Malta: Reporting On What Matters: Sustainability Reporting

Last Updated: 13 December 2014
Article by Steve Stivala

Before environmental issues even existed, organisations faced limited pressure to publish information on sustainability issues. From 1990 onwards, large corporations began to voluntarily produce reports in which they communicated an overview of the company's environmental impacts to their stakeholders. The first "sustainability" reports mostly focused on environmental performance and paid little attention to the multidimensional concepts of sustainability. Since the 2000's the number of sustainability reports increased, with more countries implementing mandatory requirements for companies to report on such issues. Sustainability reporting is moving towards the concept of "integrated reporting", which integrates sustainability issues with financial information and presented in the form of a holistic report.

Sustainability reporting is the means by which an organisation communicates a comprehensive overview of its economic, environmental and social interactions. Due to an increased interest in such multi-dimensional issues, organisations are now feeling the pressure to look out for sustainability-related issues and report on them. As highlighted in our last issue of Insight, a number of sustainability mega forces are affecting the way organisations need to think ahead to mitigate climate change risks. As these issues become more real, shareholders become more and more concerned about the way the organisation is operating. Shareholders need information to assess how these impacts interact with the organisation and understand how they are being addressed.

Reporting on sustainability issues goes beyond satisfying stakeholders' needs. Whilst traditional reporters of sustainability issues are large companies and organisations which have a significant environmental impact, this does not preclude other firms from pursuing sustainability reporting. Reporting on what matters is known to improve transparency on the risks, opportunities and performance of the company and establish trust with stakeholders. More importantly, firms are encouraged to report on these matters primarily to demonstrate their good practices, and to keep pace with competitors who are also reporting their sustainability issues. Nowadays, organisations of all sizes are reporting on these matters. Otherwise they risk losing out to competitors. Moreover, organisations seek to report on these matters to promote awareness on environmental and social issues amongst their employees and to support their environmental policy. Reporting on sustainability matters can help increase the quality of information transmitted to employees by generating additional information that is not usually communicated through traditional management accounts. Non-financial reporting is often more difficult to report since information is very often qualitative and can be more challenging to measure. However, sustainability reporting is a way of gathering and organising information, and improving management systems. The consideration of sustainability risks and opportunities can help foster innovation, develop new market offerings and ensure sustainable growth in the future and should therefore not be excluded.

Furthermore, companies which already have environmental management systems in place, may also use sustainability reporting to demonstrate that their environmental policy is more than just a vague statement of intent. In fact, organisations which are ISO 140011 or EMAS2 accredited may find it natural to report on such matters because this provides them with an opportunity to demonstrate their success at achieving cost savings and new sales as a result of incorporating environmental management in their strategy of operations. In fact, a study sponsored by DEFRA in the UK (2012) shows that two thirds of the small and medium sized enterprises (SMEs) experienced increased sales since the implementation of their environmental management system. Moreover, certified systems delivered average cost savings of £4,875 per £million turnover over two years for 31 SMEs.

Reporting on what matters to the reader

If a company is reporting on sustainability issues for the first time, then it needs to focus on what is important to the user of the report. Some issues are of value, whilst others are of less immediate interest. Shareholders require information that will enable them to assess immediate impacts and understand how the organisation is addressing them. If the organisation is not addressing them, then this may hint that the organisation is failing to manage sustainability challenges and opportunities for cost savings are not being recognised, leading to a reduction in the organisation's market value. For this reason, it is important to choose the most appropriate and relevant performance indicators that provide value to stakeholders. For sustainability reporting to be meaningful, it needs to be related to the corporate agenda. For example, if a firm is heavily dependent on electricity, then reporting the amount of carbon dioxide emissions saved and released could be an important indicator. Most importantly, producing a glossy publication which paints the organisation as being perfect is not beneficial. For some individuals such reports may be just a 'greenwash', no more than a public relations exercise with the aim of presenting the company as being 'green' and socially responsible. Within this context, there is a plethora of guidelines with the aim of guiding organisations on how to construct an appropriate sustainability report. These include: the Global Reporting Initiative, the United Nations Global Compact, OECD Guidelines for Multinational Enterprises, ISO 26000, the Carbon Disclosure Project and others. A complete sustainability report involves addressing a wide range of concepts and may comprise:

  • Values and mission statements
  • Stakeholder map
  • An explanation about the relationship between the stakeholders and the organisation
  • The organisation's performance against its own values and standards, including its own environmental management system
  • The company's goals and statements.

This idea is therefore an interesting one, and although organisations are not required to report on such matters, as discussed it is beneficial for firms to report on sustainability practices. Within this context, there have been positive developments. A report issued by the United Nations Environment Programme in 2013 shows that the number of mandatory requirements around the globe have increased substantially. In this regard, it is expected that more governments will issue sustainability reporting policies that will oblige organisations to produce such reports. The United Nations3 is already urging national governments to introduce and push sustainability reporting through the development of best practice and regulation. In addition to this, investors are recommending that sustainability disclosures should be incorporated into the listing rules for stock exchanges worldwide.

What about the European Union?

Sustainability reporting in the European Union has grown significantly, but there are still many companies that do not disclose information on such matters. Few EU Member States have developed national policies, and Sustainability Reporting mandatory requirements are still fragmented. In this regard, the European Commission launched the 2011 - 2014 EU Strategy for Corporate Social Responsibility where it provided a formal definition of CSR as "responsibility of enterprises for their impacts on society". It set out the expectation that companies should integrate their social, environmental, ethics, human rights and consumer concerns into their business operations and core strategy4. This policy will phase out in 2014, and in view of this the Commission initiated a stakeholder consultation on the impact of this strategy over the past three years and on the role of sustainability reporting in the future.

Moreover, on 15 April of this year, the European Commission highlighted that Directive 2013/34/ EU on annual financial statements which addresses the disclosure of non-financial information proved to be unclear and ineffective. In this regard, the European Parliament approved the directive on disclosure of non-financial information by large firms. This directive is expected to enter into force as soon as it is adopted by the European Council and published in the EU Official Journal. Companies will therefore be required to disclose information on policies, risks and results with regard to environmental matters, social and employee-related aspects, human rights, anti-corruption and bribery issues and on the diversity in their board of directors. This regulatory development also introduces a 'report or explain' approach whereby companies are required to focus on material issues and explain the omission of irrelevant areas from their report. However, only companies with more than 500 employees will be required to disclose this information in their management report. Therefore, the impact of this legislation is expected to be minimal in the local context. Nevertheless, this does not preclude the emergence of legislation for SMEs in the near future and taking a proactive stance in this regard will put firms in an advantageous position once mandatory requirements are imposed. Furthermore, transparent reporting allows the company to gain competitive advantage, leading to better performance in the long-run.

Sustainability reporting in Malta

Whilst a number of European countries such as the United Kingdom, France, Germany, Denmark and Sweden have introduced policies and guidelines, Malta is still lagging behind. To date, there is no policy which is focused on guiding organisations to provide information on sustainability matters within the local context. Moreover, most of the companies that do report on such issues are multinational corporations whose business cultures are normally dictated by their parent company. Usually, such companies enjoy a competitive edge and seek to implement and report on such issues to enhance their global corporate image. For multinational companies, the implementation of sustainability policies is strongly supported by the parent company and therefore is relatively easier to implement in comparison to locally-born companies. In this respect, multinational companies strive to enhance their competitive edge by ensuring that these aspects are communicated to their local consumers. In turn, this has a positive impact on Maltese businesses as it urges them to adopt such initiatives to enhance their competitive edge vis-à-vis foreign organisations operating in Malta.

Furthermore, in a research paper by Harwood5 it is noted that the key to communicating CSR in Malta is the environmental aspect. Harwood argues that this could be attributed to diverse factors including the fact that organisations reporting on such matters are primarily seen to have an effect on the environment. This could be attributed to the fact that the Maltese society is increasingly becoming aware of environmental issues. This is also increasingly being reflected in public policies.

The role of the Maltese government

The role of Government in mainstreaming sustainability reporting in Malta is multi-faceted. As a regulator, and a role model, Government is duty bound to lead by example and pursue sustainability reporting itself. Public sector organisations should nevertheless be interested in pursuing sustainability reporting to manage nation-wide sustainability risks, improve performance and transparency and enhance the management of public resource.

On the other hand, Government needs to also take on a regulatory role. Along with business associations such as the Malta Chamber of Commerce and Malta Enterprise, it could be pivotal in incentivising firms to take on board sustainability reporting. In this regard, Government could be instrumental by issuing mandatory guidelines in line with pre-established guidelines (such as the GRI) and provide training of sustainability managers on the best reporting practices. Whilst a number of large companies are already including sustainability issues in the form of a separate report or as part of the management accounts, there is still a need to incentivise SMEs to realise the benefits of incorporating these issues into their corporate agenda. In addition, the Government, as an investor itself, can expect certain sustainability aspects to be fulfilled in its investments. In this respect, the Government can be seen as a key player in promoting sustainability reporting. This will not only put Maltese organisations at the forefront of sustainability reporting within the EU, but will also provide internal benefits to the organisation including enhanced public relations with diverse stakeholders as well as a reduction in cost savings.

Concluding Remarks

Sustainability reporting is a key step towards achieving a sustainable economy. The availability of information on sustainability matters can be used by various stakeholders to assess the impact and contribution of a business to the economy, and understand how such issues are being tackled. In addition, a widespread sustainability reporting practice creates an element of transparency within the market, and aids in driving progress towards smart, sustainable and inclusive growth.

Reporting on sustainability matters may however be cumbersome to a typical firm. It involves an element of time and cost for gathering and inputting data, discussions on material impacts, verification of information and the compilation of the report itself. However, the plethora of international guidelines available may provide a way to ease the burden. For example: the GRI guidelines support organisations in preparing reports that solely focus on material topics, without delving into unnecessary detail and eliminating ambiguities on what should be reported. Therefore the use of such guidelines is a way of reducing costs and the burden of sustainability reporting. In doing so, firms undertaking sustainability reporting can rest assured that their business is reporting in an effective and efficient manner whilst reaping the potential benefits of sustainability reporting. In this way, firms can use reporting as a way of driving innovation through their products and services and improve their competitive stance within the market. Furthermore, firms can reap further benefits associated with sustainability reporting, including enhanced transparency, improved processes and systems, demonstration of good practices and most importantly, establish trust with stakeholders thereby reducing reputational risks.

Is your competition reporting on sustainability issues?

The Global Reporting Initiative (GRI) is a non-profit organisation that seeks to promote sustainability reporting and provides a widely accepted sustainability reporting framework aimed for private sector organisations.

  • GRI have produced a reporting framework that sets out the principles and indicators that organisations may use to measure and report on their economic, environmental and social performance. G4 is the latest version of GRI's Sustainability Reporting Guidelines and outline a disclosure framework that organisations can voluntarily, flexibly and incrementally adopt. The flexibility of the G4 guidelines allows organisations to adopt a path for continuous improvement in their sustainability reporting practices.
  • In supporting organisations, G4 places the concept of materiality at the heart of sustainability reporting. This means that the guidelines encourage organisations to solely provide information on critical issues that will enable them achieve the organisation's goals for sustainability and manage environmental and societal impacts.

There are two kinds of disclosures in G4:

  1. General standard disclosures. These set the overall context for the report and provide a description of the organisation and its reporting progress.
  2. Specific standard disclosures. These are divided into two:
  1. Management approach – the organisation may explain how it is managing its material economic, environmental or social impacts and thus provide an overview of its approach on sustainability matters.
  2. Indicators – these allow companies to provide comparable information on their economic, environmental and social impacts and performance. Organisations are required to provide indicators on those aspects which have been identified as material to the organisation.

These could relate to water usage, human rights and health and safety. This information is usually presented in quantitative form.

Footnotes

1 ISO14001 is a framework that an organisation can follow to set up an effective environmental management system.

2 E MAS: the EU Eco-Management and Audit Scheme developed by the European Commission for companies who wish to evaluate, report, and improve on their environmental performance.

3 https://www.globalreporting.org/resourcelibrary/Carrots-and-Sticks.pdf

4 http://europa.eu/rapid/press-release_IP-14-491_en.htm

5 http://www.um.edu.mt/europeanstudies/books/CD_CSP3/pdf/tmsitbc-mharwood.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Steve Stivala
 
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