Trucost Blog / 23 Jan 2018

Accounting for material environmental issues: from GRI, SASB and IR to natural capital accounting

As part of a series of articles for the Singapore Stock Exchange’s ESG newsletter, Trucost outlines the considerations for companies when choosing a sustainability reporting framework.

Sustainability reporting enables companies to identify important and relevant environmental, social and governance (ESG) issues that could affect the financial performance of their businesses – also known as “materiality”.

There are a number of sustainability reporting frameworks that companies listed on the SGX can use to identify material ESG issues. These include the Global Reporting Initiative (GRI) standards, the Sustainability Accounting Standards Board (SASB) standard and Integrated Reporting (IR).

There are various considerations for companies deciding which framework to choose. The GRI is aimed at companies wishing to report material environmental, social and ethical impacts to a wide audience of stakeholders through sustainability reporting. The GRI comprises a comprehensive modular and interrelated set of standards that provides a flexible way for companies to achieve this.

In contrast, SASB is aimed at companies wishing to report ESG information specifically to investors. Its origins are in the US market where it is designed to support filings to the U.S. Securities and Exchange Commission. It provides a sector-based approach offering sustainability accounting standards for 79 industries in 10 sectors, which on average recommend reporting on just five topics and 14 metrics per industry focused on the interests of investors.

IR is aimed at companies that want to explain how they potentially create value for the economy, society and the environment. IR uses a principles-based framework that aims to strike a balance between flexibility and prescription. It may suit firms that want to create an integrated report that brings together material sustainability and corporate information for its investors and other stakeholders.

Judging the materiality of different environmental impacts can be difficult when a company has to compare a range of issues all measured in different ways, such as metric tons of greenhouse gas emissions versus cubic meters of water use.

Natural capital accounting is a powerful tool that companies can use to assess the materiality of different environmental impacts because it is designed to calculate the financial cost of an impact to nature and society and to provide a proxy for the cost to the company if those costs become internalized as a result of legislation, consumer demand or catastrophic events.

Companies can use natural capital accounting to integrate non-financial metrics with traditional financial metrics in integrated annual corporate reports. Companies can also use natural capital accounting to establish hypothetical “shadow” prices for carbon and water to inform decision making.

The Natural Capital Protocol provides a standardized approach to natural capital accounting designed to generate trusted, credible and actionable information that businesses need to make truly informed decisions. Trucost was a key player in the multi-stakeholder Natural Capital Coalition that created the Protocol, taking lead responsibility for writing guidance on how to apply the Protocol in the apparel and food and beverage sectors.

A critical consideration in identifying material ESG issues is understanding who your stakeholders are and what ESG issues matter most to them – and how this affects their decision making.

Some investors may well be most interested in carbon and want to know if your business is on a pathway to reducing emissions in line with the Paris Agreement on climate change to limit global warming to 2°C. Other investors may be most concerned about your exposure to water scarcity as a result of water intensive operations or supplies of raw materials. Other stakeholders, such as your customers, may care most about social and ethical issues. Your business may want to measure and manage what matters most to these different audiences – and to communicate the progress you are making in the most appropriate way for each stakeholder audience.

Next time, we’ll look at the management processes and governance structures you need for successful and effective sustainability reporting.

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