Saturday, 19 February 2011

Interesting times for Sustainability Reporting

The next few years are looking interesting, we might even say exciting, on the sustainability reporting front. Two significant step-changes in reporting that we know we can expect are (1) the GRI G4 guidelines and (2) the Integrated Reporting framework. Last week, I attended the GRI webinar for Organizational Stakeholders where Nelmara Arbex, the Deputy Chief Executive of the GRI, took us through the paces on the way GRI is approaching both of these major developments.

The G4 - next generation of GRI guidelines
G4 is the new improved ! GRI framework which is scheduled for launch by 2013 for use in reporting probably during 2015. The process of developing the G4 will be the GRI's familiar multi-stakeholder process whereby broad consultation over a prolonged period will lead to the development of a final G4 draft by the end of 2012. G4 has ambitious objectives, designed to meet several needs as GRI expects to ramp up the number of companies reporting over the next few years. Whilst reporting has made massive headway, particularly amongst the larger public companies, the fact remains that upwards of 80,000 public companies have not chosen to disclose sustainability information. 

The G4 identifies two broad goals: improve the G3, and prepare for scale-up. This is how Nelmara Arbex presented the objectives:

Improving G3: 
  • Provide better guidance on how to report on governance issues
  • More robust definitions to better support assurance processes
  • Updated sustainability scope
  • Guidance related to current stages of normative frameworks such as UNGC and OECD reporting guidelines
  • Revision of the current Application level definitions
Prepare for scale up:
  • Offer a variety of flexible reporting elements for use by reporters dealing with different requests
  • Develop a user friendly format
  • Link to the International Integrated Reporting Committee framework
  • Link to broader ESG reporting requests and ESG information users 
Much of this might look like sudoku to you at this point, so let me try to fill in a few blanks from my own perspective.

G4 is the right direction
I will start by saying that I agree the G4 is the right way to go, and that there are many ways the current framework can be upgraded and modernized. As the GRI gains ground and becomes the de facto single reporting standard in the world, the name of the game will be not only to report on sustainability but also to do so in line with the GRI framework. As reporting "scales up" to achieve the aspirational mainstream, it makes absolute sense to reposition the common denominator and provide a platform which enables what we all want - a fair and balanced reflection of a company's sustainability performance and material impacts on all stakeholders in a way which is auditable, comparable and aligned with the business results. Additionally, disclosures should be accessible and presented in a way which makes it easier for stakeholders to use the data in a range of decision making tools.

Updated sustainability scope
The G3 is long and detailed but not long and detailed enough. The GRI's aspiration to "modernize" the G3 by including new sustainability issues which have emerged more visibly during the last five years since the G3 was developed in 2006 is absolutely relevant. Some issues have become more important such as the entire approach to water management whilst some represent new territory for the GRI such as the question of internet privacy and online exposure and intervention of corporations on social media, as well as a company's approach to managing employee presence on the world wide web. Other issues are not specifically covered in G3,  and I believe should be considered, such as the issue of road safety and how companies manage employees who spend a lot of time on the road for work purposes, a significant source of fatalities and other accidents which endanger not only employees but the general public. Many Sector Supplements  have been developed during the past 5 years and it may be that some indicators which have been identified via a single sector should be mainstreamed into the overall framework. My recent editorial for CSRwire.com refers to the mushrooming of sustainability fragments - specific industry associations that address single aspects of sustainability common to industry groupings - and it may be that these are also throwing up issues that G4 should address as basic opportunities for a common approach to disclosure. Updating the sustainability scope, providing the broadest possible scope for companies to report against the indicators which are material to them, is therefore a challenging but worthy objective for G4.

Improve the robustness of the GRI framework application
It is painfully obvious that many Sustainability Reports that have not applied the framework  lack rigor and balance. Regrettably, this can also be said of many who do use the framework, given a widespread lack of attention to detail when reporting on specific indicators. Far too often we find a GRI index at the back of a report which is neatly ticked off as fully disclosed only to find that, after detailed scrutiny, there is some fuzzy blurb which does not meet the requirements of the indicator. This is not helped by the hands-off approach by the GRI. The GRI Application Level Check, whilst very useful in providing an element of rigor in how the framework has been applied, only covers a small portion of the disclosures in any report and entirely skips over the quality of the assurance process.  Given that the GRI framework is not positioned as a "standard"  in the same way as ISO standards, for example, but as a helpful  tool for organizations, the GRI has distanced itself from any kind of "policing" or auditing of the use of the GRI framework, leaving the door wide open for all of the 1,500 users of the framework to "self-declare" pretty much anything they like. Sustainability is about impacts (outcomes) and not only inputs (actions), and as the GRI framework is the gold standard of how to report on sustainability (outcomes), I believe there has to be a greater connection between what companies are saying they are reporting and what we can actually find in the report. Therefore the GRI ambition with G4 to improve the framework to enable more rigorous assurance is a good objective of the G4 process.   

Provide a solution for harmonizing of reporting
As attention to sustainability has grown, so has the number of users of sustainability data, ranging from investor-targeted analysis and players in the financial markets, but also large companies who have understood that the sustainability of their business is linked to the sustainability of their broader supply chains. Companies such as Walmart and many others require sustainability data from their suppliers. Focused initiatives such as the Carbon Disclosure Project require data in a specific form. Local regulators are now requiring companies to include sustainability data in annual reporting. The UNGC and the OECD with whom the GRI has formed alliances, have their own reporting requirements as well. The plethora of requests to disclose that any company has to deal with is now becoming overly burdensome. The G4 aspiration is that reporters will be able to kill 43 birds with one stone and  cover off all bases with one set of guidelines. Harmonization should utopically make it possible to ensure all the data anyone might need is contained in one report. This is massively challenging but if achievable, is well worth the effort.

Revision of the current Application Level definitions
Aah, application levels. This is an interesting and controversial debate. At present, the Application Levels tend to be seen as an indication of the quality of the report, though as we know, the C, B or coveted A represents the measure of transparency, rather than quality. Arguably a more transparent report is of higher quality, but transparency still does not address the quality of the information provided. The gap between the levels is problematic - where a C report requires 10 indicators, a B report requires 20 and an A report requires all 79 plus a published Sector Supplement if relevant. The random selection of indicators, including some which are fairly lightweight and non-material to a particular business, can mean that a C reporter can actually produce a sustainability report without disclosing hardly anything about their true sustainability impacts, and a B reporter may not be much better. 

In my view, the Application Levels are unnecessary. What should be required is a summary table of indicators, in addition to the GRI detailed index which shows what has been reported and where to find it, which presents a quick n' easy overview of how many and which indicators have been reported in full. Profile and Management Approach disclosures should be required for all reports (currently C reports do not require Management Approach disclosures) as should, I believe, a minimum number of core indicators against which all companies should report. In other words, G4 is an opportunity to raise the threshold for all reports. Additionally, reporters should make it easier for us to see what else they have included. In this way, we would have a 45 report, or a 79 report, or a 15 report, or a 23 report, where the number refers to the number of indicators reported in full, in addition to the "pass" level of minimum disclosure. Partial disclosures are a bonus but, in order to achieve harmonization and a realistic assessment of sustainability performance, we need to look at full disclosures against indicators and not only work-in-progress or wannabe disclosures.

Alignment with the IIRC framework
For the uninitiated, the IIRC is the International Integrated Reporting Committee, established in 2010 by the GRI and the Accounting for Sustainability movement to create a globally accepted framework for integrated reporting.   The objective is that G4 should help companies to prepare for managing an integrated process in their companies and produce an integrated report in line with whatever framework the IIRC comes up with. The governance of the IIRC is as shown in the chart below, presented by Nelmara Arbex:

The members of the IIRC working group are predominantly accountants and investment experts, which tends to predict the nature of the output as predominantly geared towards the interests of financial markets, which is a double-edged sword and needs to be managed carefully. One of the objectives is to understand the link between sustainability impacts and financial results, if you like, a kind of platform for the financial ROI of sustainability as it is applies in a given company. This may yield some interesting outputs, but the integrated reporting framework is still a moving goalpost, and the preparatory alignment of G4 with the IIRC expected directional outcome makes sense, provided G4 does not become a pawn in the scheme of increasing the financial wealth of the already wealthy at the expense of other stakeholders.

G4 Technology
Another aspiration expressed for G4 is the use of new technology to make sustainability disclosures more accessible and allow for deeper analysis of data. New tools, ranging from XBRL to online reporting to  iphone applications and direct realtime data feeds to a range of applications could take reporting to another level and give stronger presence to sustainability performance for stakeholders. The GRi has also begun licensing software applications for GRI reporting, and once can understand an interest in these being more widely used. How technology can be used effectively for improved content development, greater accessibility and transparency of non-financial disclosures, as well as providing support for public consultation, is a challenge. Part of this is how the GRI presents the new G4 framework and what technical tools, in addition to a set of indicators, the GRI will provide. Thinking will have to transcend the basic excel tables and PDF's but not force reporting down a mechanical join-the-dots approach, exemplified by the "Let's Report" C level template.

Continue the debate
What's clear, is that the debate will continue, and if you have got this far in this obscenely long post, you might be interested in hearing more of Nelmara Arbex and other throught leaders in this space at a conference in London on 25th March, hosted by Justmeans, called Redefining Value, which I will  also attend. I love a good debate!

I could continue ... and I probably will at some stage ... but in the meantime, is there anyone who doesn't agree that the next few years will be an interesting time for Sustainability Reporting ?



elaine cohen, CSR consultant, Sustainabilty Reporter, HR Professional, Ice Cream Addict. Author of CSR for HR: A necessary partnership for advancing responsible business practices  Contact me via www.twitter.com/elainecohen  on Twitter or via my business website www.b-yond.biz/en  (BeyondBusiness, an inspired CSR consulting and Sustainability Reporting firm)

12 comments:

Henk Hadders said...

Dear Elaine,

I've read your post all to the end. Sure, the next years of Sustainability Reporting will be interesting, but will it also be worthwhile ? I have commented on your post "The Paradox of Sustainability Reporting" (22-10-2010), while advocating for Context-Based Sustainability (Metrics). In your post on 14-11-2010, you described " 12 CSR Reporting Trends for 2011", but you were still unsure about the importance and the use of "context" in sustainability-issues, and decided to further contemplate on this. Although I personally think that in that post, you didn't really understand what that notion means, we're now moving well beyond 2010, so it seems to me that you can no longer be silent about the importance of "context" in GRI G4 measurement and reporting terms (aiming for a Gold Standard). I'm very anxious to learn your reaction, and I'm sure that many others in this world will too.

With kind regards,

Henk Hadders

elaine said...

Hello Henk, congrats on reading the full post. Ha-Ha. Bet there aren't many others around who will. However, yes, the question of context is complex and quite how it should be reflected in the Gold Standard is even moreso. I do tend to keep silent until I feel I have something worthwhile to add to the debate, and when I do, I promise I will post about it :) Thank you for the reminder, though. I appreciate your continued interest and challenge and debate.
have a great weekend, elaine

Henk Hadders said...

Eliane, hope you are well and thanks for your reaction. But it's rather funny that you remain silent, while at the same time you say, " that G4 is an opportunity to raise the thresholds for all reports". For me, all these companies should reflect the real (social and ecological) thresholds in this world, and for me this can only be done with ....Context-Based Sustainability (Management). I just had the urge to cite Umair Hague, but I won't.

With kind regards,

Henk Hadders

Mark W. McElroy said...

Hello Elaine:

My name is Mark McElroy, and for what it's worth, I wanted to chime in and add some thoughts to this discussion. Henk and I know each other well, and so I know nothing I say here will be news to him. I also happen to agree with his perspectives on the subject of GRI, measurement and reporting, etc. – and most importantly, ‘context’.

That all said, I think the direction of GRI’s further development is constructive, but deeply misguided in terms of the priorities it reflects and what it leaves out. Imagine a case where we were talking about financial reporting, and the issue before us was how to improve it. Now imagine, as well, that financial reporting (income statements, in particular) at the time routinely excluded costs. Profitability, in other words, was strictly seen in terms of revenue, nothing more.

Now imagine, to take things further, that improvements were being proposed to improve financial reporting, and that they included the same kinds of things you listed for G3: “Improving” it, “Preparing to Scale It Up”, etc., but none of which addressed the absence of costs in financial reporting, as if the absence of costs was a non-issue.

Exactly what part of such proposals should we be expected, in that case, to take seriously, since costs would still be missing? Without them, how could income statements tell us anything about the actual profitably of organizations? They could not. Why? Because thresholds for profitability (i.e., cost levels that should at least be exceeded by revenues) would still be missing. Unbelievably, the same thing is happening with non-financial reporting today, notwithstanding the fact that everybody knows it (including GRI), and yet is failing to act on it.

Let me put it this way. The improvements GRI now has in mind for G4 are a big distraction. Even if/when we achieve them, GRI will still fail to enforce the idea that the equivalent of costs should be included in sustainability reporting – a point that GRI, itself, has been advocating for years. Read the GRI standard; it refers to this reporting principle as ‘sustainability context’. Thus, if/when G4 materializes in 2013 under the plan you describe, we will still have a sustainability reporting standard that fails to make genuine sustainability reporting possible. How tragically (and irresponsibly) ironic. Time to take this seriously, eh?

Regards,

Mark

Chris Milton said...

Hi Elaine, Great post, thanks for sharing!

Two things I've always hankered for in G3 are: an enforcement of materiality and a G3-lite for smaller companies.

I don't believe any standard can even start to be gold unless it requires the reporter to report against relevant sector performance. If this isn't done the rest seems like well intentioned navel gazing.

Also there are many companies which don't have the financial clout to do G3 (as Mark mentions, it's pretty onerous stuff) yet would like to have a believable standard they can apply. So while G4 may raise the threshold, it should also broaden and deepen its reach.

Just my uneducated tu'pence worth.

elaine said...

Hello Mark, Thank you for reading and commenting - Apreciate you taking the time - sorry for my delayed response - I am busy writingn sustainability reports! I would like to talk to you more about your presepectives on context and will try to make countact outside of this blog
regards, elaine

elaine said...

HI Chris, thanks for your thoughts. GRI Lite ... well, I think the C APplication level fits that bill - any more lite than that and its not a sustainability report at all. Re sector benchmarking, yes, I believe there is some merit in this through even within sectors there is great differentiation. Re G4, I believe there is a great need to adapt the reporting guidelines and allow some choice by sector/company size etc regarding what to report, but it should also create a broader playing field which has minimum standard content more clearly and rigorously defined.
best, elaine

Alexis Lindsay said...

Hi Elaine, I agree with you in that I don't think application levels are necessary. I would rather see evidence that an organisation has conducted a materiality assessment and have greater confidence that what the organisation has reported is relevant and reflects stakeholder concerns. I'm an advocate for the GRI and greater transparency but I also think organisations need to be clear on why they report what they do. This is important for readers, but also for internal stakeholders who are often the harshest critics of the time and effort that reporting can absorb. Clarity on choice of indicators (GRI or other) can reinforce the value of reporting and its linkages with other strategic efforts. Looking forward to the G4 discussions to come. Alexis

Mickey said...

Hello Elaine
Thanks for your post here, it helped me to understand the expected G4 framework better.

I was a little disappointed though that you sidestepped conversation here that I think others would probably benefit from. Meaning that the questions that were raised by both Mark and Hank brought some interesting dialog forward. I think that taking them offline offered little to the reader and maybe provided more legitimacy to the points that both of them raised.

Thanks again for your posts and I look forward to reading further your thoughts on this upcoming rollout

elaine said...

Hi alexis, thanks for your comments. I think we agree:).

Hi Mickey, thanks too, for your comments. I am glad you found the post helpful. I followed up with Hank and Mark and posted separately on the issues they raised. I do believe the G4 is an important development and will try to keep abreast of the changes.
warm regards, elaine

Eduardo Serra said...

Another step-change in reporting is the legislative framework that the European Commission is considering in order to make sustainability reporting mandatory and based on the "comply or explain" principle. We have written a post http://www.publicpolicy.telefonica.com/blogs/blog/2011/07/27/towards-a-common-framework-in-reporting/
mentioning the assets of a common framework.

elaine said...

Hi Eduardo, thanks for reading and commenting, yes, I am following the European Commission debate and it will be interesting to see they will legislate for "report or explain" and how that will play out.
Best, elaine

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