmental, social and governance (ESG) information in portfolio construction and voting policies. Key drivers behind this continuing trend in the global capital markets are the growing political and economic prominence of climate change, market based incentives for the transition to a lower-carbon products, labour standards, human rights & product safety. The main argument for incorporating ESG factors into investment strategies is that these factors have a substantial role to play in creating or eroding shareholder value. Beyond this business case, many investors and other stakeholders also argue that it will result in good corporate citizenship and enlightened self-interest. What is ESG? ESG refers to a set of standards for a company s operations that socially conscious investors use to screen investments. ESG describes three categories of factors that may affect an organisation s performance, and therefore, its value. Environmental consists of resource renewal, and responsible and effective application of resources. Social includes enhancing employee safety, creativity, and overall relationships with the wider public. Finally, Governance is comprised of executive oversight panels, transparency, and general sincerity. Collectively, these three benchmarks for sustainability are known as ESGs..The table below provides examples of factors in each category. Issue Environmental Social Governance Factors Greenhouse gas emissions Water usage, scarcity and quality Energy usage Waste and waste management Air pollutants emitted Climate Change Biodiversity Human rights Health & safety Community and other stakeholder relations Relations with indigenous peoples Labour Standards Corporate Governance Ethics Compliance Anti-corruption 4 Communicating Sustainability: Six Recommendations for listed Companies Introduction 5 Communicating Sustainability: Six Recommendations for listed Companies
02 Purpose of this Guide CSE wishes to publicly demonstrate its commitment to sustainability, while promoting better business practices within the Sri Lankan Capital Market. Moreover, CSE encourages listed companies to measure and publicly report their ESG performance and impacts Rajeeva Bandaranaike, Chief Executive Officer - CSE 6 Communicating Sustainability: Six Recommendations for listed Companies 7 Communicating Sustainability: Six Recommendations for listed Companies
Purpose of this Guide This guide will assist listed companies to address topics related to ESG issues in their capital market communication, as these aspects are among the factors influencing investment decisions today by institutional and retail investors. The guide consolidates the current practices of investors and issuers, and aims to provide guidance. Listed companies are assisted and guided in a structured way on how to approach the topic of sustainability when they incorporate it into their capital market communication. Reading this guide will also encourage listed companies to focus and limit their ESG-related reporting to the content that is really material. This is because investors and analysts are not interested in too detailed or irrelevant information. The guide seeks to navigate the issuer through the complex process of identifying the content that is appropriate and relevant to their capital market communication. Companies should bear in mind that the substance of their disclosures will depend on their industry or sector and on an individual analysis of the materiality of the information to their specific stakeholders. The recommendations are applicable across all capital markets. With its focus on capital market communication, this guide is specifically written with the investors / analysts perspective in mind. It is important to note that the objective of this guide is not to provide a mandatory listing requirement, but rather to provide specific guidance on the information that companies should consider and disclose under ESG issues. 8 Communicating Sustainability: Six Recommendations for listed Companies Purpose of this Guide 9 Communicating Sustainability: Six Recommendations for listed Companies Purpose of this Guide
03 Why reporting on ESG is important ESG indicators may have very strong economic implications, depending on the quality of the way they are managed. 10 Communicating Sustainability: Six Recommendations for listed Companies Why reporting on ESG is important 11 Communicating Sustainability: Six Recommendations for listed Companies Why reporting on ESG is important
Why reporting on ESG is important USD 60 trillion AUM, incorporate ESG considerations into their decision making & ownership practices. 1. Attract Investors seeking Sustainable Investment opportunities. According to findings from the Sustainable Stock Exchanges (SSE) 1, there is now more data available from academic and investor research, which suggest that ESG issues have a material impact on investments. In addition, large institutional investors have started to integrate ESG matters in their financial decision making & investment processes. As of April 2016, the UN PRI 2 signatories include over 1,500 asset managers, owners, & service companies, representing over USD 60 trillion of assets under management, who are committed to incorporate ESG considerations into their decision making & ownership practices. A report by GSIA 3 has found that, assets valuing over USD 21.4 trillion have incorporated ESG concerns into their investment selection and management globally. This represents 30.2 percent of the total assets under management in the regions covered by GSIA. one mandatory reporting initiative or regulation on social environmental matters. Issuing these type regulations assist companies to produce quality sustainability reports. 3. Enhanced Corporate Reputation Integrating ESG information effectively into reporting and capital market communications will certainly enhance the company s reputation and its perception among its stakeholders. Reporting on ESG will allow companies to demonstrate their commitment towards ESG issues while indicating the level of adherence to industry ethical standards and national and international frameworks on corporate sustainability 4. Strengthening financial performance Reporting on ESG will generate financial value for the company by identifying opportunities for cost savings, revenue generation and risk mitigation. Continuous improvements on accountability and fostering collaboration with stakeholders will help companies to improve their image, which in-turn has the potential to positively impact its profitability. 2. Getting ahead of regulatory developments. Regulatory bodies from around the world are uplifting the importance of ESG disclosures to the corporation to strengthen market procedures. This enables such countries to attract new investors that consider sustainability as a key facet of their investment decision making process. A number of leading market regulators have already put in place in-depth frameworks to report sustainability. For an example, 19 of the G20 member states and 9 of 32 national securities commissions on the board of the international organisation of securities commissions (IOSCO) have implemented at least 1. An initiative created by United Nations (UN) in 2009. It works as a partnership among the UN, UN-supported organisations, stock exchanges, investors, companies, regulators and governments around the world. 2. The PRI is an investor initiative in partnership with United Nations Environment Programme (UNEP) Finance Initiative and the UN Global Compact. 3. The Global Sustainable Investment Alliance (GSIA) is an international collaboration of membership-based sustainable investment organisations. 12 Communicating Sustainability: Six Recommendations for listed Companies Why reporting on ESG is important 13 Communicating Sustainability: Six Recommendations for listed Companies Why reporting on ESG is important
04 Best Practice Recommendations The following best practice recommendations for ESG reporting are made to support companies in delivering holistic and integrated capital market communications. The CSE encourages all listed companies to consider sustainability reporting with a special emphasis on the following recommendations. 14 Communicating Sustainability: Six Recommendations for listed Companies Best Practice Recommendations 15 Communicating Sustainability: Six Recommendations for listed Companies Best Practice Recommendations
Best Practice Recommendations 1. Leadership and Drive The board of directors of a company can play a leading role by demonstrating the commitment to high quality ESG reporting. The board may define and control key topics and key performance indicators (KPIs) that reflect the company s economic, environmental, social and governance impacts. This means that the senior management needs to set the sustainability agenda and ensure that line organisations understand and embrace the goals that have been set and the targets that have been agreed. Therefore, it is recommended for the board of directors to issue a statement that clarifies how the board determined the importance of ESG issues. This statement may include which ESG factors were selected, importance of different stakeholders and how and within what time frame it made these judgments on ESG issues, as they change over time. During the initial stages of report preparation, it is useful to determine the appropriate personnel within a company, who are best placed to be involved in disclosing ESG matters. Members from different departments such as finance, investor relations, communications, legal, sustainability and each business unit can team up on working towards a good quality ESG report. Any team working on ESG reporting should have the access to input from across the functional divisions of a company, as different functions within the company may be engaging with different stakeholders and managing material issues. Also it is important to highlight their responsibilities and capabilities that are relevant for ESG reporting. 2. Consider stakeholder interests ESG reporting caters for the needs of many stakeholders with differing requirements and expectations in terms of topics, as well as the format and granularity of data. Investors, financial institutions, insurers, customers, governments, communities, and non-governmental organisations increasingly want information and action on relevant environmental and social issues. When considering reporting information to investors, it is important to remember that while all investors can benefit from ESG information, different investors can have distinct information needs. Companies can therefore benefit from clarifying themselves on matters such as current top investors, the investors whom the company would desire to have in the future and their interests. Increasingly, long term investors are recognising the importance of ESG factors on the long-term performance of the companies in which they invest. In order to price and manage risk during their analysis of an investment, investors need relevant information and companies need to understand the form that information should take. 3. Identify and prioritize material ESG issues Companies should not feel obliged to report on all indicators, all the time. The degree to which each indicator is relevant will vary greatly among companies, and the materiality of each factor should be determined by the board and management of the company itself. Therefore, companies are only expected to report on ESG indicators which are considered to be materially relevant to their business and strategy. GRI defines Material Aspects as those that reflect the organisation s significant economic, environmental and social impacts; or that substantively influence the assessments and decisions of stakeholders. To determine if an aspect is material, a qualitative analysis, a quantitative assessment and discussion are needed 4. The International Accounting Standards Board (IASB) defines information as material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements 5. For a better understanding of the concept of materiality, companies may refer the guidance provided by the Global Reporting Initiative and the Sustainability Accounting Standards Board. It is also recommended to disclose the process of determination of materiality. 4. Adopt relevant performance indicators Once a company has established which ESG topics to report on, it can begin to disclose specific performance indicators to demonstrate progress. These indicators may be generic, industry-specific or company-specific. It is also recommended that companies use widely accepted indicators developed via a credible national or international process. The GRI, for example, produces the most widely used set of indicators for corporate sustainability reporting with detailed guidance on their application. 4. https://g4.globalreporting.org/how-you-should-report/reporting-principles/principles-for-defining-report-content/materiality/ Pages/default.aspx 5. International Accounting Standards Board (2005) IASB Framework. 16 Communicating Sustainability: Six Recommendations for listed Companies Best Practice Recommendations 17 Communicating Sustainability: Six Recommendations for listed Companies Best Practice Recommendations
Commonly reported ESG aspects and measures ESG Aspect Recommended Measure Environmental Materials - Total weight or volume of materials that are used to produce and package the organi ation s primary products and services Energy Intensity Water Management Direct and Indirect Emissions Waste Management Compliance - Total fuel consumption from non-renewable sources, in joules or multiples - Total fuel consumption from renewable fuel sources, in joules or multiples - Total volume of water consumed - Total volume of water recycled and reused - Direct & Indirect(Scope 1 & Scope 2) GHG Emissions, metric tons of CO2 equivalent - Total weight of hazardous and non-hazardous waste generated and recycled - Total number & monetary value of significant fines. Social Employment - Total number and rate of employee turnover. Training and Education Occupational Health and Safety Workforce Diversity & equal treatment Society - Average hours of training that the organiz ation s employees have undertaken - Total number of work related accidents resulting harm to employees. - Total number of hours lost due to accidents - Total number of fatalities - Percentage of women in workforce - Ratio of average female salary to average male salary - Ratio of highest paid individual s salary to Median salary for all others - Amount of money spent by the company on community building activities 5. Reporting Integrity and Transparency The absence of generally accepted accounting standards for measuring and presenting environmental, social and governance metrics creates challenges for investors in interpreting performance. Companies should describe to investors any standards that they have applied in the preparation of key ESG metrics. This should be supplemented with details of key definitions and assumptions used in the calculation of metrics where an external standard does not exist or has not been applied. To facilitate ease of use by investors, it is preferable that a brief basis of preparation explanation or document is made available either within the company s report itself or on its website. 6. Proper Communication Companies may use various communication channels including integrated reports, standalone sustainability reports, websites or any other publications to disclose relevant, comparable and timely information on ESG matters. The right disclosure channels ensure investors receive relevant, easily-accessible, comparable and timely information. It is advantageous for companies to be familiar with the preferred ESG information sources of its key stakeholders, and to update these with timely and accurate news about their performance. Governance Companies may refer Section 7.10 (Corporate Governance) of Listing Rules Code of Best Practice on Corporate Governance 18 Communicating Sustainability: Six Recommendations for listed Companies Best Practice Recommendations 19 Communicating Sustainability: Six Recommendations for listed Companies Best Practice Recommendations
Appendix: Sustainability Reporting Initiatives 20 Communicating Sustainability: Six Recommendations for listed Companies Appendix: Sustainability Reporting Initiatives 21 Communicating Sustainability: Six Recommendations for listed Companies Appendix: Sustainability Reporting Initiatives
Appendix: Sustainability Recommendations Global Reporting Initiative (GRI) GRI is an international independent organization that helps businesses, governments and other organizations understand and communicate the impact of business on critical sustainability issues such as climate change, human rights, corruption and many others. Thousands of corporate and public sector reporters in over 90 countries use the GRI Guidelines. More than 24,000 reports have been registered in GRI s Sustainability Disclosure Database and 27 countries and regions reference GRI in their policies. GRI s activities are twofold: firstly the provision of sustainability reporting guidelines and secondly, the development of engagement activities, products and partnerships to enhance the value of sustainability reporting for organizations The 4th generation of the guidelines is referred to as G4 and contains two parts. The first part, Reporting Principles and Standard Disclosures, contains criteria to be applied by an organisation in preparing its sustainability report in accordance with the guidelines. It also includes definitions of key terms. The second part, the Implementation Manual, contains explanations of how to apply the reporting principles, how to prepare the information to be disclosed and how to interpret the various concepts in the guidelines. It also includes references to other sources, a glossary and general reporting notes. Organisations should consult the Implementation Manual when preparing a sustainability report. The guidelines contain precise specifications on what to report. www.globalreporting.org Sustainability Accounting Standards Board (SASB) SASB is a non-profit U.S.-based organization, has a mission to create and disseminate accounting standards that reporting issuers can use to disclose material sustainability factors in filings with the Securities and Exchange Commission. Developing provisional standards for more than 80 industries in 10 sectors, SASB researches material factors within industries, convenes industry working groups, and conducts a public comment period to establish accounting metrics, and provides education on recognizing and accounting for material nonfinancial factors. SASB plans to release provisional sustainability standards for all sectors and industries by 2016. The SASB Materiality Map is a visual tool that helps users identify SASB disclosure topics on an industry-byindustry basis and compare the potential materiality of various sustainability factors across different industries and sectors. www.sasb.org UN Global Compact (UNGC) UNGC is a voluntary framework helping businesses align their operations and strategies with ten principles in the areas of human rights, labour, environment and anti-corruption. It comprises more than 13,000 organizations in 80 local networks worldwide. Business participants are expected to publicly report on their progress in an annual Communication on Progress. www.unglobalcompact.org/ International Integrated Reporting Council (IIRC) IIRC is a group of international leaders from the corporate, investment, accounting, securities, regulatory, academic, standard-setting and civil society areas with a mission to create the Integrated Reporting framework. The Framework will provide material information about an organization s strategy, governance, performance and prospects in a concise and comparable format, a fundamental shift in corporate reporting. www.integratedreporting.org 22 Communicating Sustainability: Six Recommendations for listed Companies Appendix: Sustainability Reporting Initiatives 23 Communicating Sustainability: Six Recommendations for listed Companies Appendix: Sustainability Reporting Initiatives