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Sustainability

 
 

Governments and businesses face significant changes from megatrends like population growth, urbanization, climate change and natural resource constraints. We help our clients understand and act on these issues so they can thrive in this changing world.

 
 

Investor Expectations Spur Sustainability Reporting

June 27, 2014
 

Sustainability reporting is on the rise as more and more property management companies around the world are voluntarily or legislatively required to report. Owners, investors, managers and tenants are also demanding greater relevance, credibility and transparency – trends that are driving new developments in the content and quality of sustainability reports.

 

Now  a  mainstream  business  activity, sustainability  reporting  is  practiced  all  over the world. In its annual global survey, KPMG states that of 4,100 companies studied, 71% author  sustainability  reports,  equating  to  a 59%  increase  since  the  inaugural  survey twenty years ago. Of the G250 – the world’s largest 250 companies according to Fortune 2012 – 93% publish a sustainability report.

In  essence,  this  is  the disclosure of a company’s social, environmental,  governance  and economic  strategies,  priorities, actions  and  performance.  It  helps businesses  understand  and  communicate their exposures to risks and opportunities in a rapidly changing world. When done well, it  allows  external  audiences  (employees, consumers, neighbours, governments and investors) to understand how a company is addressing these issues.

For example, a social risk might include the potential that legal action by members of local communities might  prevent  a  gold  mining company from developing a proven site. The company’s  strategy  could  be  to  develop education and employment practices that are shown to improve the lives of those living near existing mine sites.

An  environmental  risk  might  be  the depletion of aquifers at the site of a food and beverage  producer.  To  manage  this,  the company  might  invest  in  highly  efficient technology to improve its water use practices, and create local partnerships to improve and replenish the aquifer going forward.

Rationale

Recently,  investors  have  been  a  dominant sustainability  reporting  driver  and, collectively,  they  are  demanding better  data.  CDP  –  formerly  the Carbon  Disclosure  Project  –works with institutional investors representing  more  than  US$92 trillion  in  assets,  and  each  year requests  standardized  climate change,  water  and  forest  information  from some of the world’s largest listed companies.

The  United  Nations-supported Principles  for  Responsible Investment  (PRI)  Initiative  is another  international  network  of investors  with  more  than  1,200 members  and  US$34  trillion  of assets  under  management. Together,  members  are  working  to put  the  six  Principles  for  Responsible Investment  into  practice,  including incorporating  environmental,  social  and governance  (ESG)  issues  into  investment decisions  and  seeking  appropriate disclosure on ESG issues by the entities in which they invest.

Regulation  is  another  key  driver  of sustainability  reporting.  While  sustainability reporting remains voluntary in most countries, it  is  increasingly  legislated  –  especially  for publicly listed firms. Researchers at Harvard University  have  shown  that  adopting  such laws  and  regulations  improves  corporate governance  and  managerial  credibility, encourages  more  ethical  practices  and decreases bribery and corruption.

A recent report by UNEP, GRI, KPMG and the Centre for Corporate Governance in Africa reveals that, across the globe, governments had created 134 separate mandatory policies and  53  voluntary  policies  covering  various aspects  of  sustainability  reporting.  These regulations  promote  corporate  participation – for example, France, Denmark and South Africa have almost 100% reporting rates – as well  as  consistency  in  content,  quality  and timing of reports that allow for comparability.

Moreover,  high  quality  sustainability disclosure is now a prerequisite for inclusion in some prominent stock exchanges – Brazil, China (including Hong Kong), Malaysia and South Africa – as well as stock indices, such as  the  Dow  Jones  Sustainability  Index,  the Carbon  Disclosure  Leadership  Index, FTSE4Good  and  Fortune’s  Most Admired Companies.

Disclosure Standards

Many guidelines and standards exist to help companies disclose useful  information  that  is standardized,  comprehensive  and consistent  over  time.  The  two  best known  are  the  Global  Reporting  Initiative (GRI)  and  the  International  Integrated Reporting  Framework  (IR),  both  of  which published updated versions last year.

Global Reporting Initiative

The  Global  Reporting  Initiative  (GRI) encompasses  the  most  widely  used sustainability  reporting  guidelines  today. GRl Guidelines offer principles for defining report  content  and  quality,  and  a  set  of disclosures  that  can  be  applied  in  any organization, regardless of size, sector or location.  The  Guidelines  also  provide  a standard  process  for  identifying  what  to report on, how to report on it and how the report can be assured.

In  May  2013,  the  GRI  released  what  is known  as  G4,  the  fourth  generation  of  its Sustainability  Reporting  Guidelines.  Key updates to the Guidelines in G4 include:

  • the introduction of new standard disclosures (content that should appear in a report);
  • a greater focus on materiality (defining what matters most for a given organization);
  • more  emphasis  on  supply  chain  impacts (impacts of decisions that ripple beyond the walls of the organization);
  • a requirement to describe the process used to define the boundary of impact for each material issue; and
  • replacement of the three application levels: A, B and C (or 6 levels if A+, B+ and C+ are included)  with  two  simpler  two  “in accordance”  levels:  core  and comprehensive, which indicate the breadth of the disclosure.

Reporters have two full reporting cycles to transition from using the current G3.1 to the new  G4  Guidelines.  However,  all  reports prepared  after  December  31,  2015,  must comply with the G4 Guidelines if they are to qualify as GRI-compliant.

International Integrated Reporting Framework

In December 2013, the International Integrated Reporting Council (IIRC), a global consortium of regulators,  investors,  companies  and accountants,  released  the  International Integrated Reporting Framework (IR).

Integrated  reporting  is  intended  to provide  a  concise  communication  about how an organization’s strategy, governance, performance and prospects – in the context of  its  external  environment  –  lead  to  the creation of value in the short, medium and long term. For providers of financial capital, it offers an integrated representation of the key factors that are material to a company’s present and future value creation.

Like the G4 Guidelines, the IR Framework focuses on materiality, stakeholder engagement,  strategy,  performance, governance, risks and opportunities. However, unlike current  sustainability  reporting, integrated  reporting  combines  both  financial and  non-financial  disclosure  across  six capitals:  financial,  manufactured,  intellectual, human, social and relationship, and natural.

It  also  emphasizes  conciseness,  future orientation and the connectivity of information. Unlike the GRI  Guidelines,  the  Integrated Reporting Framework has not yet been widely adopted, though it is seen as the future.

Market Demand

Sustainability reporting  is  growing  and improving because it fills a real need in the market.  Investors  are  recognizing  that  a company’s  financial  value  is  increasingly related  to  how  it  plans for and responds to sustainability risks and opportunities. Sustainability reporting provides insight to guide action by all stakeholders. The demand for  this  kind  of  transparency  is  likely  to increase.

Real Estate Role Models

Sustainability emerged in Canadian real estate at the building level with properties pursuing building certification (LEED and BOMA BESt) and targeting energy performance improvements. More recently, leading asset managers and owners have been implementing policies, aggregating data, setting targets and ultimately reporting at the portfolio level. The following are some examples of leadership in reporting in the Canadian real estate sector.

Bentall Kennedy

Since the release of its first report in 2009, Bentall Kennedy has continuously reported on sustainability using the GRI Guidelines. In 2011, the company transitioned from the GRI G3 to the G3.1 Guidelines. Each year, it has self-declared an application level B.

Ivanhoé Cambridge

Conducting a materiality assessment helps companies determine their reporting priorities. To involve its stakeholders in the process of identifying important sustainability issues, Ivanhoé Cambridge organized three workshops in Montreal, Toronto and Vancouver. Attendees included tenants, retailers, suppliers, academics, non-profit organizations, employees and a shareholder representative.

First Capital Realty

To communicate its progress on sustainability, First Capital Realty has published four annual sustainability reports, 2009 through 2012. In 2010, First Capital became the first publicly traded real estate company to issue a GRI 3.1-compliant and externally assured report. First Capital Realty’s reports have all been an Application Level B+ under the GRI.

HOOPP & Cadillac Fairview

It’s easy to get lost in a 200-page report. HOOPP (2012) and Cadillac Fairview (2013) both released brief summary reports that present the key components of their sustainability strategies and performance progress in an easily digestible format.

Oxford Properties

In 2013, Oxford Properties launched a user-friendly, interactive microsite to accompany a brief summary report of its sustainability performance. The visual layout and intuitive interface make reading the report fun.

 

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