By Nadia Woodhouse
It’s hard to imagine chocolate posing any significant threat to corporate sustainability. But that’s exactly what happened when Nestle was brought to its knees by an aggressive Greenpeace campaign highlighting the destruction of native orang-utan habitat in Borneo as a result of the company’s sourcing of palm oil.
The importance of identifying and managing sustainability risks, such as those in the supply chain, has been underlined by recent changes to the ASX Corporate Governance Principles. Specifically recommendation 7.4 which 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.”
While Recommendation 7.4 is not about orang-utans, it does highlight the range of risks for investors when organisations don’t consider all of their impacts.
Why Recommendation 7.4 might limit the Kit Kat Effect
At a presentation in Melbourne on 3 June 2014, the ASX Corporate Governance Council specifically pointed out the impacts of not understanding your risk, using Nestle as a key example.
In this video, we see destroyed rainforest - a direct impact of Nestle's palm oil purchasing. The Greenpeace campaign against the company demonstrates the impact a group of committed campaigners and investors can have on an organisation which fails to identify and manage sustainability risks.
Don’t risk a reduction in your investor base
According to the ASX, the introduction of Recommendation 7.4 was a result of business failing to adequately understand and address risk in the past, which ultimately led to the global financial crisis.
It is clear that economic, environmental and social sustainability risks are an increasingly red hot issue for investors. Asset managers accountable for 15 percent of global investable assets now subscribe to the United Nations Principles for Responsible Investment. By not disclosing sustainability risks, listed entities will effectively cut out 15 percent of their organisation’s potential investment.
Do you have a material exposure to sustainability risk?
Recommendation 7.4 defines material exposure as "a real possibility that the risk in question could substantively impact the listed entity's ability to create or preserve value for security holders over the short, medium and long term". It requires companies to demonstrate that they understand their material exposure beyond financial risk to include social, economic and environmental risk.
The recommendation includes an 'if not, why not' approach, noting that if you don't believe you have a material exposure to economic, environmental and social sustainability risks (as defined by the ASX), then that is all you need to disclose. However, given the definition of material exposure surely all companies will have some sustainability risk? Entities in the infrastructure, extractive, agriculture and property industries may certainly have a material exposure to climate change. Likewise, all manufacturing organisations, or any entity that procures goods and services, may have a material exposure to supply chain risk. Those companies that take the “opt out” route may do so at their peril.
Links to sustainability reporting
Recommendation 7.4 requires companies to disclose their material sustainability risks. To meet this disclosure “does not require a listed entity to publish a sustainability report ….however a sustainability report may meet this recommendation…”
It is interesting that the Corporate Governance Council does not specify the form of disclosure or sustainability reporting framework required to fully address Recommendation 7.4. As we all know, there are sustainability reports and there are Sustainability Reports. For example, a report prepared in accordance with GRI G4 will meet the required risk disclosures. Experiments with Integrated Reporting may also meet these requirements. Currently however, some organisations that self-declare their reports as integrated are really single cover reports that don’t address these issues from a risk perspective. There is a danger that a sustainability report not prepared with a globally recognised framework may not adequately address the Corporate Governance Principles and Recommendations.
While there is much work to do, the ASX Corporate Governance Principles and Recommendations have shone a bright light on the need for organisations to start communicating broad governance practices to the market. If companies have not yet begun identifying and managing their sustainability risks they need to do so promptly as the recommendations come into force from 1 July 2014. It is now time to answer the call of investors, shareholders and the broader stakeholder base to ensure you don’t have a Kit Kat moment.
How can Net Balance help?
Materiality and Reporting - Net Balance works with companies to help them understand and prioritise their material sustainability risks. We also develop strategies to demonstrate how they are managing these risks. Our expertise in developing sustainability reports from reporting frameworks, to data and information gathering, and writing is well known. Please contact Robyn Leeson on 0448 588 200/ firstname.lastname@example.org
Assurance – Net Balance is one of the leading providers of sustainability assurance in Australia. In the same way that your financial information is audited, your investors want to understand your sustainability disclosures are accurate and robust. Please contact Nadia Woodhouse on 0432 850 949/ email@example.com
[Disclaimer: The 3rd Edition of the Corporate Governance Principles and Recommendations involves many more technical aspects outside of recommendation 7.4. Net Balance is qualified to provide advice or assurance over sustainability information]