Making a sustainable business strategy for all

Investors, consumers, employees and suppliers are all asking one question – what are businesses doing to look after the planet?

As sustainability commitments (or pledges) increasingly feature on corporate websites, brands need to ensure that they are not overpromising or failing to deliver on their initiatives. But there are many topics to explore when scoping an internal audit in this area.

For many stakeholders, financial information is not enough, particularly in the aftermath of COVID-19, which has put unprecedented levels of pressure on business and the economy. Enhanced non-financial reporting can play a vital role in building back a sustainable economy and promoting trust in business. Many will welcome the development of a single set of non-financial reporting standards to encourage this.

In the meantime, companies have taken it upon themselves to publish their own commitments to the planet. Some pledges focus on the climate and achieving net-zero emissions, but it could be something as simple as reducing waste. For other sectors, it might be to stop testing on animals or improve supply chain assurance, employee welfare, or diversity and inclusion policies.

As an objective function, internal audit can provide an independent perspective throughout the process of creating and defining pledges. This gives extra assurance to shareholders and key management that the process effectively manages risk through controls, policies and procedures.

Process improvement and optimisation is at the heart of an internal audit function. Providing assurance at key checkpoints throughout the process helps to identify and address control gaps and weaknesses before sustainability commitments are finalised and communicated externally. This can create a strong control environment from the beginning and help to mitigate risks before they arise.

More than 90% of executives surveyed in 2020 consider sustainability and environment, social and governance either ‘somewhat important’ or ‘very important’ for driving enterprise value.

Consequently, sustainability is increasingly expected by shareholders and customers. However, companies overpromising and under-delivering can cause reputational damage, a decrease in customers, disruption to the supply chain and a loss of competitive advantage.

Align strategy with sustainability

An organisation should be able to clearly identify why and how sustainability matters, and the areas to focus on. Categories could include environment, labour (marketplace), social (people and communities) and ethical (doing the right thing). These topics can be applied to any industry and a strong commitment considers each area.

Using this lens, an organisation can analyse its current market position and its accomplishments relative to key competitors, providing an objective measure of performance and assisting with the formation of defined objectives and aspirations.

Engage the board

The tone at the top can define whether an organisation has the support to drive an appropriate agenda. Boards can lead the way by understanding the ‘what’, ‘why’ and ‘how’ of effective oversight and advise management accordingly. The frequency of reporting to the board and its involvement may vary depending on the maturity of the initiatives.

Collaborate across functions

To capture the right opportunities, the company’s commitments need to be fully embedded across departments and functions, from strategy to reporting, tax to legal, and HR to M&A. Success requires a joint effort and can’t be siloed to a corporate social responsibility team. Key performance indicators dedicated to an organisation’s pledges promote desired behaviour among employees and stakeholder groups, ensuring everyone is working towards a common goal.

Having sustainability committees in place can also help to align departments, encourage governance and create cross-departmental buy-in. Members should come from key departments such as: finance; sustainability; internal audit; risk management; IT; operations; legal; HR; and procurement. They should also be of appropriate seniority to help drive a strong tone, top-down, through the rest of the business. To challenge, contribute and advise on how sustainability agendas impact various key departments, meetings should occur periodically, while initiatives themselves are led by independent experts.

Responsibilities and sustainability aspirations should be communicated to employees and internal stakeholders once finalised.

Define and prioritise milestones

Milestones should be mapped out and broken down into an action plan supported by a responsibility assignment matrix with deadlines. Individuals who are assigned actions need to be aware of their targets, which should form the basis of discussion and reporting to the sustainability committee and the board. Actions that are dependent on milestones being achieved need to be identified so that knock-on effects can be managed. RAG (red-amber-green) ratings are often used to prioritise tasks, for example.

Ensure compliance

An organisation needs to be aware of the laws and regulations across the countries within which it operates. These could include regulations around waste management, pollution and energy efficiency, as well as human rights and labour responsibility. Compliance with laws and regulations can vary depending on an organisation’s industry, the countries it operates in and whether the supply chain is horizontally and vertically integrated. Risk registers are often created to identify regulations and to document compliance. They also address whether an organisation needs to take further action to become compliant or strengthen compliance.

Utilise external accreditations

Depending on the industry, external accreditations could be utilised to provide additional assurance to stakeholders regarding the quality of operations and controls. This could include accreditations and certificates that sit alongside external audit.

Make SMART targets

Goals should be SMART (Specific, Measurable, Achievable, Relevant and Timely). Science-based targets refer to those developed to measure greenhouse gas emissions, which should be in line with the pledges made at the 2015 United Nations Climate Change Conference in Paris. They should be defined and aligned to guidance issued by the Paris Agreement and compared with the relevant industry standards.

Track and analyse data

An organisation should share knowledge and learn from the past. Relevant, complete and accurate data should be collected and analysed to inform future decision-making. To effectively report and measure sustainability commitments, it is necessary to consider the data required from third parties and how it could be obtained.

Stress-test pledges for feasibility

Assumptions informing sustainability commitment forecasts could be challenged for reasonableness and be based on either evidence from data collected and analysed within an organisation itself or benchmarked against industry averages. Forecasts should be stress-tested to determine the impact of changes and the results should inform escalation processes and contribute to amended commitments.

Communicate with stakeholders

Communication and commitments should be factually correct, consistent, and up to date across all platforms, including the website, social media channels and formalised reporting.

Abigail Harper, Head of Internal Audit at Soho House, Chartered Accountant, and member of the Business and Management Faculty’s Internal Audit Panel and the Institute of Internal Auditors

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