Sustainability risks are financial risks!
Eva Lindström was the ECA Member responsible for the recently published rapid case review Reporting on sustainability — A stocktake of EU Institutions and Agencies. On 17 June 2019 she hosted the ECA Sustainability Reporting Forum in Brussels. The objective of this conference was to bring together major stakeholders from both the public and the private sectors and raise public awareness on sustainability reporting and the auditors’ role. We interviewed her about sustainability reporting, the Sustainable Development Goals (SDGs), and the main challenges for the public and private sectors in this area.
Interview with Eva Lindström, ECA Member
By Derek Meijers and Gaston Moonen
Putting sustainability reporting on the agenda
On 17 June 2019, ECA Member Eva Lindström hosted the ECA conference on sustainability reporting in Brussels to raise awareness for the topic and to bring together major stakeholders from both the public and the private (audit) sectors. She explains the conference was set up around three main themes highlighted in the rapid case review: ‘These were the state of sustainability reporting, the information needs of stakeholders, and the auditors’ role in sustainability reporting. One of the main goals of the event was to offer a forum for exchange between EU and national audit institutions and the private sector.’
…such exchange about the topic of sustainability reporting is important because a lot is going on in the private and the big private audit companies are investing into this topic.
Eva Lindström underlines that such exchange about the topic of sustainability reporting is important because a lot is going on in the private sector and the big private audit companies are investing into this topic. Eva Lindström: ‘We can learn a lot from each other, also when it comes to performance work and sustainability reporting.’ She continues: ‘For me, one of the key take-aways from the conference was that auditors need to step up when it comes to auditing sustainability reporting.’ She adds: ‘Participants in the conference underlined the need for sustainability reporting to create trust, to keep organisations accountable that they use SDGs and sustainability in their decision making.’
Sustainability reporting as a challenge
The development of sustainability reporting in the private sector is driven by investors. When it comes to sustainability reporting in the public sector, Eva Lindström sees a clear challenge: ‘As institutions, we need to realize that we are in the business of reliability and trust. People, citizens, voters expect that we can report on how we will contribute to the achievement of the SDGs, both in the short as in the long term.’ She thinks that, also based on her experience, working for 30 years in the public sector in Sweden, including as Auditor General, institutions take it for granted that their work entails such a contribution by definition and do not explicitly report on it. ‘Making the public sector more aware that it needs to actively show how it pursues the SDGs is one major challenge!’
As institutions, we need to realize that we are in the business of reliability and trust.
The public sector should have an advantage given the sector’s experience with performance reporting. Eva Lindström continues that, ‘in the EU budget but also in countries like Sweden, the UK, Denmark, and Finland, there is a long tradition of working with performance reporting. And sustainability reporting is about good performance reporting.’ She adds that this also means that sustainability criteria are similar to performance criteria that can often be linked.
The EU and its Member States have actually agreed committed themselves to implement upon the SDGs and the EU clearly supports them as well. We should definitely use our experience and expertise with performance audits and reporting to promote and further develop sustainability reporting.’ Furthermore, Eva Lindström thinks that sustainability and the role of auditors when it comes to reporting on sustainability could also be a very good issue to discuss amongst peers and amongst other SAIs.
Action versus perception
The ECA Member notes that an important issue with the SDGs is that many people do not think they are concerned. ‘Although the SDG’s are not really building on the UN’s Millennium Development Goals, they are perceived as their successor. However, contrary to the Millennium Goals, the SDGs are not just for the developing world, but addressed to all countries.’ Eva Lindström says that, in fact, people in the developed countries have to realize they have their role to play.’ ‘We are all part of the problem. So the U.S., Russia, China, and Europe have an extremely important role to play, also, especially, when it comes to climate and all need to report on the measures we take to achieve the SDGs.’
… SDGs are not just for the developing world, but addressed to all countries.
When she says ‘we’ are part of the problem, Eva Lindström refers to the risk of exporting our carbon-footprint. ‘We have regulated our industry very much because we do not want that industry to pollute here in Europe, but despite that we continue to consume, which means the pollution is taking place somewhere else. We have exported our problem, but that does not make it disappear.’
The findings: Reporting on sustainability — A stocktake of EU Institutions and Agencies
Eva Lindström: ‘That was quite an impactful review, and I think our auditee, the Commission, is on the same page as the ECA when it comes to importance of reporting, but it can still do more.’ She explains that the Commission might be fully aware and supportive of the need for action, but that this is not the same as actually doing something on sustainability reporting. Eva Lindström: ‘I see room for improvement.’ She mentions a response by Vice-President Katainen to the recent ECA conference on sustainability reporting, who tweeted that ‘the EU is fully committed to the SDGs and the Paris Agreement, also by reporting and monitoring progress in a transparent way.’
Eva Lindström: ‘The Commission’s statistical office, Eurostat, publishes a report which describes the general development within the EU countries, the Commission published a reflection paper on a Sustainable Europe by 2030. But the Commission does not report on or monitor how the EU budget and policies contribute to achieving the SDGs.’ In this context, she also refers to the fact that there is no EU strategy on sustainability and SDGs after 2020 and that the outgoing Commission wanted to leave this decision to its successors. Eva Lindström: ‘One could also expect the Commission to have done more since 2015 since they also describe themselves as the ones who were crucial to putting the SDGs in place. There is no time to loose.’
The review was also the first one looking at what each of the 12 EU Institutions and 41 EU Agencies are doing on sustainability reporting. It found that only two European bodies — the European Investment Bank and the EU Intellectual Property Office — have so far published sustainability reports. Other institutions’ and agencies’ published information is incomplete and piecemeal, risking that important issues are not covered.
Sustainability as a financial factor
Eva Lindström points out the SDGs are important for all countries and sectors and integrate the three aspects of sustainability. ‘Sustainability is not only about climate or environment but also very much about economic and social development. Public bodies should take the lead here, but the public sector cannot manage this on its own’.
Sustainability is not only about climate or environment but also very much about economic and social development.
When discussing possible ways to push sustainability aspects onto the agendas of public organisations and companies, Eva Lindström underlines that an important factor is the increasing reputational risk related to sustainability. ‘Increasingly, customers find it important that the companies they purchase products from support the same values they have themselves. So building and maintaining goodwill is hugely important for many companies.’ She says that this interplay represents a valuable asset for businesses that has to be maintained and secured. ‘Sustainability needs to be considered in risk assessments as well. You have to get the financial departments into this.’ She explains that sustainability risks can be financial risks. ‘More and more companies also realize this and start considering topics such as climate change in their strategies.’ Eva Lindström brings up the risk of greenwashing, where a company makes an unsubstantiated or misleading claim about the environmental benefits of a product, service, technology or company practice. ‘You can imagine that sometimes a company has an interest to appear more environmentally friendly than it actually is. This is why clear standards and the role of auditors is so important so that sustainability reporting doesn’t become a mere PR exercise.’
We need to enable businesses to use the full sustainable potential and give them a clear competitive advantage over polluting and unsustainable business operators.’ She underlines that if consumers and investors do not care, it will not happen. ‘But now you can see they start caring, especially young people, and that is extremely positive. But a major issue is that companies and consumers do not have complete and reliable information about sustainability matters, and that is where sustainability reporting comes into play.’
The challenges for auditors
‘Many auditors,’ Eva Lindström argues, ‘have experience with performance audit, but auditing sustainability reporting is challenging — both for the public and the private sector’. She highlights the challenges of defining materiality and of the completeness of reporting, looking at whether all important sustainability matters are reported or whether significant issues are not included.
She thinks it is important that the auditors also communicate clearly that sustainability is an important aspect and that it falls within the scope of their work. ‘This is how you can create impact, already during the audit. For example when you talk to your auditee or when you ask input from experts. This creates the awareness that sustainability is something auditors are looking at, which in turn means that it is something the auditee must pay attention to.’
Eva Lindström continues that, for some, this could be perceived as a bit of a sensitive issue, because it entails ‘getting political’ by asking whether a government is missing out on things to address and whether they are taking the right measures, one might be perceived of becoming political. ‘To be clear, I do not think that from time to time being accused of becoming political should be a problem. On the contrary, if we are never accused of being political, we would not be doing a very good job. As auditors, we have to look into whether the right things have been addressed, as we need to audit the right things.’
Communication is essential
Eva Lindström notes that this is also the reason why communication is so important. ‘And I absolutely understand that as an essential part of my role as ECA Member.’ She explains: ‘Apart from delivering on our tasks and producing audit reports, ECA Members are the face of the organisation — especially in the Member States — and have an important role to play in the institution’s communication. It is important to realise that we need to start communicating from day one, so from the moment in which we start discussing the topic with the audit team, with the staff, with other colleagues and during the first discussion with the auditees. We should also inform our stakeholders that we are working on a topic, not just once we publish our results.’
She believes that the ECA is doing a good job here and that the result is that the auditees become more aware of important subjects and that this form of awareness raising is beneficial for the discussions about the audit after the report has been published. Eva Lindström: ‘If everyone is well-prepared and aware, we can have better informed discussions, which eventually will lead to better decisions, better policies and better results for our citizens. That is in the end why we are here.’
Box — The 4 major challenges identified in the ECA review
1. Developing an EU strategy post 2020 that covers the SDGs and sustainability
2. Integrating sustainability and SDGs into the EU budget and the performance
3. Developing sustainability reporting in EU Institutions and Agencies
4. Increasing the credibility of sustainability reporting through audit
This article was first published on the 3/2019 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.