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The 6 Principles of Trust: Responsible Business

The following is an excerpt from our Rewiring for Resilience research report. Access to the full report and webinar recording can be found here.

 

Communicating the full range of value created and the actions taken to manage, sustain and develop these sources of value will illustrate accountability and preparedness for the future.

Why this is important

While some have worried that ESG would become yet another COVID-19 casualty, or at least be put on the backburner, research has shown that companies with high ESG rankings have outperformed relative to peers during the crisis. So much so, that money has continued to flow into ESG investment products unabated.

Some would argue that strong ESG performance can serve as a good indicator for management agility and adaptability, skills that are more crucial than ever. But the COVID crisis has also effectively turned all investor calls into calls on issues such as employee, customer and supply chain safety, and as we emerge from the crisis we might find that even hardened mainstream investors have a newfound appreciation for ESG.

For companies this means that investor focus on ESG is therefore more likely to rise than fall going forward.

In the short term, the ‘E’ in ESG may take a backseat compared to the ‘S’ and ‘G’ as we continue to scrutinise how companies treat their employees in light of the pandemic, and we may also see greater focus on income and racial equality.

There is no doubt that COVID-19 is serving as a highly accelerated filter that separates those that display integrity, responsibility and ingenuity from those that happily sacrifice their employee or other stakeholder interest ahead of profit. Or in fact those that generally seem to have poor governance or a misplaced moral compass.

Part of the Build Back Better solution may be for companies to execute on a genuine and authentic purpose in a way that makes them relevant and useful to society by contributing to a more sustainable world. The Sustainable Development Goals (SDGs) are a natural outlet in this context. But companies will need to mature their approach and focus on where they have the most potential to make a significant and positive impact. They must also ensure disclosures are sufficiently balanced in terms of their actual net impact, positive as well as negative.

How the FTSE 100 is reporting

Overall, the research this year finds that companies are still very much focused on wider value creation and are increasingly responding to new reporting frameworks.

Continuing the trend of the previous year, 87% of companies now express a commitment to wider value creation. However, only 57% have a clear strategy for a sustainability approach that goes beyond loosely defined priority areas. Also, only 35% indicate that their sustainability priority areas were identified through a formal sustainability materiality assessment. While this may be available in a separate sustainability report, being clear about why a company focuses on a set of topics and why they are seen as material areas where the company has the potential to have the most impact, seems a logical starting point. This year has seen increased focus on the SDGs with 60% saying that they contribute to achieving the SDGs (46% in 2018), however only 12% set out the specific underlying SDG targets they have selected and are contributing to.

What’s more, only 13 Chief Executives or Chairmen discuss the SDGs, suggesting that for most companies the Goals are not seen as central to their sustainability and impact philosophy. Barely any companies discuss SDGs in relation to their purpose, adding further to the conclusion that a fair amount of window dressing is going on and certainly leaving room for improvement going forward. In fact, impact is an area companies are reluctant to focus on in general with only just over a quarter discussing some level of impact they are having. The research does show a smaller emerging trend on socio-economic impact, which quantifies the total economic impact of the company. In this regard, eight companies have provided such content. However, it is almost entirely focused on positive impact, which suggests that we are some way away from a sustainability P&L statement.

Finally 67% of companies discuss the Task Force for Climate-related Financial Disclosure (TCFD) reporting framework. However, only 7 companies disclose scenario analysis, which is key for investors to have forward-looking information on the risk and opportunities. See more on this in our 2020 Features report.

Going forward, companies will need to ensure they are sufficiently balanced in their portrayal of impact and contributions, and also to be more transparent in terms of their materiality.

Key requirements:

2018 Corporate Governance Code:

  • Role of the Board is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.
  • The Board should assess the basis on which the company generates and preserves value over the long term and should describe in the Annual Report how opportunities and risks to the future success of the business have been considered and addressed.

Considerations for the board to address:

  • How it has ensured that it is sufficiently informed on interdependencies and trade-offs between capitals
  • How it has satisfied itself that opportunities and risks to the stocks of tangible and intangible capital have been considered and addressed
  • How it has considered the sustainability of the company’s business model and how its governance contributes to the delivery of its strategy

Rewire and resilience considerations to address:

  • A balanced view of value created and value depleted
  • The dependencies such as resources and relationships that are most important for value creation, focusing in particular on intangible factors that are not captured in the financial statements
  • Clear strategy and plan in place to deliver on net zero commitments of the company
  • Risks to crucial intangible factors such as brand, intellectual property, research and development and customer

Key developments:

Greater commitment

  • 87% express a commitment to creating wider value creation (68% in 2018)
  • 27% provide net zero targets
  • 60% discuss the UN SDGs (46% in 2018

But balance is missing

  • 12% indicate underlying SDG targets they have selected and are contributing to
  • 52% have a clear sustainability strategy beyond loosely defined priority areas
  • 35% indicate that sustainability priority areas were identified through a formal materiality assessment (46% in 2018)

 

For further information and to request the report, please get in touch with our Senior Business Developer, Naomi Hawkins.

Black Sun is a stakeholder communications company. We help businesses to communicate authentically how they deliver value to inspire, engage and influence their important stakeholders. We believe that inspiring strategic communications can spark positive change and drive long-term, sustainable performance. We want to work with companies who want to build better businesses through better communications.