Sunday, September 1, 2019

GRI: Still in the lead?

GRI  remains the most widely used global standard for sustainability reporting - though I find myself wondering if that's something that still counts for something. Are GRI Standards still a worthy leader of sustainability reporting frameworks? Or is it time for a fundamental review of GRI as the baseline set of standards for sustainability reporting (on a timescale that assumes most of us will still be alive before it's complete)?

There are several things I would consider revisiting:   

The first is that GRI largely remains a standard for measuring direct accountability. The concept of material impacts which is so central to GRI standards is not borne out by the overriding focus on measures (topic-specific disclosures) that address mainly direct impacts. Almost all of the 200, 300 and 400 Standards measure direct operational performance and not impacts on stakeholders. Reporting on resource consumption, adherence to labor standards, anti-corruption etc. is all well and good, and necessary, but most of these are not the true currency of sustainable business today. Stating year after year in your sustainability report that you do not employ child or forced labor or that you paid no fines for non-compliance are no longer the key proof points of a sustainable business.

The indirect impacts of a business reach much further than their direct impacts. We all know that a pharmaceutical company has a far more meaningful impact on healthcare and access to medicines than the amount of carbon emissions the company saves in its operations. Internet providers have a far greater role to play in keeping children safe online than in managing resource consumption of optic fiber cables. We know that food producers affect how we lead healthy lifestyles in ways that are far more significant than the amount of fuel saved by increasing logistics efficiency. And we probably know that the public expects companies to take a stand on human rights, environmental health and social justice and have an impact on policy in areas where governments are not doing the job.

If we want standards that truly reflect how companies are affecting our lives, I think we need to think differently about what such standards ask companies to report. I am reminded of one of the transformational books I read many years ago and often reference: The High Purpose Company, by Christine Arena, one of the first sustainability experts, I believe, to highlight purpose as the core of sustainable business, purpose being the positive impact on society beyond making money. Sustainability then is about two things: driving positive impact (a purpose-driven business) and doing business ethically (an accountable business). GRI focuses on the latter. What about a Standard that focuses on the former? 

Some companies currently make their sustainability reporting about their core social purpose and the bulk of their disclosure is about how they make a difference through the business they do. The GRI Content Index then fills the transparency gap for how companies operate in a resource-efficient, socially responsible and ethically viable manner. Many companies haven't reached this realization yet: they use GRI as a rigid framework, selecting material topics from the limited number of GRI-prescribed options (the Standards), failing to link to their bigger picture. Currently, GRI Standards do not expressly encourage purpose-driven thinking.

The second review of GRI Standards that I would consider concerns the challenges of reporting on materiality.  GRI Standards offer a definition of a material topic as one that: reflects a reporting organization’s significant economic, environmental and social impacts; or that substantively influences the assessments and decisions of stakeholders. How long is a piece of string?

Material can mean anything from generic topics, such as climate change, to specific topics, such as increasing use of renewable energy - one being so much broader than the other. If materiality means "what matters most", listing a set of any-company-anywhere sustainability topics as material undermines the intent. With such generic lists, everything matters most. In the early days, it might have made sense for GRI to get materiality on the map with a light touch, by leaving the process for determining materiality wide open and the constituents of materiality somewhat vague. In today's world, where materiality seems to be anything you want it to be, more prescriptive guidance might be worth considering.

How confident can we be of all those materiality matrices that are floating around out there? What tools do companies use to define materiality and what makes an internal and external stakeholder engagement process robust enough to deliver a materiality outcome that's meaningful, relevant and balanced? Some companies interview select stakeholders. Some conduct broad online surveys. Scoring and ranking mechanisms are a black hole. I think this is one of the big paradoxes of materiality. Despite materiality being the pivot of sustainability disclosure, it's still a black box of often rather arbitrary selections, delivered through an imperfect process, skewed by an often random collection of opinions. And even then, despite the selection of material topics, companies report on everything anyway, except those things that they prefer not to report, and conveniently call not material.

I think it's time for an overhaul that prescribes a certain number of data points for all companies to report as a baseline (what I call Operational Materiality)  The more meaningful indirect impacts, which are a more effective measure of most companies' impacts (what I call Precision Materiality or Differential Materiality) should be company specific - and companies need to get better at measuring these in some way. GRI calls this Mission Effectiveness, adapting its own guidance on materiality to create something GRI Standards do not reference anywhere. GRI's 2018 Material Topics use the term "other sustainability topics" for those indirect impacts, the most significant in terms of GRI activities,  that are not captured in the GRI Standard sets.

GRI's Disclosures on Management Approach (GRI 101-103) for these other topics are rather general without  precise ways of measuring performance in these areas. GRI's creativity in applying its own framework shows that the standards have not stood the test of time. In its 2015-2016 report, GRI's material topics were entirely direct (see matrix below), indicating that GRI's thinking has moved on (which is good) but the Standards have not.

Another aspect of GRI Standards that could do with a refresh is the way standards reflect the changing dynamics of business. In 2016, with the introduction of GRI Standards, we were promised an agile set of standards that could be quickly adapted to changing realities and new requirements. Since then, a new Water Standard and a new Standard on Occupational Health and Safety have been published. One new Standard on taxes is scheduled to be published in 2019, and some additional Standards revisions are scheduled for 2020. This may be progress, but it's slow progress. And in the meantime, realities are changing. For example, one of the issues I frequently encounter in reporting on employees is that gender can no longer be a simple reference to women or men. Today, gender identity includes, for example, transgender. All of GRI's employee demographics reporting requirements are based on a gender split, and in some cases, specifically women and men. 

In general, GRI's Diversity and Equal Opportunity (Standard 405) may not go far enough to reflect today's higher aspiration of equity rather than equal opportunity. Other aspects of doing business today come to mind, such as the circular economy, regenerative business, democratization of technology, data security and more, that are hardly addressed by GRI Standards. For GRI Standards to remain in the lead, the pace of change must accelerate to create standards that show how companies are responding to today's sustainability challenges, not only those that were identified 20 years ago.

I am an admirer of the work of  Dan Esty, Hillhouse Professor of Environmental Law & Policy at Yale, whose research has exposed shortcomings in corporate sustainability disclosure. Developed from a perspective on sustainable finance with a focus on investors (but don't let that put you off 😉), his paper on Corporate Sustainability Metrics: What Investors Need and Don’t Get   is a sensible approach to sustainability disclosure. While I may not agree with everything, the following summary of issues in current sustainability disclosure makes sense to me.

Dan Esty  writes:

"One of our core observations is that repurposing ESG metrics that worked for the “values”  investors of the past does not work for the sustainable investors of today. Mainstream investors now want a more comprehensive  and  carefully curated perspective on the companies in their portfolios – which existing ESG data sets so often cannot provide."

He also recommends a government-mandated framework of ESG methodologies to underpin disclosures that are common to all or most companies. It's not by chance that I am pondering this question at this time, because, next week, the third annual Asia Sustainability Reporting Summit (register here 😀 ) which I co-chair, will run under the theme of Is mandatory better? Among other things, I will facilitate two panel discussions with prominent and accomplished Chief Sustainability Officers, regulators, analysts and academics on this subject.

Another brilliant academic whose work I admire, Professor Guler Aras (Integrated Reporting Network Turkey Executive Chair and Yildiz Technical University Finance Governance and Sustainability Research Center Founding Director), will be an expert voice on a panel next week. She has proposed a multi dimensional sustainability model in her research article which was published in Journal of Cleaner Production. She says: "In addition to the traditional sustainability components, finance and governance components allow businesses to maintain healthy and continuous performance over a long period of time and provide benefits to all stakeholders. Hence, apart from the economic, environmental and social dimensions of corporate sustainability, a good governance structure and financial factors should be integrated to properly evaluate firms’ sustainability." Prof. Aras's diagram below illustrates a multidimensional comprehensive corporate sustainability disclosure model.

This is worth mentioning because, mostly, the link to overall business results is a missing element in sustainability reporting. While finance (Economic Performance GRI Standards 200), and governance (GRI General Disclosures 102-18 - 102-39) are part of GRI-based reporting, there is often a disconnect in reporting between economic and governance factors from a sustainability perspective and actual business results. More direction in sustainability reporting standards could be considered to help companies define how sustainable practice impacts their own business through risk mitigation, employee engagement, customer loyalty, cost benefit and new business opportunities, to name just a few. But that's probably a whole other discussion....

Voluntary or mandated, corporate sustainability disclosure needs to get with the times, deliver the need and be more useful to not only investors, but to all of us whose lives are affected by the actions of corporations, in positive and less positive ways. Whether the new declaration of the Business Roundtable on the Purpose of a Corporation, that commits to delivering value to ALL stakeholders inspires or depresses you, there seems to be a consensus that we need better frameworks for measuring and disclosing sustainability impacts. With leadership comes responsibility to stay in the lead. As an established leader in driving sustainability disclosure, GRI has the capability to help transform sustainability reporting standards into more meaningful, comparable and useful tools for sustainable development.

P.S.  I you got to this point, you deserve a double ice cream. 🍦🍦 

elaine cohen, CSR consultant, Sustainability Reporter, HR Professional, Ice Cream Addict. Owner/Manager of Beyond Business Ltd, an inspired Sustainability Strategy and Reporting firm having supported 100 client reports to date; author of three books and several chapters on Sustainability Reporting and the Human Resources connection to CSR; frequent chair and speaker at sustainability events and judge in several sustainability awards programs each year. Contact me via Twitter , LinkedIn or via Beyond Business       

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