Sustainability reporting is moving up a gear with the publication of the draft International Integrated Reporting Council framework, and the Global Reporting Initiative G4 guidelines
Richard Howitt, a UK Labour party member of the European parliament, makes a bold prediction. The integration of social and environmental information into corporate reports is set to sharply increase, he says. “By the end of this decade, it will become the globally accepted norm.”
Howitt should know. He represents the European parliament on corporate responsibility at the United Nations, and is an adviser to both the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC), the bodies that are developing guidance on how to report on corporate value creation beyond traditional financial measures. And indeed, for many large companies, such reporting is already the norm.
But the spread of sustainability reporting should not be overestimated. GRI’s sustainability disclosure database lists 3,098 sustainability reports from 2012, up only slightly from 3,028 in 2011. To put that into perspective, the world’s five largest stock exchanges alone (New York, Nasdaq, Tokyo, London, Hong Kong) list more than 11,500 companies. Though the importance of sustainability reporting is growing, relatively few companies are doing it.
This is not for want of frameworks. Developments during 2013 could persuade many more companies to start reporting on sustainability. In April, the IIRC published its draft integrated reporting framework, and called for comments to be submitted before July 15.
Then, at its May 22-24 conference in Amsterdam, GRI will publish the so-called G4, the fourth generation of the GRI sustainability reporting guidelines. The G4 gestation period has lasted for two years, and the updated guidelines are eagerly awaited.
Other developments are also afoot. The European commission has published proposals on disclosure of non-financial information by companies in the European Union (see box). Meanwhile, in the United States, the Sustainability Accounting Standards Board (SASB) is working on a series of sectoral “materiality maps” to help companies identify sustainability-related risk factors, and to include them in their mandatory Form 10-K submissions to the Securities and Exchange Commission (see box).
This growing body of guidance and standards is increasingly likely to be reinforced by regulation. In a world of limited resources, companies must show not only that they are generating value, but also that they can sustain that value, despite the constraints – from restricted emissions to water shortages, among many others – that they face.
An integrated standard
Howitt says the frameworks should encourage more companies to report on sustainability, and to combine that information with financial information in integrated reports. The guidance has been well thought-through, he says, to make sustainability reporting “affordable, realistic and not burdensome”.
The integrated reporting framework in particular is “the necessary step to take [sustainability] to the next level”, Howitt says. If the IIRC framework is seen as credible, it will give companies the confidence to start reporting, and once they start they will not want to stop, particularly because the exercise of integrated reporting “often involves cost improvements”.
The draft integrated reporting framework published in April builds on extensive preparatory work, including an extensive IIRC pilot programme involving dozens of companies and investors. Prominent corporations involved in the road testing of integrated reporting include Danone, HSBC, Marks & Spencer and Microsoft.
IIRC spokesman Jonathan Labrey says the draft framework is “the product of consultation with around 300 organisations”, and this proves its credibility as a vehicle for “concise communication of value” that takes into account financial and non-financial elements.
“We live in an age of transparency,” Labrey says, and companies had better get used to it. “Businesses have multiple users of their reporting. Where the information is relevant to the creation of value, that is the information that should be mined from the data and presented in the integrated report.”
Broadened value
The IIRC draft framework 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 over the short, medium and long term”.
In integrated reporting, the idea of value is broadened out from only financial value to embrace “six capitals”. A company should evaluate the extent to which it has created or destroyed value each year on the basis of an assessment of stocks of financial, manufactured, intellectual, human, social and relationship, and natural capital.
The integrated reporting framework further breaks down these categories. Social and relationship capital includes the value of shared behaviours within the company, and relationships with customers, suppliers, business partners, local communities and regulators, for example.
Once a company has identified what is material for it for each of the six capitals, it can identify key performance indicators and start to track its progress, thus providing a measure of its creation of different types of value. This approach “encompasses other forms of value that the organisation creates through the increase, decrease or transformation of the capitals, each of which may ultimately affect financial returns,” the draft framework says.
The IIRC is not expecting major changes to the integrated reporting framework to arise from the consultation period, but is calling for the widest possible input to further refine it. The final framework will be published at the end of 2013. Then “2014 will be the year of implementation”, Labrey says.
Complementary initiatives
When it comes to assessing their natural capital, many companies have a head start because of work done to report their sustainability performance in line with the GRI framework, which dates back to the late 1990s. This should mean that IIRC and GRI are compatible, rather than a duplication of efforts. The two bodies are “institutionally very closely aligned,” says Labrey.
GRI’s G4 update, due in May, will seek to improve on the current G3.1 framework by emphasising simplification and the quality of reporting over quantity. There will be a greater focus on “materiality” – in other words, on reporting on sustainability issues that are directly relevant for a company – rather than on covering all bases, even though some issues might be only peripheral. For example, greenhouse gas emissions will be far less of a direct concern for a financial services company than for an oil company.
There will be guidance to help companies think about materiality in sectoral terms, and it will be clearer in the update that indicators and disclosures on the corporate management approach apply only to material issues.
Currently, GRI reporters declare the application level – A, B or C – of their reports, indicating the amount of GRI standard disclosures that the report covers. G4 will do away with this distinction and replace it with a simple, two-tier system, though how this will work is, at the time of writing, still to be finalised.
In addition, the framework has been subject to a general overhaul designed to make it more internally consistent and concise. Judy Kuszewski, a sustainability consultant and member of the GRI’s technical advisory committee, says G4 will offer much greater clarity, with a very clear separation between guidance on what to report and on how to report.
Companies should feel confident that G4 will not make sustainability reporting needlessly complex, Kuszewski says. This criticism arose in response to earlier drafts of the G4 guidelines, but “people should be reassured that GRI has been listening,” and the final result will be significantly streamlined in comparison to the drafts, she says.
Kuszewski accepts that “probably in the short term G4 is going to make life more difficult [for companies] because the changes are profound and will take some time to absorb; but in the long term the reporting system that will result from it will be more coherent and material”. She adds that “when the dust settles” the clearer framework should encourage more companies to report on sustainability.
Companies will have a period of time to adapt to G4. Ultimately, however, the current GRI versions, G3 and G3.1, will be dropped as acceptable bases for sustainability reports.
Wait and see
Companies are taking a wait-and-see approach to the IIRC and GRI developments. German multinational Henkel, which owns brands such as Persil, Right Guard and UniBond, tells Ethical Corporation that the impact of G4 on its reporting “will depend on [G4’s] uptake by our key target audiences, as well as [on] how it will be interpreted by reporting practitioners”.
Henkel adds that the focus on materiality in the G4 revision “could improve the relevance of reporting – but questions remain: are the requirements realistic and do they reflect the needs of the different information users? The GRI guidelines have been one of a number of frameworks that we have used to define the content of our reports.”
For Henkel, though, the most relevant indicator for the quality of its reporting – and for that matter performance – “is the feedback we get from our stakeholders, including international rating and ranking providers, customers and our own workforce”.
Companies are also likely to take time to see how G4 and the integrated reporting framework that will be finalised at the end of 2013 will fit together. Stefan Schaltegger, a professor of sustainability management at Germany’s Leuphana University in Lüneburg, says that moves to integrate reporting are good for companies because “they involve a lot of people in dealing with sustainability who usually wouldn’t deal with sustainability”.
Some company departments, especially accounting and financial management, can be insulated from thinking about sustainability, Schaltegger says. Implementation of sustainability frameworks means that different departments “have to deal with these issues and talk to one another. They initiate learning processes.”
Sustainability report phase out?
However, it would be a mistake for a company to think that an integrated report can result in the phase-out of the sustainability report, he adds. The integrated report is “more a kind of roadmap” that should link to other forms of reporting for different audiences, such as environmental groups or investors interested in sustainability.
The main audience for the integrated report could be the internal one, however. Companies should strive to find the right balance between the division of tasks that are done in silos – financial reporting, sustainability reporting and so on – and the bringing together of information in an umbrella integrated report, which would be a horizontal activity within the company. Companies should avoid, for example, integrated reports that are just “financial reports integrating a little more sustainability than in the past”, Schaltegger says.
By signing off on a properly thought-through integrated report, corporate boards will show that they have grasped the arguments and are putting their weight behind sustainability, which is, after all, the main objective.
Mandatory sustainability reporting?
The European commission has arguably triggered a revolution in sustainability reporting. It has proposed that all companies with 500 or more employees should be required to make sustainability disclosures in their annual reports.
The obligation would apply to “material information on policies, results and risks concerning environmental aspects, social and employee-related matters, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors,” the commission says.
Companies would be free to use existing frameworks, such as the GRI, as the basis for their declarations. The commission says each company would have to determine what issues are material, and report on those only. There would be no requirement to have a boardroom diversity policy, for example, but if one is not in place, the company should explain why.
The proposal must pass through the European parliament and the European council, which represents EU governments, before coming into force. In the process it could be watered down. Nevertheless, if the requirement for all companies with more than 500 employees to report survives, the impact will be a huge extension of sustainability reporting.
According to the commission, about 2,500 large EU companies currently report on sustainability. Under the measure, 18,000 companies would have to comply. Depending on the passage of the legislation, the first year of mandatory reporting could be 2016.
UK Labour party MEP Richard Howitt, who represents the European parliament on corporate responsibility, says the measure is “a huge step towards promoting sustainable and accountable business”. The legislation will smash “a glass ceiling on corporate sustainability reporting, where the number of companies reporting on their social, environmental and governance impacts had peaked”, he adds.
The commission concedes that the measure would involve costs for companies, but encourages them to consider the long term. Sustainability reporting “is good for society and is good for companies and investors”, the commission says.
However, the powerful industry federation BusinessEurope signalled its opposition. “This proposal will create red tape and further disadvantage for a large number of European businesses in international markets”, BusinessEurope fumes.
Mapping materiality: SASB
While the International Integrated Reporting Council consults on its draft framework, and the Global Reporting Initiative finalises its G4 update, the Sustainability Accounting Standards Board (SASB), from its headquarters in San Francisco, is drawing up “materiality maps”.
These are guidelines that identify and rate sustainability issues on a sector-by-sector basis. SASB is a relative newcomer, having been founded in mid-2011. It has so far produced a materiality map for six healthcare sectors, but aims ultimately to provide maps for 88 industries.
As an example of work so far, for the biotechnology sector, SASB rates the most pressing non-financial issues as customer health and safety, research and innovation, and product quality and safety. Other issues, such as child labour, the impact from facilities, and political lobbying, are less immediately concerning.
SASB’s primary aim is to help companies include sustainability-related risk factors in their annual Form 10-K submissions to the US Securities and Exchange Commission. These submissions should disclose “material information” that could affect earnings.
Jean Rogers, SASB founder and executive director, says SASB standards are “a cost-effective way to comply with existing SEC requirements to report on material issues. From a legal compliance perspective, corporations acknowledge that not reporting on material sustainability issues, or reporting on them in a CSR report but not the Form 10-K, presents risk.”
SASB complements other frameworks, Rogers says. “For corporations that have the resources to disclose on sustainability performance more exhaustively via a full-length CSR or integrated report, the GRI and IIRC frameworks are excellent resources.”
Robert Eccles, a professor of management practice at Harvard Business School, who is also chairman of SASB and a member of the IIRC steering committee, says SASB is needed for the US, which is a “much more litigious society” than Europe. US companies are frequently sued by shareholders for inadequate disclosure.
Nevertheless, companies in the same sectors face common challenges wherever they are in the world. Consequently, SASB’s work on materiality could be “a really good starting point” for any corporation starting on sustainability to get “a very tangible sense” of what they should be reporting on, Eccles says.
G4 GRI Stephen Gardner sustainability reporting