Will SASB make G4 redundant?

The Global Reporting Initiative has never met the challenge of developing great and focused sector guidance. With just a small number of sectors for which specific guidance is available, we might be inclined to say that GRI has missed the boat. Even with the seemingly hastily put-together publication on Sustainability Topics, which could use a good edit, and a little formatting, the GRI is still nowhere near catching up with the times when sectors, not companies, rule the world.

 

Cue SASB.

 

Or as we fondly refer to it: The Sustainability Accounting Standards Board.

 

Almost before we could blink, SASB set itself up, inspired us with a vision ("SASB envisions a world where all forms of capital are accounted for and managed"), played on our aversion to information overload and irrelevant content in Sustainability Reports,  created a strong governance structure and network, made bold, measurable and time-bound declarations about what it would accomplish, remained focused on a singular goal of "creation and dissemination of sustainability accounting standards for use by publicly-listed corporations in disclosing material sustainability issues for the benefit of investors and the public", achieved accreditation by the American National Standards Institute (ANSI), published a first set of healthcare standards, and even started to generate a revenue stream by selling off its industry briefs that were used in the development of the new standards. SASB has done for sustainability materiality in a short couple of years what GRI has not done in 15 and the IIRC is fumbling about trying to do in what may still turn out to be the most invested flop of corporate reporting. Despite the first real output of SASB, the new healthcare standards, being pipped at the materiality post by the earlier publication of the G4 guidelines, it's probably true to say that the SASB hype has done no less to focus the debate around materiality.

The new SASB Healthcare Standards were published last month and include six specific Standards:

• Biotechnology
• Pharmaceuticals
• Medical Equipment and Supplies
• Health Care Delivery
• Health Care Distributors
• Managed Care

A neat matrix of sustainability issues on the healthcare sector radar is freely available on the SASB website (as are all the standards). A cursory glance will tell you that there is nothing rocket-science-ish about this. The same fairly generic issues that GRI has incorporated for years and years feature in the SASB matrix: energy, water and waste efficiency, product safety, corruption and bribery, manufacturing and supply chain management, employee recruitment, development and retention, ethical marketing and more, alongside sector-specific issues such as patient safety in clinical trials, counterfeit drugs, climate change impacts on human health and patient privacy and electronic health records. Clearly, and not surprisingly, although SASB is focused on the SEC disclosures of U.S. publicly listed corporations, there is some not miniscule overlap with existing sustainability reporting frameworks.

I took a deeper look at the SASB Standard for Pharmaceuticals, a sector I know quite well. The first thing that strikes you is that the document is only 34 pages short. Wow. Only 34 pages. That's one tenth of the totality of the G4 guideline materials. Guess they had a good editor. The second thing is that the pharmaceutical industry, according to SASB, has 11 material topics.

Interestingly, climate change is not considered material for the pharma industry so no data on carbon emissions is required to be disclosed by the SASB Pharma Industry Standard.

The SASB Standard says about these issues: "Sustainability disclosures are governed by the same laws and regulations that govern disclosures by securities issuers generally. According to the U.S. Supreme Court, a fact is material if, in the event such fact is omitted from a particular disclosure, there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of the information made available”. SASB has attempted to identify those sustainability topics (above) that it believes may be material for all companies within the Pharmaceuticals Industry. SASB recognizes, however, that each company is ultimately responsible for determining what is material to it."
 

In other words, there is an expectation that every pharma company will disclose on these issues, as they all appear to be relevant for pharma companies. Beware, if you do not disclose, the U.S. Supreme Court may make your life very difficult.

Drilling down into the nuts and bolts of the SASB Pharma Standard, you fairly soon start to feel that familiar disclosure-related headache coming on. The 11 issues beget 30 metrics, and metrics they are. Try HC0102-03 (Drug Safety and Side Effects): List of products listed in the FDA’s MedWatch Safety Alerts for Human Medical Products (Drugs and Therapeutic Biological Products) database, including those products with Potential Signals of Serious Risks or that have New Safety Information identified by the FDA Adverse Event Reporting System (FAERS) or HC0102-08: Number of FDA Clinical Investigator Inspections of investigators used for clinical trials during the past year that resulted in: (1) Voluntary Action Indicated (VAI) and (2) Official Action Indicated (OAI). This is seriously sector sector. But is it sustainability? Or is SASB getting so granular that we will all need a PhD in PII (Pharmaceutical Industry Impacts) to understand it?

A comparison with G4's General Standard Disclosures and Specific Standard Disclosures yields the observation that roughly 14 of the thirty SASB HC metrics are exclusively sector specific, while the remainder are broadly comparable to GRI metrics in contained in G4. In some cases, the wording is a little different and one or two of the details required for disclosure are not directly comparable, but, broadly speaking, less than half of the SASB Pharma Standard metric are exclusively sector specific. The ones that are include Drug Safety and Side Effects, Clinical Trials and Counterfeit Drugs, as well as certain specific aspects of Manufacturing and Supply Chain. The 16 SASB indicators for which I see a certain correlation with G4 are shown in the table below.

The implications of this for G4 Pharma reporters that are publicly listed in the U.S. and wish to comply with both SASB standards for reporting to the SEC in their Forms 10-K or 20-F, and wish to deliver a G4 "In Accordance" G4 Sustainability Report, is that they will need to take into account the material issues identified for their own company through due process as well as the thirty SASB sector indicators.

 

If a pharma reporter accepts the material issues identified by SASB, and wishes to report at G4 CORE or COMPREHENSIVE level, then the following matrix applies:

 

 

This seems to indicate, then, that the G4 CORE option seems to be the most sensible for U.S. pharma reporting companies that wish to meet both the relevant, non-overload desires of the regulatory and investor community, while meeting the needs of the sustainability reporting community with no additional massive effort. Why prepare 100 disclosures when 64 will do?

 

Of course, it's not as simple as that. Life never is. G4 process requires more of an effort to identify material issues than copying a "this is one we prepared earlier" version directly out of the SASB Standard. In G4, Material Aspects should be the result of a discussion with stakeholders, not materiality-by-proxy, using the list that SASB developed. Of course, the SASB standards represent fabulous guidance for the pharma industry, not just publicly traded U.S. companies, but for all pharma companies around the world. Once SASB becomes more established, and there are more standards out there, we will definitely see a leakage to sustainability reporting, with SASB-defined material issues lists being a key input to, if not a key output of company materiality matrices.

 

Is it appropriate to use this materiality-by-proxy approach in G4? If companies choose to do this, then we will possibly see G4 CORE reports referring to G4 disclosures reported under the SASB banner in 10Ks and 20Fs (as companies currently refer to Annual Reports), leaving the G4 sustainability report to include only the General Disclosures and Disclosures on Management Approach for the relevant issues. This could have the effect of continued fragmentation of sustainability information and perhaps, relegation of the sustainability report direct content to general approaches, policies and plans, with no teeth, leaving all the quantitative information to the regulatory disclosures. Might this make Sustainability Reporting redundant? For 10K and 20F companies, that's a possibility.

 

However, we must remember that the SASB definition of materiality is different from the G4 definition. SASB focuses on material events which "will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations" while GRI focuses on material issues which are defined as "those that reflect the organization’s significant economic, environmental and social impacts; or that substantively influence the assessments and decisions of stakeholders."  In a G4 report, we might see, for example, a pharma company not identifying corruption and bribery as currently material to their business. In this case, SASB would require disclosure but G4 would not. On the other hand, climate change might be seen as material by a pharma company, so G4 disclosure would be required where SASB would not.  

 

To get a sense of what happens now, I took a look at Merck's 2012 Sustainability Report, a self-declared Application Level A G3.1 report, which also reports against the Access to Medicine Index, Millennium Development Goals and UN Global Compact Principles, as well as the Carbon Disclosure Project carbon and water disclosures. 

 

While there is no materiality matrix, Merck identifies four focus areas:

 

 

 

 

In addition to reporting against 6 frameworks mentioned above, Merck lists 36 KPIs, some of which are relevant in the SASB line-up, some in GRI, and some in none, such as two indicators on employee volunteerism. And yet, when I tried to find a response to a specific G4 Energy disclosure, total energy consumption by source, I had to download the company's CDP submission which records energy consumption by source in MWH whereas Merck's Sustainability Report refers to total consumption in trillion BTUs (G3-EN3). In other words, more may not be more. More may be confusing.

 

Abbott Laboratories 2011-2011 report defines their four priorities slightly differently.

The Abbott report is GRI referenced (does not disclose an Application Level), reports on fewer indicators than the Merck report, and, in addition to the GRI Index, provides a list of 27 key metrics in financial, social and environmental performance. The presentation is user-easy with interactive graphs so that I could quickly find, for example, total energy consumption in gigajoules, the preferred reporting unit for GRI, although some of the Abbott metrics appear in no other published framework, for example, global vehicle accident rate, and U.S. employee giving campaign results. Are these company-specific material issues?  

 

Will Abbott and Merck gain by using the materiality-by-proxy reporting method in the future? Merck was represented on the SASB Healthcare Standards Working Group but Abbott was not. Maybe that's a hint. There is no doubt that the SASB approach could serve to reign in and align the disclosures of pharma companies around what are probably most of the core sustainability issues that affect the industry. In that sense, SASB does corporate sustainability reporting a good service, and perhaps may help achieve some sort of comparability which G4 does not. On the other hand, sustainability issues by sector are not necessarily sustainability issues by company, and the SASB route applied to sustainability reporting may leave some gaps. If innovation is material to Abbott, whereas employees are material to Merck, we may see very different materiality priorities, and probably, very different G4 reports but similar SASB disclosures.

 

By now, I guess you are expecting me to answer the question, will SASB make G4 redundant? Well, like any good blogger, I am going to hedge my bets. With both SASB Standards and the G4 guidelines seeing the light of day earlier this year, and with only one non-corporate G4 report having been published to date, the jury is out as regards the level to which both frameworks will be taken up by corporates. Will SASB be widely adopted? Will G4 be widely adopted at CORE level once G3 is killed at the end of 2015? If so, will companies align the two? Will companies use due process to determine material aspects and aspect boundaries, or will they use the materiality-by-proxy approach? Or will GRI and SASB finally get around a table and issue a new set of guidelines, called G5-SASB, which converts G4 into a suite of linked sector specific guidelines which incorporate both G4 and SASB disclosures by sector, for use as a basis for both G4 Sustainability Reports and 10K-20F corporate reporting? 

 

Either way, we perhaps ought to remind ourselves what Sustainability Reporting was designed to do in the first place. Account for company impacts on all stakeholders. Both GRI and SASB have an important contribution, I feel. The shame is that both appear to live on different planets, while the companies that are reporting are all on the same planet, and, more importantly, we are too!  

 

elaine cohen, CSR consultant, winning (CRRA'12) Sustainability Reporter, HR Professional, Ice Cream Addict. Author of Understanding G4: The Concise Guide to Next Generation Sustainability Reporting AND Sustainability Reporting for SMEs: Competitive Advantage Through Transparency AND CSR for HR: A necessary partnership for advancing responsible business practices Contact me via www.twitter.com/elainecohen   or via my business website www.b-yond.biz   (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)

CLOROX: G4: good to go?

In the run-up to G4 (to be launched in May at the GRI conference), I decided to examine some recent reports (at random, but GRI-based and broadly same sector) to see if they would be good-to-go if the Exposure Draft is approved as published (albeit the likelihood of this appears low - the grapevine is indicating that significant stakeholder pushback is likely to dilute G4, though quite to what extent is not clear).

Below is a reminder of  what reports must include in order to qualify as "In Accordance" with the potential G4 Framework as we know it today from the Exposure Draft:

1. All of the Profile Disclosure Items. (There are 73 (!) Profile Disclosures)

2. 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.

3. All disclosures identified in any applicable GRI Sector Supplement(s).

4. A GRI Content Index as specified in the GRI Guidelines.

5. 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.

Regarding Profile disclosures, there are four substantive disclosures in G4 which make a difference to the entire reporting content. These are:

DI 12: Describe the organization's supply chain (number, type, location of suppliers, value of materials purchased etc)

DI 17: List the identified material Aspects (and other material topics).

DI 18: Describe the organization’s value chain.

DI 19: Place material Aspects (or other material topics) in the value chain.

Not reporting on these Profile Disclosures invalidates the "In Accordance" adherence. I will focus on these in my review of reports.

I ignore the 38 (!) Profile Disclosure items relating to governance and remuneration (up from 10 disclosure Items in G3), as, in my view, many of them are irrelevant, unnecessary and a waste of hours that the Working Group invested in devising every data point that they could possibly imagine. I expect this justified the cost of bringing the group to Amsterdam, but, in my view, it makes sustainability reporting look like Amazon.com's inventory of items shipped in the last five years.  I suspect that in almost every case, these 38 disclosures alone will disqualify all existing reports from claiming "In Accordance". However, let's not get bogged down in the negatives before we even started....

 

Regarding Disclosures on Management Approach, there are now three specific disclosures (replacing rather general guidance in G3) which require the company to report for each material issue (aspect), what the issue is and its key impacts, why it is material and what it's doing about it.      

First guinea pig:

The Clorox Company

Enduring Value 2012 Annual Report (integrated report)

GRI B+ GRI-checked online report with download (78 pages) Household Cleaning Products

Quick Overview of the Report

Clorox is a $5.5billion household products business with markets in over 100 countries and a workforce of 8,400 people. At Clorox, sustainability is paying off. Clorox people write in their annual report: "Sustainability investments in our Burt’s Bees®, Glad®, Brita® and Green Works® brands have accounted for about 40 percent of our sales growth in the last five years. Additionally, we’ve saved about $15 million annually by making sustainability improvements to our operations." A nice touch in this report is a description of some megatrends that are influencing Clorox's thinking. Clorox's Ingredients Inside is an interesting initiative, which lists all raw materials used in Clorox's cleaning products, with their chemical names and function. Of course, you would have to have a PhD in chemistry to make sense of all of that, but it's a good step for transparency.

The report receives a "+" from the GRI for being assured, although only GHG emissions from electricity consumption in U.S. facilities were verified. Frankly, you couldn't find a smaller sample of disclosure to assure, even if you tried really really  really hard. This report, to me, does not stand the test of assurance. I fail to see how the GRI can reasonably award a certificate for assurance here.

The well-respected Leon Kaye's concludes in his review of this report that "Clorox stands out as a corporate citizen that more companies within and outside of its space would be wise to emulate". Certainly the company demonstrates strong performance in waste reduction, GHG emissions, and water consumption. I note some positive employee practices including a new health and wellness program and also good community support.

 

However, I feel the Clorox report lacks some reporting depth and breadth, and is focused on activities rather than the change that Clorox is effecting in society as a result of its sustainable business focus. For example, 21% of products (since 2010) have been reformulated to reduce materials and waste, but Clorox does not disclose the extent of these improvements and the reduction in impact. There is a commitment to "responsible sourcing" but zero detail on what this actually means, beyond the existence of a Supplier Code of Conduct. More importantly, there is little about how Clorox is changing consumer behaviors with the exception of one or two small examples. With key business growth coming from "green"-ish products, I would have appreciated Clorox telling this story more fully.      

 

Profile Disclosures: 

Clorox lists four issues of material focus, based on insights gained from stakeholder engagement processes:

• Sustainable Product Innovation to include solutions for public health and more natural or plant-based products.
• Product responsibility  to improve human and environmental safety and ingredient transparency.
• Environmental sustainability for reducing Clorox's eco footprint.
• Public health in the area of disinfecting products.  

Looking at G4's matrix of Categories and Aspects, these appear to be just two aspects: Environment (emissions, effluent and waste aspect) and Product Responsibility (customer health and safety aspect). This is quite convenient for Clorox, as the performance indicator content of G4 is required only for Material Aspects. An opportunity to move from 78 pages to 20 :)

Clorox does not describe its Supply Chain, nor its Value Chain and does not place material aspects in the Value Chain. These are required G4 disclosures. G4 good-to-go? NO

As an aside, another interesting Clorox issue which invited the wrath of leading commentator Marc Gunther  and several others was their Greenworks campaign, which was too late for this report but may (or may not) be mentioned in the next report. Perhaps it's something for the Material Aspect: Marketing Communications! 

Disclosures on Management Approach

This is easy for Clorox as there are only two Aspects to report. I think this report meets the requirements for this section.G4 good-to-go? YES

Performance Indicators

There are 10 indicators which are in the Emissions, effluent and waste Aspect (EN16 - EN25), of which seven are core. Clorox currently reports on three of these seven core indicators in full, providing no data relating to, for example, water discharge (EN21) or significant spills (EN23), and avoiding non-core indicators such as hazardous waste (EN24) and biodiversity affected by water runoff (EN25). G4 good-to-go? NO

There are just two Performance Indicators in the Customer Health and Safety Aspect (PR1, PR2) and Clorox currently reports on one of them, providing a good description of safety assessments and procedures (PR1). Clorox does not report on incidents of non-compliance with regulations concerning the health and safety impacts of products during their life cycle (PR2), but this is non-core, so not required for "In Accordance". G4 good-to-go? YES

Despite producing a lengthy and generally comprehensive report using G3, and recording some good sustainability achievements, it looks like Clorox has quite some work to do in order to prepare future reports "In Accordance" with the G4 Exposure Draft. And this is based on an analysis which barely grazes the surface of the total new scope of G4. I believe this shows that G4 as proposed is not a small evolution for reporting, but a major overhaul, and will require significant reconsideration of what and how to report. The upside is that Clorox G4 will not be required to report on anything not defined as material. But is that really an upside? Are there not some disclosures which should be reported by all companies whether or not they are company-specifically-material? I suspect there are several.

At least Clorox will not be alone in having to make significant change if the company decides to adopt G4... watch this space for an example from Henkel's report in my next post.

 

elaine cohen, CSR consultant, winning (CRRA'12) Sustainability Reporter, HR Professional, Ice Cream Addict. Author of Sustainability Reporting for SMEs: Competitive Advantage Through Transparency AND CSR for HR: A necessary partnership for advancing responsible business practices Contact me via www.twitter.com/elainecohen or via my business website www.b-yond.biz (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)

The proposed GRI G4 GHG Emissions draft - explained

The plot thickens. After presenting the G4 Exposure Draft available for comment between 25th June and 25th September, the GRI has now published what it's calling Thematic Revisions, for public comment between 14th August and 12th November. I think that's what they call eating the elephant in two easy slices. Of course, the CSR Reporting Blog is here and ready with our analysis of one of the two new Thematics  - Greenhouse Gas Emissions - to make your life a little easier.  The other one (Anti Corruption) will be the subject of my next post.

First, download the draft GHG Thematic document here. It's 55 pages. Get them all. You're gonna have your work cut out as you go through this document.

According to the draft, the proposed revisions align with the GHG Protocol, jointly released by the World Resources Institute and the World Business Council for Sustainable Development, and the ISO 14064 Standard. The proposed GHG Emissions Indicators are fully aligned with the GHG Protocol’s grouping of emissions into three subsets (Scopes 1, 2, and 3), as well as the ISO 14064 grouping. Energy Indicators have been modified to align with the GHG Emissions Indicators and intensity Indicators were added for both energy and GHG emissions. More about intensity later....

Specifically the draft contains:

• New disclosures and guidance for the Energy and Emissions Aspect (Environmental Category)
• Edits to Indicator EC2 (Economic Performance Aspect, Economic Category)
• Edits to Indicators EN3 – EN7 and Indicators EN16 – EN20 (Energy and Emissions Aspects, Environmental Category)
• New indicators under the Energy and Emissions Aspects, Environmental Category

Before discussing the changes in detail, it might be worth listing the new EC2, EN3-7 and EN16 -20 and new indicators proposed in this section. First point to note is that 11 indicators now becomes 13 indicators, and this includes two intensity measures, energy intensity and GHG emissions intensity. As promised, more about that later.

• CORE EC2: Financial implications and other risks and opportunities for the organization’s activities due to climate change
• CORE EN3 Direct energy consumption
• ADD EN4 Indirect energy consumption
• CORE G415 Energy intensity
• ADD EN5 Reduction of energy consumption
• ADD EN6 Reductions in energy requirements of products and services
• CORE EN16 Direct greenhouse gas (GHG) emissions
• CORE G416 Energy indirect greenhouse gas (GHG) emissions
• CORE EN17 Other indirect greenhouse gas (GHG) emissions
• CORE G417 Greenhouse gas (GHG) emissions intensity
• ADD EN18 Reduction of greenhouse gas (GHG) emissions
• CORE EN19 Emissions of ozone-depleting substances (ODS)
• CORE EN20 NOx, SOx, and other significant air emissions

So what's different? Intensity, as we've seen.  But more about that later.

GHG Protocol framework

A key difference is the clarification in definitions for energy and emissions reporting. The GRI has aligned itself with the leading carbon reporting standard - the GHG Protocol in which direct and indirect energy are classified into three scopes of emissions.

• Direct Energy > Scope 1 emissions
• Indirect Energy > Scope 2 emissions
• Other Energy > Scope 3 emissions

You probably already know this, but for those of us who are not environmental experts, it does take some getting your mind around. Scope is a classification of the organizational boundaries where GHG emissions occur.

• Direct (Scope 1) refers to emissions are created by sources owned or controlled by the organization. For instance, a coal-powered power plant which makes electricity.
• Indirect Energy (Scope 2) refers to emissions resulting from the generation of the electricity, heating, cooling, and  steam that is purchased by the organization. Scope 2 emissions occur at facilities which are owned or operated by other organizations. For example, using electricity purchased from the coal-fired power plant (probably via a national grid) is classified as Scope 2, because the emissions were generated in producing the electricity and not in your organization.
• Other Indirect  Energy (Scope 3) refers to emissions resulting from the organization’s activities, but are not created by the organization. This includes emissions from outsourced activities, such as the transportation of goods by haulage companies using vehicles that are not owned or controlled by the organization.

In other words, most companies report fuel and coal as direct energy sources and purchased electricity as an indirect energy source. In environmental reporting, the  energy source and what you do  with it is less important than where you do it. If the emissions occur in your factory, cue Scope 1. If they occur in someone else's factory, cue Scope 2 and if they happen on the bus to work or on a truck to China, cue Scope 3 (provided you don't own the bus or the truck).  

The John Lewis Partnership CSR Report for 2011 contains a good graphic that makes this all crystal clear:

Which emissions to account for: Control or Equity
The key to defining what to count is the precise scope of where emissions occur. On the face of things, it sounds straightforward, but in practice, there are two definitions are available: the equity or control method.

The control method calls for a company to account for the total GHG emissions from operations over which it has control, whether this be financial or operational control. It does not account for GHG emissions from operations in which it owns an interest but has no control. In other words, if you lease a factory, and you run it, and all the people working there are your employees, and all the materials used in the factory are sourced by you, and the final output is your products, then you have control.

The equity method calls for a company to account for GHG emissions from operations according to its share of equity in the operation. For example, if you have a 51% financial share in an operation, or even a lower financial share but full management control, you would report your emissions proportionately, according to the percentage share, and not full control.

This is an important distinction and must be applied consistently throughout the entire reporting spectrum. It could significantly change the level of emissions reported, so watch for the fine print when you are reading reports.

Alignment is Good
Closer alignment with the GHG Protocol (which is also used as the basis for CDP reporting) clearly makes sense, and hopefully will encourage greater comparability in energy and emissions reporting. At present, there are still wide variations but some do it well. ENEL, the energy company, for example, reports  for 2011 in classic textbook G4 style:

ENEL 2011 reporting EN3

ENEL 2011 reporting EN4

ENEL 2011 reporting EN16 Scope 1 Emissions

ENEL 2011 reporting EN16 Scope 2 emissions

ENEL 2011 reporting Scope 3 other emissions

Oh, did we mention intensity ?
G4 includes two new indicators relating to Energy Intensity (G415) and GHG Emissions Intensity (G417). This is a way of normalizing consumption and impacts to a common denominator which may be financial ($ of revenue), human (per person), physical (per square meter of factory or office space, or per vehicle) or per product (units sold, units produced) or, in fact, any other factor that you can imagine which is relevant to your business (or which makes your numbers look better than the absolute numbers). In most cases, my experience tells me, the intensity figures will always look better than the absolute figures - companies use more and more energy and generate more and more emissions, but on a per something basis, they proudly show a major reduction.  Take these examples:

Air China reports in the 2010 Corporate Responsibility Report on fuel consumption and carbon emissions by PTK (per ton/kilometer), stating that they have achieved "remarkable results" as they have reduced fuel consumption PTK by 6.6% in 2010 versus 2009. We do not know what the total fuel consumption was during this period.

Delhaize, the Belgian supermarket chain, shows fabulous energy intensity results per m2 sales in the company's 2011 CR Report. A 7.5% percent reduction over three years. (It is not clear whether this is all three Scopes, but I assume just Scope 1 and 2)

Delhaize 2011 reporting on emissions intensity

Delhaize does not disclose the total number of carbon emissions. Delhaize also reports to the Carbon Disclosure Project and you can access their report (after several clicks and registration on the CDP website) but you will find that the 2011 report covers 2010 data, and is therefore not comparable to the CSR Report 2011 period. After a quick calculation, I note that Delhaize absolute Scope 1 and 2 emissions increased by 3%, using 2008 as a baseline. Turning an increase into a decrease is the power of the intensity measure. This might have been achieved by increasing some prices, changing the sales mix or recording some currency adjustments and wow, suddenly the carbon emissions performance looks actually quite positive.

NH Hoteles 6th's CSR Report includes both absolute emissions and intensity rates per guest per night. Absolute emissions fell by 8.82% while intensity emissions fell by 11.9%.

What did NH Hoteles choose to highlight in its reporting narrative ? Intensity, of course.

 

 

CapitaLand's Sustainability Report for 2011 also shows a similar picture, in one handy graph.

Again, you can see that on an absolute basis, there is an increase of emissions by 39% since 2008 but intensity on a square meters basis reduces by 11.1% since 2008. CapitaLand's emissions target is an intensity target reduction of 20% by 2020, but there is no absolute target.

BT uses yet another model for calculation of emissions intensity and that is emissions per GBP million value added - which is EBITDA plus employee costs.  This formula is what BT has called its Climate Stabilization Intensity Target - a measure of carbon emissions in relation to its (financial) value added as a company and the contribution it makes to a country's GDP. Hmm. Make more profit, improve your carbon emission performance. BT's absolute emissions reduced 53% versus their 1997 baseline, and intensity improved by 61%.

What would be interesting to know is what specific factors contributed to this intensity improvement. BT report that they have improved energy efficiency, invested in renewable energy generation and purchased low-carbon energy. Wonder how much of what went into that 61%? And how much was a change in profit and employee costs?

Ericcson, on the other hand, report a different type of intensity. According to Ericcson's 2011 CSR Report, the carbon dioxide emissions associated with the lifetime operation of delivered products totaled approximately 24 Mtonnes in 2010. This is the measure used for carbon intensity. Don't worry about the fact that while carbon intensity was reducing every year, absolute emissions were increasing by 8% between 2008 and 2011.

Procter and Gamble have a lofty goal, stated in the P&G 2011 Sustainability Report: of powering their plants with 100% renewable energy. In the past few years, however, total carbon emissions (Scope 1 & 2, Scope 3 is off the radar) have increased  by 5% in 2 years. This doesn't prevent  P&G from proudly displaying the intensity figures:

As you can see, P&G refers to intensity per unit of production. Hmm. Now would that be a 5kg pack of washing powder, or a tube of Crest toothpaste, or a pack of Eukaneuba for dogs Denta Defense®, a type of micro-cleaning crystals that help reduce tartar by up to 55%?

Enough of intensity. By now you get the picture. Carbon emissions can be normalized to practically anything at all, depending on what a company wants to manage or what it wants to show to the world. In almost every single case you can find, intensity measures will always beat absolute measures. If only the planet would respond to intensity and become more sustainable. If every company were emitting carbon emissions relative to the number of expense claim-forms submitted, or the value of bottle-caps sold or the number of emails sent per hour, we might find carbon reporting much more interesting but it would hardly be saving the planet. If only we could become more sustainable by becoming less intense.

Why would the GRI choose to add two intensity measures to the G4 reporting framework? The GRI says this: "In combination with an organization’s absolute GHG emissions, disclosed with Indicators EN16, G416, and EN17, GHG emissions intensity helps to contextualize the organization’s efficiency, including in  relation to other organizations."
 
Normalizing energy consumption or carbon to financial values - turnover, sales or profit - or to other operational values - may be a way of comparing the performance of companies of different size in a similar sector. The carbon footprint of a cellphone is comparable whereas the manufacturers of cellphones may be very different in size and scope of operation. This might help investors (the ones who understand) to make decisions. Similarly, whatever the normalization factor, if a company consistently uses this to benchmark its own performance, it can be a management assessment and decision making tool. However, the trick is in the selected normalization factor. If such a factor has no direct relationship to whatever causes or influences the level of emissions, it may simply be a way to present good-news numbers. If my operations are the same size and my turnover increases because of a price-hike, or a change in currency exchange rates, I may still be generating equal or more carbon emissions but all of a sudden, my intensity plummets. We will have to be vigilant of the way that intensity measures are used in reporting, and ensure they are never  a replacement for absolute measures.

Some Less Intense General Points
The environmental disclosures as with, I think, all other disclosures in the proposed G4 framework are not time-specific. This means that the reporting company could report data only for the declared reporting period. I believe it would make sense to require organizations to present 5 years data on these critical data points. Of course, those who do not have 5 years data cannot do this. But of the many companies who have been producing sustainability reports over the years do have the data available (and several already include this). As we look at sustainability with a long-term lens, it is often frustrating when companies report only current and prior year data. We should require a little more perspective in G4.

Similarly, I believe that the G4 could be tightened up by requiring explanations of how performance has been achieved. For example, it would make sense, if energy consumption has decreased by 20%, to know what the organization has done to reduce this. The G4 proposals  in the updated EN5 (Reductions in energy consumption) and EN6 (Reduction of energy requirements in products and services) require listings of the reductions achieved but not a full explanation for HOW they were achieved. Adding such information would be helpful both for internal review and for external stakeholders. Companies who have made serious efforts to reduce carbon emissions should be able to say what actions caused the reduction. Unless it was all a lucky strike!

The Last Word (it's not intensity)
Overall the new GHG Reporting Thematic Revision tightens up environmental reporting and makes several aspects both clearer and less overlapping. G4 also ups the stakes a little (a lot). The G4 framework requires reporting on all three scopes of carbon emissions as core indicators (EN16, EN17, EN18). This is also the case in G3 (EN16 and EN17), but in G3, companies had the option to report at Application Level B or C, reporting Scope 1 and 2 emissions under EN16 and avoid Scope 3 emissions in EN17. With G4, every company which includes climate change as a material issue will be required to report all three Scopes in order to be In Accordance with the G4 framework. Sounds like there's gonna be a lotta scrambling around for data going on, and suppliers of goods and services to In Accordance reporters are going to feel the heat.

Whew! Glad that's covered. I hope  Anti-corruption is not so complicated. Watch this space.
   

 

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 www.twitter.com/elainecohen   on Twitter or via my business website www.b-yond.biz (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)

Part Two: Sustainability: What the Numbers Tell You

Since my recent Sustainability: What the Numbers Tell You post was so resoundingly successful, I have decided to maintain the momentum and  take a look at some more numbers. This time I am going to look at environmental metrics that were covered in the Sustainability Practices 2012 Edition, which I fairly glossed over in my previous (resoundingly successful) post. The Report covers a range of environmental metrics including those relating to: emissions, energy, water, waste, recycling, packaging, purchasing and spills and fines. Let's start with this number:

39%

of companies in the Bloomberg ESG 3000 Index report having a Climate Change Strategy. This compares with only 26% of the S&P 500 and 16% of the Russell 1000. (Just to remind you, the Bloomberg ESG 3000 covers a range of global companies while the S&P and Russell indices cover large-cap U.S. companies. So when the Bloomberg is higher than the S&P/Russell, it means that the world is doing better than the U.S.) In this case,  U.S. companies have not yet caught up on climate change as something they need to be making decisions about.

Many people probably don't know the difference between a climate change strategy and reducing energy consumption. In the Sustainability Practices Report, a climate change strategy is defined as: "a set of risk management procedures designed to mitigate the impact on business operations of climate change". Typically, as defined in the report, such a strategy will include: an assessment of the energy efficiency of the business, a commitment to capital investment in environmentally preferable technologies and a search for new sources of capital through commodity trading of GHG emissions or government subsidies for GHG emission reductions. 71% of big companies (over $100 billion revenues) have apparently given this some thought as they do have a climate change strategy. Only 22% of companies under $1 billion have done the leg-work in this area. The rest of them either they have a policy and are not disclosing (unlikely) or they don't have a policy and they are ostriching (likely). That's a shame, because "if you think mitigated climate change is expensive, try unmitigated climate change", (a quote from Dr Richard Gammon) .

And now for a little quiz: How many of the Bloomberg ESG 3000 actually report their total carbon  emissions?
A: 83%
B: 72%
C: 65%
D: 48%
E   34%
F:  21%

Yes, great, you were either wrong or right. The correct answer is:

 34%

That's it. Just over a third of the world's leading companies disclose their total carbon emissions. But this is not really the world's companies - it's Japan. In the Bloomberg 3000, there are 644 companies from Japan of which 80% disclose CO2 emissions, which is required by law. In the U.S., for example, only 8% of the 70 U.S. companies in the 3000 Index disclose CO2 emissions, which is the lowest rate of disclosure across a range of countries. The Netherlands and Sweden do better at 70% and 62% respectively, but France and the UK are lagging with 39% and 30%. This might be changing fairly soon in the UK with new legislation which will require large listed UK companies to disclose GHG emissions.  But disclosure is one thing and sustainable performance is another.  Think about this next number:

16,536,533

which is the average total CO2 emissions in tons from the 36 disclosing companies in the S&P 500 Index. This is a whopping 5 times higher than the total emissions from the 1,033 disclosing companies in the Bloomberg ESG 3000.  Utilities and energy companies reported the highest level of emissions, as you might expect. It takes energy to produce energy, apparently. Double whammy. When normalized per employee, we find that the utilities sector produces 1,473 tons of CO2 emissions per employee (median, not average). This is equivalent to emissions per employee resulting from powering 167 homes with electricity for a full year, or running 262 passenger cars for a full year. Wonder if all those employees think about that on their morning commute: "Hah, wonder how many cars on the road the carbon emissions resulting from my working today will equate to?" Perhaps this could be the next stage in sustainability-driven Employer Branding. It might work for the Financial Services Industry, where CO2 emissions are a mere 3 tons per year per employee (median). "Do you feel you have a personal responsibility for protecting our planet? Come and work for us. Your work will generate only 3 tons of carbon emissions per year, which is less than the equivalent of keeping one car on the road. You can manipulate interest rates with hardly any impact on the environment".  

But, enough of CO2, let's go deeper and look at energy efficiency. Consider these numbers:

 1,933  -  249  -  321

These are the actual numbers of companies in our three reference indices of 3,000, 500 and 1,000 companies which declare that they have an energy efficiency policy. 64%, 50% and 33%. I find that incredible. Forget sustainability, just think about energy costs. Heck, we even have an energy efficiency policy in our home! (Well, I admit, it's not a written policy, but if the kids leave the lights on in their bedrooms, they know there will be unpleasant consequences). Why wouldn't businesses have an energy efficiency policy? Ah, you might say, "companies which are primarily office based have more significant sustainability impacts to think about and more important cost considerations". Ah, I might say back to you, "and pigs can fly".  Even the financial sector, primarily office based as it may be, has a higher rate of energy-efficiency policy disclosure at 52% of companies than the energy sector itself at 46%. Energy efficiency is the second most material issue for companies everywhere, based on a study that was done last year on materiality issues. So how come so few have a policy? Possible they are just doing it because it's in their DNA. (A friendly reference to Oliver Balch, who tweeted "Please, one piece of advice to all companies: ban the phrase 'In our DNA' from your corporate lexicon"). Consider this number:

5%

which is the percentage of companies in the Bloomberg ESG 3000 which report using renewable energy. That's just 164 companies. For all the others, renewables are apparently not yet in their DNA.

Moving on to water consumption, consider this:

3.72

is the ratio of average water consumption in the U.S. based S&P 500 to the average in the Bloomberg ESG 3000. The average water consumption per S&P company in the U.S. sample (104 companies disclosing) is 3.72 times higher than the global sample (1,111 companies disclosing). Clearly, size does matter, as the bigger companies have higher water consumption.  Yet still only 74% of the companies in the $100 million revenue category disclose total water consumption, despite the fact that the median water consumption for this group is over 35 million cubic meters in comparison to a $1-10 million revenue company which uses 1.4 million cubic meters per year. With water scarcity becoming the number one resource issue globally, it seems incredible that disclosure for such large corporate users should not be mandatory, leaving 26% of the largest companies in the world to decide for themselves whether to manage water consumption transparently or not. But it gets worse. Consider this:

2%

is the number of companies which report that they use recycled water. 74 companies in a sample of 3000. But it gets worser. Waste is also one of the big drags on our economies and quality of life, not to mention sustainability. Here's another number:

31,739,944

is the average waste in tons generated by companies in the materials sector (which is made up of companies that manufacture chemicals, construction materials, containers and packaging, paper and forest products, extractives etc) which is more than the total average waste of all the other sectors added together, yet only 36% of companies in this sector report on the total levels of waste generated. Waste is cost. More often than not, it's unnecessary cost. How are investors using this information? Companies which are generating so much waste are also wasting investors' money.  Which brings us to the next number:

$997,299

which is the average amount that companies in the Bloomberg ESG 3000 spend on environmental fines each year. In the S&P 500 index, this becomes a whopping $2,224,831.

I could go on, but I won't. The Sustainability Practices 2012 Edition Report is an encyclopedia of data and comparative numbers. I have given you a jump start. You'll have to do the rest of the leg-work yourself :)  

By now, I think you get the picture. It's one of desperately poor levels of disclosure. Despite the growing momentum of voluntary disclosure and Sustainability Reporting, frameworks, measures, surveys, CEO commitments, investor pressures and all the hype that this brings with it, the picture on transparency is still bleak. Most of the largest companies in the world are barely disclosing most of the most important sustainability metrics. And this low level of disclosure gets proportionally lower and lower as company size decreases. In the U.S., performance is generally lower in comparison to the rest of the world. So it's fabulous that the U.S. is now leading the Medals League Table at London 2012 (39 Gold Medals as I write), but sooner or later, even that performance will not be sustainable without stronger and more transparent behavior by American corporations.

There is something about numbers. They clarify our reality. In this review of environmental sustainability and transparency-by-numbers, that reality is rather depressing, because there is a stark realization that, for all the talk, the results are pretty shameful and perhaps, voluntary disclosure is not all it's cracked up to be. Self-regulation is more self than regulation. When the authors of this Sustainability Practices benchmark report maintain that "there is significant room for improvement", I think we can safely agree that this is more than a mild understatement. With Paragraph 47 not promising to be massively instrumental in driving change in transparent disclosure, we have to wonder just what will propel corporations around the world into a different paradigm, before something else propels them out of ostrichland.

An eternal optimist, I believe change will happen. As a realist, I see it's painfully slow. As a pragmatist, I accept that we have to move on and, as the amazing Pema Chodron says, Start Where we Are. As an icecreamist, I know there is always comfort just around the corner.

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 www.twitter.com/elainecohen   on Twitter or via my business website www.b-yond.biz  (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)

Is Sustainability Reporting off-target?

Sustainability information, research and survey-results overload is one of the greatest challenges of the sustainability profession! It seems that every day, another informative and insightful report plops into my inbox or miraculously appears in my Twitter Stream or Google Alert. Just scanning most reports is a full time job, so being selective is a key skill. One current report that I have selectively read end-to-end is worth reviewing. Here goes:

Finding Common Ground on the Metrics that Matter

This report, published by The Investor Responsibility Research Center Institute (IRRC), a not-for-profit organization established in 2006, working at the intersection of corporate responsibility and the informational needs of investors, and authored by Peter A. Soyka President, Soyka & Company, LLC and Mark E. Bateman President, Segue Point, LLC, describes three major findings, based on analysis of corporate data from the results of a recent "Green Metrics that Matter" survey conducted by the National Association for Environmental Management (NAEM), ESG researcher/investor data from company web sites and interviews with corporate execs and investment researchers.

The Metrics that Matter Report explores and documents the extent to which corporate environmental, social, and governance (ESG) information tracked and managed internally by companies is consistent with information sought by external parties, in particular, by ESG investors and the research companies that serve them.

In other words, are companies reporting what (investor) stakeholders want to know and are they doing it effectively? Great question. As Sustainability Reporting expands - CorporateRegister.com confirms 5,700 reports published in their database for 2010 and Mike Wallace of the GRI confirms roughly a 35 percent increase in GRI reporters in the U.S. from 2010 to 2011 - so the importance of the effectiveness of reporting becomes more acute. Add this to the fact that "virtually all publicly traded mid-cap to large-cap firms in the U.S. and in many other countries typically are included" in investment-focused analyses, and you can see that ESG disclosures are key to driving market impact.

The report covers five main aspects of this complex topic:
1: Background and context of reporting and investor requirements
2: Commonly used ESG metrics and why they are important
3: Analysis of metrics approach by leading rating frameworks
4: Commonalities and differences of ratings
5: Recommendations for the way forward

The major findings are:

#1 : No agreement on number of ESG metrics required

There is general agreement about the key corporate sustainability issues, but not necessarily on the specific form and number of metrics used to measure them. There is also a fundamental difference in the purpose(s) to be served by examining corporate ESG information between corporate executives and ESG researchers/investors. The IRRC report claims that there may be a "mismatch along several relevant dimensions between what ESG information companies claim they are developing and using and the information requested by external parties."

#2 : ESG is still about risk, not about value

Both ESG researchers / investors and corporate EHS managers and executives approach ESG issues from a risk mitigation perspective, not a value creation perspective.

#3 : More dialogue is need to improve disclosure effectiveness

Future improvements in corporate disclosure quality and in efficient and adroit collection and use of these data in investment analysis will require improved clarity and more effective and consistent communication between companies, researchers, and the consumers of information.

The crux of the metrics

The real issue of this report, however, addresses the mismatch between what investors want to analyze and what companies track and disclose in terms of ESG metrics, and why the mismatch exists. With typical companies tracking and disclosing on 37 ESG metrics, with some tracking more than 50, and sustainability performance being reported to C-level executives or Boards of Directors at numerous companies, as well as the rise in use of the GRI guidelines, one might be forgiven for thinking that alignment between investor interest and corporate disclosure would be more consistent. Surely, all the stakeholder engagement that the increasing number of companies is now attesting to would lead to a common denominator of interests, right? Wrong. First, different investors look for different metrics.  Second, dialogue is not really dialogue. Third, all that drives ESG tracking and disclosure is not wrapped up in $ bills. The Metrics that Matter Report shows that accountability and decision-making are the key drivers for the tracking of metrics within companies.

Table reproduced from the IRRC Report :
Finding Common Ground on the Metrics that Matter, February 2012

In other words, ESG data is used to help businesses manage themselves more sustainably for the long term. Isn't that great? It's not only about presenting ESG risks to investors. And here we circle back to my heretical thoughts on Integrated Reporting. Despite the fact that "ESG evaluation is all about assessing management quality, which raters believe is a key determinant of future financial outperformance", all that matters in sustainability metrics should not be investor driven. Happily, the way companies are using metrics seems to support this view. This being said, there is some correlation between demand and supply:

Table reproduced from the IRRC report - from the NAEM survey -
showing the level of analyst interest versus the number of companies that track related metrics

Most ESG researchers want disclosures on climate change, most companies provide them. Most analysts want information about diversity, most companies provide it. Most ESG researchers want health and safety data, everyone supplies it (influenced possibly, by regulation, not just voluntary disclosure). Going down the list, however, you can see the mismatch - mainly on the side of greater disclosure about things that most analysts do not (yet) consider all that important. However, the IRRC goes on to indicate that there are several other issues that ESG researchers look for which were not covered by the NAEM survey for which disclosures by corporations are less common.

Of course, companies should not  ignore investor demands, and no-one (I assume) would argue against the need for greater consistency, comparability, and even correlation to financial impacts of ESG data. However, a broader perspective needs to be retained when considering what companies should track in terms of metrics and what they should disclose. This should also be informed by a company-specific materiality analysis, something which is not always present in many Sustainability Reports.

The role of the GRI

The Metrics that Matter Report maintains that "the GRI has been very helpful, but contains too many questions and imposes burdens on responding companies that may limit its uptake." The interviews conducted with various experts indicate that they generally support the concept of GRI, and believe that it has substantially improved the ESG research space. "But there was also widespread recognition that GRI may ask for too much and make it too difficult for companies to disclose important information...and..that companies that report based on the GRI guidelines put significant effort into generating these reports. One interviewee described the process as like the 'Bataan Death March [for companies] to do a report.' As a result, relatively small numbers of companies issue such reports compared to the universe of companies ESG researchers must evaluate." This is important insight, but, in my view, it is not the reporting process that presents the largest burden, but the data management processes within companies. It is not the GRI Framework that is preventing companies from reporting - after all, many companies manage to report without the GRI Framework.

I work on many Sustainability Reports for companies, and there is no doubt that the most challenging parts of the process are (1) gaining genuine stakeholder input (2) assessing material issues and (3) gathering sustainability performance data that is consistent, comprehensive and accurate. Turning this into a Sustainability Report is the easier part of the process. If investors want the data, companies need to do the work whether or not they produce a Sustainability Report which fully conforms to GRI Guidelines at whatever level. Let's not forget that the GRI Framework is extensive but not mandatory - data points which are not relevant for companies can be (and are) skipped. I have found that, for companies that are serious about sustainability, and are prepared to make the effort to put in place good data management systems for key metrics, GRI reporting is not a barrier but a beneficial tool.  

The (sensible) recommendations made by the IRRC report include:

#1 : More clarity (or at least, more transparency) is needed regarding the relationships between ESG management and performance improvements and corporate financial performance.

#2 : Additional research is required to determine how closely disclosure reflects ESG management quality and performance.

#3 : Understand link to value creation - gaps remain in our understanding of the linkages and research illuminates a number of key issues and questions that speak to corporate value creation through adroit management of ESG issues.

#4 : Greater dialogue and sharing of information and perspectives is essential for both sides to understand the other’s needs and constraints, and to forge communication mechanisms that are more effective and less burdensome.

My view is that in an ideal world, there would be 30 core indicators (agreed by the main body of ESG researchers, analysts, regulators, where relevant, and corporations), that are material to all companies in any sector that every company would disclose, on a regular basis, using the same methodology, for all global operations,  in a way which makes a causative link between sustainability impacts and economic performance. This would achieve greater clarity, comparability and act as a basis for meaningful assessment of relative risk and opportunity. These indicators might even be the prime indicators for inclusion in Integrated Reports. Beyond the 30 core indicators, there may be another 50 - 100 sustainability performance metrics  that are in the pickn'mix category, with higher or lower material relevance to different companies in different sectors and geographies. Companies could choose if, and how, to disclose against these indicators, in line with their stakeholder interest.  I wonder if the revision of the GRI Framework to G4 will move in this direction?

Finally, I stress that there is much more insight and valuable information in the Metrics that Matter Report, whatever side of the equation you are on, and it is well worth the investment of time to read it in full. It contains a wealth of perspective, it's intelligently written and addresses many questions which are at the core of sustainability reporting efforts. It will certainly be useful material at the Smart Sustainability Reporting Conference in May.

Of course, I did a PDF search for "ice cream" and found none in this Report. This post, then, is a testimony to my impartial and magnanimous nature. I recommend the report anyway!

elaine cohen, CSR consultant, Sustainability 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)