More and more we are seeing businesses choose to – or be required to – include non-financial measures when they report to stakeholders or market themselves to the outside world. But why should businesses go to the trouble of considering such issues and presenting the information, and are there any benefits in doing so beyond compliance?
What types of information are disclosed?
Non-financial reporting is frequently broken down into the areas of environmental, social and governance issues, which may be included in annual and periodic reports to stakeholders. Businesses may measure themselves against criteria or produce qualitative narrative to explain what steps have been taken to focus on these issues.
How each of these areas applies to any given business will vary greatly depending on factors such as the size of the business, its market sector, the nature of its trading, its geographical location and reach, and its customers, suppliers and employees. Recently we have seen an increased interest in supply chains including the origins of raw materials and the potential for labour exploitation. Products from food to fashion are marketing themselves using terms such as “sustainable”, “green” or “clean” in an effort to attract consumers.
Why deal with non-financial issues?
Directors of UK companies have duties enshrined in law, and these extend beyond obligations to the company and its shareholders. In recognition of modern expectations of behaviour, directors must have regard to a number of different factors such as “the impact of the company’s operations on the community and the environment”. The wider effects of doing business cannot be ignored and the pursuit of profit is not the only consideration.
Large companies are required to report on their energy use and emissions in their annual reports. Other measures are gradually being brought in by the government or by regulators. Both the disclosure requirements and the extent of businesses covered by such rules will only increase over time. Getting ahead of the curve can not only ensure the business will be compliant but can also offer a competitive advantage. These issues are relevant to businesses of all sizes; it is just a question of understanding how they can be applied.
What does it look like in the real world?
Implementing better governance can transform a business and reduce risk, as well as making the business appear more attractive to the outside world. A starting point could be something as simple as setting up payment processes in a small business and critically assessing each stage by considering what could go wrong. Owner managers often rely on memory but this creates a risk for the business.
The risk could be mitigated by introducing a process and taking away the onus from the owner, freeing them up to concentrate on strategy and taking the business forward.
Even seemingly small decisions such as sourcing stationery or staff uniforms can have an impact and can demonstrate what a business is doing to consider the knock-on effects of its operations.
What are the benefits?
Time spent on dealing with environmental, social and governance concerns can feel like unnecessary bureaucracy which holds the business back. However, it can in fact be hugely beneficial.
Investors are increasingly alive to non-financial factors when making funding decisions. They themselves may have to report on such aspects to stakeholders, or it may be part of their brand to invest in businesses which are seen to be doing good.
Employees are becoming more and more interested in non-financial benefits when considering their future employers. In order to attract and retain the top talent, businesses may need to demonstrate their credentials especially around social and wellbeing issues. At Menzies we have a number of initiatives to support our staff, and those who have come to start their careers at Menzies have said the support was something that attracted them.
Many businesses are researching and obtaining data on their supply chains, and this extends to the public sector too. Tender documents will frequently ask questions around sustainability, risk and social matters; the cost and ability to perform the requested service forms only a part of the decision on the successful bidder. Consumers are also becoming savvier when it comes to choosing where they spend their cash and seeking to make ethical spending decisions.
Business owners may feel a moral duty to improve rather than worsen the planet or its people. Some businesses are set up with a social or charitable element behind them. In these cases, the owners often want to broadcast what they are doing and perhaps raise awareness of the cause at the same time.
There are risks when a business chooses not to keep up with the trend towards increased awareness of non-financial issues. The business may find itself being left behind its competitors. Where customers, suppliers or employees vote with their feet, the business may struggle to replace them, and financial difficulties could follow.
As we move into a world of increased awareness of environmental, social and governance issues, and increased regulation of such issues, all business owners should be alive to the non-financial aspects of their operations and the unintended consequences of their actions or inactions. Preparing for what is to come and sharing successes can give a competitive advantage worth more than the pain of change.
For further information, or to discuss your specific circumstances, please contact Rachel Lai or contact us via the form below.
Alternatively, we have recently launched our own Environmental, Social and Governance support service for our clients. To find out more on how we can assist your business, please click here or contact Richard Singleton directly.