Apr 10, 2013

Dots On Sustainability Reporting And Disclosure Practices.

INTRODUCTION

Increasingly, organizations are identifying Sustainability material issues relevant to their business and addressing them strategically through Sustainability programs. They didn’t stop there, but have also increasingly started to disclose data on these matters. In contrast to financial reporting, the history of Sustainability reporting is comparatively recent. Alternatively presented as non-financial disclosure, it has increased to become the buzz word in the business today. 

In order to make non-financial reporting possible, a variety of different standards and frameworks have emerged over the last years both mandatory and voluntary.  First, the vast amount of those initiatives made it difficult for reporters to decide which framework to pick and second for report readers to assess the quality and reliability of disclosed data.  

Global Reporting Initiative (GRI) has emerged as the preferred international framework for reporting; a set of guidelines enabling organizations worldwide to assess their Sustainability performance and disclose the results in a similar way to financial reporting.

According to GRI "95% of the world’s largest companies are already producing Sustainability reports in 2012 up from around 80% in 2008 and 50% in 2005" and According to a 2011 KPMG report (Corporate Sustainability: A Progress Report) "62% of companies surveyed (378 global companies) have Sustainability strategies in place. Almost 60 percent of China’s largest companies already report on corporate responsibility metrics".

An October, 2010 report from Thomson Reuters (ESG and Earnings Performance) concluded that, "U.S. companies with stronger ESG (Environmental, Social and Governance) scores consistently beat earnings estimates more frequently than those with lower scores".

However, despite the fact that Sustainability reporting is now the "de facto law for business" (as pronounced by KPMG in their 2011 survey of Corporate Responsibility Reporting) and even with all the progress we have seen so far, reporting continues to be one of the most challenging issues for Sustainability executives and practitioners; questioning and debating its relevance and its value to the business today.

The more I attend Sustainability conferences and summits, the more this issue comes in the first place during discussion and debates. It’s quite clear today, that companies now understand the worth of reporting and are trying to figure out how to utilize it in a smart way. Whereas, other companies have decided to drop the practice and work on developing creative and more effective ways to engage with their stakeholders and disclose information about their Sustainability performance.

More than 6,000 reports are being published each year and numbers keep increasing. How much money, effort and time were invested to produce each one of them? Who’s reading those reports? There are also questions about the accuracy and completeness of data reported, and its relevance to financial performance; if a company X gets A+ in GRI index does it rank better than other company Y? Most importantly, what the future of reporting will look like and how we can revolutionize the disclosure practices to generate more value to reports and stakeholders addressed? Is the next evolution of Sustainability report tied to the next iteration of the current frameworks including GRI?

I’ve finally decided to free my mind with regards to this topic J and here I’m placing some Sustainability reporting dots so you can connect them and predict where this is all heading. 

  • Only disclosing what is relevant to your business

Trying to set meaningful global metrics across the different areas of Sustainability, even within single sectors, wasn’t really the best thing to add value to the practice.

Business realities vary, and what would be considered material by one organization would not apply for another. Some companies choose to develop their own reporting frameworks, including Sustainability metrics and indicators.

This provides them with the flexibility to focus on industry-specific issues and metrics and report those that they judge most relevant. Various national incentives are given for Sustainability reporting. These include national regulations and policies, as well as stock exchange listing requirements and recommendations. However, here comes the issue of the questioned credibility, therefore they have to comply with a recognized Sustainability reporting standards such as GRI. 

The good news is that GRI learned from this and with the new G4 guidelines rules are going to change; reporters will be required only to provide disclosures and indicators that are relevant to their business.

It will be for the organization itself, in dialogue with its stakeholders, to determine what these material indicators are. Until, GRI G4 guidelines are applied and tested, we only have to be optimistic about it J

  • Ranking Sustainability Reports

The general perception around Sustainability ranking reports is that, while they may be useful in providing some indications of companies' activities, they lack credibility and the methodologies tend to be unclear. If a company X gets A+ in the GRI index does it rank better than other company Y? Although this dichotomy is going to be dropped from the coming GRI G4 guidelines and the A, B and C reporting levels which often caused confusion about the quality of the reports produced will be totally eliminated.

Yet, some companies continue to believe that it’s a mark of their Sustainability performance and are still focusing efforts to get that gold star.  It is, therefore, critical to develop a meaningful ranking system that reflects a companies’ quality of performance and their improvement over time, rather than simply their level of transparency.

"The answer is that there has been far too much focus on companies wanting to look good, and not nearly enough attention paid to actually performing well" explains Ramon Arratia, Sustainability Director of Interface in his book Full Product Transparency. "The problem with all this activity (Ramon commenting on labels, certifications and standards for Sustainability reporting …etc.) is that looking more virtuous doesn’t have anything to do with being more sustainable ….  We have been tremendously innovative in coming up with fairly meaningless stuff … that can deliver nice stories and marketing claims, but frighteningly ineffective at producing anything that will affect actual performance".

  • Accuracy of Sustainability data.

There are various factors contributing to reporting inaccuracies and misrepresentations. The core issue for accuracy and fair representation of data and information in Sustainability Reporting goes back to the management of Sustainability reporting and the degree of priority and professionalism it enjoys in the hierarchy of leadership decision making.

The general perception is that companies do aim to deliver accurate Sustainability data. They tend to massively over-claim when they state some of their key indicators in order to be in compliance with GRI guidelines or to cover more GRI indicators and gain the upper level in GRI scale.

In order to confirm their transparency, many companies already seek third-party assurance of their Sustainability reporting. While lots of practitioners advocate for it, I’m not personally entirely sold on its value, especially since there hasn’t been so many efforts to develop a universal set of rules to support the assurance like there is on the financial side.

The system needs to look at the whole full product life cycle and embrace customers and suppliers to measure an entire value chain for Sustainability performance. By opening up the process to a full value-chain transparency approach, no single action can be labeled green washing because all value chain partners will be on the same path and some are further along.

I know you’re tired now. As a break, you can enjoy a little poem about GRI G4 Sustainability guidelines J http://bit.ly/s4TFA1

  • Integrated Reporting

Developed by the International Integrated Reporting Council (IIRC), the Integrated Reporting demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. It represents another sign of the increasingly serious attention being given to Sustainability for the future operations of business. In 2011, the Johannesburg Stock Exchange was cited as the first institution to require all of its 450 listed companies to produce an annual integrated report in place of separate financial and Sustainability report.

This framework may solve the issue of financial reports being read only by investors and would bring more audience, readers of Sustainability reports, to have a look at this combined disclosure.

In addition to that, stakeholders need to make informed assessments about the longer term Sustainability of a company and this integrated reporting will facilitate a more holistic and meaningful reporting of financial results, enabling all stakeholders to gain a better understanding of a company's Sustainability in the future.

However, some experts in the field believe that the integrated reporting could devalue Sustainability and reduce it to a narrow set of indicators within an annual report that focuses on financial features.

  • Digital reporting

Isn’t it worth it to finally admit that only consultants and few practitioners are currently reading 60 - 70 pages Sustainability reports? How significant is the number of customers, suppliers and even employees whom take the time to download a Sustainability report of a company and learn about its Sustainability performance, achievements and challenges?  This is the truth that we keep hiding and avoiding to talk about today.

And in case interested, how easy it is for stakeholders to access to information that are relevant to them or their relationship with the company?

It is obvious today, that producing those big reports is not practical anymore and there has to be some creative ways on how to make it easier, accessible and more readable. Some companies went digital and designed micro-websites for their reports. Those reports were created in a unique format offering easier access from smart phones, tablets and other popular mobile devices.

Other companies produced GRI reports available in eXtensible Business Reporting Language (XBRL).  The GRI Taxonomy XBRL, developed in collaboration with Deloitte, provided the users of Sustainability performance data with the leverage to push and pull information that meets their requirements. Also helped investors, auditors and analysts to access information in Sustainability reports faster, and more simply.

GRI expects that XBRL will be increasingly used for disclosure on Sustainability information and will facilitate and improve the comparability of information especially with the coming G4 guidelines.

However, it was argued by some experts globally that due to the complexity of the data and the lack of standardized taxonomy, it would not be possible to compare results from different companies, even using XBRL.

But that is not where the innovation needs to take place. That is not where the excitement has to be J I believe that the reporting and disclosure practice has to be easier that.

The key problem today, is how companies can engage their stakeholders continuously throughout the year by providing them with information about their Sustainability performance in a short, smart and relevant way to engage and seduce them to even care in the first place then enjoy following the progress. 

This is why the next evolution of Sustainability reporting is not tied to the next development of GRI guidelines or other standards. The next evolution of reporting is about genuinely connecting and engaging with the audiences. Providing the information they will respond to.

 

Our Co-founder Monaem Ben Lellahom's new article on "The Rise Of Purpose-Driven Marketing" featured on www.csrwire.com , www.sharnoffsglobalviews.com and www.indiacsr.in

Monaem Ben Lellahom