ESG-Disclosure Using The Economist as a Proxy (2)

The second installment in an effort to distill relevant ESG-topics from The Economist has notable differences from the first effort (see here). Digging through the second series of four months of articles (May to August), I found that:

  • climate change remains the number one topic;
  • green technology is in firm second place;
  • governance more or less keeps the same spot in the matrix;
  • pollution gets a lot less attention but remains important in terms of impact on a firm’s profitability;
  • environmental laws are a new category with potentially big impacts on business models (not including climate policies, which I include in the climate change category);
  • new these last months, is the coverage of ecology, conservation and environmentalism (which I grouped under ‘ecology’); although important from a stakeholder’s perspective, I opted to put ecology to the left of all other categories since the subjects at hand still need to find their way into the mainstream; on top of that, laws and regulations on these topics seem further away then the ones on, for example, climate change and governance.

The picture above follows, again, the format of a Materiality Matrix, with the number of articles per topic on the Y-axis and the – debatable – impact on a firm’s profitability if this topic is not tackled by its management, on the X-axis. If The Economist can be used as a guide, you should, in addition to the topics that were already present in last month’s Materiality Matrix (i.e. climate climate change, green technology, pollution and governance) consider disclosing information on your efforts towards a healthy ecology. As far as new environmental laws are concerned, these were of course already included in your risk management approach.

Below, some interesting snippets taken from the articles can be found, grouped per topic. (Most quotes are adopted directly from The Economist).

Climate Change

Interesting facts taken from all articles in the group ‘climate change’:

  • Businesses are overvalued because of a “carbon bubble” and could suffer if the climate threat is tackled resolutely. A study at Oxford University found that electricity producers would have to retire a fifth of capacity, and cancel all planned projects, if the Paris goals are to be met.
  • What is the single most effective way to reduce greenhouse-gas emissions? Go vegetarian? Replant the Amazon? Cycle to work? None of the above. The answer is: make air-conditioners radically better. On one calculation, replacing refrigerants that damage the atmosphere would reduce total greenhouse gases by the equivalent of 90bn tonnes of CO2 by 2050. Making the units more energy-efficient could double that. By contrast, if half the world’s population were to give up meat, it would save 66bn tonnes of CO2. Replanting two-thirds of degraded tropical forests would save 61bn tonnes. A one-third increase in global bicycle journeys would save just 2.3bn tonnes.
  • Scientists have laid out steps that Arab countries could take to adapt to climate change. Agricultural production could be shifted to heat-resilient crops. Israel uses drip irrigation, which saves water and could be copied. Cities would be modified to reduce the “urban heat-island effect”, by which heat from buildings and cars makes cities warmer than nearby rural areas. Few of these efforts have been tried by Arab governments, which are often preoccupied with other problems.
  • Virtually all simulations which chart paths toward meeting the Paris climate agreement – to keep temperature rise “well below” 2°C relative to pre-industrial levels – assume not just a sharp reduction in actual emissions but also the removal of carbon dioxide from the atmosphere on a massive scale.
  • In Canada, provinces can control emissions in their own way. British Columbia has already introduced a carbon tax (now C$35 a tonne). Alberta charges C$30 a tonne. Ontario’s cap-and-trade scheme would have qualified. If a province fails to tax or cap emissions, the federal government will impose a tax.
  • Three years after countries vowed in Paris to keep warming “well below” 2°C relative to pre-industrial levels, greenhouse-gas emissions are up again. So are investments in oil and gas. In 2017, for the first time in four years, demand for coal rose. Subsidies for renewables, such as wind and solar power, are dwindling in many places and investment has stalled; climate-friendly nuclear power is expensive and unpopular. It is tempting to think these are temporary setbacks and that mankind, with its instinct for self-preservation, will muddle through to a victory over global warming. In fact, it is losing the war.
  • Two social psychologists have found that Republican voters will back carbon taxes if they are told Republicans favour such a policy.
  • The number of Europeans who can expect to witness a temperature above the current record, wherever they happen to live, would double from 45m today to 90m if the planet warmed by another 0.5°C or so on top of the 1°C since the 1880s. If, instead of 0.5°C, it warmed by 1°C, the figure would rise to 163m.This looks even more alarming if you factor in humidity. Human beings can tolerate heat with sweat, which evaporates and cools the skin. That is why a dry 50°C can feel less stifling than a muggy 30°C. If the wet-bulb temperature (equivalent to that recorded by a thermometer wrapped in a moist towel) exceeds 35°C, even a fit, healthy youngster lounging naked in the shade next to a fan could die in six hours.
  • A report published on August 6th by Sarasin & Partners, an asset manager in London, suggests that oil firms are assuming that decarbonisation will be limited and are thus overstating their assets. Sarasin notes that eight European oil giants all used long-term oil price assumptions of $70-80 a barrel, rising by 2% a year with inflation to $127-145 by 2050, to price their assets. But that does not appear to assume any drop in demand. The International Energy Agency predicts a price of just $60 by 2060; Oil Change International, an activist think-tank, estimates one as low as $35. Oil firms could face a sticky mess of forced writedowns.
  • A new IMF working paper finds that taxes raise around twice as much revenue as today’s cap-and-trade schemes, and are roughly 50% better at cutting emissions.

Green Tech

Interesting facts taken from all articles in the group ‘green tech’:

  • Plastic production has tripled over the past 25 years, and the mess it causes has risen commensurately. Recycling is an option. Another is biology. At Stanford University, they found that bacteria in the guts of mealworms can break down polymers faster than fungi and bacteria can.
  • Six of the top ten producers of solar-panels are Chinese.
  • Though solar was the world’s biggest source of new power-generating capacity last year, it still generates a paltry 2% of global electricity.
  • Materials-science researchers are finding that plant fibres can add durability and strength to substances already used in the construction of buildings and in goods that range from toys and furniture to cars and aircraft. A big bonus is, because plants lock up carbon in their structure, using their fibres to make things should mean less carbon dioxide emitted. The production of concrete alone represents some 5% of man-made global CO2 emissions, and making 1kg of plastic from oil produces 6kg of the greenhouse gas.
  • In the bike-mad Netherlands nearly one in three newly bought bikes last year was electric.
  • Acid rain damages crops. In particular, it damages rice. I can be cleaned with water but it is not always obvious when it needs to be cleaned. A cheap method now has been found: rice plants sprayed with artificial acid rain, cut the release into the soil of three relevant bacterial food stuffs. The electric current the bacteria in the ground generate consequently drops. This is easily measurable using cheap electrodes.
  • India has plans for alternative means of generating electricity. Even before the Paris summit, Narendra Modi, the prime minister, aimed to install 175 gigawatts (GW) of renewable-energy capacity by 2022, a vast increase from today. That has now risen to 227GW. In the meantime, prices of wind and solar power have tumbled. Recent auctions have led to a 50% drop in the cost of solar power in the past two years, to about three rupees ($0.05) per kilowatt hour, about the same as wind. This can make both sources cheaper than building new coal-fired capacity. An excise tax on production and imports makes coal ever less attractive. After a massive spree of building coal-fired power plants in recent years, investment slumped last year, while that in alternatives surged.
  • A view prevails that the blockchain will guzzle too much electricity for energy applications to make sense. But this assumes that projects will use a public blockchain such as bitcoin, which anyone can access with the right software, requiring lots of computing power and time to verify each transaction and protect the blockchain. Energy firms could in fact employ blockchains in which only trusted participants can join, making the process of maintaining the blockchain faster and less energy-hungry.
  • America’s Forest Service uses a model to assess fire risk. This model feeds on data on the distribution and types of trees, bushes and other vegetable ground cover, and on construction materials used in an area. Such intelligence will be needed increasingly in the future. Predictions based on the likely effects of climate change suggest that, by the middle of the century, fires will burn twice as much acreage as they do today.

Pollution

Interesting facts taken from all articles in the group ‘pollution’:

  • Two books have been reviewed that have the Flint water pollution disaster as a subject: Had the dirty river water been treated with the right chemicals, thousands of people would not have been poisoned by lead and bacteria, including one that causes Legionnaires’ disease. But to save more cash, the city declined to add anti-corrosion agents that would have stopped the water eating away at the lining of the pipes, thus preventing lead from leaching out. That might have cost around $100 a day—peanuts compared with the hundreds of millions that the state and federal governments are now forking out to repair some of the damage. These two books both show how an austerity drive with racial undertones led to the mass poisoning of mostly poor and black residents, and how officials tried to cover it up, attempting to discredit anyone who came up with proof that the water was tainted.
  • Also on Flint: to almost everyone’s surprise, the citizens of Flint prevailed in March 2017, when the government agreed to an expensive settlement in the first type of lawsuit. The state of Michigan agreed to spend at least $87m to replace lead-contaminated water pipes in Flint within three years. The settlement also required the city to run at least two centres where residents could pick up free bottled water and tap-water filters until September 2017, and beyond that if tests continued to show that Flint’s water was contaminated. The government stopped the giveaway in April this year, saying the city’s water passed the test; Karen Weaver, the mayor of Flint, retorts that many of her constituents still do not trust it.
  • Kapuas, Indonesia’s longest river, is murky because of deforestation. Since the 1970s, logging has enriched locals while stripping away the vegetation that held the soil in place. The Centre for International Forestry Research (CIFOR) found that between 1973 and 2010 over 100,000 square kilometres of forest was lost on Kalimantan, or a third of the original coverage. A national moratorium that began in 2011 has done little to still the axes. As a result, torrential tropical rains wash lots of loose earth into the Kapuas.

Governance

Interesting facts taken from all articles in the group ‘governance’:

  • Plato argued that the richest members of society should earn no more than four times the pay of the poorest. John Pierpont Morgan, a banker, reckoned that bosses should earn at most 20 times the pay of their underlings. Investors today hold chief executives in vastly higher esteem: America’s largest publicly listed firms on average paid their CEO 130 times more than their typical workers in 2017.
  • “I fear that we may be at a peak of anti-bribery efforts”, says a spokesperson of Transparency International. Western firms in the mining and oil-and-gas industry grumble that rivals from China, Russia or elsewhere have “advantages” bidding for contracts in say, parts of Africa, as they face few limits on bribe-paying. If such complaints grow loud, pressure not just to stand still on anti-bribery standards but actually to lower them could return.
  • In India, women are less likely to work than they are in any country in the G20, except for Saudi Arabia. They contribute one-sixth of economic output, among the lowest share in the world and half the global average. The unrealized contribution of women is one reason India remains so poor.
  • On Danone: The latest effort is to win certification as a “B Corporation”, a label meant to reflect a firm’s ethical, social, environmental practices. Smaller outfits, such as Patagonia, a clothing firm, or Ben and Jerry’s ice-cream (now part of Unilever) were early B Corps. Some 2,500 have been certified in the past decade or so.

Ecology

Interesting facts taken from all articles in the group ‘ecology’:

  • Humans have had a profound impact on the prevalence of other species: the biomass of wild mammals has decreased to a sixth of its previous value. Meanwhile, the carbon count of domesticated poultry grew to three times higher than that of every species of wild bird combined.
  • Columbia BIO is a huge project to survey Columbia’s biological assets. The government’s aspiration is that biodiversity itself might be harnessed as an economic resource, and that this might contribute as much as 2.5% of Columbia’s GDP by 2030.
  • The Great Barrier Reef has died and then been reborn (with rising and falling sea levels) five times during the past 30,000 years. Bleaching is now threatening the reef for the sixth time. In the short term, global warming really does look like a serious threat.
  • Sudan, the last male northern white rhinoceros on Earth, died in March. He is survived by two females. IVF seems the last hope for the northern white rhino.
  • Around 40% of bee species globally are in decline or threatened with extinction. Beekeepers in North America and Europe are losing hives at an abnormally high rate. Why? Diana Cox-Foster, an entomologist, offers the theory of the four Ps: parasites, poor nutrition, pesticides and pathogens.

Environmental Laws

Interesting facts taken from all articles in the group ‘environmental laws’:

  • Since the 1970s enormous farms growing irrigated crops such as cotton and nuts spread across the Murray-Darling basin in Australia. Illegal extraction of water is a problem. Farmers are meant to use meters to monitor how much they pump. But last year, cotton irrigators were accused of tampering. Wide-scale abuse has been possible because states and local governments have failed to enforce the rules.
  • Shipping accounts for only around 2% of global carbon emissions, but is quite dirty. Burning heavy oil, the industry produces 13% of the world’s sulphur emissions and 15% of its nitrogen oxides. And by 2050 ships will be producing 17% of all carbon emissions if left unregulated.
  • The International Maritime Organisation agreed to halve the industry’s carbon emissions by 2050.
  • The Trump administration is committed to undoing the Clean Power Plan —which sought to reduce carbon-dioxide emissions from power plants by 32% from their levels in 2005 by 2030—before it comes into effect. Its new proposal, the Affordable Clean Energy (ACE) rule, is much less ambitious because it would let states decide their emissions-reductions targets (including having none at all). Its name is Orwellian. The EPA’s own analysis shows that retail electricity prices would be reduced by a mere 0.1%-0.2% by 2035—but that use of coal, a pollution-belching fuel, would shoot up by as much as 9.5%.
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Embedding ESG-risk into Your Risk Management Framework (COSO)

We wrote about integrating environmental, social, and governance (ESG-) risks into your overall risk management framework before, see blog post Feb2018.

This short video shows you why this is so important to businesses nowadays:

The Reporting Exchange (an exhaustive source of information for anyone preparing sustainability reports) and COSO (organization that supplies risk management models and tools) have teamed up to integrate ESG-risk in your existing Enterprise Risk Model. It includes seven related modules and underlying methods and tools:The detailed guidelines can be found here (PDF download link): COSO ESG guidelines.

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Which ESG-Topics Should You Disclose Using The Economist as a Proxy?

Digging through the first four months of The Economist for relevant ESG-articles, I thought it would be nice to group the articles and see which groups get the most coverage in this highly regarded newspaper. My effort in the form of a Materiality Matrix is shown above, with the number of articles per topic on the Y-axis and the – debatable – impact on a firm’s profitability if this topic is not tackled by its management, on the X-axis. If The Economist can be used as a guide, the topics that should be covered by your organization are thus governance, green technology, pollution and climate change.

Some interesting snippets taken from the articles can be found below, grouped per topic. (Almost all quotes are adopted directly from The Economist).

Governance

  • Must read governance-article on women on boards: Skirting Boards
  • Norway introduced compulsory quotas requiring stockmarket-listed companies to give women at least 40% of their board seats.
  • In Belgium, Germany and France women make up 30-40% of board directors in large listed firms.
  • Quotas have done little to advance women further down the career ladder: in Britain, France, Germany and the Netherlands 80-90% of senior-management jobs are still held by men.

Green Tech

  • Oil firms Shell and Total plan to take on utilities in deregulated markets to provide electricity and gas direct to homes and businesses. They are toying with a strategy that could move their core business from oil to electricity. Must read article: From Mars to Venus
  • Solar cells made from perovskite (a compound of calcium, titanium and oxygen) are coming to the market and might drive silicon-based cells out of business. It’s early stages though.
  • Solar power gets a lot of attention but generates only 2% of the world’s electricity.
  • Microchip costs have fallen a million times faster than those of solar panels.
  • Solar suffers from “value deflation”: the more solar is installed, the less of the electricity that is produces in the middle of the day is needed. Unless it can be stored, the more costs it imposes on the rest of the system.
  • In an article on electrical vehicles, The Economist doubts if batteries will displace diesel in trucking anytime soon. Batteries have to replace part of the cargo and that makes it too pricey for a thin margin business.
  • To see how hard governments can push for renewable energy, look to South Australia: all coal-fired power stations have been closed, it gets 50% of its power from renewables and recently set a target of 75% renewables for 2025.

Pollution

  • Must read article on plastic pollution: Plastic Surgery
  • China is not only the world’s biggest emitter of carbon, but the world’s largest recycler, treating just over half of exported plastic waste. On January 1st China banned the import of 24 categories of waste, including household plastics.
  • China furthermore has taken a harder line and pressed on with pollution controls, hitting coalminers, cement-makers, paper mills, chemical factories, textile firms and more.
  • The European Union launched a “plastics strategy”, aiming, among other things, to make all plastic packaging recyclable by 2030 and raise the proportion that is recycled from 30% to 55% over the next seven years.
  • On current trends, by 2050 there could be more plastic in the world’s waters than fish, measured by weight.
  • Just 10% of 3.6m tonnes of solid waste discarded each day the world over is plastic. Whereas filthy air kills 7m people a year, nearly all of them in low- and middle-income countries, plastic pollution is not directly blamed for any.
  • Researchers have identified 400 species of animal whose members either ingested plastics or got entangled in it.
  • Trucost, a research arm of Standard & Poor’s, puts the overall social and environmental cost of plastic pollution at $139bn a year.
  • To put that into perspective, the United Nations Development Programme says that the costs of overfishing and fertiliser run-off amount to some $50bn and $200bn-800bn a year, respectively. By 2100 ocean acidification, which is caused by atmospheric carbon dioxide dissolving into water, could cost $1.2trn a year.

Climate Change

  • Must read article on including carbon pricing in decision making: Low-Carb Diet
  • Of the 6,100-odd firms which report climate-related data to CDP, a British watchdog, 607 now claim to use “internal carbon prices”.
  • Investors increasingly demand that companies take a carbon tax seriously.
  • The atmosphere contains two-and-a-half times as much of methane (a powerful greenhouse gas) as it did before the Industrial Revolution.
  • Methane emissions must be slashed. Several giants have made strides to limit fugitive emissions. If all the world’s gas producers attained BP’s leakage rate of 0.2%, instead of an industry average of over 2%, it would prevent 100m tonnes or so of methane from entering the atmosphere every year. This would spare Earth as much warming as cutting all the carbon dioxide emitted since the 19th century by one-sixth.
  • The X Prize Foundation awards companies that come up with carbon capture and storage techniques: Four of the finalists plan to produce sturdy building materials such as cinder blocks made from the slag left over from steel production, cured with carbon dioxide. Another four will fashion the gas into plastics or carbon-fibre composites. The remaining two have invented ways to turn the stuff into carbon monoxide or methanol, which are industrial raw materials.
  • Shipping and airlines were the only greenhouse-gas-emitting industries not mentioned in the 2016 Paris climate agreement.
  • Shipping produces 3% of the world’s greenhouse-gas emissions, similar to an economy the size of Germany’s. Lack of cleaner shipping technology is not a constraint. Zero-carbon fuels are becoming available. Slowing ships down by 10% could reduce fuel usage by almost a third. Diplomats argue that the slow progress is because their actions affect not just the shipping industry, but exporters too. If regulators move too aggressively they may reduce the competitiveness of seaborne trade.

This was a first attempt to a materiality matrix inspired by articles that appeared in the Economist in the first quadrimester of 2018. I hope to also create materiality matrices for the remaining quadrimesters of 2018.

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Veel gestelde vragen rondom de Wet bekendmaking niet-financiële informatie (NFI)

This post is about the translation of the EU regulation on disclosure of non-financial information to a Dutch national regulation; this entry will, therefore, be in Dutch.

1. Welke organisaties moeten aan de wet bekendmaking NFI voldoen?

Organisaties van openbaar belang (beursgenoteerde ondernemingen, banken, verzekeraars en kredietinstellingen) met meer dan 500 werknemers, een balanswaarde groter dan 17,5 miljoen en een netto-omzet van meer dan 3,5 miljoen.

2. Wij moeten toch al niet-financiële prestatie-indicatoren betrekken bij onze bedrijfsanalyse in het bestuursverslag? Wat verandert er nu precies?

Klopt, u betrekt al milieu- en personeelsaangelegenheden in uw analyse. Echter, de huidige Wet gaat verder omdat:

  • u een verklaring moet opnemen; deze verklaring gaat verder dan dat u prestatie-indicatoren betrekt in uw analyse; wat u dient op te nemen in deze verklaring vindt u in het antwoord op vraag 3.
  • naast milieu- en personeelsaspecten dient u nu ook sociale aangelegenheden, mensenrechten en bestrijding van corruptie en omkoping te bespreken in uw bestuursverslag.

3. Wat zijn de belangrijkste Wetspassages?

Artikel 2, lid 1: De rechtspersoon maakt als onderdeel van het bestuursverslag een niet-financiële verklaring openbaar en doet mededeling omtrent:

  • artikel 3, lid 1b: het beleid, waaronder de toegepaste zorgvuldigheidsprocedures, alsmede de resultaten van dit beleid (…);
  • artikel 3, lid 1c: de voornaamste risico’s, negatieve effecten, en risicobeheersmaatregelen van zakelijke betrekkingen en producten of diensten;
  • artikel 3, lid 1d: niet-financiële prestatie-indicatoren die van belang zijn voor de specifieke bedrijfsactiviteiten.

4. Wat houdt niet-financiële informatie precies in?

Niet-financiële informatie wordt in de Wet gedefinieerd als informatie over milieu-, sociale en personeelsaangelegenheden, eerbiediging van mensenrechten en bestrijding van corruptie en omkoping.

5. Wat zijn voorbeelden van de verschillende NFI-aspecten die in de wet genoemd worden?

  • Milieu: gebruik van duurzame energiebronnen, broeikasgasemissies, waterverbruik en luchtverontreiniging. Maar ook informatie over natural capital, natuurlijke hulpbronnen (drinkwater), of bijdragen aan een circulaire economie.
  • Sociaal: dialoog met plaatselijke gemeenschappen, eerbiediging van bestaande landrechten, recht op informatie.
  • Personeel: gelijkheid mannen en vrouwen in arbeidsvoorwaarden, raadpleging van werknemers, recht op vereniging.
  • Mensenrechten: werkomstandigheden, werktijden, kinderarbeid, slavernij, vrijheid van meningsuiting, etc.
  • Corruptie en omkoping: maatregelen om corruptie en omkoping tegen te gaan.

6. Waarom moet onze organisatie NFI rapporteren / wat is de achtergrond?

De EU betoogt dat door bekendmaking van NFI de samenhang, vergelijkbaarheid en transparantie van rapportages verbeterd wordt in het belang van stakeholders zoals investeerders en consumenten. De Wet moet er bovendien voor zorgen dat risico’s met betrekking tot duurzaamheid inzichtelijk worden gemaakt.

7. Wanneer en hoe moeten wij rapporteren?

  • Organisaties van openbaar belang moeten over 2017 NFI bekend maken.
  • NFI dient opgenomen te worden in het bestuursverslag; daarbij mag gebruikt gemaakt worden van een kaderregeling (zoals ISO 26000, Integrated Reporting of het Global Reporting Initiative); u dient te melden welke kaderregeling u gebruikt.
  • Een separaat duurzaamheidsrapport is niet voldoende. De verklaring omtrent NFI dient opgenomen te zijn in het bestuursverslag.

8. Hoe verhoudt de bekendmaking NFI zich tot ons duurzaamheidsrapport?

Bekendmaking van NFI voor oob’s is wettelijk vastgelegd; een duurzaamheidrapport is niet verplicht. In uw duurzaamheidsrapport heeft u meer vrijheid in de onderwerpen die u communiceert (en de manier waarop).

9. Kunnen wij NFI ook nog voor andere doeleinden gebruiken?

Jazeker. Wij raden aan NFI te integreren in uw bedrijfsprocessen. Processen waar NFI  een bijdrage kan leveren aan een betere bedrijfsvoering zijn bijvoorbeeld risico management, stakeholder management en het strategieproces.

10. Wie controleert of onze organisatie conform de wet rapporteert?

De accountant.

11. Waarop en hoe vindt de controle plaats?

  • De accountant gaat na of de niet-financiële verklaring overeenkomstig de Wet is opgesteld en met de jaarrekening verenigbaar is, en of de verklaring in het licht van de tijdens het onderzoek van de jaarrekening verkregen kennis en begrip omtrent de rechtspersoon en zijn omgeving, materiële onjuistheden bevat.
  • Mocht de accountant op zaken die stuiten die niet in lijn zijn met de verklaring NFI dan maakt zij daar melding van.
  • De accountantscontrole is dus meer dan een simpele aanwezigheidscheck. De accountantscontrole gaat echter minder ver dan een volledige controle van de niet-financiële informatie waarbij de accountant ‘afzonderlijke gedetailleerde controlewerkzaamheden’ zou moeten uitvoeren.

12. Mag onze huisaccountant adviseren over de inrichting van onze NFI-rapportage?

Nee. De Wet toezicht accountantsorganisaties verbiedt dit. Een accountantsorganisatie die wettelijke controles verricht bij een oob, verricht naast controlediensten geen andere werkzaamheden voor die organisatie.

13. Wat zijn grofweg de stappen om te komen tot een NFI-rapportage?

U begint met een quick scan waarin u bepaalt of u klaar bent voor de Wet. Mocht dit niet zo zijn dan kunt u vervolgens prioriteiten voor de bekendmaking NFI stellen, uw rapportageproces inrichten en uw rapportage opleveren. Deze stappen zijn verder uitgewerkt in de figuur bovenaan deze post.

Neem vrijblijvend contact met ons op voor meer informatie.

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What every manager should know about (5/5): Non-Financial Disclosure

Introduction

This ‘What Every Manager Should Know About’-series is intended for managers whose businesses have to disclose (or feel the need or pressure to disclose) non-financial information. The needs or pressures to disclose non-financial information are manifold. Regulatory compliance such as EU directive 2014/95/EU, NGO pressure, ESG-risk management, demands from investors, and many other factors can all be reasons for a firm to start on a journey of non-financial reporting. Different non-financial topics have in common that they arguably feel unfamiliar to business managers who are trained to mainly think in financial terms. Now that the business case for non-financial reporting is well established (see The Business Case for Non-Financial Reporting), it is time for managers to familiarize themselves with the non-financial aspects of their business operations. In this series, I covered climate change, human rights, new governance, and corruption and bribery. Of course, these merely scratch the surface of non-financial aspects. The range of topics discussed, however, allow us to draw a number of general recommendations that will help you make a plan for implementing non-financial disclosure for your organization. After summarizing these general recommendations, pulled from previous posts in this series, I offer you an additional important point for consideration: which organization function should ultimately be responsible for non-financial reporting?

What we can take from previous posts in this series

  1. Non-financial reporting is tied to risk management. The first thing that you should be aware of is that non-financial reporting is closely tied to environmental, social, and governance (ESG) risk management. Focusing on non-financial aspects will tell you much about the risks your firm is facing in these non-financial areas. In the post on climate change for example, the case was made that focusing on climate change offers your firm the chance to gauge asset and infrastructure risk, price and yield risk, government regulation risk, and reputational risk. Reputational risk was also discussed in relation to human rights. Not adhering to human rights principles, can furthermore lead to risks of disruption in your supply chain because of strikes, bad quality of products, or drops in productivity for example. Managing governance or anti-corruption (discussed in two other posts) in an insufficient manner can lead to anything from reputational risk, to profitability risk, to ultimately risking your firm’s license to operate.
  2. Involving stakeholders is key. In the post on governance, we saw that both an explosion of advocacy groups since the 1970’s and increasing globalization lead to ever more importance and influence of a multitude of stakeholders on your business operations. It makes sense to involve your most important stakeholders when you select the most material non-financial topics for your reporting effort.
  3. Don’t reinvent the wheel and use existing guidelines, certification schemes and overarching (inter)national policy goals. A number of authoritative sources for your ESG-policies are readily available. Posts in this series referred to, among others, the OECD Principles of Corporate Governance, the UN Guiding Principles on Human Rights, and the Anti-Corruption Ethics and Compliance Handbook for Business drafted by the UN and World Bank. In the environmental realm, there is a plethora of multi-stakeholder initiatives that can help your business implement proper policies. For example, WWF endorses a number of multi-stakeholder initiatives, such as the Forest Stewardship Council (FSC) for wood and other forest products, Marine Stewardship Council (MSC) for seafood, the Roundtable on Sustainable Palm Oil (RSPO), the Roundtable on Responsible Soy (RTRS) and the Better Cotton Initiative (BCI). Multiple actors offer tools to help you pick the certification scheme that fits the needs and demands of your business, focusing on social, environmental and governance elements. Beyond certification, your company should be aware of overarching goals set by for example the United Nations (see the Sustainable Development Goals) and governments (see for instance the Dutch push for a circular economy in 2050 which is, in turn, based on an action plan for a circular economy drafted by the EU). Aligning your efforts with those grander (inter)national schemes will help structure your message to stakeholders.
  4. Use a step-by-step implementation plan for your ESG-policies. In both the post on human rights and the post on governance, an 8-step approach to implement a policy on any ESG-topic in your company’s operations (including your supply chain) was proposed:

1) Analyze and prioritize. First, perform a risk analysis and determine where your priorities need to be.

2) Engage stakeholders. Engage widely with stakeholders and formalize the dialogue. The engagement should lead to a decision on a compliance strategy: a code of conduct or certification scheme that has the support of your stakeholders.

3) Select suppliers. Select suppliers that are willing to work together on your priority ESG-topics and are willing to work towards compliance with your targets.

4) Develop KPIs & implement processes and policies. Develop KPIs together with suppliers and other stakeholders. Important: do not forget to design and implement processes, policies and systems that can actually deliver on your KPIs.

5) Evaluate. Evaluate your (and your suppliers) efforts on a regular basis. Follow-up frequently to see if expectations are being met and evaluate progress.

6) Enhance performance. Use supplier development strategies to enhance performance. Implement collaboration and training programs at the supplier, invest in assets, or offer technical and (potentially) financial assistance. Informal evaluations and audits could encourage suppliers to take initiative.

7) Report. Communicate your efforts and results according to the compliance strategy you chose in step 2 or integrate the results in your current ESG-report. Reach out to all stakeholders involved in step 2 and get their feedback.

8) Review. Set-up a periodic review board. Make sure it is composed of in-house professionals and external academic, NGO expertise, and worker unions. Review performance evidence quarterly to identify patterns and explore possible solutions

Assigning non-financial reporting to the CFO

Now that we have a number of guidelines on how to implement non-financial policies and reporting in your organization, the next question would be: ‘who should be in charge?’ For a number of reasons, the answer to that question is unequivocal:

  • Non-financial reporting may not be financial reporting, but it is reporting. Consequently, the person in charge should know how to deal with data gathering, reporting processes, reporting systems, compliance and auditing.
  • Non-financial reporting is closely tied to risk management. The person in charge should have strong knowledge of enterprise risk management.
  • Non-financial reporting has implications for the firm’s strategy and vice versa, the person responsible should have a role in which she can influence decisions on both fronts.

For all these reasons, I propose to hand final responsibility for non-financial reporting to the Chief Financial Officer. Ioannis Ioannou, of London Business School, who has published widely on corporate strategy in relation to ESG-topics, tends to agree in an article in The Guardian:

There are important implications in terms of organisational design and structure. How separate should the strategy and sustainability functions be within a corporation? What should the relationship between the CFO and the Chief Sustainability Officer (CSO) be? Current corporate mindsets consider CSSR [corporate sustainability and social responsibility] issues as peripheral or at best, as separate issues, and therefore there is a clear distinction between strategy and CSSR functions. This is an artificial and dangerous segregation. In fact, for a company that truly understands what strategy will look like in the age of sustainability, the CFO and the CSO should be the best of friends, or even, the same person.

Conclusion

This last installment summarized the main takeaways from previous posts in the series ‘What Every Manager Should Know About’ that focused on non-financial reporting. These takeaways should give you an advantage in implementing both regulatory reporting and voluntary reporting. I covered a number of ESG-topics in relation to non-financial reporting and concluded that 1) non-financial reporting should be tied to risk management; 2) involvement of stakeholders is key; 3) you should use existing guidelines, certification schemes and overarching (inter)national policy goals; and 4) a step-by-step implementation plan for each of your ESG-priorities is needed. In addition, I argued that non-financial reporting should be the responsibility of the C-suite: if not the CFO, then a CSO (Chief Sustainability Officer) that works closely together with experts in governance, compliance, risk and reporting that resort under the CFO. What I failed to discuss is the difference in actual frameworks that structure your overall non-financial report. Again, there is an abundance of frameworks available – e.g. GRI, IIRC, ISO 26000, CDP, SASB – and I hope to give an overview of their respective uses in a future blog entry.

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What every manager should know about (4/5): Corruption and Bribery

Introduction

Now that large corporates have to adhere to EU regulation 2014/95/EU, managers should be more familiar with a number of non-financial topics. The EU regulation on the disclosure of non-financial information asks firms to provide information on environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

In this post, the spotlight will be on corruption and bribery. I will give you definitions of bribery and corruption, explain why businesses can benefit from fighting corruption and bribery, and will show you how to implement an anti-corruption policy.

Corruption and bribery, an attempt at a definition

Transparency International (TI) defines corruption as ‘the abuse of entrusted power for private gain’. In addition TI says: ‘It can be classified as grand, petty and political, depending on the amounts of money lost and the sector where it occurs.’ I use TI’s definition of corruption, and not the definition given by the EU in its regulation, because the EU regulation does not include a definition. Nor does the EU provide a definition of bribery. So, instead, to find a less concise definition than the one used by TI, I consulted the anti-corruption convention endorsed by the highest number of states, the United Nations Convention against Corruption (UNCAC). However, UNCAC also couldn’t agree on the right definition…

According to Leslie Holmes, the reason why defining corruption (and bribery) is so difficult is threefold. In Corruption, A Very Short Introduction, he writes that cultural reasons, jurisdictional reasons and scholarly reasons all contribute to definitional confusion.  To solve this – and to elaborate on the definition offered by TI – Holmes proposes a 5-step approach to identify corruption, which I will use in the remainder of this blog:

  • the action (or omission) must involve an individual (an official) or a group of officials occupying a position of entrusted power;
  • the official has a degree of authority in decision-making;
  • the official must commit the act (or omit to do what he should) at least partly because of personal interests or the interests of an organization to which he belongs, and these interests must ultimately run counter to those of the state and society;
  • the official acts in a clandestine manner, and is aware that his behavior is or might be considered illegal or illicit. If uncertain about the level of impropriety, the official opts not to check this because he wishes to maximize his own interests;
  • the action or omission must be perceived by a significant proportion of the population and/or the state as corrupt.

Corruption encompasses both economic improprieties, such as embezzlement and bribes, and social improprieties such as appointing family (nepotism) or friends (cronyism). (Please note that cultural norms might label the same activities as corruption in one culture, but not in another; this is the reason for including the last step — i.e. the action must be perceived as corruption — in the approach to identify corruption.)

The difference between corruption and bribery, thus, becomes clear: bribery is a form of corruption. The OECD further defines bribery by listing some instruments for bribes: gifts, hospitality and entertainment, customer travel, political contributions, charitable donations, sponsorships, facilitation payments, and solicitation and extortion.

Considering the possible elements of corruption above (i.e. bribery, embezzlement, nepotism and cronyism), bribery is arguably the salient form of corruption in the business world. This is perhaps the main reason why the terms ‘bribery’ and ‘corruption’ are almost used interchangeably in guidance documents targeted at the business world. The OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance, for example, uses ‘ant-bribery’ exclusively. When the same OECD joins forces with the United Nations and the World Bank to draft the Anti-Corruption Ethics and Compliance Handbook for Business, however, the nomenclature is ‘anti-corruption’ instead of ‘anti-bribery’. This confusion of terms should not deter us, though. Bribery is a form of corruption. When a guideline calls for business to implement procedures to combat corruption, I think it’s a safe bet that they want you to implement procedures to combat bribery. In the remainder of this post, I will use the terms interchangeably.

Why should businesses care about corruption and bribery?

Your business should obviously comply with rules and regulation (such as EU regulation 2014/95/EU) on the disclosure of your policies and results in preventing corruption and bribery. There are a number of reasons why governments and international organization would push for such regulations (all that follows is, again, from Corruption, A Very Short Introduction):

  • Societal reasons. Corruption can lead to reduced aid. It can lead to increase inequality and a sense of ‘them and us’, or to reduced social capital and low levels of trust, and higher (organized) crime rates. A specific example where society pays the price for corruption relates to the construction industry where corrupt safety inspectors ignore malpractices in return for bribes, leading to unsafe buildings. (Also see my blog on human rights and the Rana plaza disaster.)
  • Environmental reasons. Corruption and bribery can be a problem in issuing permits for natural resource exploitation. One problem that you have surely heard about is illegal logging in countries like Brazil and Indonesia.
  • Security reasons. ‘For a state to exercise its defense, law enforcement, and welfare function properly it needs adequate funding; if corruption reduces government revenue, this has detrimental effects on the state’s overall capacity to protect its people. There is a strong correlation between weak states and high levels of corruption.
  • Economic reasons. Countries that score high on perceived corruption (see for example the corruption perception index 2016 from Transparency International) face lower levels of Foreign Direct investment, have lower tax revenues, and often face issues like ‘brain drain’.

In addition to the reasons that governments and international organization would offer to combat corruption and bribery, surely there is a conspicuous reason for business to do so as well: free competition. Businesses depend on free markets and free competition. Without it, your firm could lose out on business unfairly. It is one thing to lose business to a competitor where there is a level playing field; it’s an entirely different thing if you lose business to a competitor who engages in bribes to secure sales. The UK Secretary of State for Justice, in his foreword to the guidance for business to the UK Bribery Act (2010), says:

Addressing bribery is good for business because it creates the conditions for free markets to flourish.

A second reason why business should care is to maintain its reputation. The numerous corporate corruption cases which surfaced in the last years didn’t do much good. Holmes gives some examples:

The focus so far has been on the negative impact of corruption in the narrow sense (i.e. that involves state officials). But in the 21st century, the general public has become far more aware of the potentially devastating effects of corruption in its broad sense. As one Western corporation after another – Enron (USA), WorldCom (USA), Parmalat (Italy), Siemens (Germany), AWB (Australia), to name just a few – has been shown to have been engaging in misconduct, including bribery and kickbacks to secure overseas contracts, so the public’s trust in the corporate sector has plummeted.

The Economist, in a review on a new book about corruption, puts it like this:

Corruption is never far from the front page. In recent weeks, thousands of Romanians protested against plans to decriminalize low-level graft, and Rolls-Royce was hit with a [$835m] penalty for alleged bribery. Meanwhile, long-running corruption scandals continue to roil political and corporate leaders in Brazil and Malaysia. The growing attention has spurred governments to pledge action, as dozens did at a global anti-corruption summit in London last year.

Anti-corruption policies thus help companies (i) to defend free markets and (ii) build their reputations as trustworthy and reliable business partners. One way to do this is to explicitly report on bribery and corruption (just as the EU directive demands). Some see this as an extension of corporate governance reporting (see my blog on new governance) and propose to add it to other corporate governance disclosures. Holmes describes the evolution to a quadruple bottom lining as follows:

Since at least the early 1990s, more and more companies have been presenting their annual reports not merely in terms of financial performance – the traditional ‘bottom line’ – but also of their social and environmental achievements. (…) This triple bottom lining – also known as the 3Ps approach, namely ‘people, planet, and profit’- is usually presented as ‘sustainability reporting’. But in recent years, there has been a push to add a fourth bottom line, governance. This would include reporting on what a company has been doing to reduce bribery and corruption. It is argued by proponents of this ‘quadruple bottom lining’ that firms would benefit from reporting a fourth line, since it should enhance a company’s reputation.

To be able to report on your efforts to prevent bribery and corruption — as Holmes describes, and the EU regulation demands — you first have to implement the proper procedures within your firm. This is the subject of the next paragraph.

How to implement an anti-corruption policy

In implementing an anti-corruption policy, you could revert to one of the many guidance documents available. I already mentioned the UK Bribery Act Guidance and the OECD Guidelines. What follows is a (very) short overview of best practices from the Anti-Corruption Ethics and Compliance Handbook for Business drafted in a joint-effort by the OECD, the World Bank, and the UN Office on Drugs and Crime (UNODC). This is not so much a step-by-step guide on how to implement an anti-corruption policy, but an exhaustive list of things to keep in mind while drafting, implementing and following up on your policies and procedures to combat corruption.

  1. A risk assessment, addressing the individual circumstances of the corruption and bribery risks faced by your firm and its business partners, should be the basis for any anti-corruption program.
  2. Support and commitment from senior management for the prevention of corruption. Senior management’s involvement should be strong, explicit and visible.
  3. Develop an anti-corruption program. The program should at least include your firm’s anti-corruption efforts, including values, code of conduct, detailed policies and procedures, risk management, internal and external communication, training and guidance, internal controls, oversight, monitoring and assurance. The program should be applicable to all employees.
  4. Oversight of the anti-corruption program. Top management appoints a senior officer to oversee and co-ordinate the compliance program with adequate level of resources, authority, and independence. The senior officer in charge, reports periodically to top management.
  5. Clear, visible, and accessible policy prohibiting corruption. Here, you can think about preparing and disseminating an internal anti-corruption manual.
  6. Detailed policies for particular risk areas. Areas often mentioned are: gifts, hospitality and entertainment, customer travel, political contributions, charitable donations and sponsorships, and facilitation payments.
  7. Application of the anti-corruption program to business partners. Here, you should consider all business partners you may need to include in rolling out your compliance program, such as contractors, suppliers, agents, lobbyists, consultants, auditors, representatives and distributors.
  8. Internal controls and record keeping. This refers to proper financial accounting procedures and other checks and balances.
  9. Communication and training. Periodic communication and periodic documented training for all employees.
  10. Promoting and incentivizing ethics and compliance. The firm’s commitment to an anti-corruption program should be reflected in its human resource practices. It should be clear that compliance with the program is mandatory and that no employee will suffer demotion, penalty or other adverse consequences for sticking to the program, even if it may result in losing business.
  11. Detecting and reporting violations. The anti-corruption program should provide a safe space, and encourage employees and others to raise concerns and report suspicious circumstances.
  12. Addressing violations. Your firm should consider appropriate disciplinary procedures to address, among other things, violations of laws against corruption and bribery, and the company’s ethics and compliance program.
  13. Periodic reviews and evaluations of the anti-corruption program. Install periodic reviews to assess if improvements to your program are needed.

What’s next?

The ESG-topics covered in this series have some common aspects. First, they could all be seen as posing a risk to your company’s efforts for profitability (or even your license to operate). Second, it could be argued that they are not a core element of your firm’s mission but are ‘hygiene’ factors that do not immediately lead to higher profitability per se, but could hurt profitability if not properly managed. Third, external communication on these topics goes beyond communicating to such direct stakeholders as shareholders, customers and regulators. These three common aspects lead me to propose that ESG-topics should be viewed and managed as an integral topic from both an organizational structure as a business process point-of-view.

In my final post on the EU directive and related ESG-topics, I will, thus, revisit the advice given in previous blog posts, and try to synthesize these in a unifying approach towards managing ESG-topics relevant for your organization.

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What every manager should know about (3/5): New Governance

As your organization is getting ready for the implementation of EU guideline 2014/95/EU on the disclosure of non-financial information, I hand you a series of blog posts on non-financial topics that business managers might be less familiar with. My aim for this series of posts is twofold: First, to give you insight into concepts that are integral to non-financial frameworks on reporting, such as the Global Reporting Initiative (GRI) framework. Second, to show why and how you should integrate these specific non-financial disclosures into your overall business and risk management strategy.

The first blog in this series discussed climate change; the second post discussed human rights.

For the third installment in this series on non-financial information, I will focus on governance. Not the governance business managers might already be familiar with; but a new governance arising from a world where a diverse multitude of stakeholders influence the decision-making process within the firm.

I will discuss what new governance is, why new governance is a good way to manage your ESG-risks, and how you should go about implementing a way of working that takes into account new governance.

Corporate Governance

Governance is the process of governing. Governing, in turn, is defined by the Oxford English Dictionary as conducting (i.e. directing or managing) the policy and affairs of a state, organization, or people. Corporate governance, therefore, can be defined as managing the policies and affairs of a corporation.

Business managers will be familiar with corporate governance being described along the lines of the following (and many more) concepts: accountability procedures for board and management team; policies and accountability to shareholders and other stakeholders; transparency; ethical behavior; audit procedures. All these concepts and procedures of corporate governance have been well established: see for example the G20/OECD Principles of Corporate Governance. (Although I have to add that discussions on governance issues such as executive pay, and occurrences of accounting scandals will probably never end, as this article and this article (respectively) in The Economist show; I guess no amount of governance will ever change human nature…)

Since business managers (and their internal and external auditors) already have a very clear understanding of what corporate governance entails, it would not add anything to their knowledge by only restating the principles of corporate governance as defined by (e.g.) the OECD. Instead, I will focus on a broader definition of governance. As you will see, this broader definition will help you understand how governance is a more extensive issue than just corporate governance, and how it is linked to those other ESG-risks: environmental risk and social risk.

Beyond Corporate Governance: New Governance

Setting rules, regulations and policies to govern the organization internally is not sufficient to manage a business organization in the twenty-first century. A number of developments in the last decades have pushed governance from hierarchical structures (such as those followed by most corporates and all national governments) towards new forms of governance.

The first of these developments is the ‘explosion of advocacy groups during the last third of the twentieth century’ as Mark Bevir calls it in Governance, A very Short Introduction. Without a doubt, the increasing range and variety of stakeholders are getting an ever stronger say in policy development, whether it be government policy or corporate policy. A second development is that the rise of globalization has called for global governance to manage international flows of good, money and financial products or investment. Increasing globalization necessitates governance of non-economic issues such as security, food safety standards, climate change, and other issues affecting global commons that transcend national boundaries (e.g. clean air and water, protecting marine life).

The old form of hierarchical governance (via national or international institutions) is increasingly replaced by multi-stakeholder governance models. According to Bevir, the features that these new models have in common are:

  • they combine established administrative arrangements with features of markets and networks;
  • they are multi-jurisdictional and often transnational;
  • they involve an increasing range and plurality of stakeholders;
  • governing arrangements, different levels of governance, and multiple stakeholders are often linked together in networks.

Business firms should be aware of new governance because they increasingly run into non-economic issues that transcend national boundaries. In many cases, they will find that the issue at hand is governed by new governance, instead of by old-fashioned hierarchical governance (i.e. national rules and regulations).

Corporate Governance vs. New (or Network) Governance

Although governance in business organizations is already in place in the form of corporate hierarchical governance, business managers need to be aware of new governance in the form of network governance. There are roughly three types of governance according to Bevir:

Most of the typologies focus on three ideal types: hierarchy, market, and network. Each of the ideal types relies on a particular form of governance to coordinate actions. Hierarchies rely on authority and centralized control. Markets rely on process and dispersed competition. Networks rely on trust across webs of associations. (…) Box 1 provides an overview of the resulting types.

As for corporate governance, organizations are – by their very nature – steeped in hierarchical thinking. In addition, the market variety of governance should not hold too many secrets for business organizations either. Network governance, however, is a different matter. Because of developments described earlier – dramatic increase in advocacy groups, and increasing multi-stakeholder governance for transnational issues –, organizations are faced with mounting pressure to start using network governance as an additional governance model in organizational processes.

Implementing Network Governance

Implementation of network governance within a business organization – to manage issues that transcend the sole responsibility of the company – might feel unconventional for business managers for two reasons. First, companies are built on hierarchical foundations and compete in markets, but the principles of network governance – based on trust – will feel new and alien in a business environment. Second, corporate governance is still very much focused on shareholders (as opposed to stakeholders) as Bevir argues:

A key principle of corporate governance is thus the rights of shareholders. The main issue of corporate governance is how to ensure that the rights of the shareholders are properly safeguarded.

Network governance introduces the concept of interdependency between multiple stakeholders, which comes with a number of sets of conflicting modi operandi: trust vs. authority, interdependent vs. dependent, diplomacy vs. rules and commands, and reciprocity vs. subordination. (Again, see box 1.) It is, thus, not an exaggeration that the ways of network governance are a-typical for how most business managers are used to conduct their business.*

Taking into consideration that i) network governance is a-typical for any business organization, ii) the need for implementing network governance is increasing, and iii) not being able to handle new governance poses an (ESG-) risk in itself, I propose that organizations start implementing new governance on a case by case basis, in order for the organization to get used to the processes of network governance.

In my previous blog post in this series, I introduced an 8-step approach on how to implement a human rights policy in your organization. Here, I repeat that approach in a slightly different format to highlight the elements that I think will help you understand where network governance comes into play.

An approach to start working on an issue that needs involvement of many stakeholders should always start with a broader ESG-risk analysis to determine where your firm’s priorities should be. After that – and this is the first step of implementing network governance in your organization – engage stakeholders. Engage widely with stakeholders and formalize the dialogue. The engagement should lead to a decision on a compliance strategy: a code of conduct or certification scheme(s) that has the support of your stakeholders. (The next four steps in the 8-step approach are mainly geared towards supplier selection in such a way that you can deliver on your results, so I will not discuss these here.)

After you have results from your activities and operations, report and communicate your efforts and results according to your compliance strategy or integrate the results in your ESG-report. Reach out to all stakeholders involved and get their feedback. The last step is setting up a quarterly review board. Make sure it is composed of in-house and NGO experts, external academics, and local stakeholders such as unions and local communities.

In short, to put you on track for implementing network governance in your organization, you should: engage stakeholders, report to stakeholders and get their feedback, and finally discuss your results in a quarterly review board. Putting so much emphasize on stakeholder processes (and regular transparent public reporting) might feel unconventional in a business environment, but it is the only way to adapt the firm’s processes to face non-economic transnational issues.

As I already argued in my blog post The Business Case for Non-Financial Reporting, disclosing non-financial information can lead to insights on how to update your business strategy or improve stakeholder relations. In addition, by implementing the new governance model, your firm will report on ESG-topics in such a way that your stakeholders will endorse your efforts. Implementing network governance thus becomes a powerful mechanism to reduce your overall ESG-risk and manage your firm’s reputation.

(* On a more philosophical note: network governance might also feel a-typical or unconventional because of the reign of the two main theories in international relations. Realists seem to accept that international issues are power-issues not all too different from Thucydides’ history of the power struggle between ancient Athens and Sparta. (Reading the classics really never is a waste of time.) Liberals hope to solve international issues through international institutions and law. Network governance (in this case called global governance), in contrast, seeks a solution that is not found in realist or liberal views; it tries to solve international issues through informal norms and self-monitoring. This could also be called the multi-stakeholder view, I suppose. For a short introduction on these views, again refer to the excellent little book by Bevir on governance.)

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