Transparency in ESG

The Speeki ESG Model includes transparency as part of the governance element.

Most articles written about transparency focus on tax transparency; essentially, the articles suggest that companies should not work out of tax havens and should declare their standard effective tax rates as an indication of the tax that they pay around the world.

At Speeki, we agree that tax transparency should be an important part of a company’s governance model. However, we believe that transparency is more than just tax transparency. We believe that transparency should focus on much broader disclosures, that organisations should have cultures of transparency, and that being transparent means making accurate information accessible to multiple stakeholders (employees, customers, suppliers, investors and whoever else is interested).

Before going into the areas where we think companies should be transparent, it is important to address some of the concerns around transparency. Below we will outline some common concerns, along with our view on how to move past the concern and drive a message of transparency.

Confidentiality

Obviously some information will be confidential, and this will be a consideration when making disclosures. It may be possible to do partial disclosures, masked disclosures, or disclosures that show a strategy and a format but don’t necessarily disclose actual numbers or names. Being transparent doesn’t mean you have to expose your confidential material, but it may challenge you to find a middle ground.

Competitive advantage

If you have worked very hard and been successful in a particular area of business, you probably think that disclosing how you achieved that success through a transparency initiative would be akin to sharing a trade secret, and you would therefore lose your competitive advantage. This is a fair issue to consider. The challenge for most companies is whether they see the value in sharing that they were innovative, or the first to think of something. Sharing something may mean that competitors follow, but not only will you have a great head start, you are going to look better in the eyes of your stakeholders and the market.

Privilege

You don’t want to inadvertently waive privilege. If a matter is currently before the courts or subject to legal professional privilege, consult your legal department before disclosing anything.

Potential embarrassment

News isn’t always good, and some negative disclosures might need to be made. In days gone by bad news could be hidden among good news, but in the modern digital environment it can be better to clearly own up to a negative disclosure. Most readers and followers will react better to people owning up to their mistakes and saying how they are going to make them right rather than just stating the facts.

Lack of pressure

There may be a lack of pressure to disclose – no one else in your industry is disclosing matters, so why should you? This is really a fundamental question as to whether you want to be a leader in ESG and transparency or a follower. Being a leader may set the tone for your industry and, while making disclosures may not be advantageous in the short term, being a pioneer will start paying off when your competitors ‘catch up’ over time.

Customers don’t care

Your customers may not appear to care about whether you are transparent. At the end of the day, they just want to buy the cheapest product from you, even if you paid little tax or hid your income offshore in a tax haven. Right? Maybe, maybe not. There is a growing movement in the younger generations to stop buying products for precisely that reason. Plus, it may not be your customer that takes this action – it might be a partner, a supplier or an investor.

Not a legal requirement

It may not be a legal requirement at this stage to report a particular issue. In fact, there is almost certainly no legal requirement. In many ESG areas you will need to balance what is legally required with what should be disclosed. The feedback of ‘Why are we doing this when we are not legally required to do so?’ will no doubt be bouncing off the meeting room walls and it will be important to look at the ESG framework that you have built and determine whether it is something that you should do because you can, not because you have to.

Reliance on representations

There is a risk that if you disclose information that is not correct, someone could rely upon it, suffer loss and seek to recover that loss from you. It is important to not mislead or deceive in any way and to ensure accuracy in every disclosure.

What should you disclose?

Now that we have the concerns covered, consider what you should disclose to be truly transparent.

Transparency is part of the G in ESG and, as mentioned above, mostly refers to tax transparency. However, in a modern ESG framework, we think it means a lot more.

These are the top 20 areas where we think that transparency could be an important part of your ESG initiatives:

1. Tax transparency, showing the average rate of tax paid in each jurisdiction as a percentage of revenue in that jurisdiction, and the countries in which taxes are paid or not paid (and if they are not paid, why not)
2. Corporate structures, showing all the companies within the group including investments, holding companies, joint ventures, side companies and related companies of all senior executives and directors, as well as all countries where the company is set up
3. Purpose, mission, vision, values and value drivers that are up to date and signed off by the board and management
4. Risk management frameworks, including what the major risks are, how risks are being evaluated and controlled, and an overview of the risk tolerance of the company, so that investors and members of the public can see if the risks are being managed according to a risk tolerance
5. What compliance framework the company adopts (e.g. following an ISO standard such as ISO 37301 or another framework) and how that framework is embedded across the company
6. Donations, sponsorships and community involvement, showing all amounts paid and promised, an overview of the due diligence conducted on each payment, and associated conflict of interest disclosures
7. Board remuneration and key executive remuneration, and bonus policies and clawbacks showing the rules to receive or lose a bonus
8. Whistleblowing statistics and key information and learnings from reports of potential misconduct, including reports made directly or indirectly through a reporting system as well as those made informally to management
9. Key policies and procedures on areas like corruption, money laundering, human trafficking and conflicts of interest, as well as the code of conduct, so that everyone can see the core set of documents that drive ESG initiatives
10. Examples of training given to executives and staff around key compliance and governance topics showing the actual material and completion rates
11. Statistics on due diligence on suppliers and supplier management, showing what due diligence is done, what the results are and whether the suppliers and the supply chain are also practising similar ESG initiatives
12. Your harassment, discrimination and workplace policies – specifically an overview of those areas that require improvement and details on the gaps that are being worked on
13. Employee turnover numbers and a summary of exit interviews relating to management issues, poor leadership, compliance or ESG misconduct, or retaliation
14. Pay practices, with a focus on gender and racial equality and an analysis of pay comparisons across similar roles in the company
15. Steps that the company is making around mental health and what assessments have been done around overall employee health
16. Carbon usage and carbon reduction across the company, with targets and steps for achievement
17. Waste management practices and goals for waste reduction across the company, with targets and steps being taken to achieve those targets
18. Energy usage and energy innovation to drive maximum use of green energy across the company
19. Data protection and information security policies and procedures to guarantee safe usage of private data
20. Compliance information, with key industry initiatives and mapping to millennium development goals or any other set of goals that the company has agreed to adopt

There are likely to be many more disclosures that would support a company to say, ‘We are transparent’. What the above list of 20 examples shows is that it is far more than how much tax that you pay (or don’t pay).

Many of these 20 areas might be aspirational for some companies to disclose, and some companies may not even have the data to even think about disclosing. ESG transparency is a long road, but you need to start somewhere.