Sustainability strategy — no longer just a 'nice to have'

The sustainability arena has changed significantly over the past decade. Sustainability Matters talks to Dr Matthew Bell, EY Oceania Climate Change and Sustainability Leader, about the changing attitudes towards sustainability strategies and what organisations need to be thinking about.

Organisations that once viewed sustainability as a ‘nice to have’ have now recognised the importance and value of embedding it into their strategy. According to Bell, the introduction of the ASX Corporate Governance Principles, which specify disclosures on environmental, social and sustainability risks, reflects these changing attitudes.

Recommendation 7.4 of the ASX Corporate Governance Principles requires “a listed entity [to] disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks”.

The rules came into play this financial year and although not mandatory, Bell believes they will eventually have the same sort of a ripple effect that was seen when the ASX introduced a similar type of disclosure rule on gender diversity a few years ago. Gender equality still has a fair way to go, but Bell says there is no doubt these disclosure requirements did have an impact, particularly when it came to increasing the number of women on boards and in senior leadership roles in Australian listed companies.

“I think in the past sustainability reporting has kind of been the tail that wags the dog,” he said. “We’ve seen organisations putting a lot of effort into a sustainability report and then going back to put things in place to meet these objectives, targets and goals. That has been useful but I’d like to see that change around. I’d like to see strategy thought through and then reporting the outcome of that. And yes, this is a trend that is happening, and more so in the last 12 months than we have ever seen.”

Certainly, carbon-intensive organisations have been targeted as having the most sustainability risk and most likely to be impacted by environmental and social risks. But Bell said: “The reality is, now, all companies need to consider their sustainability context.”

With such political uncertainty surrounding sustainability issues, Australian companies have had to take it on themselves to determine what’s important. “However, we’ve seen a trend in the last 12 months where organisations aren’t fixated on legislation domestically, they are actually thinking more about what legislation our major trading partners have in place or are considering because that might have a more profound impact on their business.

“From most companies' perspective it is kind of irrelevant what we do here in Australia because we are all part of the global supply (or value) chain, so it’s really important to look at what our major trading partners do.

“We are seeing a real evolution in the human rights and social impacts space. Organisations are focusing on where the risks are in their supply chain and, rather than moving away from a supply risk, there is an acceptance that there is risk in every supply chain. Organisations need to work out where those risks are and work with their suppliers to make improvements over time.”

There is also a renewed drive from investors to understand the value of non-financial risks, and increasingly customers and business partners are expecting it too, said Bell. “This is elevating the conversation about sustainability strategy and disclosure of these risks to senior management and the board. Questions being asked include: Are your disclosures appropriate? And if your disclosures aren’t adequate, is that because your strategies aren’t adequate?

“EY works with clients to help them determine their sustainability strategies, disclosures and avoid greenwash. We think about the materiality and the context of their disclosure. Unlike the financial term for materiality, in this context, it is more around what’s the likelihood of an event occurring and how could it impact the organisation, which stakeholders will be impacted and how much do they care.

“It is not so hard to work through this concept of materiality from a greenwash perspective because it is pretty obvious if someone is disclosing something that actually has no material impact on the organisation.

“I’m all for corporate philanthropy and the general concepts of corporate social responsibility, but that’s not really what sustainability is any more. Sustainability is the capacity or the resilience of an organisation to be around for the next 30 years.”

Bell says one of the challenging parts in the process is gaining a clear understanding of what stakeholders think will be important to their organisation going forward. “We work with them to make sure their disclosures are in the right context and that they are balanced.”

Social media also plays an important part in this process. “It has never been so easy for someone to have a voice,” said Bell. “As part of our sustainability reporting work, we carry out social media analytics and sentiment analogy on the company. This can be quite fascinating as it challenges traditional stakeholder engagement processes and can reveal some interesting results.

“From a sustainability lens, what we are saying [to organisations] is, think through what some of the global changes in the future may be and how your business may be affected and are they likely to impact their ability to make returns to shareholders. Then, explain to your stakeholders how you are managing those risks in your company.”

At this stage, non-financial ASX disclosure requirements don’t have the same level of scrutiny as financial disclosures and they are not audited, but Bell believes that the audit element is going to grow over time. “We have built a team here at EY on that assumption,” he said.

“We want to see companies start to position themselves for the longer-term trends so that they are the ‘Google of the future’. There are pockets of great activity but also plenty of ground for growth,” concluded Bell.

Dr Matthew Bell has recently been appointed as EY Oceania Climate Change and Sustainability Leader. He is a partner at EY Australia with more than 10 years’ experience advising on climate change and sustainability. His team provides advice on a wide range of sustainability strategy, climate change, reporting and assurance, carbon, social impact, health, safety and environment opportunities.