DIRECTIONS SUPPLEMENT

MARCH /APRIL 08

TRENDS AND ISSUES IN THE WORLD OF CORPORATE REPORTING

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Why companies should look out for the pitfalls of not joining up carbon management, internal engagement and external communications.

The climate change challenge

Directions Supplement March/April08

So does your business have the internal processes and systems in place to justify your rhetoric and help you avoid the traps that lie waiting for you?

LucieHarrildHeadofCRCommunicationsSalterbaxterlharrild@salterbaxter.com

Welcome to the March/April edition of Directions Supplement.ThisissueisaspecialcollaborationbetweensalterbaxterandErnst&Young.Togetherwetakealookatthechallengesofmakingsureclimatechangecommunicationhasrealsubstance.Wetrytoidentifywhatshouldbegoingoninsidethebusinessandaddresstheexternalandinternalcommunicationsissues.Weexplorethestepsthatneedtobetakeninternallyandhighlighttheneedforrealjoinedupthinkingoncarbonmanagement,externalengagementandinternalcommunications.

Douglas Johnston Director, Corporate Responsibility ServicesErnst & Youngdjohnston2@UK.EY.COM

There is no point in reporting your position on climate change and your activities simply to be seen to be doing the right thing. Companies need to understand the impact of climate change on their business, have clear plans to improve performance, understand progress in performance and be able to provide an accurate picture of this performance to stakeholders.

Ernst & Young and salterbaxter are holding a seminar in May to open the topic of this edition up for debate and discussion.

If you’d like more information please do get in touch. You can email: directions@salterbaxter.com or call us on +44 (0)20 7229 5720

“ Businesses stand a much better chance of delivering against their targets because employees are engaged and empowered.”

Overthepastyearmoreattentionhasbeenpaidtoclimatechangethananyothercorporateresponsibility(CR)issue.AccordingtoarecentMcKinseysurvey70%ofexecutivesviewclimatechangeasanimportantconsiderationformanagingcorporatereputationandbrands.50%confirmitisimportanttoaccountforclimatechangeinareassuchasinvestmentplanningandsupplychainmanagement.Businessesnowrecognisethatnotaddressingtheissuecanhaveadetrimentaleffectonabusiness.

Step1intherightdirection–mostbusinessesnowunderstandthatsomethinghastobedone,theyarecommunicatingtheirstanceexternallyanditappearstheyareincorporatingitintomanagingtheircorporatereputation.

Communicatingexternallyispartoftheprocessintacklingclimatechange,buttherearepitfallsforabusinesssimplystatingitsstance.AccordingtotheMcKinseysurvey,60%ofglobalexecutivesviewclimatechangeasimportanttoconsiderwithinthecompany’soverallstrategy–buthowmanyarereallymakingclimatechangepartoftheoverallbusinessstrategy,howtheyinvestinthefuture,riskassessmentandthelong-termvalueofthebusiness?Howmanyarefallingintothetrapofdisclosingexternallybeforehavinginternalprocessesandcommunicationsinplace?

Morebusinessesaretranslatingawarenessofclimatechangeintoexternalcommunicationscampaigns.CorporateRegister’srecentreportshowsalmostallFT500sustainabilityreporterspublishtheirclimatechangeimpacts,athirdsetouttargetsandonly7%assuretheirdata.Withtheriseofthedreaded‘greenwash’term,wearecertainwewillseemanybusinesses’claimsundercarefulexamination.Disclosuremustmatchtheinternalprocessesabusinesshasinplace.IntegratingCRintoabusinessrequirestheinvolvementandunderstandingofemployees.Tacklingclimatechangeshouldbeapproachedsimilarly.

Ifemployeeshaveaclearunderstandingofwhatclimatechangemeansforthebusiness,thenbusinesseswillbeinabetterpositiontodeliverontheirgoals.TheMcKinseysurveyshowsfewexecutiveshavetakenactiontotackleclimatechange.Over60%ofcompanies,whererespondentsconsidermanagingenvironmentalissuestobeimportant,failtodefineemissiontargetsand15%shownoawarenessofwhetheranytargetsareevenset.

Employeesneedtobearmedwiththisinformationforthebusinesstobeabletodeliverchange.OneoftheFT100companyrepresentativesthatwespokewithunderstoodthisandexplainedhowtheylaunchedanemployeeengagementprogramme

“ Climate disclosures must be accurate and they must clearly reflect both the reasons why an organisation considers it to be important and the principal activities in place to manage performance.”

Stakeholders’tolerancethresholdsareloweringdramaticallyallthetimeandclimatechangedisclosureswhichareseenassimplyPRwillnolongermeettherequirementsfortransparentandopencommunications.Developingandexecutingasuccessfulstrategytoaddresstheissuesarisingfromclimatechangewillbedependentonhavingacleargraspofthecompany’sexposure.Thismeansmakingitaprioritytotakecontrolofthewaysinwhichinformationaboutclimatechangeexposureisidentified,gatheredandreported.

Companiesarebeginningtoexaminethecarbonintensityoftheiractivitiesandseekingtomeasurethis.Whilstthisiscommendable,preparationofacarbonfootprintrarelyconsiderswherekeyrisksandopportunitiespresentedbytheclimateagendaarelikelytobe;howchangestopoliciesorconsumersentimentmayimpactonacompany’sabilitytodobusiness;andhowtomaximisethebenefitsofprojectstoreducecarbonintensity.

Todateemphasishasbeenlessontheaccuracyandconsistencyofcarbonbaselinedataandmoreonsimplydisclosing.Limitedinvestmentinthecontrolsneededtoprovideconfidenceincarbondatameansthatthequalityofthisinformationvariesfromreasonablewithinasmallhandfulofcompaniestopoor.

Ifthisisakeybusinessissue–asmanystateintheirpublicreporting,thequalityofdataneedstoincreasesignificantlybeforeitcanbeusedtosupportbusinessdecisionmaking.

Ifdisclosingdetailsofclimateperformanceandkeyprogrammesistodelivervaluetobusiness,companiesneedtodevelopmuchgreaterconfidenceintheclarityandintegrityoftheircarbondata.Putbluntly,thequestionhastobe:

Why disclose something if you’re not sure you can believe in it yourself?

Methodologiestoestimateandreportdataoftensetoutahierarchyofmeasurementoptionswhichvaryincomplexityandaccuracy.Manyfirsttimecarbonbaselinesusealowestcommondenominatorapproachtogenerateanumber.Thefirststepforanyorganisationhastobetoexaminethemethodsusedforgeneratingdataforitsmostsignificantsourcesofemissions.Majoremissionsourcesarelikelytobewherethereisgreatestexposuretorisksfromtheclimateagendaandwheretherearelikelytobethegreatestopportunitiesforimprovement.Buildingconfidenceinthedatafromthesesourcescanthenallowgreaterconfidencewhenmakingdecisionsaboutinvestments,regulatorydialogueandriskmanagementcontrols.

“ With the rise of the dreaded ‘greenwash’ term once again, we are certain we will see many business’ claims under careful examination. Disclosure must match the internal processes a business has in place. ”

simultaneouslywiththeexternallaunchoftheirclimatestrategy.Themainaimwastoempowertheirmostimportantstakeholdergroup–theirownemployees.Feedbackwasencouragedanditgenerateda95%positiveresponserate.Suggestionsandcommentswerethenintegratedintothestrategyandobjectives.Anotherpersonstatedreducingresourceusewasimperativetothebusiness.Raisingawarenessofenergyefficiencyamongstemployees,forexample,wouldempowerthemwithknowledgeandenhancetheservicetocustomers.Becauseofthesecommunicationinitiativesthesebusinessesstandabetterchanceofdeliveringagainsttargets.

Employees,asmembersofthepublic,areinundatedwithinformation.Businessesareabletohelpbringclaritytothecurrentdebatebyimprovingtheirunderstandingoftheimpactofclimatechange.FollowingarecentChannel4programme,onebusinessfoundfromstafffeedbackthat5%ofitsemployeeswerestillquestioningwhetherclimatechangewasanissue.‘MovingConsumersfromGreenInteresttoGreenAction,’astudyconductedbyInsightResearchGroup,foundconsumerswerewillingtodomoreiftheyunderstoodhow‘green’actionscouldhelptheenvironmentandbenefitthempersonally.

AroundathirdofrespondentstotheMcKinseysurveysaidtheircompaniesplacemoreemphasisonclimatechangethananyotherissue.Unfortunately,itseemsthatmanyarenoteffectivelyengagingwiththeiremployees.Forexample,onepersonexplainedtousthatinternalcommunicationsonCRissueswereessentialtocarryingthroughtheirbusinessstrategy–buttheydidnothaveanythinginplaceforclimatechange.Althoughdisclosingexternally,theyhadnotyetformalisedtheirinternalapproach.Sobusinessesneedtoapplyajoinedupapproachtotacklingclimatechangeandrealisetheimportanceofemployeeunderstanding.

Salterbaxtersuggestinternalcommunicationsshouldbeastepaheadofanyexternaldisclosure.Onthepositive,wenowseemoreofourclientsappreciatingtheimportanceofavoidingthepitfallofaddressingclimatechangethroughexternalcommunicationsalone.Oneofthepeoplewespokewithhadfoundvalueintheuseofinteractivityontheirintranet.Ourresearchalsoshowed6ofthe30FT100peoplewespokewithwerereluctanttodiscussanyinternalprocessesorcommunicationstheymayhavehadinplace.Butifyouareengagingwithyouremployeestotakeyourstrategyforward,beproudofit–it’smorethanjustonestepforwardtowardsmeetingthosecarbontargets!

Thisisnotjustaone-offexercise.Climatedatawillbeaffectedbymanythings:changesinthebusinesssuchasdisposalsandacquisitions;changesinthemethodsusedforgeneratingthedatasuchastheemissionfactorsandimprovedmethodsforgatheringinputdata;changesinenergysources;andactualactivitiestargetedatimprovingenvironmentalperformance.

It is important that measurement systems allow for tracking changes in the business to enable isolation of the relative contribution of each of these factors to overall carbon data.

Onlysystemswhichcanclearlyexaminetherelativecontributionofvariousfactorstomovementsincarbondatacanbeusedtoclearlydemonstrateimprovementsinperformance.Itisnolongerenoughtopresentabsolutedataanddiscussareductionasanimprovementinperformance.Suchmovementsneedexplanationrelativetoallpossiblefactorstoidentifytheactualimprovementmade.

Thereispressuretobackupacommitmenttotacklingclimatechangewithcleartargetstodemonstrateprogressandtherearecertainquestionsthatorganisationsshouldbeaskingthemselvesbeforedisclosingontargets.Withoutcarefullydesignedmeasurementprocessesallowingbothaggregationatacompanylevelandperformancetrackingof

individualprojects,itisdifficulttoestablishmeaningfultargetsandtomonitorandreportprogressagainstthem.

Carbondisclosureisnowafactoflife.However,it’simportantthatitisnotsimplyseenasa‘tickinbox’orPR.Climatedisclosuresmustbeaccurateandtheymustclearlyreflectboththereasonswhyanorganisationconsidersittobeimportantandtheprincipalactivitiesinplacetomanageperformance.Itisimportantthatmanagementunderstandtheaccuracylevelsandpotentialrisksinthedataandthatreadersunderstandtheconfidencelevelsinthedataandcanthereforeviewthedatainanappropriatelight.‘Ballpark’greenhousegasdatawillprovidereaderswithasenseofscaleoftheissuefortheorganisation,butarenotusefulinmanagingissuesordisclosingprogress.Companiesshouldinvestinmeasurementprocesseswhichsupportaggregationofcompanyleveldataandalsoallowfortrackingofperformanceofindividualprojects.

Theseinvestmentsshouldgivetheconfidencenecessarytomakeproperdecisionsonacompany’sapproachtoclimatechange,buildmeaningfultargets,trackprogressinimprovementactivitiesanddiscloseprogrammestoexternalstakeholderswithconfidence.

“ If disclosing details of climate performance and key programmes is to deliver value to business, companies need to develop much greater confidence in the clarity and integrity of their carbon data.”

The communication steps to take to get up the ladder…

1. As members of the public, employees are inundated with information so businesses have a responsibility to bring clarity to the debate around climate change and help their employees understand what they can do – not only at work, but also at home.

2. If employees have a clear understanding of what climate change means for the business they are in a better position to deliver on their goals.

3. The return of the ‘greenwash’ criticism surrounding climate change means, to be taken seriously, disclosure must match internal processes – internally and externally.

4. There will always be sceptics but robust information and a clear commitment can only help.

…and a few questions your business should ask itself before disclosing targets.

1. Do we have enough certainty in our baseline when setting targets to know we are being realistic with what we can achieve? And should it be absolute or allow flexibility for changes in our business?

2. How much of the ‘low hanging fruit’ have we already realised and what investments will we need to make to achieve these targets?

3. How will we measure progress in our improvement projects, are our current measurement systems sufficiently detailed or will we need to make changes to these?

4. Do we have sufficient detail of existing climate programmes in place across our businesses and do we know the likely impact of these activities on our overall climate performance?

5. Are our targets ambitious enough to demonstrate a real commitment to driving down the carbon intensity of our business?

How to avoid the pitfalls of disclosing on climate change? Salterbaxter and Ernst & Young provide some tips and questions your business should ask itself before communicating externally.

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Contact:

Lucie Harrildlharrild@salterbaxter.comTel:+44(0)2072295720

Pavan Athwalpathwal@salterbaxter.comTel:+44(0)2072295720

202KensingtonChurchStreetLondonW84DP

Tel+44(0)2072295720Fax+44(0)2072295721www.salterbaxter.com

TheDirectionsSupplementssupportourmainDirectionsreportandareproducedeverytwomonths.ThemainDirectionsreportispublishedeachyearandisnowregardedastheUK’smostcomprehensiveanalysisofthetrendsandissuesinCRcommunications.Ifyouwantacopy,callusonthenumberbeloworemaildirections@salterbaxter.com

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