31 ways of looking at materiality

If everything is material, it's not material. Everything cannot be top priority. Everything cannot be most important. The complexity of sustainability, especially for large, global businesses, is vast. A list of potential material issues can run in to hundreds of issues. Ford, for example, started out with a list of over 500 issues and whittled those down to a mere 57 issues which the company considers material. Identifying and prioritizing material issues is one of the most difficult tasks of companies on the sustainability journey. Most ignore it. In Sustainability Reporting, most skip over the materiality piece, presenting instead what I call a shopping list of activities which includes just about anything which can be crammed into the heading of CSR. However, some do it better. The best reporters include a Materiality Matrix, which, arguably, is the most important part of any Sustainability Report, and certainly the thing I look for as soon as I have finished reading the CEO statement.

That's why the new report, Materiality Futures, from the recently formed consulting firm, Fronesys is a fascinating look at how companies report materiality. Chris Tuppen, formerly BT CSO, together with Jyoti Banerjee, a business application software professional, partnered up to found Fronesys and start making a material impact.

For those of you who can't remember what a Materiality Matrix looks like, here is the basic format that is included in the GRI Reporting Framework:

Issues appearing in the top-right part of the matrix are the most important ones which both impact the business results and are important to the organization's stakeholders.

Materiality Futures analyses the Materiality Matrices of 31 sustainability-reporting companies for reports published before August 2011, presenting a refreshing and innovative look at how materiality gets reported. Overall, Fronesys discerned 140 separate issues listed somewhere on these 31 matrices, quite a low number when you think that the companies analyzed listed between 8 and 65 issues with the overall average being 27 issues per company. The analysis whittles this down to 50 core issues which were listed by at least 5 companies, and are not industry sector specific, and mapped these issues in what Fronesys calls the Matrix of Matrices.

The top 10 issues which emerge as important both for businesses and stakeholders in terms of number of times mentioned and relative importance to business and stakeholders are:

1 Sustainable Products
2 Product Carbon Footprint/Energy Efficiency
3 Economic Development/Emerging Markets
4 Customer Relationships/Satisfaction
5 Economic Stability/Recession
6 Climate Change (policy/strategy)
7 Energy Use/Own Greenhouse Gas Emissions
8 Employee Retention and Attraction
9 Legal Compliance
10 Product Safety

It is interesting that Sustainable Products takes top place. Perhaps this is an indication that companies are hoping to make some money out of sustainability. The fact that Legal Compliance appears in the top ten is perhaps an indication of the efforts companies need to make simply to keep up with changing legislation in the area of sustainability. Although compliance is often thought of as a precondition for voluntary sustainability efforts, the fact is that compliance is by no means something to be taken for granted.

Issue number 50, right down at the bottom of the materiality ranking list, is Senior Executive Remuneration, something which is starting to affect more companies as shareholders, not only stakeholders, are taking a stronger stand and demanding more proof of performance and bang for the executive buck.

The two issues which were mentioned somewhere on the matrix by most companies (irrespective of their positioning) were Health and Safety (25 times) and Climate Change (24 times). This is what the overall matrix of companies looks like for climate change - you can see that most companies have it right up there with the leading issues.

Fronesys also offers two additional ways of looking at materiality:

Issue Coherence Level: This is the degree to which companies (and their stakeholders) agree that an issue is material. In any given set of companies, each will note specific material issues in at different points on the Materiality Matrix. The degree to which all companies are synchronized regarding the relative importance of the issue as noted on their matrix, is the Issue Coherence Level (ICL). Across the 31 companies analyzed, the highest coherence is achieved for Economic Stability / Recession, Stakeholder Engagement, Employee Retention and Attraction, Customer Relationships/Satisfaction. Sustainable Products, however, has a much lower level of coherence, demonstrating that, although many companies include this on their matrix, not all agree about how important it is. The lowest level of coherence is biodiversity. This is indeed an issue which is either high on the radar or or very low, depending on sector, I think, so it doesn't surprise me to see companies placing this in different corners of the matrix.

Materiality Convergence: This is another metric invented by Fronesys which shows the degree to which a company and its stakeholders agree or disagree on the relative importance of a particular issue. For example, a company might rate customer satisfaction, as Cisco does in their 2010 materiality matrix , as very important to the business but not so important to society.

Fronesys says that total convergence of issues between a company and its stakeholders would be "odd" where as "a total lack of convergence would suggest the company is out of touch."

So far, this is all very interesting, but ...err... what's the point? Why is comparing materiality of different companies important? Well, first, Fronesys says, this represents a benchmark for all companies battling with materiality prioritization. If each company in your sector (and its stakeholders) confirms that renewable energy is one of its most material issues, but it's nowhere on your radar, perhaps you should be asking why not.

However, there is another important motivator for this analysis - the run-up to integrated reporting. Fronesys maintains that the integrated thinking which necessarily precedes integrated reporting will require good materiality work.

"It is hoped that the IIRC framework will not only lead to a consolidation of the reporting of a companyʼs most material issues, but also lead to more forward looking reports that illustrate a more strategic alignment between sustainability and conventional business objectives. For any company adopting the IIRC framework, the process of materiality determination will need to be at the core of their thinking."

I am not so sure. Right now, the materiality matrices contained in sustainability reports are based on sustainability issues and do really address core (financially material) business issues. There is some overlap, but broadly, sustainability matrices do not truly serve Integrated Reporting in their current form because they mainly address sustainability as separate from the business. For Integrated Reporting, a business materiality matrix containing financial and sustainability issues will need to be created. As mentioned in a previous post, I hope that when all the issues are put together,  the issues which are primarily sustainability driven won't drop off the bottom of the matrix. However, maybe the development of Materiality Matrix Muscles will help and I concur that companies need to get better at "the process of materiality determination".

The issue that the Materiality Futures Report does not cover is whether, having developed the Materiality Matrix, a company adequately discloses on the material issues in the Sustainability Report. I often find that a Matrix is stuck somewhere in the report but the actual issues are not addressed in any depth. The whole point of identifying material issues is to understand them, make decisions about them and report on them to stakeholders. If you see a Materiality Matrix in a Sustainability Report, look for disclosure on the highly material issues.

There is another whole debate (which Materiality Futures references) and that is the process for determining material issues, stakeholder inclusion, diversity of stakeholder voices and how issue are prioritized. The fact that a Materiality Matrix exists is not necessarily an indication of good process, which Fronesys highlights as another area where disclosure should be improved. Sustainability is as much about the "how" as it is the "what". If you see a Materiality Matrix in a Sustainability Report, look for disclosure on how the Matrix was developed.

If I were to do a materiality matrix of issues in my life, I would probably find that 24/7 Ice Cream Supply probably comes out as the top issue, but don't ask me about process or the convergence score or the coherence level. 

 

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)

Heretical thoughts on Integrated Reporting

I have been hesitant to add my voice to the Integrated Reporting debate because, as one who writes Sustainability Reports for a living, I might find that the requirement for dedicated Sustainability Reports slowly disintegrates as Integrated Reporting takes over. Therefore, I have had to examine my own concerns in the light of potential bias and fear that my passion for Sustainability Reports as standalone documents may get in the way of an objective analysis. However, as a reporter, I cannot stay on the sidelines, and heck, who is objective these days anyway?

To acclimatize myself for the debate, I re-read two excellent analyses of the new discussion paper that the International Integrated Reporting Committee published recently (download here). James Farrar, an outstanding commentator, takes the considered view and lists the oportunities and the challenges, asking whether Integrated Reporting can solve the information gap. Another superb analysis came from Richard Welford of CSR Asia, who comments that the IIRC document "raises some huge questions as to whether the IIRC is being so ambitious that it risks actually damaging what it is setting out to do."  Both of these accomplished and influential writers motivated me share my thoughts, which are still work in progress.

I find great fulfillment in writing Sustainability Reports because I firmly believe they add value in a way that Annual (financial) Reports can not. I believe Sustainability Reports speak to different kinds of stakeholders - ones who are interested, not (only) in the financial stability and forward projections of the firm and how much (more) profit it will make, but in the impact of companies on their lives and on the planet, almost regardless of a company's profitability. 

I believe that most stakeholders want to know about the soul of a company, about its practices, its stories and its relationship with the planet and its dwellers. For most stakeholders of companies, the fact that a company makes more profit is almost incidental. We know it's there, we know, somewhere in our consciousness, that companies exist to make profit. We understand the free market economy. We are ok with that.

But sustainability stakeholders, and that includes everyone outside of the financial services and investment professions, want the money thing to take care of itself. They don't want to be bothered with financial balance sheets. They want to know about the company and their life. The company and their children. The company and their local park. The company and the air pollution that is affecting their asthma. The company and the Amazon Rainforest that may be so far away but rainforest destruction is just heartbreaking. The company and how it treats its employees, some of whom are relatives. The company and its gender equality policy and why a colleague was not promoted despite clearly being the best for the job. The company and our smartphones and whether someone committed suicide on the production line due to stress at work. The company and how it raises the price of cottage cheese out of all proportion to the cost of its manufacture.

Sustainability is about people, not about balance sheets. It's about aspirations, not about cumulations. Companies need to make enough money, that's clear. But if sustainability becomes subordinate to the restlessness and greed of the financial markets and sustainability reporting is taken over by the brilliant minds which created the Great Financial Crisis, the shameful economic inequalities around the globe, the bonuses of senior executives, each of which is enough to keep a village in rural India in food and clothing for a year or two and even, the Integrated Reporting Framework, then we are likely to transform sustainability into a cool and calculated numbers game, where $ count instead of impacts, and reports count instead of values.

Now, don't get me wrong. There is a linkage between financial performance and sustainability. The so-called non-financials are actually very financial, for the most part. They cost money, they save money, they build business or they present risk. In most cases, sustainability performance can be calculated and as such, it makes sense to present them in a company's annual financial accounts. Sustainability is about risk, and safeguarding risk carries cost. Sustainability is about opportunity, and investing in the future often comes with a price-tag. And as consumers and purchasers of goods and services, we are all complicit in making the economy what it is today. Many of us have chosen to enjoy the benefits of today's economic wonderland without considering the true cost.

But, wasn't sustainability reporting borne out of a desire to reflect those imbalances in a way when everyone could understand, not just Finance PhD's? Didn't sustainability reporting serve to fill a gap that financial markets ignored? The Integrated Report should reflect, so the discussion paper says, integrated thinking. But at the same time, the current focus of the Integrated Report is the needs of Investors. In other words, the Integrated Report will become just another financial tool, serving the needs of those who want to get richer, by providing them with a modern methodology to evaluate whether sustainability performance makes more money or less. And if it makes less?

Yes, I agree that financial accounting needs to reflect elements of sustainability practices. Carbon accounting for example seems to be a no-brainer. Yes, I agree that we should move to quantify and integrate some aspects of ESG risk in financial reporting. Yes, I agree that integrated thinking could well lead to new integrated business models, rather than traditional models which equal "make money + do sustainability projects". Those are good things.

But no, I am not yet sure that the Integrated Reporting model will lead to a fair and balanced representation of a company's sustainable practices as they affect ALL stakeholders,  especially when those practices deliver impacts which cannot be readily squeezed into a mathematical number-crunching exercise. I am not yet sure that the lay stakeholder will find interest in the predominance of CFO-dictated jargon-ridden legalese that will be prevalent when The Integrated Report becomes the norm. I wonder if the non-financial stakeholder will be marginalized and will eventually become irrelevant in the heydey of integrated reporting, bringing things back full circle to when sustainability reports were not even on the horizon, with only a slightly modified epicenter.

So where I am, I guess, is in a sort of hybrid model. Let's call it Venn Reporting. It's kind of like Financial Reporting with a Sustainability Boost, and Sustainability Reporting with a Financial Boost. To follow an integrated strategy, a company must do the sustainability work. To deliver a good sustainable business strategy, a company must do the financial work. But like a Venn diagram, where both circles overlap is only part of the story and not the whole story. We need to make business strategy more sustainable, which means changing the models and the thinking, and we need to make sustainability strategy more business-like with more quantified targets, impacts and yes, financials. My concern is that force-fitting them both into one model delivers only one model. The financial model. Slightly padded, maybe, but still a financial model.

By now, I get to reading the IIRC discussion paper. I like the proposed framework for the Integrated Report which follows 6 key sections.

Organizational overview and business model: What does the organization do and how does it create and sustain value in the short, medium and long term?

Operating context, including risks and opportunities: What are the circumstances under which the organization operates, including the key resources and relationships on which it depends and the key risks

and opportunities that it faces?

Strategic objectives and strategies to  achieve those objectives: Where does the organization want to go and how is it going to get there?

Governance and remuneration: What is the organization’s governance structure, and how does governance support the strategic objectives of the organization and relate to the organization’s approach to remuneration?

Performance: How has the organization performed against its strategic objectives and related strategies?

Future outlook: What opportunities, challenges and uncertainties is the organization likely to encounter in achieving its strategic objectives and what are the resulting implications for its strategies and future performance?

However, it's all in the fine print. What's value? Financial value? What's risk? Financial risk? What are material issues? Financially material issues? Will  "reduce our carbon emissions" ever be as material as "launch a new product"? Against the massive weight of financially driven development, marketing, sales, employment imperatives, how will the true interests of non-financial shareholders emerge strongly enough to create a balance? How can we ensure processes are in place to ensure sustainable business decision-making and sustainable practices which are at the base of integrated thinking?   

There are some businesses which are inherently sustainable - cleantech, water and waste management technologies, for example. The indirect impacts of these businesses far outweigh the direct impacts of how much carbon they emit in their process or how much waste they send to landfill. By advancing their core business proposition, these companies advance sustainability. Integrated Reporting is easy for these companies. They don't have to establish a sustainability program - their business is the program. But 95% of all other businesses need to integrate ESG considerations in to every business decision and weigh up the financials. For these businesses, integrated reporting is well beyond current capabilities. For these businesses, the Venn model may work best. Report on sustainability performance and reflect the truly financially material elements in the Annual Report. As linkage capability (connectivity, the IIRC calls it) improves, so we will see more complete Integrated Reports. But there will always be a need for a document which reflects the spirit and soul of the company to a broader span of stakeholders, and that will be the detailed Sustainability Report.

That's not to say sustainability reporting is perfect. It is not, in so many ways. Despite the valiant efforts of the GRI, it is still not mainstream and the quality of reports published varies so widely that true comparability is almost impossible. The leap from inadequate sustainability reporting to adequate integrated reporting (really integrated) is like reinventing the cotton gin. 

I have no doubt that Integrated Reporting will move forward and there will be uptake, of sorts. It's the sexy thing in reporting today. It has the weight of all the most dominant financial powers in leading markets behind it and many influential individuals. Of course it has. It serves their interests. I just hope that, as integration integrates, sustainability doesn't disintegrate.

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

A very tasty CSR conference

This time last week I was engrossed in fascinating conversations at the Justmeans  Redefining Value: Integrated Reporting and Measuring Sustainability Conference in London on 25th March 2011. But before I talk about content, I can't help but mention that the conference was held at the best conference venue I can ever recall in having visited in London - the Brewery - complete with a sustainability policy and gourmet food worthy of so many sustainability people, hungry for change and hungry for the best conference lunch in London. (OK, no ice cream, but what the heck!). The conference itself was serious, thought-provoking, no ribbons and bells, just 5 intensive sessions with lots of talking, many insights and a few challenges to the status quo. Some sessions were more valuable than others, as inevitably happens, but all were interesting. Lunch provided a welcome break for ribbons and bells, with the announcement of the Social Innovation Awards winners in a tastefully done ceremony where every winner got to say a few words about their accomplishments.

The conference started out with a powerful panel session moderated by Justmeans CEO, Martin Smith, intended to be a catch-up with what's happening in the world of non-financial reporting, with leading players in the form of the GRI (Nelmara Arbex), A4S project (Jessica Fries) and the CDP (Paul Dickinson) .There is a consensus that sustainability reporting is not mainstream, despite the daily Sustainability Report announcements that fill our RSS feeds. The GRI, as my regular readers will know, is moving towards G4 which should address some of the current shortfalls of the GRI framework while A4S is planning a pilot program to enhance non-financial reporting without increasing complexity and length, among other things. The CDP has now completed 9 reporting cycles, demonstrating that "repetitious normalization" is gaining the attention of 551 investor groups who represent $71 trillion in funds, more than the GDP of the world. 3,000 companies reported to the CDP, rather less than the number who issued sustainability reports, last year. The single biggest challenge for reporting is mainstreaming sustainability reporting in a harmonized way (GRI), providing data to shareholders (CDP) and getting the right systems in place (A4S). The point was made that reporting should not only be about the past but how a company intends to create its sustainable future. It is true that this often gets lost in backward looking reports and even companies who express targets do not often explain how they expect to achieve the targets in their reporting .

"What is driving the growth of international standards?"  was the question that led the next panel session , led by Judy Kuszewski whom it was nice to meet in person after our twitterous acquaintance to date. The fascinating takeout of this panel was the collection of perspectives from Carsten Ingerslev, the Director of the Danish Government Center for CSR, who said that "if we leave things up to the market, they won't happen quickly enough". It is certainly a good thing to see a government body taking initiative to drive CSR, and of the 91% (I think) of the top 1,100 companies in Denmark who chose to report following the law which came into effect in FY2009, 43% were reporting for the first time. (The Danish law, which was an amendment to the Financial Statements Act, requires companies to report on non-financial matters or give a reason why not. Of course, not too many companies are happy to say they don't give a hoot about sustainability, even if they are not sharing sustainability prime-time, so reporting becomes the only viable alternative.). Carsten said that the companies who did report confirmed that they gained benefit and were able to understand risks and opportunities for their businesses in a way they had not before. The Danish motto: you can't fly below the radar. Sustainability reporting is the radar. The "comply or explain" model is surely one which will be emulated, I suspect. Wim Bartels made the point that building the systems required for good non-financial reporting needs accountants. But who would have expected less from a partner in sustainability services at KPMG. He has a point, but some pushback was felt from the audience who suggested that sustainability reporting needs anything BUT accountants. This, when you consider that the IIRC is comprised of almost exclusively accountants and financial specialists, may already be a lost cause.

The next session showcased reporting leaders from Novo Nordisk, Novozymes and the data collection systems company Enablon. The best quote from this session was "you can't internally manage unless you externally report" (Dan Vogel of Enablon) . The question of how far you can monetize sustainability in integrated reporting was one of the interesting aspects raised, as the drive to fit sustainability into financial reporting frameworks may just create pressure in this direction. All agreed that better models to measure impact and the cost-benefits of sustainability impacts are required.

Toby Heaps of Corporate Knights and the 100 Best Corporate Citizens posed the question: Will social change happen through capital markets? and then proceeded to answer it by explaining that radical transparency is the key. Wow. Sounds so easy. The 100 Best Corporate Citizens has honed in on 10 core indicators which are the clue to radical transparency. Caution. This is a buzzword. Use it sparingly. Considering that only 2% of UNPRI signatories, according to Toby, disclose non-financial information, transparency has apparently not reached radical levels quite just yet. Bloomberg, in the form of Curtis Ravenel, align with Denmark in the belief that regulation is the only way forward.

Finally, a large lunch, a few exquisite muffins and some delightful pastries later, (N.B. Don't diet at Justmeans conferences), BP (Nicholas Robinson) took center stage and explained what it's like not to sleep at night when you need to produce a sustainability report when everyone is accusing you of being about as sustainable as a rabbi at the Vatican. After being slapped with the largest class action law suit in history, trying to produce sustainability report sounds like something only Merlin the wizard might attempt. However, without Merlin's assistance, apparently, but with a strong dose of Triazolam, BP has done it (see here - more on that in a later post). The complexities of reporting for companies who are dual listed (US and UK) were interesting to hear about from BP, who took four years to combine their different submissions into one report that meets both requirements. Hmmm. And that's only financial reporting. At that rate, integrated reporting should be with us by the time my great-great-grandchildren will wonder whether separate reporting was ever an option. Another interesting discussion in this panel was about what happens when Greenpeace decide you are the bad guys and viralize a gory video about endangered orang-utans, attacking one of your iconic brands. Invite them to the table, was the answer from Niels Cristiansen, the Public Affairs guy at Nestle. I just hope the conference room refreshments did not include Kit Kat. Greenpeace asked Nestle to develop an auditing plan for their rainforest impacts and Nestle agreed. Not only this, but the Head of Operations at Nestle is reported to have said "I am glad they did because it made us a better company." Who needs McKinsey when Greenpeace can help you improve your bottom line?

By this time, my head was reeling with  many old and new concepts, and my waistline was begging for relief, so it was probably a good thing that Justmeans didn't cram any more into this day. I will certainly be happy to attend another Justmeans conference, but only if they hold it at the Brewery.

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

33 reasons to attend a conference on reporting

The  main reason I attend conferences is to keep up to date, learn new stuff and gain new insights from inspiring people doing inspiring things. Of course, networking is a big bonus, and more and more these days it's about meeting people face-to-face after months or years of positive interaction on social media, as well as catching up with those you have not seen in a ling while. As plan my trip to the UK later this month, I thought I would share my 33 reasons for attending the Justmeans Redefining Value: Integrated Reporting and Measuring Sustainability Conference in London on 25th March 2011.

33. The Agenda looks great
32. It's about sustainability reporting.. my favorite subject in the whole wide world (sorry Chunky Monkey)
31. I haven't been to a Justmeans conference before, and it's about time I checked them out
30. Some of the great thought leaders in sustainability and reporting, and sustainability reporting will be on stage - Wim Bartels, Thomas Conde, Toby Heaps, Judy Kuszewski and more
29. I am interested to hear what Niels Christiansen, Vice President of Public Affairs, Nestle S.A, has to say, given Nestle's sometimes not so comfortable positioning in the media.
28: It's in London, a very convenient location and the home of fish and chips.
27. There are plenty of breaks to download emails whilst networking.
26. The winners of the Social Innovation Awards will be announced. I always like a scoop!
25. I will be interested to hear Carsten Ingerslev, Director, Danish Government Centre for CSR, given Denmark's prowess in so many areas of sustainability including mandatory ESG reporting.
24.Maybe they will serve ice cream in the breaks.
23. The venue is close to Oxford Street. Yeah! Shopping.
22. The GRI, CDP and A4S will be updating us on the State of Reporting. Three leading lights.
21. I won't have to make dinner for the kids.
20. I won't have to make dinner period.
19. The attendance list reads like the top 100 corporate citizens list.
18. The venue is corporately responsible
17. This line is intentionally left blank.
16. The Social Innovation Awards shortlist is intriguing.
15. I happened to have March 25th free.
14. Integrated reporting is a complex topic and thinking is evolving. It's important to be where integrated reporting is being discussed. Every voice counts.
13. I can't attend the pre-conference workshop so the conference will be my compensation.
12.I am looking forward to watching everyone tweeting from the conference (what was that hashtag again?)
11.The conference promises to showcase best practices from companies at the forefront of reporting. Who would want to miss that ?
10. You never know, there just might be someone attending who is looking for a great Sustainability Reporter to help them write their next Sustainability Report. (Darn! I told myself I wasn't going to plug the services of my company, Beyond Business, in this post. I always had a problem with self-discipline.)

Keep going. Only 9 more to go. I saved the best till the last.

9. I get to meet up again with Martin Smith, the Justmeans mastermind.
8. It's something to do before my flight back home.
7. I am hoping to meet many co-#CSR-tweeps. #CSR tweeps are fabulous.
6. The conference is on a Friday. That means we can #FollowFriday it.
5. It's something to tell the folks back home about.
4. Do you really think they will serve ice cream in the breaks?
3. I will have lots of material to blog about.
2. It sounds like fun.
1. It's gonna be a blast.
0. I have the opportunity to be really generous and pass on a substantial discount to just a few people who register quoting a secret code that I am able to reveal to a few lucky friends. (If you also have 33 reasons to attend this exciting conference, just drop me a line and I will see what I can do.There are just a few places still open).

If you are at the conference, please come and say : Hi Elaine, how about ice cream?


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

Interesting times for Sustainability Reporting

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

The G4 - next generation of GRI guidelines

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

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

Improving G3: 

• Provide better guidance on how to report on governance issues
• More robust definitions to better support assurance processes
• Updated sustainability scope
• Guidance related to current stages of normative frameworks such as UNGC and OECD reporting guidelines
• Revision of the current Application level definitions

Prepare for scale up:

• Offer a variety of flexible reporting elements for use by reporters dealing with different requests
• Develop a user friendly format
• Link to the International Integrated Reporting Committee framework
• Link to broader ESG reporting requests and ESG information users 

Much of this might look like sudoku to you at this point, so let me try to fill in a few blanks from my own perspective.

G4 is the right direction

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

Updated sustainability scope

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

Improve the robustness of the GRI framework application

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

Provide a solution for harmonizing of reporting

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

Revision of the current Application Level definitions

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

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

Alignment with the IIRC framework

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

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

G4 Technology

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

Continue the debate

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

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

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

BT is getting connected !

I was preparing my review (coming soon!)  for CSRwire and my CSR-Books blog of  the recently published book,  Accounting for Sustainability,  in which there is a case study of BT and its approach to sustainability strategy and  reporting. In the meantime, as I went to check out the BT 2010 sustainability report, I thought I would highlight what does appear to be their  good practice in the analysis and quantification of sustainability intiatives.

The report covers materiality, the result of a considered process of analysing and prioritizing business and stakeholder-raised issue, and a range of other sections relating to social and environmental impacts. At the heart of the report is a KPI table, included as a separate PDF download here. There are 12 core non-financial  indicators, with performance shown for the last three fiscal years, and a set of corresponding financial indicators, showing what financial impact is delivered by the performance against each of these non-financial indicators. The financial measure of the non-financial indicator "Improving Customer Service", for example, is total revenues and average revenues per UK household. An increase in the BT employee engagment score delivers a financial impact on employee costs. The lost time injury rate target has a financial impact on the cost ot the business resulting from injuries arising at work. The implementation of BT's Human Rights Standard in supplier procurement has an impact on the value of human-rights-approved procurement as a percentage of total supplier spend. Investment in society delivers an impact on the financial bottom line in terms of the overall spend in cash, time and equipment donated. Reducing carbon emission intensity delivers a financial effect on overall energy costs. An ethical performance measure delivers an interesting financial impact which counts revenue support - the number of customer bids which require a sustainability component. Interestingly, BT have a diversity target to maintian a top ten placement in four of five diversity benchmarks, but note that they have been unable to develop an appropriate financial measure for this non-financial target. 

I believe this is good practice and clearly influenced by the "Connected Reporting Framework" proposed by the book I have just read. However, it's just a start. The value of assigning a financial result to a non-financial target can only be meaningful  if you show the investment in performance development alongside the overall result. Average revenues per household may have increased, but what cash investment in customer service programs were necessary to deliver this improvement? What incremental safety programs, and at what cost, delivered the reduced cost of injuries to the business. What investment in carbon emission intensity reduction was needed to recude energy costs? There is not always a clear linear relationship between all these numbers. This demonstrates the rigour of thinking necessary to put all these sustainability initiatives into nicely separate  "financialized" compartments. I think BT are doing well to make a first stab at this, and I would be really interested to see them take this thinking further.

Oh and as for diversity .. no financial measure ? What about the cost of additional efforts to recruit and retain a more diverse workforce against the benefit of low non-diverse turnover ? What about the financial contribution of women / minorities / disabled etc as a percentage of revenue generation? What about the cost of competing in all these external rankings against the value benefit of reputation enhancement ? Haha. That one was tongue in cheek. 

Anyway, if all this is a little too intense for you to handle, BT also provide a little light relief from the metrics with some interactive sustainability games, which is why writing this blop took about 13 hours. (I am much better at metrics!)   

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