Connecting business strategy and sustainability

• Market context: An analysis of the environmental and social trends which have a material impact on the sector, market and regulatory context within which the business is operating, where possible in quantitative terms and supported by evidence.
• Business model: A description of the implications for the way that the business operates and generates value in response to identified environmental and social trends.

• Objectives and strategies, risks, resources and relationships: The connection between material sustainability impacts and issues, the achievement of the company's objectives and implications for the strategies it has adopted. The analysis of material sustainability issues should include:

  • principal risks and opportunities, an explanation as to why they are important and an estimation of their impact in either financial or operational terms;
  • assessment of the sustainability of key resources (natural, human and financial) and key relationships (e.g. supplier, customer, employee, regulator, community)upon which the strategy is dependent;
  • reference to the approach followed by management to determine which sustainability factors are material; and
  • a description of the actions being taken by management to effect organizational change, including development, training and incentives.

1. Identify the social and environmental issues that are most relevant to the organization, the sector and markets in which it operates, ensuring that:

   • an assessment is made of the full range of products/services offered, markets served and site locations;
   • both global issues (such as climate change, population growth and over-consumption of finite resources) and those which are more localised (such as the availability of a skilled workforce) are considered;
   • issues with potential future impacts are considered, as well as those affecting the organization at present;
   • broader impacts are assessed, including the direct impacts of the organization on the communities and the environment in which it operates, as well as more indirect upstream (supplier) and downstream (customer) impacts; and
   • stakeholders, with whom relationships are critical to the success of the business, are consulted and their views considered.

2. Determine which of the identified issues are material to the organization's performance, by taking into account:

   • risks, resources and relationships, the potential impact of issues on the way that the business operates and on the achievement of the organization's strategic objectives (which may highlight the need for objectives to change); and
   • the extent to which issues that have an impact on external parties, but do not represent a cost to the business ('externalities'), are likely to become internalised through additional regulation or impacts on the organization's reputation.

3. Report on each material issue, using both qualitative and quantitative analysis, to provide an explanation of how it impacts on the organization's objectives, strategy and operations, including:

   • Market context, for example, changing patterns in customer demand towards more sustainable products, as evidenced by trend data on market share of 'eco-products' as a percentage of total market.
   • Business model, for example, within the food retail sector, changes to structure of relationships with suppliers to improve security of supply in the face of projected scarcity of key products resulting from increasing water stress.
   • Risks and opportunities, for example, the value of property considered at high risk from the physical impacts of climate change as a percentage of the total.
   • Resource availability, for example, the impact of sustainability performance on ability to secure project finance from banks which are signatories to the Equator Principles (representing over 80% of the global project finance market) or the availability of finite natural resources upon which production growth objectives are dependent.
   • Relationships with key stakeholders, for example, the linkage between employee satisfaction, cost of absence and retention rates.
4. Make available to users, for example on the company's website, an outline of the process followed to identify material issues. This should, in particular, explain why any measures generally considered significant at sector, national or international levels are not considered material for disclosure by the business. This will help to avoid concern about possible cherry-picking and will provide insight into management decision-making and risk management processes.

Very few companies reviewed provided a description in their Annual Report and Accounts of how material sustainability issues impact on the achievement of their strategic objectives, unlike the worked examples which were specifically created to supplement the above guidance. Reporting on sustainability issues as key risks is also a specific area that many companies could develop much further. However, the following provide examples of where elements of the guidance have been applied in practice: