Environment
- About this document
- Drivers for change
- The benefits of reporting
- What are the UK supermarkets are already doing?
- The indicators
Introduction
Few now doubt the severity of the environmental crisis we face. Quite simply, our current systems of industrial production and consumption are unsustainable. Business as usual is no longer an option. We need to transform our industrial economies. This process is already beginning to happen. Leading companies are implementing environmental management systems, setting performance targets and implementing policies. To meet the expectations of their various stakeholders - including consumers and investors - public reporting is essential. To track progress and compare performance government and non-government initiatives such as the Global Reporting Initiative (GRI) are calling for a more consistent approach to reporting. In the absence of an adequate response from industry the UK Government has threatened mandatory reporting. Guidelines for the reporting of waste, water and greenhouse gas emissions have already been issued. The Turnbull inquiry and the recent Company Law Review will also require company directors to assess and report on the wider risks - including environmental and social risks - faced by their companies and to develop appropriate systems of internal control to deal with them. Environmental management and reporting is no longer just an option.
The
human impact on the planet has reached a point where
it is posing grave threats to our future prosperity and security.
Until a couple of centuries ago we lived comfortably within
natural limits, depending upon the Earth's resources without
affecting its ability to replace them. But now, our economic
systems of production and consumption are taking us beyond
critical thresholds in the use of non-renewable resources
(and the unsustainable use of renewable resources) and the
assimilation of wastes. The planet's life support systems
- the provision of an atmosphere and a stable climate, a protective
ozone layer, and the absorptive capacities to disperse, neutralise
and recycle the material outputs and pollution generated in
ever increasing quantities from our global economic activities
- are being overwhelmed and impaired. As a consequence, the
Earth's ability to maintain the conditions necessary to support
life, let alone economic activity, are being compromised.
It is as bad as that.
Why? Part of the explanation lies in the failure of markets - it is down to economics. The prices we pay for our goods and services do not generally reflect the full/true costs of their production and consumption. External costs (or externalities) - such as the contamination of ground water, soil erosion, traffic congestion, poor urban air quality, global climate change and so on - are imposed on the rest of society - not the company, individual or organisation responsible for them. The final sales price of a carton of orange juice, for example, does not include the wider costs to society that can be (but are not always) associated with its production, transportation, and storage prior to sale. These costs could include the loss of biodiversity, soil erosion and chemical pollution of watercourses when new orange groves are established and the fruit treated with pesticides. Acidification and health related costs associated with emissions of nitrous oxides, particulate matter (PM) and volatile organic compounds from road transport. External costs attributable to the storage of the juice could include emissions of green house gases from in-store energy use and damage to the ozone layer resulting from the leakage of ozone depleting refrigerant gases. As noted above, these costs are often not borne by the consumer or reflected in the economic transactions along the supply chain. If they were (ie effectively internalised) everything changes - costs, what is and what is not profitable and consequently, what is produced, how it is produced and how it is transported (see Box 1 at then end of this paper for further explanation).
As the world population has increased 6 fold over the last 150 years - from one billion to six billion, the external costs of economic activity have multiplied, particularly over recent decades with the increased globalisation of our markets and supply chains. The evidence of the unsustainability of our economic systems is now all too pervasive, prompting governments and increasingly, business, to act and respond to the key environmental sustainability challenges.
Drivers for Change - Legislation, Consumers, and the Investment Community
The Business Case for Reducing Impacts, Improving Performance and Reporting
Companies are increasingly recognising the need to manage, improve and also report on their environmental performance. Leading companies also recognise that their long term future and ultimate sustainability is inescapably linked to their ability to reduce their environmental impacts and to continuously improve their overall environmental performance - in many cases, beyond legislative compliance. It makes sound business sense, and in many ways, represents best practice in terms of cost and business risk management.
Legislation and fiscal incentives can support the business case. The principle of environmental taxation - shifting the tax burden from labour to environmental outcomes - is one way to internalise external costs. The landfill tax, climate change levy and aggregates taxes provide recent examples of such legislation. Governments throughout Europe are committed to the increased use of such policy instruments. Customer and local communities' expectations and demands for responsible corporate environmental governance are also increasing and the consequences of 'environmental failure' - reputation disasters such as Shell with Brent Spar - have also become all too apparent in our world of global communications and markets.
The City/financial community is showing more interest in assessing corporate environmental performance. Whilst investor/financial market pressure has historically been limited to concern over legal liabilities and to negative risk factors, recent legislative changes and emerging evidence of the link between earnings and environmental management have encouraged analysts to consider the more positive aspects of corporate environmental performance. [1] Increasingly the quality of a company's environmental management is being seen as an indicator to the outside world of the overall quality of its management — a key investment/stock selection consideration. Analysts are being urged to demand new forms of data and information to measure this more positive aspect of corporate environmental governance. A number of commercial environmental risks rating initiatives have recently been launched in response to this demand. New indices based on an assessment of corporate environmental / social / sustainability per-formance have also been launched, such as the Dow Jones Sustainability Index and FTSE4Good. The demand for environmentally related performance data is likely to increase, and with initiatives like the Global Reporting Initiative (GRI) becoming more widespread, the provision of standardised, comparable data is likely to become the norm, enabling comparisons to be made between good and bad performers.
Without adequate and appropriate environmental management systems in place - whether certified or not - it is unlikely that companies will be able to meet the expectations of their customers, shareholders and the requirements of as more stringent regulatory environment and environmentally aware City in terms of disclosure of environmental performance data.
The Benefits of Reporting
Environmental reporting contributes to meeting the increasing demands from external audiences for environmentally related data. As noted, a proactive approach to environmental management is seen as a good indicator of the overall management quality within a company. Whilst the City is not interested in reactive ad hoc environmental initiatives, it is interested when a company can demonstrate a systematic approach to consistently delivering greater value, or reducing business risk, through effective environmental management. The public reporting of environmental performance data can also serve as a powerful demonstration of a company's overall commitment to managing and reducing its environmental impacts and hence, publication can also provide an effective means for companies to differentiate themselves in increasingly competitive global markets. This proactive approach could help to secure existing markets and contribute to winning new business. It could also contribute to increasing the demand for the company's share capital, as investors are encouraged to seek out and invest in 'best in sector' (in terms of their overall financial, social and environmental performance) companies.
What are the UK Supermarkets already doing?
The UK retail sector as a whole, through the British Retail Consortium and its Environment Policy Advisory Group, has taken a first step towards industry-wide improvements in environmental management. In 2001 it published Towards Retail Sustainability, which outlined objectives and targets for the next five years. Within the supermarket sub-sector itself, the response to the environmental challenges outlined above and the level and commitment to reporting is varied. Whilst some companies have registered environmental management systems, include references to key environmental issues and aspects of performance in their annual report and produce standalone environmental reports, others don't. The quality of reporting also varies considerably with several companies still limiting their reports to a discussion of the issues, highlighting success stories but failing to set and report against meaningful and comparable performance targets. This project provides an opportunity to address this by developing and implementing an agreed common and comprehensive reporting framework that will enable performance to be ranked and benchmarked across the sector.
The indicators
The remainder of this paper details the RTTT Environment module indicators. They cover three broad areas, summarised in the table below:
Issue |
Indicator |
Corporate Commitment to Environmental Responsibility and Performance |
|
Climate Change |
|
Waste |
|
This does not represent a comprehensive list of the key environmental issues and challenges racing the retail sector. For practical reasons - principally the need to keep the total number of questions in the complete Race to the Top survey at a manageable level - we have had to limit the review of supermarket performance to these three critical areas - common challenges for all companies in this sector. In future years, depending upon the ease of data collection and the standardisation of reporting procedures, other areas may be added. These may include additional questions concerned with contaminated land, emission of ozone depleting substances and impacts on biodiversity.
We acknowledge that many supermarkets, but not all, are already recording and in some instances reporting their performance in these three areas. Supermarkets participating in the annual Business and the Environment (BiE) Index of Corporate Environmental Engagement survey will also have had to address some of the questions detailed below in their annual submission to BiE. Consequently, to save time and duplicated effort, we have detailed where there is overlap and degrees of overlap between the questions in both surveys. Those companies completing the BiE survey have the option of submitting their responses to the relevant sections as indicated. Questions which are not identified as being covered in the BiE survey require a direct response from all retailers.
[1] A recent driver for change in corporate behaviour lies in the recommendations of the of the Turnbull Committee, which lead to the new 'Combined Code.' This requires the boards of a company listed on the London Stock Exchange 'to report on their systems of internal control for identifying risk, including risk associated with their reputation and the environment.' (www.icaew.co.uk). The Company Law Review provides another driver. An expanded Operating and Financial Review (OFR) (in the company's main annual report and accounts) will now have to include a discussion on the company's policies and performance on environmental, community, social, ethical and reputational issues including compliance with relevant laws and regulations (where deemed material by the directors). Irrespective of their materiality, the OFR must disclose a discussion, within the dynamics of the business, on the risks, opportunities and responses relating to environmental costs and liabilities.