Sustainability reporting is becoming more focused, but continues to be a work in progress. It has been a big year-and-a-bit for sustainability reporting


It has been a big year-and-a-bit for sustainability reporting. In May 2013, the international go-to sustainability standard, the Global Reporting Initiative (GRI), published its G4 update. Since then, the GRI's Sustainability Disclosure Database has registered more than 200 reports prepared to the G4 standard.

In December 2013, the International Integrated Reporting Council (IIRC) published its framework – a guide to help companies incorporate non-financial information into their annual reports. Integrated reporting is seen as the logical complement to the GRI G4, with the latter providing the material sustainability information that will feed into the former (see box).

Meanwhile, other major sustainability reporting initiatives have not been sitting on their hands. In 2013, the CDP (formerly the Carbon Disclosure Project) marked the tenth year of its questionnaire that is designed to support investment decisions by eliciting greenhouse gas footprint information from companies. A mere 235 companies responded to the questionnaire back in 2003. Now more than 4,000 do, including 81% of the world's 500 largest public companies.

In the US, the Sustainability Accounting Standards Board (SASB), which aims to help US-listed companies fulfil their materiality obligations, has been busy publishing new standards – by May it had covered 19 sub-sectors within the financial services, healthcare and technology sectors. SASB also announced, on 1 May 2014, that former New York mayor and sustainability advocate Michael Bloomberg would become its chairman, indicating the seriousness with which its standards are being treated.

For companies, especially those that have yet to get to grips with sustainability reporting, it can all seem a bit overwhelming, especially in the context of regulators requiring ever more environmental, social and governance (ESG) disclosure from firms. Companies also face concrete challenges, such as the cost and organisational obstacle of data collection to underpin their sustainability reports, and have concerns over issues such as liability.

Liability worries arise because of the tendency, especially when it comes to integrated reporting, for the responsibility over disclosures to move from corporate responsibility managers to the boardroom. Boards are not keen to leave themselves open to charges of misrepresentation, or to make declarations about which they are not fully confident.

Gordon Wilson, senior manager, sustainability services, for professional services giant KPMG, says that for boards to take responsibility for sustainability disclosures, companies “need to be quite confident internally about what is material. The argument for transparency is certainly stronger than it was five years ago, but the general counsel will be sitting with the risk management hat on, saying ‘why are we saying this?’.”

Watching and waiting

Such concerns mean that “no one is leaping into the ‘fantastic’ GRI G4”, Wilson says. Many companies are watching and waiting. Companies are aware that it is increasingly difficult to escape the pressure for ESG disclosure, but in terms of adopting the latest standards, “a sensible company would be thinking about a two- to three-year time frame for proper procedures and policies and dry runs to be put in place”.

Some are ahead of the curve. According to the Global 100 Most Sustainable Corporations ranking, which is compiled by Canadian investment advisers Corporate Knights, the most sustainable European company in 2013 was minerals and metals processor Outotec, headquartered in Espoo, Finland. Outotec's 2013 revenues were close to €2bn.

Outotec prepared its 2013 report largely in accordance with GRI G3. Minna Aila, the company's senior vice-president for corporate responsibility, says that “we included some new elements from G4 in the report, such as lifecycle and value chain”, but a full move to G4 will take place only after “a new thorough materiality analysis this year, which is the key for G4 reporting”. She adds: “With G4 we can focus more on the topics that are most material to us, which helps readers to better understand the company and its relevant corporate responsibility matters.”

Michael Yow, lead analyst for Corporate Knights Capital, says the Global 100 sustainability rating is done on the basis of facts and figures disclosed by companies. The ranking is “solely based on quantitative data, qualified by consistency and comparability”.

In this respect, the most important frameworks are GRI and CDP, Yow says, but the next few years could start to see a transatlantic divergence. Yow identifies SASB as a “competitor” to GRI G4, because of the differing regulatory requirements in Europe and the US. For example, European Union rules on ESG reporting, agreed in April by the European Parliament, refer specifically to the GRI as a framework that companies could use in preparing their non-financial disclosure.

SASB standards, meanwhile, are designed for US-listed companies to fulfil a Securities & Exchange Commission obligation that they should disclose material information, including relevant sustainability information (see box). It will be “a few more years” before a meaningful SASB/GRI comparison can be made, Yow says, but GRI is “more of a European product” and US companies already report less using GRI than their European counterparts.

This is borne out by GRI numbers on sustainability reports prepared according to the G4 standard so far. At time of writing, 37% originated in Europe, 24% in Asia, 19% in Latin America and just 9% in North America. As sustainability disclosure becomes progressively more mandatory, companies will have to decide which is the right framework for them.

Is it material?

In terms of the practice of sustainability reporting, the emphasis is moving from building up banks of data on the environmental and social impacts of company operations, to analysis and communication of material information.

In this respect, says KPMG's Gordon Wilson, companies coming new to sustainability reporting might be advised to begin with GRI G3, which includes a comprehensive list of the ESG indicators that a company might report on, plus descriptions of what the right documentation might be. Working through the G3 checklist is a “helpful way of starting a materiality assessment, and asking ‘is this relevant to me and my key stakeholders?’”, Wilson says.

G4 is likely to be used by companies that have done the basic assessment already, Wilson adds. Whereas G3 can lead to a “clunky, cumbersome, all-things-to-all-people report”, G4, with its greater focus on materiality – the relevance of sustainability indicators to the broader impact a company has – is more “sophisticated” but requires some reporting experience.

James Osborne, a partner with Milan-based corporate responsibility consultants Lundquist, says: “The G4 insistence on materiality is really hitting home with a lot of companies.”

Understanding the relevance of ESG issues to a company's basic operations – for example the need to secure water supplies – can be “an enormous penny-dropping moment”, and is “the end of sustainability being thought of as separate,”, he says.

Lars-Olle Larsson, a former director of KPMG Sweden, and an “ambassador” to the International Integrated Reporting Council, is currently the senior manager for ESG affairs for Swedfund, the Swedish investment fund that finances development-related business opportunities in poorer countries. He says there is a short cut to the identification of material issues: speaking to groups with an interest in the company, from investors to customers to potentially critical campaign groups.

“To know what is material is crucial, and you can find that out through stakeholder dialogue,” Larsson says. “Start by analysing which stakeholders have a stake in your company operations. Let them be included; inclusiveness is essential here.”

Such a process should not tie a company to follow the advice of any particular stakeholder group, but should be a recognition that “companies do not operate in a vacuum and they need to discuss how that impacts on natural capital, relationship capital, knowledge capital and of course financial capital”, Larsson says.

Wilson says stakeholder engagement carries its own risks. “You have to define who your stakeholders are,” he says. Some companies struggle because they define their stakeholders too widely and “end up with hundreds of pages of non-material facts and figures”. He adds: “Organisations that are able to say ‘here is a relatively small number of specific targets that we and our stakeholders deem material, and we're going to report on these’ should be able to drive a relevant and consistent report.”

Be transparent

Ultimately, good sustainability reporting and, potentially, good integrated reporting are about drawing the line: identifying what is material and to what extent is can be disclosed. In this respect, the logic behind frameworks such as GRI G4 and SASB is that transparency should be the objective. Companies that have gone through the materiality analysis, and have progressed to credibly managing their impacts, should have no problem being transparent about what they are doing.

James Osborne of Lundquist says that increasingly there is a price for not reporting transparently. “When people see companies that don't produce non-financial information, they fear the worst, and that is a risk,” he says.

Lundquist hosts annual CSR Online Awards to recognise the companies that most effectively communicate their sustainability activities. In the 2014 ranking exercise for the awards, Lundquist found only two out of Europe's 100 largest listed companies that do not disclose ESG information: the French luxury brands Dior and Hermès. It looks bad to be the odd ones out.

Whether it is because of peer pressure or regulation, even the laggards will eventually have to catch up. When they do, they will at least have a mature library of standards and guidance to inspire them.

The Global Reporting Initiative

The Global Reporting Initiative (GRI) is the starting point for most companies setting off on the sustainability reporting trail. The organisation was founded in 1997 and its standard is now in its fourth incarnation: G4. The aim of GRI is to provide companies with a flexible template for their sustainability reporting. The broader benefit is that the more companies that use GRI to report on their sustainability performance, the easier it is for investors and other interested parties to compare and assess which companies are likely to perform well in the long run.

The finalised G4 framework has been available since May 2013. GRI spokesman Brian Jones says companies have until December 2015 before its predecessors, G3/3.1 will be formally withdrawn. G4 consists of a guidance document setting out reporting principles and standard disclosures, and an implementation guide – a more detailed check list of principles and indicators for companies to work through.

GRI's aim with G4 was to put the spotlight on materiality – to get companies to focus on those issues, from anti-corruption to waste management, that are relevant for their operations and that could ultimately affect the bottom line. Jones says a transition to G4 is under way, and that “all types of feedback have been received, but in general organisations are happy with the results of their report when using the G4 guidelines”.

His advice on using the guidelines is straightforward: “Start reporting with G4 as soon as possible. Both documents will help you to design your project planning and support you during the preparation of the sustainability report.” James Osborne of Lundquist says the transition to G4 is in itself a boost for sustainability. Many companies “are really trying to use the G4 process as an opportunity to work both internally and externally on the whole sustainability agenda”, he says. This should lead to more extensive integration of sustainability at the heart of business strategy and management.

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The Sustainability Accounting Standards Board

The Sustainability Accounting Standards Board (SASB) has a specific objective: to help corporations fill in the US Securities & Exchange Commission's Form 10-K. This is a mandatory annual submission that provides a comprehensive overview of a company's financial performance. One part of the assessment requires companies to disclose “material factors” that might affect their financial performance – including environmental, social and governance (ESG) factors.

SASB's guidance on what, in sustainability terms, is material for Form 10-K is being built up on a sector-by-sector basis. It has so far published “materiality maps” for a number of sub-sectors within financial services, healthcare, and technology and communication. The sub-sectors covered include biotechnology, pharmaceuticals, commercial banking, insurance and internet media and services. Issues that might be covered, for biotechnology for example, include initiatives to promote healthcare in poor countries, ethical marketing, measures to counter the proliferation of counterfeit drugs and anti-corruption.

SASB is something of a sausage factory of standards. During 2015 and 2016, it will expand its guidance to sectors including aerospace, chemicals, agriculture, tobacco, real estate – you name it. It is early days yet, however. Michael Yow, lead analyst for Corporate Knights Capital, says: “There is really no SASB [sustainability] report at the moment.”. SASB is “predominantly a US thing”, and it is not clear how relevant it might be to non-US companies, though its guidelines could in principle be useful to inform the thinking of any companies operating in the relevant sectors.

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Integrated reporting: the vision thing

For many companies that already publish sustainability reports, an integrated report is the next step. An integrated report, which is intended to be a more holistic snapshot of a company's situation than a traditional financial-results-focused annual report, would not replace the sustainability report, but would pull out from it information with a bearing on the company's ongoing operations. In an integrated report, companies should also provide some strategic insight related to sustainability – how they plan to adapt their operations to cope with the sustainability challenge. This might include, for example, how they will manage water shortages or the need to cut greenhouse gas emissions.

The International Integrated Reporting Council (IIRC), which published its framework at the end of 2013, defines an integrated report as a “concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term”. Some authorities, such as the Johannesburg stock exchange, have started to oblige companies to file integrated, rather than simply financial, reports.

In practice, however, integrated reports so far have often been standard financial reports with some sustainability information tacked on. They lack the strategic vision that the IIRC wants – which for some companies is a thorny issue, because it might involve a radical rethink of their business model if they are to become truly sustainable.

Lars-Olle Larsson, an IIRC “ambassador” and senior manager for ESG affairs for Swedfund, the Swedish investment fund that finances development-related business opportunities in poorer countries, says the hard part for many companies is “how to discuss future orientation and the call from the IIRC to have a future outlook”. He says some companies are wary about disclosing strategic plans because they are “perhaps afraid of telling secrets”. Nevertheless, he adds: “I am certain that integrated reporting will become the reporting agenda in the coming years.”

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GRI  IIRC  reporting guidelines  reporting standards 

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