Monday, July 30, 2012

Is Integrated Reporting truly Integrated?

Right on the heels of the GRI G4 Exposure Draft, which rightly avoided getting into any discussion of Integrated Reporting, despite an original intent to create a seamless harmony between these two streams, it looks as though the GRI and the IIRC are having a bit of a language problem. That is, neither is speaking the same one. GRI is talking material impacts. IIRC is talking value creation.

The IIRC recently published a Draft Framework Outline  which is written, I think, in English. This follows the IIRC Discussion Paper which was published in September 2011 and elicited over 200 responses. A summary of the responses can be downloaded here, or you can do as I did, and take a look at all the individual responses submitted by people and organizations here (including mine here). It's worth taking a peek at these. They are very interesting. And sometimes rather amusing!

The purpose of the Integrated Reporting Draft Framework is to keep stakeholders informed. The Draft for Public Consultation will not be issued until 2013, with a Version 1.0 for implementation by end 2013.

The Integrated Reporting Draft Framework describes the elements that the Framework is expected to contain when it is actually a Framework and not a Draft. It has two parts: the concepts that are likely to be included in the Integrated Reporting approach,  and the expected elements contained in the route to preparing one.

The Draft framework refers to a "principles-based approach rather than focusing on specific KPIs or rules for measurement or disclosure of individual matters". While the IIRC threatens to issue KPI's or rules for disclosure (in GRI language: Performance Indicators and Profile Disclosures) at some future date, the emphasis is clearly on companies using their own judgment to sort out what's important and what to measure. In this way, the Draft Framework does have some similarity to the elective elements contained in the new G4 Exposure Draft which proposes a more rigorous process to define material issues and disclosures relating to those issues only.

Creating and Preserving Value is a key theme in Integrated Reporting. While one might argue that value is determined by considering all stakeholders, the focus on value rather than impacts moves Integrated Reporting further away from the accountability focus that has been, in my view, a pivotal factor in the development of sustainability reporting.  I think this positioning - value creation versus accountability - is one of the basic differences in perception between financial reporting and sustainability reporting.  The Draft Framework expects to include a definition of value, just to make it clear for everyone - and the implication is that by using the capitals system (see below), the definition of value will be broadened to include value for all stakeholders rather than purely financial value for shareholders. But what I am not sure about is whether there is a loophole that assumes you can create value without being accountable? If Integrated Reporting focuses on value creation, who focuses on accountability?  
The IIRC calls resources and relationships "capitals" of which there are six: financial, manufactured, human, intellectual, natural and social. I don't really identify with this. Why call them capitals when they are actually resources? Almost any definition of capital you look at makes the connection between capital and creating money. If all that the new approach to Integrated Reporting is doing is changing the words we use to refer to creating money, I am not sure we haven't lost the plot.

The Framework is likely to include a set of  guiding principles which should be used to prepare the report.
  • Strategic focus
  • Connectivity of information
  • Future orientation
  • Responsiveness and stakeholder inclusiveness
  • Conciseness, reliability and materiality.
These principles make sense, as I have said before. The aspects of connectivity and future orientation are often very lacking in our current forms of sustainability reports.

The Framework  is likely to prescribe six content elements relating to business model, operating context, strategic objectives, governance, performance, and future outlook. So far, so good. These are the elements that were introduced in the Discussion Paper that was published last year and seem to be the right sort of questions that a company should address.

To what extent this Draft Outline Framework actually moves us further down the track of Integrated Reporting. What exactly is integrated here?
Claudia Kruse writes on the IIRC Blog: "There is still much confusion about the distinction between sustainability reporting and integrated reporting. From an investors’ perspective it is absolutely critical that integrated reporting is positioned firmly within the realm of value creation and in a manner that speaks to the boards and financial (reporting) departments of companies". How integrated is that? I understand the need for investors to seek ESG information. I understand that the financial community is looking for another way to safeguard their cash. So what is this distinction that Claudia Kruse refers to? If all we are doing is moving from Financial Reporting to Value Reporting by adding in a few more ESG context-related content areas, then there is no new distinction. There will be Integrated Reporting and Sustainability Reporting. Just like now. Annual Reporting and Sustainability Reporting.

The state-owned energy Company from South Africa, Eskom, has delivered an Integrated Report which, for the first time, claims to align with the principles of the IIRC Discussion paper, stating,
"Eskom has combined sustainability and financial reporting for a number of years, but this is the first integrated report that aligns with the principles contained in discussion papers published by the International Integrated Report Council and the Integrated Reporting Committee of South Africa. Integrated reporting is a new international initiative that has emerged in response to the shortcomings of traditional reporting, which emphasises financial results without taking account of the broader context in which companies operate, and fails to weave together different reporting strands. Integrated reporting allows for reporting on financial results, governance, sustainability and other material factors in an interdependent manner. It addresses the challenges that companies face, the advantages they enjoy, the external factors that influence them and the way they in turn influence the external environment."

The report appears to present both financial and sustainability information in a comprehensive way. There is a degree of integration in the narrative of social and environmental context.  Eskom lists a set of material issues throughout the value chain. These are typically the sort of issues we might see in a Materiality Matrix of the type that many companies include in Sustainability Reports today. It is certainly a good thing to see this in an Integrated Report and Eskom has made a great pioneering attempt to present a full view of the organization in this 166 page report (of which around 60 pages are pure financials).  

Using Eskom as my test-case, I was interested to see how the principles of connectivity of information and future orientation are reflected in this report. I looked at the material issue Becoming a High Performance Organization which relates to safety as a key issue.  

25 people were killed in the course of duty in Eskom in 2011. The same number as 2010. Eight more people than in 2009. Despite declarations of the unacceptability of this safety record, and several programs in place to improve safety awareness, the fact remains that for three years, the situation has not improved, it has worsened. According to the new report, Sustainability Practices 2012 Edition, the average total annual fatalities in the Bloomberg 3000 for companies in the energy sector globally is 3. Eskom is about 8 times worse.

While Eskom expresses regret, and names the employees who died individually and sympathizes with the families, which shows respect and concern, as an investor, I would be interested to know a few more things:
  • What impact does this level of fatalities have on  business continuity?
  • What is the cost of this safety record (insurance premiums, employee morale, litigation, recruitment potential, work delays etc)?
  • What level of investment is required to improve employee practices?
  • What are the implications for creating and preserving value?  
In the context of future orientation, I would be interested to know more precisely what Eskom will be doing differently to prevent 25 more people being killed in 2012. Eskom describes activities and general frameworks relating to safety management, but a very detailed action plan to prevent fatalities is not included.

In a typical Financial Report, I would not necessarily expect to see these analyses.
In a Sustainability Report, I would expect to see what Eskom has included in this current report - details of the issue, an expression of sympathy and an intent (with a plan) to improve.  
In an Integrated Report, I would expect to see an analysis of the financial (as well as social) impact of this material issue and its connectivity to business performance, continuity and value, together with a detailed future plan (not just a target).

I think the Integrated Reporting discussion still has a long way to go. If it is to be something just more than a Financial Report which contains ESG information, the entire quality of thinking needs to change. If it is to be a tool for investors, then companies need to get better about understanding, measuring and reporting on the impacts of sustainability performance in financial terms. Otherwise, how will investment analysts be able to use this additional information to inform their decisions and calculate long-term risk? If the Integrated Report is to satisfy non-financial stakeholders, it needs to ensure that social and environmental impacts, not just value creation, are transparently disclosed, demonstrating accountability. Finally, if the Integrated Report is to become a document which is of any use to anyone, it needs to be more .. well.. integrated.

elaine cohen, CSR consultant, winning (CRRA'12) Sustainability Reporter, HR Professional, Ice Cream Addict. Author of CSR for HR: A necessary partnership for advancing responsible business practices  Contact me via   on Twitter or via my business website  (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)

Friday, July 27, 2012

Sustainability: What the Numbers Tell You

Sustainability is not only about numbers. When all is said and done, sustainability is about people, community, society, collective responsibility and action, stories and interventions. But, sometimes, the numbers form a picture, and pictures can help us develop new insights and change our paradigms. And this can lead to new action. So,  when the The Conference Board, a non-profit organization which creates and disseminates knowledge about management and the marketplace to help executives make the right strategic decisions,  published a deep-dive study - perhaps the most comprehensive study available - of Sustainability Practices of thousands of companies around the world, containing more numbers about Sustainability Practices than I suspect you have ever seen in one place, you have to sit up and take notice. Ready?

The study is called Sustainability Practices 2012 Edition and is a 176 page epic, containing more data than anyone can absorb in one sitting and a wealth of relevant information for anyone interested in sustainability numbers, trends, areas of focus by sector and by subject, and opportunities to make a difference. The report was prepared in collaboration with Bloomberg, who runs one of the most extensive real-time financial and non-financial information networks to hundreds of thousands of subscribers, and with the GRI - no introduction necessary.

Sustainability Practices 2012 Edition is based on a global sample of 3000 business organizations tracked by Bloomberg's Environmental, Social, and Governance (ESG) database and covers 72 environmental and social practices including: atmospheric emissions, water consumption, biodiversity policies, labor standards, human rights practices, and charitable and political contributions. For benchmarking purposes, Bloomberg ESG data is compared with the S&P 500 (large capitalization U.S. companies) and the Russell 1000 (market cap-weighted index of U.S. companies), and further analyzed across 11 business sectors, using the CIGS code, and four revenue groups (under $1 billion, $10 billion, $100 billion and over $100 billion). The findings of the report are split into three broad areas: Disclosure Practices, Environment Practices and Social Practices.

Now for the numbers. Sitting up and taking notice?

This is the overall social and environmental disclosure rate for companies in the global Bloomberg ESG 3000 Index, which is made up of largely non-U.S. companies. Does that surprise you? Only 574 companies out of a total 3,000 disclose on the full spectrum of 72 sustainability practices analyzed. This compares with 15% in the S&P 500 and 10% in the Russell 1000, showing that U.S. companies are lagging when it comes to overall sustainability disclosure. Match this with the next number:

This is the number of companies in the Bloomberg ESG 3000 Index which released Sustainability Reports - 747 companies. More companies are reporting than disclosing. What does that tell us? That Sustainability Reporting is not delivering full transparency. In other words, just because it's called a Sustainability Report doesn't mean that it's transparent. By comparison, in the U.S., 45%  of the S&P 500 and 24% of the Russell 1000 publish reports. However, these indices are smaller and include large-cap, often global, companies, headquartered in the U.S., versus the Bloomberg Index which includes only 510 U.S. companies, 17% of the total 3000 sample. Overall the Bloomberg 3000 is weighted towards Japanese companies who have 27% of the sample, and with strong representation from India, China and the UK, and a host of other countries.  So Sustainability Reporting is more widespread globally than it is in the U.S. But that's not news. Match this with this next number:

This is the rate of Sustainability Reporting for companies with more than $100 billion in annual revenues. Not surprising, perhaps, that this is a high figure. The larger the company, the greater its impacts, the more extensive its resources, the greater its risk exposure, the higher the expectations from stakeholders. However, 20% of these mega-corps are still resisting the reporting opportunity. The rate of Sustainability Reporting drops to 63% for companies over $10 billion, 25% for companies below $10 billion and only 4% for companies below $1 billion. $1 billion is still a heck of a company size and has potential for some serious impact. Who is chasing the other 96%? Match this with this next number:

This is the rate of companies in the telecommunications services sector which publish Sustainability Reports. This is the highest reporting sector in the Bloomberg 3000. Contrary to the long-held view (and data) that financial services companies and energy companies have been leading the fray in sustainability reporting, only 20% and 25% respectively in these two sectors are publishing reports at a global level.

 Great work by telcos. What's driving this industry's reporting prowess? Match that with this number:

This is the rate of telcos which use the GRI guidelines to report. Again, this is the highest rate of all sectors, with an overall average being 30%, generally lower than the hype would suggest. Consumer Discretionary and Information Technology companies have the lowest uptake rate of the GRI guidelines, at 27%.  Again, we find that the highest revenue companies are more likely to use GRI guidelines (66% - 23 companies) versus the lowest revenue companies (10% - 109 companies). The picture in the telecommunications sector is both of high disclosure and high use of the GRI guidelines. Telcos also have the highest rate of report verification and assurance at 26% (versus an overall average of 13%).  Match that with this number:

telcos. No wonder it's so expensive to connect.  But take a look at these numbers:

54% - 43%
The numbers of women employed in the workforce and the numbers of women in management in the telco sector. Hah! One of my favorite indicators.  Not so rosy in the IT sector, where women make up 13% of the workforce and only 9% of management. Across all sectors, the lowest revenue group of companies has the highest proportion of women in management - 24%. Telcos stand out for positive diversity in other respects too - with 26% disabled employees, and 7% of minorities in management. Apparently, if you are a disabled woman from a minority group,  you stand the best chances of advancing your career in a telco. If you are a man, the materials sector is for you. A median 86% of managers are male, and 85% of the total workforce. Match that with this number:

This is the proportion of companies reporting employee fatalities in the Bloomberg 3000. Only 197 companies out of 3000 disclose this figure (even less in the U.S. large company Russell 1000, where only 36 companies disclose). The average rate of fatalities across all those companies reporting is 2, but the Information Technology Sector inflates this average with a total of 6 fatalities. Conclusion: don't go into IT if you value your life. Match that with this number:

This is the proportion of companies that disclose their Health and Safety Policy. This includes 58% of Information Technology companies where six people died. Just think how things might improve if 100% of companies had a Health and Safety Policy. Would things get worse, or better? Match that with this number:

This is the average number of workforce accidents reported by the 12% (364) companies who disclose this information. I calculate this to be a total of  almost half a million accidents in this small sample. Only 5% of companies report how many lost workhours result from these accidents, reporting an average 56,111 lost hours across only 137 companies, but this is much higher than the average in large U.S. companies, which report an average of 36,121 hours (13 companies) in the Russell 1000. This might indicate that it is safer to work in the U.S.  Or that you have your accident, and get back to work pronto. Even so, the Russell 1000 indicates the lost-time equivalent of 18 employees per year per company that do not come to work as a result of an accident. Rather shocking, don't you think? The impact on families and communities of such safety issues can be quite significant. Match that with this number:

This is the proportion of companies which disclose their charitable giving. I would have expected this number to be higher. Companies like to tell their good news. Match that with this number:

This is the average community spending reported in the energy sector in the Bloomberg 3000. This is by far the highest rate of charitable giving, comparing with an average across all companies which disclosed of almost $28 million. The healthcare sector is the second largest giver with an average of $98 million reported by 47 companies. Industrial sector companies have not been bitten by the bug to this extent, apparently, with the giving average at a mere $10 million reported by 232 companies. Match that with this number:

This is the median total corporate giving reported for 21 companies with in the highest revenue group - over $100 billion. If ya got it, share it. Seems to work for them. Companies with under $1 billion revenues give a median of $88,552. Yes, that's thousands, not millions. Match that with this number:

This is the average utilities sector spend on political lobbying, more than double that of any other sector in this study. Overall, in the Bloomberg 3000, the average amount spent on lobbying is $226,065 per company (though only 14% of companies disclose this information). Interestingly, in the U.S. alone, the amount spent is three times that much. The politicization of business in the U.S. is quite some investment, it seems, if you are a utilities company. Wonder if it's worth it?

I am going to stop here for now, while I continue to study this report. You can read a great review of key findings and  broader conclusions of this report  in the Conference Board's Press Release. Or you can wait for my next post, as I will definitely have more to say about this in the coming week, after getting to the rest of the numbers that I have not looked at yet in detail. 

In the meantime, you might now like a little light relief, by watching the Sustainability Practices 2012 Edition authors, Matteo Tonello, Director of Corporate Leadership at the Conference Board and  Thomas Singer, Conference Board Research Associate, talk about the importance and relevance of this study and what this means. It's short and to the point and contains no numbers.

Thomas Singer rounds off with this perspective: "To a large extent, sustainability is about long-term risk management. It's about making sure that, if you are a company that is dependent on finite resources, you make sure that those resources are available, that they are clean and that you have access to them in the long haul. However there is a very important second part to sustainability which is ensuring innovation and new products, new markets. It is those companies that actually go beyond seeing sustainability as a risk strategy and more of an innovation strategy, those are the companies that really become sustainability leaders in the long term"

Final Tip: ice cream is a great remedy, if your eyes are getting a little fatigued from figures and percentages. Any flavor will do.

elaine cohen, CSR consultant, winning (CRRA'12) Sustainability Reporter, HR Professional, Ice Cream Addict. Author of CSR for HR: A necessary partnership for advancing responsible business practices Contact me via   on Twitter or via my business website  (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)

Friday, July 6, 2012

The GRI G4 Exposure Draft explained

So, you download the GRI G4 Exposure Draft, billed as the most significant upgrade of the GRI Reporting Framework since the last upgrade :) which aspires to solve all, or many, or most, or even a lot of the issues that reporting companies and other stakeholders have expressed regarding the current GRI Framework.

You may find, as I did, that new GRI G4 Exposure Draft is evidence of a major piece of thinking about Sustainability Reporting and contains many insightful changes which will, if approved and implemented by reporting companies, change the landscape of reporting in a meaningful way.

It takes some time to navigate the Exposure Draft, especially for those not intimately familiar with the existing G3 Framework. My initial reaction after having spent some time studying the draft is: Kudos! There has been some serious thinking going on. It's not simply G3+. It's quite a step-change for reporting. People had better sit up and notice.

Let's remind ourselves of the GRI G4 promise:

  • To offer guidance in a user-friendly way, so that new reporters can easily understand and use the Guidelines.
  • To improve the technical quality of the Guidelines’ content in order to eliminate ambiguities and differing interpretations – for the benefit of reporters and information users alike.
  • To harmonize as much as possible with other internationally accepted standards.
  • To improve guidance on identifying ‘material’ issues – from different stakeholders’ perspective – to be included in the sustainability reports
  • To offer guidance on how to link the sustainability reporting process to the preparation of an Integrated Report aligned with the guidance to be developed by the International Integrated Reporting Council (IIRC)
  • To provide support for data searching (XBRL) to provide a taxonomy which captures all the guidelines in XBRL form
"More Reports - Better Reports -we want to see more organizations joining in." said Bastian Buck, in the GRI webinar on 4th July. "Better reports for us means improving technical quality and aligning more with other technical frameworks, but also offering guidance which helps reporters focus on material issues - strengthening the materiality concept is one of the key ideas of G4." Adrian Henriques, an insightful CSR commentator, has already pronounced on G4, saying it represents a step change in reporting and it would be childish to oppose it. Dwayne Baraka, another great CSR protagonist, has given G4 "big ticks"!.

Exposure to G4 - A Range of Options for Review
The first thing you notice about the full Exposure Draft is that it is 325 pages. Oh, but it includes the entire current GRI Framework including all the bits that have not changed. So don't worry, you don't need to read it all. In fact, you can download a just-the-changes-only document which, at only 131 pages, is a real doddle. But if you find that also to be a little daunting then the four page overview is for you. If that, too, is overload, read on! This post is far from an elevator pitch, but I have tried to bring out the main points.

Giving Feedback
Before we go any further, the way to give feedback on the G4 Exposure Draft is by way of the GRI Consultation Platform.  It takes a second to register and answer as few or as many of the questions as you wish, or provide open comments. I think this is important. Please do it.

The feedback will be reviewed by the GRI bespoke G4 Working Groups and the Technical Advisory Council, and then the new full draft will be approved by GRI Governance Bodies.  The public comment period on this Exposure Draft is open until 25th September. The launch is planned in May 2013, at the GRI Conference in Amsterdam - an event not to be missed! Two additional G4 working groups will meet in July and develop revised content on anti-corruption and GHG emissions - with output for comment around mid August 2012.

The Key Changes
These are the keep-your-finger-on-the-pulse aspects of the change to G4:
  • Application Levels:  Applications Levels are proposed to be abandoned due to concerns "that the Application Levels are wrongly understood by some report users to be an opinion on the quality of the report, or even a reflection of the sustainability performance of the organization." Yes, no more A, B, C! Instead, every reporter must meet a minimum threshold to qualify as a GRI Report, with a two-report grace period for first time reporters to get used to the new stuff. 
  • Boundary: G4 gives clearer guidance on how to select what to report, shifting the goal posts from the where a company works to how a company impacts through its total Value Chain.  
  • Disclosure on Management Approach: Reporting on management approach should now be driven by identified material aspects. G4 includes new screening, assessment and remediation reporting indicators.
  • Governance and Remuneration: More disclosures to strengthen the link between governance and sustainability performance and the way remuneration is determined.
  • Supply Chain: More thorough definitions and much more detailed reporting requirements.
  • Structure and Format: Changes in the way the content is presented to make it easier for people to understand.

Now to the Deep Dive: (brace yourself)

Exit Application Levels. Enter Materiality.
The new go-no-go, pass-fail, either-or proposal in G4 means that, to claim "in accordance with GRI Guidelines", all reporters will be required to include the following:
  • All of the Profile Disclosure Items.
  • Disclosures on Management Approach and Core Indicators related to all of the Material Aspects identified by applying the Technical Protocol: Defining Report Content and Boundaries. 
  • All disclosures identified in any applicable GRI Sector Supplement(s). 
  • A GRI Content Index as specified in the GRI Guidelines. 
  • A statement, signed by the highest governance body or Chief Executive Officer (CEO), that the report has been prepared in accordance with the GRI Guidelines and that it is a balanced and  reasonable presentation of the organization’s economic, environmental and social impacts.
What does this mean?
In G3, as most of you probably know, there is a modular approach to transparency which the Application Levels are designed to reflect. "A" for total transparency (report on everything), "B" for middle transparency and "C" for lower level transparency, requiring disclosure on certain Profile Disclosures, no Management Disclosures and a selection of 10 Performance Indicators (Core or Non-Core). At Application Level A, Sector Supplements, where available, must also be included.

So far, of the 587 reports published in 2012 and logged in the GRI Database, 21% report at Application Level A, 24% at Level B, 16% at Level C and 9% at an undeclared level. 27% use Sector Supplements.

The big change here, then, is that, in order to be in accordance with the GRI, a reporting organization must first decide on the topics which are material to its business (after due input from stakeholders of course) and then report as a minimum on those material topics – both in terms of Management Disclosures and Core Indicators. It's a sort of self-service GRI. Take a look at the menu, decide what you want and report on it.

If a company decides that six  Management Approach Aspects are material to its business, G4 requires disclosure only on those aspects. If environmental impacts are not material, then, in theory, a company can produce an in-accordance Sustainability Report without disclosing any aspect of its environmental impacts. In response to this, the GRI says that materiality is determined by stakeholders, and if stakeholders do not think this is important, then this is ok. In practice, it is unlikely that any large company will not have environmental aspects as part of its materiality radar.

But materiality is a relative thing. How many material aspects are most important in any business ? As we have seen in the vast range of materiality matrixes that are published in current reports. A company typically has anything between 8 and 65 most material issues, with 27 issues being the rough average.

The G4 Framework proposes that each organization should decide for itself, after due stakeholder consultation, what is material and therefore which Indicators it should report on. Clearly, this presuposes that organizations are able to engage in meaningful consultation with stakeholders and reflect their input into the selection of Material Aspects, something which I believe does not happen widely today. For the more seasoned reporters, however, where materiality analysis has been part of their reporting process and disclosure, selecting the Material Aspects may not be such a stretch (although the Boundary is wider - see below.).

The new G4 offers a broader choice of disclosures. There are 73 Profile Disclosures, 6 Management Disclosure Categories with 44 Aspects, and 95 Indicators, of which 66 are Core Indicators. This is far more extensive in terms of Profile Disclosures (only 42 in G3) and Core Indicators (49 in G3). The Profile Disclosures are now non-negotiable (Application Level C reporters have some discounts in this area in the current system) but in terms of Core Performance Indicators, there is more comprehensive coverage which reporters can select from.

What's good about this?
This focuses Sustainability Reporting squarely in the materiality camp. It's no longer a shopping list of anything and everything an organization does, it's about material issues. Of course, companies can disclose as much as they want beyond the minimum requirements and even if, say, Procurement Practices are not deemed most material, a company may choose to report on these. But the minumum requirement is now not about transparency. It's about material transparency. This is good because it cuts through the chaff, ensures companies are focusing both in their thinking and in their disclosure on the areas in which they make the most impacts in their Value Chain. 

The other good thing about this is that it gives companies some control over what they disclose on. GRI becomes less of an imposition, no longer requiring companies to make excuses for not reporting on biodiversity, when they have absolutely no impact on biodiversity, or to grapple with details of indicators which are not relevant to their business. Instead, companies can invest their energy in reporting on what is most relevant for them and their stakeholders, and doing a better job.   

SME reporters may have an easier time as their matierial impacts may be less complex and therefore the reporting requirement could be more modest.

Overall, this is a bold proposition. It says go-no-go transparency. G4 proposes that you cannot be half-transparent any more. Now you have to be fully transparent, in a material sense. Companies which want the reputational value of being a GRI Reporter will need to pull up their socks and do their material stuff. The G4 Message:  "Don't mess with Materiality". That's good.

What could be problematic about this ?
The range of Profile Disclosures is very extensive, much more than in G3. This includes new disclosures about Supply Chain and all the detail referred to above relating to materiality. Typically, materiality has been the issue that many small, first-time or inexperienced reporters have chosen to omit. The Profile Disclosures also contain very detailed governance and remuneration disclosures (see below) which may be tougher for some companies, especially private companies, to disclose in full. The high Profile Disclosure requirement may deter many reporters.

As it is currently phrased, first-time reporters are allowed a "grace period" of two reports to build up to full disclosure. Level C and Level B reporters are not entitled to the "Grace Period" of two reports. This means that every company which has ever reported at Application Level A or B must now ship up or shape out in terms of all the Profile Disclosures. This may be too big a stretch for some companies and may cause them to stop using the GRI guidelines after the transition period has phased out. It may completely frighten off first time reporters who may not be able to state with certainty that they will be able to report in full within two reporting cycles, if ever. Any company contemplating writing a first report now, may choose to wait until G4 kicks in so that they can gain the "grace period" advantage.

The choice of reporting only on material indicators also leaves a lot of scope for avoidance. By selecting only 5 Material Aspects, for example, and not the average 27 that companies currently select, companies can elect to report at a much lower level of transparency than the current B or A level Report requries today. Unless there is a strict process of assurance, no-one checks to what extent a company has consulted its stakeholders about material issues. If a company selects 5 material issues, who will say they are wrong? We could find that many companies do not report on things we would like to know, thereby reducing the overall level of comparability between reports and companies.  

The inclusion of Sector Supplements as a minimum reporting requirement in material aspects discriminates against those sectors which have a supplement available (7 sectors at present, excluding NGO's, out of  a possible forty or more sectors, depending on which way your cut up the market). This disadvantages those sectors who now have to report in more detail to achieve the  "in accordance" label. 

My first thoughts
On the whole, I like this approach. I like the Profile Disclosure requirement. I believe that companies should be able to make this stretch. I think the new additional disclosures are broadly well placed. Where I have a different view is about the question of reporting on only Material Aspect Performance Indicators. I believe there is a base set of around 25 or 30 indicators that every single company should report on. While I agree that materiality is important, I think it is inconceivable that a company may report and omit to disclose energy consumption, carbon emissions, safety data, key employee demographics such as gender diversity etc. In all probablility, many companies will report these items even if they are not identified as material, but this should not be left to chance.

A possible solution would be to revise the two categories of performance indicators. Core Indicators should be mandatory and required by all companies as part of the "in-accordance" deal. I would suggest this is probably 20 - 25  indicators. The rest should be Material Aspect Indicators, which relate to the selected material aspects, as proposed in G4. I don't find much relevance in the split between Core and Additional indicators today. If the focus is changing to materiality, and a company has selected a material issue, then reporting on all the indicators in that category should be manageable.

I think the GRI should also step up the number of Sector Supplements available, to cover off a fuller set of sectors, and level the playing field a little. 

Exit Legal Structure Boundary. Enter Value Chain
This is described by the GRI as the most significant content contribution which has conceptually changed the definition of and approach to defining boundaries for the Sustainability Report. The new definition is:

‘Boundary’ refers to the range of value chain elements or areas covered in the report for each material topic. In setting the boundaries for material topics, an organization should consider impacts throughout its entire value chain, regardless of whether it exercises control or influence over the elements in its value chain. Boundaries vary based on the topic being reported.

Get that? Value Chain is the operative phrase here. Companies are now asked to report not only on what they are doing, but the impacts of what they are doing throughout the entire Value Chain of which they, their products and services, are a part. A G4 report is no longer about legal ownership or direct control of a manufacturing plant, a fleet of vehicles or a nice new LEED-certified building. It's about how a company affects its social and environmental stakeholders. G4 provides guidance through the updated Technical Protocol, showing how Mapping the Value Chain is now the first step in determining the Boundary of your spanking new Sustainability Report.

Mapped your Value Chain? No? Oops. Don't report!
This means that the Boundary of the G4 Sustainability Report is drawn around the (material) elements in the Value Chain and where they occur, and not where a company's operations are conducted. But beware! G4 says: "Inevitably, the process for defining report content scope and boundaries requires subjective judgments. The reporting organization should be transparent about its judgments. This will enable internal and external stakeholders to understand the process for defining report scope and boundaries."

What's a Value Chain ?
All upstream and downstream elements linked to your organization's activity.

What's good about this?
This is a major step forward in reporting relevance. Far too many reports are focused on "what we do" with almost no regard for the "impacts of what we do". And why do we read reports? Because we want to know about how it all affects us and our great-great-grandchildren in our daily lives. By mapping the Value Chain, companies will be required to think well beyond their breakfast. Indeed, this could become a central process in companies which will add necessary meaning  to the way in which reports are developed and how materiality is determined. We will see a new type of 3D materiality matrix: what's important to our business, what's important to our stakeholders, and where does this fit in our Value Chain. Two new Profile Disclosures (DI18: Describe the organization's value chain and DI19: Place Material Aspects (or other material topics) in the Value Chain) specifically require companies to address this in their report. Bravo to G4 for this proposal!

What's problematic about this?
The real question here is the scope of the Value Chain mapping itself. Taken to its ultimate conclusion, a large organization's Value Chain can contain hundreds of impacts, multiplied by the countries and sectors in which the organization operates. Some companies may have several individual Value Chains, for example, those which operate across sectors in different markets - consumer, institutional and more. Including all these Value Chains in the report could make for a rather confusing and lengthy document. Leaving some out could make the report misleading.

The other issue is the methodology used for mapping the Value Chain. Does it count if the CSO jots down the Value Chain connections on the back of an envelope? Does the Value Chain need to be approved at Board Level? Should the Value Chain be determined with the input of external stakeholders? A list of high level generic Value Chain impacts - as we see with some Materiality Assessments today - may be inadequate. Mapping the Value Chain requires process and G4 includes a Disclosure (DI24) which requires companies to report how the Value Chain was determined. The real question is to what extent companies will be able to rise to this challenge.

My first thoughts 
Give it a go. It's a good discipline. It broadens the corporate radar on sustainability.

Exit Aspects. Enter Material Aspects.
Disclosures on Management Approach (DMA) provide narrative information on how an organization analyzes and responds to its actual and potential material economic, environmental, and social impacts. DMA also provide context for the performance reported by an organization, including Indicators if applicable and required an organization to make explicit: 1. What the material topic is 2. Why the topic is material 3. How the topic is managed and 4. How the management approach is monitored, evaluated, and adjusted.

One of the most frustrating things about G3 has been the requirement to report on Management Approach Disclosure Aspects, even though the organization has no relevant connection to a specific aspect. Biodiversity has always been a good example. If you are an office-based business,  with no operations situated in areas of biodiversity risk, then it doesn't make sense to have a detailed Management Policy about Biodiversity. In G3, reporters at B and A level are required to disclose their approach on all Management Disclosure Aspects.

In G4, reporters are encouraged to disclose the Management Approach for Material Aspects only. The list of DMA Categories and Aspects now looks like this:

There are now 44 Aspects in G4 (34 in  G3). The changes are the inclusion of Procurement Practices in the EC Category, the inclusion of Equal Remuneration for Women and Men in the LA Category, and the inclusion of two Aspects : Screening and Assessment, and Remediation, in four Categories (EN, LA, HR and SO).

Screening refers to a formal or documented process that applies a set of performance criteria as one of the factors in determining whether to proceed with a relationship with a supplier or other business partner.
Assessments refer to evaluation of agreed performance expectations which were set and communicated prior to the assessment and may include include audits, contractual reviews, two-way engagement, and grievance and complaint mechanisms.
Remediation refers to the extent to which actual adverse impacts are compensated or rectified and may include grievance and complaint mechanisms, apologies, restitution, rehabilitation, compensation, or guarantees of non-repetition.

In G4, the requirements for disclosure on these DMA Aspects are very prescriptive. For example, new Supply Chain indicators G4 12, G4 13 and G4 14 include specific requirements to report on the percentage of new suppliers and other business partners screened for society-related performance, and actions taken, the percentage of existing suppliers and other business partners identified as having actual and potential adverse impacts on society assessed on society-related performance, and actions taken, and the number of grievances about society-related impacts filed, addressed, and resolved through formal grievance mechanisms.

The new DMA reporting requirements are a response to consistent feedback that GRI had received about the lack of guidance in reporting Management Approach Disclosures. G4 goes into great detail with a clear set of items to report in each of the DMA Categories.

What's good about this ?
G4 offers greater clarity and expectations about reporting in the DMA area. This might lead to fewer generic "employees are our greatest asset" or "we make significant efforts to improve our impacts on the environment" statements, and encourage meaningful responses which actually link Management Approach to Management Action.  Also, the focus on material issues will mean that companies are not forced to regurgitate generic platitudes if there really have no connection to the Material Aspect.

What's problematic about this ?
The level of detail required may be off-putting for companies. Given that DMA is now a minimum requirement for reporting in-accordance with the GRI, this may represent a blocker for some companies, particularly smaller companies. Additionally, reporting only on Material Aspects may leave great gaps in our knoweldge about a company's basic operational approach. G4 enables non-disclosure of anything that's not material. A responsible workplace may not be identified as a most material issue - but still, we would probably want to see in the Sustainability Report some declaration and disclosure of the way an organization creates a responsible workplace.  

My first thoughts
Green light. Companies should make to effort to define their Management Approach because Approach precedes and guides Action. The advantages here outweight the negatives.

Exit Blind Eye. Enter Board Accountability.
The G4 Governance Disclosures have undergone a complete overhaul and have been entirely replaced and augmented. The requirement  increases from 17 Disclosures to 41 Disclosures - yes a whopping 41 Disclosures on Governance, split into seven new subsections. These are:
  1. Highest governance body’s role in setting purpose, values, and strategy (DI 32 - 34)
  2. Governance structure and composition (DI 35-43)
  3. Highest governance body’s competencies and performance evaluation (DI 44-47)
  4. Highest governance body’s role in risk management (DI 48 - 51)
  5. Highest governance body’s role in sustainability reporting (DI 52-53)
  6. Highest governance body’s role in evaluating economic, environmental, and social performance (DI 54-57)
  7. Remuneration and incentives (DI 58 to 68)
The idea is not to duplicate information on governance and remuneration which is typically provided in an annual report, but to ensure the addition of information that relates to the way governance of sustainability and remuneration and sustainability are interlinked. New disclosures are far-reaching.

For example, two new Disclosures (DI 52 and DI 53) require an organization to report whether the highest governance body (the Board of Directors, usually) formally reviews and approves the organization’s Sustainability Report and ensures that all Material Aspects are covered, and the highest governance body’s role in commissioning assurance of the Sustainability Report. This places the publication of the Sustainability Report on the desk of the Board Members, or, for those who are less disciplined about attending Board meetings, in their inbox or on their iPad App. In most companies, I suspect that most Board Members barely know of the existence of their company's Sustainability Report and that many don't read it, let alone approve it and discuss its assurance.

The other big, big change in disclosure relates to Remuneration. Ten very detailed disclosure requirements are included ranging from provision of details about remuneration policies for Board Members and Executives,  to reporting details of all retirement benefits provided by the organization, to a requirement to report on the ratio of the annual total compensation for the organization’s highest-paid individual in each country of significant operations to total, average and median compensation for all employees in the same country. 

Clearly, stakeholder focus on executive compensation that we have seen in the last couple of years has made an impact. Similarly, the general tendency to blame lack of rigorous governance for the failures of the economic system and the Great Financial Crisis are now reflected in much more detailed governance disclosures in G4.

What's good about this?
Board Members will have to wake up and become accountable. G4 may lead to a mass awakening of a largely dormant but important group that provides the sustainability checks, controls and balances in any organization. No more zzzzzzsustainabilityzzzzzzzzzz  in the Board Room. No more acceptance of Sustainability Reporting as a low-key sideline. Sustainability, and the way it is reported, is now a Board Agenda Item in G4. This is good. In addition, the requirement to analyse and report may lead to deep review of compensation policies and ratios in many companies. This may result in a more "reasonable" approach to remuneration, though the definition of "reasonable" remains to be agreed.

What's problematic about this?
The reporting requirement increases significantly, and goes into a level of detail which many companies may find hard to address. Most companies are simply not at this level of sophistication in terms of relating governance and remuneration to sustainability and getting there may take time. G4 penalises these organizations. Given that all these are mandatory Profile Disclosures, there is no picking and choosing - all companies must report on all 41 Disclosures in order to be in-accordance with the G4 guidelines.  I expect this will add a very significant level of reporting activity for many companies, especially the larger and more complex organizations.

My first thoughts
I like some aspects of this new section and agree that a strong, involved and competent Board of Directors is a necessity for sustainable companies. I wonder if the remuneration reporting requirements are a little too invasive - do we really need to know the detailed remuneration packages of managers in every significant country of operation? Is this really what sustainability is all about. I think we could ease up a little here. Disclosure could probably be restricted to the Executive Committee packages.

Exit the Black Hole. Enter the Supply Chain
G4 makes the Supply Chain one of the new stars of the show. There is a new definition of Supply Chain and a new definition of Suppliers.

Supply Chain: The part of the value chain which consists of the sequence of suppliers and activities that provides materials, products or services to an organization.

Supplier: An organization or person that provides materials, products or services directly or indirectly to another  organization. This includes brokers, contractors, consultants, distributors, home workers, independent contractors, primary producers, wholesalers and sub-contractors - each of which has it's own sub-definition.

Disclosure D1 12 requires a detailed description of the supply chain including numbers of suppliers and their locations by country and region, materials sourced,  and the new Aspect of Procurement Practices requires reporting on the number of suppliers with long-term agreements,  suppliers who have been engaged for the first time during the reporting period, the time taken to pay suppliers and a whole lot more. This is new territory for Sustainability Reporting.

What's good about this?
Clearly, the Supply Chain is an important part of the total Value Chain and many companies export their problems to the Supply Chain and forget about them, let alone report on them. Many companies have abusive, non-inclusive or even discriminatory Supply Chain practices which generate negative overall impacts in the Value Chain. Calling companies to account on how they manage their Supply Chains is a good thing, and may lead to improved practices overall.

What's problematic about this?
As with the changes on governance and remuneration, this is a massive new reporting requirement in an area in which most companies have not yet assigned in-depth focus. The detail of disclosure required means lots more work for reporters, and many may decide it's just not worth the effort. The link to the overall sustainability of an organization and some of the new Performance Indicator disclosures is tenuous.

My first thoughts
It's a great plan - it covers off the aspects of Supply Chain which companies ought to be accountable for. In practice, however, the number of reporting companies which will be able and willing to disclose at this level may not be aligned with the G4 aspiration to encourage more companies to report. A little trimming of this section might be more helpful. They can always be added back in with G5.

Exit Fuzzy. Enter Clarity.
G4 has reorganized its content to provide greater clarity on what to report, why it's important and provide guidance on how to report. The draft seems clear enough to me, though, I admit, it's no piece of cake. I won't linger on issues of format and friendliness here. You judge for yourself.

What's NOT in G4?
The main omission, which was part of the GRI promise, is the guidance for Integrated Reporting. GRI says: "The G4 exposure draft does not include such guidance at this time, as it was not possible to do so due to the differing timelines between the development process of G4 and that of the IIRC’s Integrated Reporting Framework. However, GRI remains committed to provide such guidance in due course." I guess that should not come as any surprise. I am not even sure it's the right objective. More about that in the future. Sometime.

Another omission is a revision of the G4 guidance and reporting requirements relating to Assurance. This has not been touched. This means that all these new super-duper-in-accordance with the GRI G4 Reports may not have been assured at all or may have been only partially assured or verified. I believe G4 should have come down more clearly on the need for more thorough and rigorous assurance practices.

Differentiation between organizations might have been addressed. GRI says it will issue more guidance for SME's. At this point, G4 looks a little beyond the reach of SME's and may simply preclude them from GRI Reporting in future. Unless there is a future GRI G4 SME "light" version, SME's may opt out. The same may apply to non-business organizations who have bravely started to report - NGO's, Academic Institutions, Government Organizations.

I am not clear how G4 responds to the objective of harmonization with other reporting standards and requirements. No references are made to other frameworks and the new materiality focus may actually de-harmonize and distance the GRI from other more comprehensive reporting requirements. But again, this should come as no surprise. Attempting to turn G4 into a catch-all reporting panacea was probably a little over-ambitious anyway.

Next Steps
GRI expects to approve the G4 and launch it in May 2013. However, I think there might be merit in a test run for some reporters - global, larger and smaller. I would welcome some assessment of what additional resource and effort will be required of both seasoned and new reporters to meet the new and highly challenging level of minimum disclosure. It would be nice to see what kind of report G4 might produce before it gets rubber stamped. Between now and the May launch, there may be time for a few guinea pigs to test G4 out. I think the challenge is as much in the way of thinking about reporting as it is in gathering and presenting information and data. Right now, a report is everything that we do that is good. In future, it should be everything that we do that has a Material Impact in our Value Chain. That's a paradigm shift in most companies' approach to Sustainability Reporting. It would be nice to prove it can be done.

To date, GRI has been synonymous with Sustainability Reporting. I hope that G4 will be seen as a positive challenge and opportunity for companies and not an impossible burden.

My First Thoughts
This post is my first thoughts, no more. I wrote this post to help me distil my understanding of the changes proposed by G4 and to help my blog readers get a quick appreciation of the Exposure Draft, in plain language. I will probably review the Exposure Draft several times more before I submit my feedback to the GRI. I may change my mind, or realize that I missed, or mis-assessed something. I hope this is helpful to readers - it was certainly helpful for me - but please accept my ponderings as an interim commentary on everything mentioned above. I encourage you to review it for yourself and form your own conclusions. I look forward to hearing what other people have to say as well.

In the meantime, congrats to the GRI for a mammoth undertaking. I am sure there will be many debates as we go forward. Better stock up on Cherry Garcia.

elaine cohen, CSR consultant, winning (CRRA'12) Sustainability Reporter, HR Professional, Ice Cream Addict. Author of CSR for HR: A necessary partnership for advancing responsible business practices Contact me via   on Twitter or via my business website  (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)
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