Responsibility: Sustainability reports offer an opportunity for SMEs – LBBW Perspectives

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Sustainability reports: An opportunity for SMEs

Starting from 2018, large corporations will be required to report on sustainability. LBBW Research explains why this is important for SMEs, too.

Just according to the letter of the law, only around 500 large corporations in Germany will be affected by the new legislation on sustainability reporting starting from 2018. This is because the reporting requirement taking effect on 1 January will only apply to capital-market-oriented companies, financial service providers and insurance companies that employ more than 500 people, have total assets of more than EUR 20m, or generate annual sales of more than EUR 40m.

Reporting requirements as part of the supply chain

However, Landesbank Baden-Württemberg (LBBW) believes that the implementation of the EU Directive on Corporate Social Responsibility (CSR) will soon result in more and more SMEs publishing sustainability reports, too. This is attributable to a kind of chain reaction: The investigations carried out by the large corporations that are subject to reporting requirements in order to describe their supply chains force their suppliers to gather sustainability data on their part – even if these companies actually fall below the legally stipulated reporting threshold. Consequently, all of these medium-sized companies will already incur costs that could expediently be used to produce their own sustainability reports.

„As the topic of sustainability becomes increasingly important, more and more companies will expand their financial reports to include sustainability aspects.“- Martin Dresp, Analyst, LBBW Research

Transparency along the entire value chain

One striking example of such effects in a supply chain can be seen at the automotive group BMW in 2016. In order to increase transparency and resource efficiency along the entire value chain, around 5,600 BMW suppliers worldwide were sent a detailed questionnaire on sustainability. On this basis, the automotive group carried out a rigorous assessment: Suppliers that did not meet the minimum requirements had to submit a plan for corrective measures. Acting sustainability and being able to provide specific information on this is therefore increasingly becoming a prerequisite for business success for medium-sized suppliers, too. Of course, this also applies to companies that do not supply DAX companies, as can be seen in the case of EDEKA Südwest, which is organized as a cooperative. You can read about how the fresh food specialists handle the topic of sustainability and what they expect from their suppliers in this interview with the head of the Sustainability department, Michaela Meyer.

Benefits can compensate for costs of sustainability reports

Companies along the supply chain could derive considerable benefits from producing their own sustainability reports, assesses LBBW analyst Martin Dresp: “The positive effects often more than compensate for the cost of the reports.” For example, the knowledge gained about the company may suggest approaches for reducing costs when it comes to energy or materials management. In addition, a good sustainability report can open doors to sustainability-focused investors and improve the company’s reputation among employees, applicants and potential customers. .

  • Energy efficiency potential with cross-sectional technologies spanning multiple industries

    Acting sustainably – using energy efficiency potential

    Companies that review their sustainability can identify and realize savings potential in this context. This diagram shows what can be achieved with cross-sectional technologies that span multiple industries. Sources: German Energy Agency; LBBW Research

It is important to bear in mind that when assessing a company’s sustainability, it is not just about environmental protection and energy. There are three areas that must always be examined: economic, ecological and social sustainability. But for many SMEs, the corresponding analyses and reporting are still a long way off.

  • Percentage breakdown of economic, ecological and social topics in sustainability reports

    Reports are dominated by social and ecological responsibility

    Social responsibility is the area that is reported on most extensively among the companies examined. On average, a quarter of the pages were dedicated to this topic. Source: LBBW Research

LBBW forecasts trend towards integrated reporting

But there is plenty of room for improvement at large corporations, too. As shown by a recent empirical study by LBBW Research, companies subject to reporting requirements do not yet make sufficient use of the many different opportunities, either. Among the 61 large corporations analyzed, most of which come from the DAX family, some used only 20 pages to present their sustainability work. Reports by other companies ran to ten times this length. More than two thirds of the companies examined chose to publish a separate sustainability report. However, it is more than likely that there will be a shift towards integrated reporting, according to Martin Dresp. “As the topic of sustainability becomes increasingly important, more and more companies will expand their financial reports to include sustainability aspects,” he says. He also sees it as noteworthy that two thirds of the companies examined commit themselves to specific measurable goals and a fifth of them even link part of their management board remuneration to sustainability targets. “For these companies, sustainability has already become an integral part of their corporate strategy,” says Martin Dresp.

Use standards as a basis for reporting where possible

Whether it is integrated as part of the annual report or appears alone as a separate publication, sustainability reporting must meet certain quality standards in order to be useful to the company and its stakeholders and to satisfy the legal requirements. Experts therefore recommend using guidelines and recognized standards as a basis. One standard that is widely recognized internationally is the GRI G4 standard, developed by the Global Reporting Initiative (GRI). This creates transparency, comparability and standardization at an international level (a comprehensive presentation of the G4 standard can be found here).

However, even a full report is limited in terms of what it can say about a company’s sustainable orientation. For this reason, there are a range of other possibilities for companies to distinguish themselves in the area of sustainability. Well-known examples include the Fundamental Principles and Rights at Work of the International Labor Organization ILO (GER), certification of environmental management systems by EMAS (GER), and ISO (GER).In addition, further certification is possible at the level of individual products. Examples of this include the Fair Trade label (GER), the Bio logo (GER) for organic food products, and the Blue Angel (GER) label for environmentally friendly products, which has been issued since 1978. In addition to the GRI G4 standard, there are also other initiatives that prepare guidelines for handling and communicating on sustainability issues. For example, more than 9,000 companies worldwide have committed to the ten principles of the UN Global Compact Initiative (GER), while the German Sustainability Code DNK (GER) offers a condensed form of reporting that is particularly suitable for small and medium-sized companies.