Sustainability reporting is the practice of measuring, disclosing, and being accountable for an organization’s environmental, social, and governance (ESG) performance. The main objective of sustainability reporting is to communicate the organization’s commitment to sustainable development and its impact on various stakeholders such as investors, customers, employees, and the broader community. Reporting is a tool that promotes transparency and accountability in issues that traditional financial reporting does not address. These include the interplay between environmental, social, and economic issues, as well as a long-term perspective.
For many organizations, regardless of size, reporting on sustainability is a challenging task. Identifying “material issues (materiality),” which are important to the company and its stakeholders, is one of the most challenging aspects of sustainability reporting. The focus of traditional business reporting is on financial information that impacts decisions regarding investments. On the contrary, sustainability reporting is more multifaceted, taking into account social, environmental, governance risks, and opportunities that impact important stakeholders and may have a direct or indirect impact on financial and economic performance. In order to show both short- and long-term business value, sustainability reporting is increasingly becoming a necessary disclosure for consumers, employees, regulators, investors, and civil society.
Dr. Mumbi Wachira, a panelist and accounting lecturer at Strathmore Business School, pointed out during the discussions at the second edition of RBC‘s Susty Dialogue Series event on sustainability materiality and reporting that sustainability reporting was not an information exercise but instead provides organizations the opportunity to understand what matters to their stakeholders and align organizational thinking with this, since stakeholders possess a significant effect on an organization’s operations and performance.
As part of the RBC Susty Dialogue Series, participants engage together to brainstorm and solve for ideas, solutions, to practical challenges in their day-to-day work. The first part of this next section provides a broad overview on the sustainability reporting approach; and the second part provides tips, ideas, solutions on 5 key materiality and reporting issues for practitioners such as: understanding double materiality, quantifying carbon footprints, achieving transparency in reporting and more.
PART I – SUSTAINABILITY REPORTING APPROACH
Understanding the organizational context
Each organization operates in a unique context, with its own set of services/products, culture, and business objectives. This uniqueness necessitates a tailored approach to sustainability reporting. A one-size-fits-all framework may not accurately reflect the specific challenges and achievements of a particular organization. Understanding the organizational context helps in identifying what is material to the organization in terms of sustainability. Materiality in this sense refers to the issues that are most significant to the organization’s stakeholders and have a direct or indirect impact on the organization’s ability to create and sustain value. By focusing on these material issues, the organization can ensure that its reporting is relevant and valuable.
Industry standards and frameworks
As companies gain clarity on their organizational contexts, it is important to have an understanding of the interplay of internal and external factors that influence their operations. Industry standards and frameworks are invaluable tools for helping companies in achieving this clarity. Companies can benchmark their processes against industry best practices, identify areas for improvement, and strategically position themselves within their sectors by adhering to established norms.. This helps the companies to focus their sustainability efforts on the most significant areas relevant to their industry, ensuring their reporting is both relevant and impactful. For example, sustainability practitioners in the telecommunications industry might consider materiality around energy consumption, electronic waste management, data security, ethics and biases, etc. A company could benchmark its energy efficiency-waste recycling programs, against industry standards, and even international industry standards e.g. for data privacy standards, ensuring that its sustainability efforts are both relevant and competitive. This may also involve understanding the specific regulations and standards set by these industry-specific regulatory bodies that are relevant to the organization’s industry and geography.
The chosen framework should not only comply with these regulations but also facilitate ease in reporting and adherence to the legal requirements while answering very specific questions on materiality to specific stakeholder groups associated with the company. This alignment is crucial to maintaining legitimacy and avoiding legal ramifications. “Globally, the GRI is the world’s leading standardized, systematic, multi-stakeholder reporting framework. The Nairobi Securities Exchange (NSE) reporting guidelines are based on the GRI, as it is designed to be inclusive and encompass all types of organizations and companies,” highlighted by Wendy Boit, from NSE, a panelist at the event.
“Empowering Kenyan businesses, both listed and non-listed, the NSE Disclosure Guideline Manual serves as a compass, guiding SMEs to embark on a structured path towards sustainability reporting.” she said.
Identification of key stakeholders
Identifying and understanding stakeholders is critical in materiality and sustainability reporting because it lays the groundwork for a comprehensive and transparent communication strategy. Customers and investors, as well as employees and local communities, all have diverse interests and perspectives that shape their expectations of a company. Recognizing these divergent points of view becomes critical for businesses seeking to prioritize issues that truly matter to their stakeholders and the larger societal context. Organizations can tailor their materiality assessments to include not only financial considerations but also environmental, social, and governance factors by acknowledging and integrating stakeholders’ perspectives. This nuanced approach fosters a more holistic understanding of material issues, aligning reporting practices with the values and concerns of those who hold a stake in the company’s success. In turn, this contributes to the development of more meaningful and impactful sustainability reports, enhancing trust and accountability within the stakeholder ecosystem.
Conduct materiality assessment
After identifying and understanding the importance of stakeholders, their interests, and perspectives on materiality and sustainability reporting, businesses must systematically assess the significance of various issues. Materiality assessments is an important step in making sure the information reported is relevant and significant is determining materiality and helps in prioritization of issues during the process of sustainability reporting for companies. Companies are able to prioritize the disclosure of information that is most relevant and impactful for stakeholders and the business itself. To conduct these assessments, companies often utilize a combination of qualitative and quantitative methods, engaging with stakeholders through surveys, interviews, and workshops through proactive means and at times through feedback coming from others stakeholder engagement channels to the company. Additionally employing tools available to aid sustainability reporting, such as the Global Reporting Initiative (GRI) standards is useful. In Kenya, the NSE, has developed a tool ESG Disclosures Guidance Manual which provides listed companies with a guide on how they can “collect, analyse, and publicly disclose important ESG information”, which aligns with international reporting standards. Companies not listed on the stock exchange can also utilize the tool to assess the metrics to measure and report their environmental, social, and governance (ESG) performance, enhancing transparency and accountability in their sustainability efforts. By leveraging these tools and engaging stakeholders in materiality assessments, companies can enhance the credibility and relevance of their sustainability reporting, fostering trust and collaboration with their diverse stakeholders.
Set performance indicators for sustainability
Setting performance indicators for sustainability is a crucial step for companies engaged in sustainability reporting. In the pursuit of organizational goals, the integration of sustainability metrics becomes imperative as it provides a systematic approach to track and measure progress toward achieving sustainability objectives. These Key Performance Indicators (KPIs) serve as quantifiable measures that align with material issues, ensuring that the organization focuses on the most relevant aspects of sustainability. The integration of sustainability metrics into business performance is essential for demonstrating a commitment to sustainable practices. It goes beyond a mere compliance exercise, emphasizing the strategic importance of sustainability in mitigating risks, shaping business strategy, guiding planning, optimizing operations, and ultimately enhancing reporting transparency. To drive this agenda effectively, it is essential for senior management and boards to enhance their understanding of sustainability and recognize its integral role in achieving long-term business success. By embedding sustainability across various facets of the organization, from risk management to strategic planning, companies can demonstrate a holistic commitment to sustainable practices and contribute positively to their environmental, social, and governance responsibilities.
Develop data collection and management procedures
Establishing robust data collection and management procedures centered on materiality factors is an essential undertaking for businesses committed to sustainability reporting. Accuracy and integrity have significance in the realm of sustainability, and achieving these requirements depends on the effective handling of data throughout its lifecycle. A systematic approach to data quality, collection, and management is not only a technical requirement, but also a prerequisite for producing credible sustainability reports. Companies must embrace transparency, honesty, and accountability as non-negotiable values for sustainability managers. Commitment to these principles is especially important in preventing miscommunication and the spread of inaccurate information. Embracing transparency involves acknowledging any limitations or uncertainties in the data and openly communicating the methodologies, information sources, and assumptions used in the reporting process. Recognizing the critical role data plays in business, companies must align their disclosure metrics with industry standards. This alignment not only enhances the reliability of the reported information but also reinforces the value of adhering to internationally recognized frameworks that enjoy credibility across diverse countries, industries, and stakeholder groups.
Annual review and improvement
Monitoring and reviewing sustainability reporting at the company level is a best practice for companies aiming to get it right in the ever-changing landscape of corporate responsibility. As sustainability reporting becomes an integral business imperative in Kenya, akin to financial reporting, the adoption of robust review and improvement processes is imperative. The shifting dynamics of stakeholder interests and the concept of materiality underscore the need for companies to stay agile and responsive. For example, in light of the increased need for compliance under International Financial Reporting Standards (IFRS) in Kenya mandating sustainability and climate-risk reporting, companies must cultivate a proactive approach to stay ahead of the curve. A proficient sustainability practitioner should stay attuned to evolving developments, incorporate stakeholder feedback, and evaluate progress against predefined metrics for continuous improvement. Sustainability reports serve as a transparent reflection of a company’s performance, not merely highlighting successes but also exposing areas for improvement. Embracing a learning organizational poise in sustainability reporting ensures that companies can effectively adapt to the changing expectations of stakeholders and contribute meaningfully to the global discourse on sustainable business practices.
PART II – TIPS FOR SOME KEY BOTTLENECKS IN SUSTAINABILITY MATERIALITY AND REPORTING
HOW CAN CONTRIBUTIONS TO THE CARBON FOOTPRINT AND THEIR REDUCTION BE ACCURATELY QUANTIFIED?
- Understand the Impact/Problem
Initially, it involves conducting a comprehensive analysis to understand one’s current carbon footprint. This includes a gap analysis to identify where emissions are highest, a resilience assessment to evaluate how these emissions impact the environment and the entity itself, and a materiality assessment to determine the significance of various emissions sources. Understanding the impact is crucial for setting realistic and impactful targets. This offers a baseline that will be useful in monitoring progress against impacts to see if the strategies for mitigation and reduction are working.
- Design Effective Strategies
The next step is to design frameworks and metrics that can guide action. This involves setting clear, science-based targets (like Net Zero goals), creating a roadmap for achieving these targets, and building capabilities to support these initiatives. Designing effective strategies ensures that efforts are focused and measurable. It is also important to know the industry benchmarks so as not to miss targets or strain too much.
- Implement Governance and Risk Assessment
To activate these strategies, robust governance structures are needed, along with thorough risk assessments and reporting mechanisms. These structures help in managing the process, ensuring compliance, and maintaining transparency in reporting progress.
- Quantify Emissions
The use of tools like the GHG Protocol and frameworks like the Science-Based Targets Initiative (SBTi) aids in accurately quantifying greenhouse gas emissions. This quantification is essential for tracking progress and making informed decisions.
- Adopt a Strategy for Reduction
The strategies for reducing the carbon footprint can be categorized into three main approaches: offsetting, reducing, and avoiding:
- Offsetting involves compensating for emissions by funding equivalent carbon savings elsewhere.
- Reducing means taking direct actions to lower emissions, like improving energy efficiency or switching to renewable energy sources.
- Avoiding refers to actions that prevent emissions from occurring in the first place, such as choosing sustainable materials or adopting new technologies.
Each step in this process is critical for accurately quantifying and effectively reducing one’s carbon footprint. The integration of these steps into a cohesive strategy ensures that efforts are not only measurable but also align with broader environmental goals.
WHAT IS THE CONCEPT OF DOUBLE MATERIALITY?
The concept of double materiality emphasizes the interdependence and reciprocity that exists between businesses and their surrounding environment. It recognizes that, while external factors such as societal trends and climate change influence businesses, businesses also have a significant impact on these areas. For businesses that want to be sustainable and socially responsible, a comprehensive understanding and strategy which incorporates both of these materiality aspects is essential. This dual approach not only aids in gaining an understanding of risks and opportunities (positives and negatives), but also in ensuring the integration of business strategies with broader societal goals such as combating climate change and promoting social well-being. However, its application is more intricate compared to single or impact materiality, demanding extensive data collection and analysis.
- Outside-In Materiality
This aspect focuses on how external factors, such as societal changes and climate-related risks, affect a business. For instance, a company might face increased operational costs due to new environmental regulations or market shifts caused by changing consumer preferences towards more sustainable products. This perspective requires businesses to be vigilant and responsive to the evolving external environment, assessing risks and opportunities that could materially impact their financial performance.
- Inside-Out Materiality
This perspective considers the impact of a business’s actions on the external environment and society. This includes the company’s carbon footprint, its contribution to environmental degradation, or how its products and services influence societal wellbeing. Here, the emphasis is on the responsibility of businesses to manage their operations sustainably, ensuring that their activities do not harm the environment or society. This approach is integral to corporate social responsibility and sustainability strategies.
WHAT KEY FACTORS SHOULD BE TAKEN INTO CONSIDERATION WHEN DETERMINING THE MOST SUITABLE SUSTAINABILITY REPORTING FRAMEWORK?
It’s important to consider the existing regulatory bodies and their alignment with the framework. This involves understanding the specific regulations and standards set by these bodies that are relevant to the organization’s industry and geography. The chosen framework should not only comply with these regulations but also facilitate ease in reporting and adherence to the legal requirements. This alignment is crucial to maintaining legitimacy and avoiding legal ramifications.
The organizational goals and objectives play a significant role in selecting a framework. The framework should support the organization’s strategic direction and help in clearly communicating its achievements and challenges in relation to its goals. It’s essential that the reporting framework be capable of accurately reflecting the organization’s performance and progress, thereby supporting decision-making processes and stakeholder communication.
The financial implications of the framework are another critical factor. This includes the cost of implementing and maintaining the framework, as well as the potential financial benefits it may bring, such as improving investment appeal or reducing costs associated with inefficiencies and risks. An effective framework should offer a return on investment by adding value to the organization, either through improved operations, enhanced reputation, or other means.
The materiality of the framework is a key consideration. This refers to the extent to which the framework can capture and communicate information that is of significant importance to the organization and its stakeholders. The framework should enable the organization to report on aspects that are critical to its operations and impact, such as environmental, social, and governance (ESG) factors. A framework that is high in materiality will provide meaningful and relevant information, enhancing the credibility and usefulness of the reports produced.
HOW CAN SUSTAINABILITY PRACTITIONERS ACHIEVE OBJECTIVE AND TRANSPARENT REPORTING?
- Demonstrating Honesty and Transparency
The sustainability manager must embody these values. This means being open about the methods, data sources, and assumptions used in reporting. Transparency also involves acknowledging limitations or uncertainties in the data.
- Clear Objectives for Reporting
It’s essential to understand the goals of reporting. Is the aim to assess environmental impact, track progress towards sustainability goals, or inform stakeholders about corporate social responsibility? Clarity in objectives helps in designing reports that are relevant, focused, and useful.
- Emphasizing Individual Virtues
Personal integrity is crucial. Each individual involved in the reporting process should adhere to high ethical standards. Honesty in data collection, analysis, and dissemination ensures the report’s credibility.
- Capacity Building
This involves training and empowering sustainability managers and their departments. Providing them with the necessary tools, knowledge, and skills ensures they can effectively gather, analyze, and report data. This also means keeping up-to-date with best practices and emerging trends in sustainability reporting.
- Considering Double Materiality
This concept involves looking at both how sustainability issues affect an organization and how the organization impacts sustainability matters. By considering double materiality, reports can provide a comprehensive view of the company’s performance and its broader impact on society and the environment.
By integrating these principles, a sustainability manager can develop reporting practices that are not only objective and transparent but also meaningful and impactful. This approach fosters trust among stakeholders and supports the broader goal of sustainable development.
WHAT CHALLENGES HINDER THE ADOPTION OF GLOBAL SUSTAINABILITY FRAMEWORKS IN KENYA?
- Incompatibility with Local Context
Kenya has not extensively developed local and contextualized sustainability reporting standards that align with global standards. This is primarily because global standards might not be fully adaptable or suitable for the unique socio-economic and cultural context of Kenya. International frameworks are often designed with a one-size-fits-all approach, which may not consider the specific needs, challenges, and opportunities present in Kenya.
- Big Companies focus
Most international sustainability frameworks are tailored to support large organizations and corporations. This leaves out Micro, Small, and Medium Enterprises (MSMEs), which are a significant part of Kenya’s economy not covered in the thinking and framing of the standards. These smaller entities may find it difficult to meet the requirements of these frameworks or to leverage them for their benefit, leading to a lack of enthusiasm or perceived relevance in adopting these standards.
- Language and technological barriers
The sustainability and reporting lingua, including technological differences and gaps, poses a significant barrier. Many international frameworks may use technical jargon or require reporting and compliance through digital means that may not be accessible or easily understandable to all Kenyan organizations. This language and technology gap can hinder the effective adoption and implementation of these frameworks.
- Educational curriculum
There is a lack of integration of these sustainability reporting frameworks into the educational system in Kenya in the colleges. Introducing these standards and practices at the academic level can foster a culture of compliance and adaptation before professionals are introduced to the vagaries of industry and practice. However, the absence of such integration means that the upcoming workforce is not familiar or trained in these international standards, leading to a gap in adoption – slow or poor.
- Partnerships for Framework Adoption
Lack of robust partnerships and collaborations to boost the adoption of a unified working framework is a significant hindrance. Partnerships, both local and international, are crucial for the successful adoption and implementation of any framework. These partnerships can provide the necessary support, resources, and expertise needed for effective adoption. However, in Kenya, there seems to be a shortage of such collaborative efforts, which impedes the widespread adoption of international frameworks. A case in examples, multinationals with good track-record for adoption can partner and mentor SMEs along their value chains.