Why your next sustainability report is the most important yet

In the wake of COVID-19, it is clear that stakeholder expectations – and perceptions – of business have shifted immeasurably. In other words, the rules have changed. In this context, it is vital for companies to report effectively how they have been impacted, what the implications are, and how they are addressing them. Below, we examine some of the immediate and longer-term issues that sustainability reporting teams should be considering as they prepare for the next reporting cycle.

Survive

The immediate priority for companies (beyond securing the health of their workforces) should be on delivering assurance to stakeholders that they have the financial resilience to come out the other side of the crisis intact. This needs to be reflected in sustainability reporting, even if financial issues typically fall outside of ‘traditional’ ESG boundaries.

In particular, companies need to deliver value-adding insight into their financial resilience. This includes:

• Cashflow and cash holdings – such as how easily you can cover your debt interest and how flexible your costs are
• Debt level, capacity and conditions – including what proportion of your debt is fixed or variable, and relevant covenants that you will need to navigate
• Fixed versus variable costs, and your broader cost base – plus the pros and cons of shuttering / restarting projects versus maintaining them
• Hedging arrangements – including your proportion of hedged production / purchases, not just now but for the future
• Ability to reduce dividends, in the context of the anticipated reaction of your investor base

In a situation like this, such financial indicators become sustainability indicators – whether or not they are included in frameworks such as the GRI Standards or the SASB framework.

Explain

Companies will face high levels of scrutiny over their ethical conduct during the pandemic – a period in which the usual rules around corporate responsibility do not apply.

All sectors will be under the spotlight, although scrutiny will be particularly acute for companies that received taxpayer-backed bailouts, or those that benefited from the unique supply / demand dynamics created by the pandemic. And investors will be at the forefront of this trend.

Legal & General Investment Management (LGIM), one of the world’s largest fund managers, has already warned that it plans to take action against businesses that mistreated employees or suppliers during the crisis.

In this context, sustainability reporting provides a valuable platform for organisations to build hard-won (and easily lost) stakeholder trust. The obvious area of focus will be on how your company managed the immediate health and financial impacts. Beyond this, stakeholder focus is likely to settle on broader issues of concern, including:

• Impact distribution: How evenly was the financial impact of the outbreak distributed across your company? For example, what was the impact on C-suite and Board-level salaries and bonuses relative to those of the wider workforce?
• Sustainability strategy: Have you managed to stick to your long-term sustainability strategy and related targets? If any sustainability activities were cut, how were these prioritised – and what are you doing to minimise the impacts on relevant stakeholders?
• Value chain: How resilient were your supply chains – and what measures have you implemented to strengthen future resiliency, given the prospect of a second wave? In addition, did you put in place adequate measures to mitigate the financial and / or health impacts in your wider value chain?
• Society: Did you receive any financial assistance from your host governments – and did you allocate these resources responsibly? Will your tax policies withstand scrutiny in this context? Similarly, what assistance did you offer to host governments and society more broadly?

Finally, it is vital to report what your organisation learned from this crisis and how you are integrating this into your long-term strategic planning.