Organizations around the world are experiencing unprecedented environmental risks and social changes, particularly in the last decade as droughts, heat stress and floods affect the world’s industries, populations and ecosystems. The risks brought about by our climate-driven economy has a significant impact on organizations, as it affects investment decisions, stakeholder behavior interactions and government regulations.
This has led to the belief that proper management of an organization’s energy, natural resources and waste has a substantial effect on improving their sustainability performance, making them more resilient to environmental risks and social change. As a result, corporate social responsibility (CSR) reporting has gained traction in the business industry and has become an essential part of an organization’s operations.
According to RobecoSAM’s 2014 Sustainability Yearbook, CSR reporting is the method a company uses to gather and analyze the data needed to create long-term value and resilience to environmental risks and social change. In other words, CSR reporting provides the basis for businesses to understand their own environmental risks and the new opportunities it presents.
Today, major companies around the world utilize CSR reporting to bring sustainability to the forefront of their business agenda. In fact, the KPMG Survey of Corporate Responsibility Reporting 2013 noted that a majority of reporting companies worldwide include CSR information in their annual financial reports. This suggests that CSR data is increasingly becoming a standard global practice for organizations, solidifying CSR information as an essential tool in the business agenda and ensuring that all stakeholders, including investors and shareholders, are provided with transparency.
The Guardian News reported that stakeholder expectations have driven organizations to raise the bar when it comes to the sustainability data in their annual CSR reports. These reports are an essential tool for shareholders and investors when it comes to considering environmental, social and governance (ESG) factors to analyze and make investment decisions.
Investors and shareholders already realize the direct impact societal and environmental conditions have on their daily supply chain operations and long-term viability. An article by The Economist supported this claim and reiterated that investors have the largest influence on firms, particularly on the disclosure of environmental data such as greenhouse gas (GHG) emissions. The increasing demand from investors and shareholders has pressured organizations to voluntarily disclose environmental data, such as emissions-reduction initiatives and emissions-reduction targets through their annual CSR report.
Financial investors and investment managers understand that managing ESG issues and managing corporate value and reputation go hand-in-hand. Studies also noted the positive relationship between ESG factors and financial performance. Research from the Institutional Shareholder Services Inc. (ISS) showed an apparent increase in the number of environmental and social (E&S) resolutions filed by shareholders of US companies during its 2013 proxy season. The data suggest that shareholder support for E&S resolutions escalated from 18.6% in 2012 to 21.7% in 2013. Another study from GMI Ratings, a global research firm on investment analysis and risk modeling, noted that investors realize that ESG analysis is the primary component in attaining superior investment performance and uncovering opportunities to enhance shareholder value.
CSR Reports Add Value to the Organization
As investors and shareholders increasingly realize how environmental risks put an organization in jeopardy, they are also expecting that companies are transparent when it comes to the risks they face, the financial implications of those risks, and the mitigation efforts of a firm’s environmental risk. When confronted with various environmental risks, organizations turn to CSR reporting to communicate sustainable values to their stakeholders in an effort to secure sustainable economic success.
According to a review by the Network for Business Sustainability (NBS), environmental key performance indicators (KPIs) and audits are critical components of effective environmental management systems (EMS) since they add value to firms by determining the long-term success of a business. ESG factors tend to increase an organization’s sustainability attractiveness in the investment community because they enhance a firm’s investment value, which makes investors, financial analysts and shareholders more receptive in patronizing sustainable businesses.
The KPMG Survey of Corporate Responsibility Reporting 2013 also supported this claim and reported that most Global Fortune 250 (G250) companies submit their CSR report information to satisfy the expectations of their own stakeholders, since sustainability reporting makes firms more attractive to the investment community.
Moreover, CSR reports reinforce an organization’s sustainability leadership and legitimize the firm’s sustainability program. Through voluntary disclosure and public reporting, businesses publicize their environmental activities and show that their practices conform with stakeholder expectations at the same time. This solidifies an organization’s transparency in sustainability data and confirms their credibility on environmental initiatives. Consequently, it enhances a firm’s corporate reputation on sustainability.
World-Renowned Sustainability Indices
As the demand from investors and other stakeholders to disclose ESG information increases, the standardization efforts of an organization’s ESG data have also improved. This is apparent in major economies such as the US and UK, where investors have greater insight into the interaction between corporate governance and operational management. Accordingly, a study by GMI Ratings showed that the use of ESG data and sustainability rankings provide objective benchmarks to evaluate an organization’s CR portfolio. In addition, sustainability rankings equip an organization with an efficient baseline from which they can make the appropriate adjustments required to improve their overall corporate governance, in hopes of ranking in various sustainability indices in the future.
Here are several examples of globally-recognized sustainability indices:
Green Rankings of Newsweek
Newsweek, a popular news magazine, ranks the world’s largest companies annually on corporate sustainability and environmental impact. Newsweek’s Green Rankings deliver a high corporate profile assessment of the environmental impact, management and disclosure of the largest 500 US and 500 global companies. Organizations are scored based on their performance on eight specific indicators. The result of the rankings is based on a comprehensive research process undertaken by Corporate Knights Capital that is supported by a high-level panel of advisors on the Green Rankings advisory council.
Global 100 Index of Corporate Knights Capital
Corporate Knights Capital, an investment advisory and research firm under Corporate Knights, Inc., releases an annual index of the 100 most transparent and corporately sustainable companies around the world called the Global 100 Index. The Global 100 Index has 12 quantitative key performance indicators which they use to correctly rank the companies that have made their short list. The Global 100 Index adheres to a rule-based construction methodology, which makes their KPIs quantitative and clearly defined, and the results objective and replicable.
Dow Jones Sustainability Index
Launched in 1999, the Dow Jones Sustainability Index (DJSI) is the world's first global sustainability benchmark. Together with RobecoSAM and the S&P Dow Jones Indices LLC., the DJSI follows a best-in-class approach, which measures the performance of the world's sustainable companies through a comprehensive assessment of a company's long-term economic, environmental and social criteria in its industry-specific trends. The DJSI prides itself in providing investors with the information they need to discern which companies are worth investing in.
FTSE4Good Index Series
The Financial Times and London Stock Exchange (FTSE) Group established the FTSE4Good Index Series. The FTSE4Good Index Series has sustainability indices, specifically for Europe (FTSE4Good Environmental Leaders Europe 40 Index), and for sustainability ratings of companies around the world (FTSE4Good ESG Ratings). The FTSE4Good was developed to identify companies with leading sustainable business practices. It was designed to be utilized as the basis and benchmark of retail and institutional investment products for organizational stakeholders, such as shareholders and potential investors wanting to gain profit and invest in companies that have the best sustainable business practices.
Climate Performance Leadership Index (CPLI) of CDP
FirstCarbon Solutions' (FCS) partner, CDP, is an international non-profit organization that helps companies and cities disclose, measure and manage vital environmental information. It has its own sustainability ranking called the CDP Climate Performance Leadership Index (CPLI), which examines the carbon reduction activities of the world’s largest corporations. It also aims to provide potential shareholders with the information they need to choose which green companies to invest in. With the CPLI, CDP provides data for investors who want to know more about sustainable programs and practices, and the companies that make use of such practices.
Aiming for the Indices: The Value of Improving Sustainability Programs
In today's climate-driven economy, environmental risks brought about by the changing climate have an undeniable impact on organizations, as they can significantly affect their entire operation. This paradigm shift has prompted organizations to raise the bar in meeting their stakeholder's expectations on sustainability and corporate social responsibility. In fact, an empirical study conducted by The Guardian Professional Network showed that organizations with high sustainability rankings create more value to their shareholders and stakeholders, gaining more competitive advantages as they continuously attract and keep more committed employees and loyal customers.
Another finding from the study showed that in the span of 18 years, highly-ranked sustainable companies have dramatically outperformed those with low sustainability performance in terms of stock market and financial measures. The annual above-market average return for the highly sustainable organizations was 4.8% higher than their competitors. The high-sustainability companies also performed better, as measured by their ROE and ROA. This is further proof that sustainable companies have better chances of improving and increasing their profit margins.
As sustainable companies take action to protect the environment and preserve natural resources, their chances of thriving in the globally competitive market increase. By aiming to be recognized in global sustainability indices and continuing to meet stakeholder’s expectations on their CSR reports, an organization’s credibility and reputation continually increases. Highly sustainable organizations also help preserve the natural resources they depend on, as they contribute to the conservation of the Earth’s land, water and energy through their environmental advocacies and sustainability programs.
FCS’ Sustainability Strategies for Organizations
FCS, a renowned sustainability solutions provider to a wide range of industries, are experts who can advise you on environmental risks and opportunities to help improve your organization's environmental performance and ESG factors. FCS provides sound environmental consulting to various industries and companies to help increase their profitability and ROI by measuring carbon footprints and achieving a sustainable supply chain. FCS helps organizations increase their chances of being included in the indices from managing their carbon intensity and implementing energy management plans, through the execution of in-depth life cycle assessments (LCA) to help reduce energy, waste and resource consumption.
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