Practical considerations for designing a sustainability framework

In an earlier step we explored the handbooks and frameworks available from standards setters such as the International Capital Market Association. However, when it comes to building your own, how do you actually write one?

Background

According to a recent study there are over 600 sustainability related reporting standards globally. While progress is being made on harmonising these, steps can be taken to future proof a sustainability framework and make a platform which can be adapted and modified as required.

Understanding the purpose of a framework will provide a better outcome when constructing one for your company.

What is a framework

Sustainability frameworks are systems for standardising the reporting of key metrics to aid investors’ understanding and provide the investment community with standardised information. They provide investors and other interested parties with insight into how well a company is managing a range of non-financial risks related to its environmental impact, social responsibility and corporate governance as it conducts its normal business.

Sustainability is a multi-faceted subject and different companies will have different ESG monitoring and reporting needs. A framework needs to lay out the company’s ambitions, goals, and milestones. Putting together a roadmap means there will be accountability for critical initiatives, and a compelling framework provides stakeholders with a comprehensive view of a company’s strengths, objectives and priorities.

Who are the stakeholders

Sustainability stakeholders will vary in importance depending on the industry within which a company operates, but broadly they include employees, shareholders and investors, customers, suppliers and trade groups, such as cooperatives and trade associations. These will be in conjunction with the oversight of corporate activity from regulators, non-governmental organisations, public health and welfare bodies.

Emphasis will change from time to time (as we have witnessed from the recent COVID-19 pandemic) where working conditions rose in importance for employers, over more traditional parameters.

A Harvard study (see link below) identified how the sustainability and ESG strategy connects with the various stakeholders to impact the economic success of the company.

Key considerations

Determine where you are now: assess your company’s current state and objectives. Identify short and longer-term goals and from these clarify which ESG factors to prioritise.

Identify resources required: ensure you have the people, the technical resources and the data required to meet your goals and that these will continue to be available over the longer term. If you don’t, you may need to consider other goals unless regulations and competition force you to prioritise these.

Have the right owner: the senior manager responsible for sustainability and ESG should have a strong command of the company’s business strategy, sufficient gravitas within the organisation to advance initiatives, and the ability to coordinate with the general counsel/corporate secretary and the investor relations team regarding current investor engagement and disclosure.

Governance structure: an effective framework needs buy-in from senior management across the organisation to push key projects. It requires strong project management to ensure that new processes are suitably embedded and problems dealt with at early stage.

Data assessment and collection: identification of relevant data and its collection and assessment is vital. Some data requirements may be new. For many organisations this will be arduous, time consuming and require constant attention and maintenance. Reference to industry standards and third-party companies such as MSCI and/or Sustainalytics can help in the early data set selection. Develop an ESG information and data framework to capture, collate, and track relevant data. The company can choose which information it wants to show to best position the narrative. This allows companies to establish a baseline, ascertain progress, and provide any sustainability/risk committee, C-suite, and board with relevant reporting data points and trends.

What to disclose: once the inventory of initiatives has been completed and the system for collecting and validating ESG data designed, it is important to identify which data points, events, goals, or accomplishments to disclose. Not all data points need to be disclosed (and it may be planned to disclose some at a later point). Clearly these will vary depending on the industry and the priorities determined by the significant stakeholders.

Communication protocol: effective dissemination of sustainability data is critical and consistency of messaging is vital in order for the progress story to be articulated clearly.

This will necessarily change and adapt as new protocols become mainstream. Sharing and discussing the framework will require a mixture of physical and virtual activities and may depend on the type of stakeholder being considered. Considering these up-front will avoid differences in expectations between stakeholders and the company. In addition the International Finance Corporation has issued a step-by-step guide. Having put in place your internal Green Bond Project Team, made your external appointments and structured your Green Bond Framework, their guide focuses on the issuance process itself, from Final Checklist, Marketing and Distribution, and Post-Issuance Obligations.