The Enlightenment According to the Big Four. Not.

I wish I were an accountant. Clearly, I'd have so much time on my hands that all I would do is prepare new frameworks for sustainability metrics. I would spend my mornings dreaming up some new framework that looks just enough different from what's already out there to make it Big News, and spend my afternoons convincing everybody why it solves all their problems. Then I would make a ton of money when people are so bewildered and confused that they adopt my framework and ask me to check it over.

This was my first reaction to the new WEF publication: Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation which can't have helped escape your attention if you are on the sustainability circuit. (OK, I don't really wish I were an accountant. I don't think I could handle all the accountant jokes.) 

I can't tell you how many clients and colleagues have asked me what I think about the WEF metrics framework, meaning, is it good or is it bad? GRI has published a diplomatic response saying they "cautiously welcome" this approach but that it doesn't go far enough. Prof. Carol Adams has also weighed in: "Once upon a time there was a glimmer of hope that accountants could save the planet. The motivation for this report is unclear and expressed differently in different parts. But it is not going to save the planet and could well do more harm than good."  And no less a scathing reaction from Carlos Tornero at Responsible Investor: "As for reforming capitalism, I’m afraid the Big Four are not the best ambassadors for that."

For those who haven't yet studied the WEF paper, here's 96 pages distilled (followed by my commentary):

The proposal was developed as part of the WEF's International Business Council (IBC) and led by the Bank of America, who chairs the IBC, and the Big Four accounting firms: Deloitte, EY, PwC and KPMG. The IBC is a community of CEOs of around 140 companies, as far as I can gather, but I cannot find a list of the specific companies that are members of this group. 

The objective of developing this disclosure framework was "to identify a set of universal, material ESG metrics and recommended disclosures that could be reflected in the mainstream annual reports of companies on a consistent basis across industry sectors and countries. The metrics should be capable of verification and assurance, to enhance transparency and alignment among corporations, investors and all stakeholders."  

The hope is to encourage "IBC companies to begin reporting collectively on this basis in an effort to encourage greater cooperation and alignment among existing standards as well as to catalyse progress towards a systemic solution, such as a generally accepted international accounting standard in this respect."

And an important point: "This effort is not intended to diminish the value of the separate sustainability/ESG/impact reports, which often provide more comprehensive information at the industry- and company-specific levels, tailored to the interests of stakeholders beyond investors."

The proposed metrics are intended to be universal, industry agnostic ESG metrics/disclosures. There are two types:

Core Metrics: 21 metrics and reporting requirements. "These are primarily quantitative metrics for which information is already being reported by many firms (albeit often in different formats) or can be obtained with reasonable effort. They focus primarily on activities within an organization’s own boundaries." 

Expanded metrics: 34 metrics. "The expanded metrics and disclosures encourage companies to move from reporting outputs alone to capturing the impacts of their operations on nature and society across the full value chain, in more tangible, sophisticated ways, including the monetary value of impacts. These tend to be less well established in existing practice and standards...They represent a more advanced way of measuring and communicating sustainable value creation, and companies are encouraged to report against them as well, when material and appropriate."

Below is an overview of the metrics (reproduced from IAS PLUS )

Governance Core Metrics include: Company purpose statement, governance overview, material topics, anti-corruption, ethical reporting mechanisms and risk management. 

Expanded metrics include: 

• How the company’s stated purpose is embedded in company strategies, policies and goals
• Disclosure of the material strategic economic, environmental and social milestones
• How performance criteria in the remuneration policies relate to the highest governance body’s and senior executives’ objectives for economic, environmental and social topic and details of Board and executive remuneration
• The significant issues that are the focus of the company’s participation in public policy development and lobbying
• Total amount of monetary losses as a result of legal proceedings associated with fraud, insider trading, anti-trust, anti-competitive behavior, market manipulation, malpractice or violations of other related industry laws or regulations
• How the highest governance body considers economic, environmental and social issues when overseeing major capital allocation decisions, such as expenditures, acquisitions and divestments

Planet Core Metrics include: GHG emissions, TCFD implementation, land use, water consumption in water stressed areas.

Expanded metrics include:

• Paris-aligned GHG emissions targets  (science-based)
• Impact of GHG emissions - the estimate of the societal cost of carbon used
• Land use and ecological sensitivity 
• Impact of land use and conversion 
• Impact of freshwater consumption and withdrawal
• Air pollution and impact of air pollution 
• Water pollution and impact of water pollution
• Single-use plastics 
• Impact of solid waste disposal
• Resource circularity - potential metrics include (but are not limited to) the Circular Transition Indicators (WBCSD), indicators developed by the Ellen MacArthur Foundation and company developed metrics.

People Core Metrics include: Diversity and inclusion, pay equality, pay levels, risks of child, forced and compulsory labor, health and safety, training

Expanded metrics include:

• Mean pay gap of basic salary and remuneration of full-time relevant employees based on gender (women to men) and indicators of diversity (e.g. BAME to non-BAME) at a company level or by significant location of operation
• Ratio of the annual total compensation for the organization’s highest-paid individual in each country of significant operations to the median annual total compensation for all employees
• Discrimination and harassment incidents (#) and the total amount of monetary losses ($)
• Freedom of association and collective bargaining at risk (%) 
• Human rights review, grievance impact & modern slavery (#, %)  - total number and percentage of operations that have been subject to human rights reviews or human rights impact assessments, by country.
• Living wage (%) - current wages against the living wage for employees and contractors in states and localities where the company is operating. 
• Monetized impacts of work-related incidents on organization (#, $) 
• Employee well-being (#, %) - the number of fatalities as a result of work-related ill-health, recordable work-related ill-health injuries, and the main types of work-related ill-health for all employees and workers, and percentage of employees participating in “best practice” health and well-being programmes, and Absentee rate (AR) of all employees.
• Number of unfilled skilled positions (#, %) 
• Monetized impacts of training – increased earning capacity as a result of training intervention (%, $) - investment in training as a percentage (%) of payroll and effectiveness of the training and development through increased revenue, productivity gains, employee engagement and/or internal hire rates

Prosperity Core Metrics include: Employment, economic contribution, financial investments, R&D expenditure, tax payments 

Expanded metrics include:

• Infrastructure investments and services supported 
• Significant indirect economic impacts - examples of significant identified indirect economic impacts of the organization, including positive and negative impacts.
• Social value generated (%)  - percentage of revenue from products and services designed to deliver specific social benefits or to address specific sustainability challenges
• Vitality Index  - percentage of gross revenue from product lines added in last three (or five) years calculated as the sales from products that have been launched in the past three (or five) years divided by total sales, supported by narrative that describes how the company innovates to address specific sustainability challenges.
• Total Social Investment ($) -  Total Social Investment (TSI) sums up a company’s resources used for “S” in ESG efforts defined by CECP Valuation Guidance.
• Additional tax remitted - total additional global tax collected by the company on behalf of other taxpayers, including VAT and employee-related taxes that are remitted by the company on behalf of customers or employees, by category of taxes
• Total tax paid by country for significant locations

********

So, take a deep breath, and let's summarize: 

First, the accountants have decided (with input via a survey from some of the IBC companies) what represents a set of universal core metrics that every company should report on - whatever their shape or size. These metrics reflect largely DIRECT IMPACTS which each company can measure, control, and improve. 

Second, the framework offers an additional set of metrics that represent mainly INDIRECT IMPACTS - the ways in which the company impacts the world through its value chain. 

Third, it uses metrics that largely already exist in different frameworks.. a pick'n'mix from well known and lesser known frameworks, heavily leaning on GRI and to a lesser extent on SASB. Interestingly, although CDP is cited, none of the metrics are directly taken from the CDP questionnaires. 

Fourth, it incorporates some new concepts such as living wage (not new but not covered by existing frameworks), inclusion of corporate purpose (the new sexy), "vitality index" (heard of that one?), WCBSD Circular Transition Indicators, monetized impacts of training and others.  Two new metrics have been invented - one for single use plastics and one for land use.

What do I think?

Although the WEF metrics-team may have tried not to reinvent the wheel, they have actually reinvented the bicycle. The proposal moves away from the GRI approach of materiality by applying a common measurement system to all companies at a fundamental level - the things any company anywhere should be taking into account in the management of its own operations. The second set of (expanded) metrics also ignores the materiality approach and prescribes a range of measurements reflecting what the WEF team feel are the most relevant universal social and environmental issues - linking their selection to SDGs. After companies have done all of this, they have the option of applying a materiality lens and adding whatever crumbs are relevant for their "other" stakeholders, i.e. not investors.  

Actually, this approach has some elements of something I have been advocating for years - see my post from 2017: Materiality - from meaningless to differentiating  in which I wrote:

• There should be a harmonized standard baseline of disclosures that are relevant to all companies - some will be more critical than others for different companies - but they are relevant - and material - for all. I call this Operational Materiality. 
• Then we should have materiality that is precise enough to differentiate - focusing on the specific aspects of a company's impacts that are a directly relevant to its business, the locations it operates in and the influence it has on society. Let's call that Precision Materiality. 

The WEF metrics partly go this route. WEF Core Metrics represent operational ESG performance. Expanded Metrics represent  broader impacts - but remain any industry, and not specifically relative to what might be considered material for a specific company. 

So back to the question, is it good or is it bad? 

Coming just on the heels of the "standard setters' " proud declaration of how well they all fit in with each other and that no-one needs to be confused any more (and that's another (long) story 😜), here is yet another framework for ESG disclosure. I have to say that I rolled my eyes so hard that they almost stuck to my skull when I read the Press Release: “This is a unique moment in history to walk the talk and to make stakeholder capitalism measurable,” says Klaus Schwab, Founder and Executive Chairman, World Economic Forum. “Having companies accepting, not only to measure but also to report on, their environmental and social responsibility will represent a sea change in economic history.”  Seriously? A unique moment in history? A sea change? Excuse me... with all due respect, where has Mr Schwab been for the past 25 years? This is not a unique moment, it's one of hundreds and hundreds (arguably regrettably) similar moments that have occurred in the past several years, with the publication of every new sustainability disclosure framework, and having companies report on their environmental and social responsibility is actually current practice for most of the large companies in the world - there may be inconsistencies, there may be gaps, but it is happening, and it has consistently been getting better. 

I also had a bit of a laugh at the visual in the WEF report's final section... rainbows galore!

The conclusion is also a Call to Action to IBC members. "Given the urgency of this agenda, we invite all IBC members to declare their intention to report on these metrics and disclosures; collectively, we will present a timeline for that process at the IBC’s Winter Meeting in January 2021. Finally, we encourage the wider corporate community to join us in this collective endeavour." Watch this space, apparently. But you have time for a quick nap before January 2021.

My answer to the question, then, is that the wheels are good but the bicycle is bad.  

I'll explain.

I agree with the concept of having a set of metrics that are relevant for all companies, as I have said. And the core metrics are a reasonable selection (with some exceptions - see below). BUT, why on earth did the accountants think they needed to create yet another framework? As I have said several times, we do not need new frameworks, we need consistent implementation of existing frameworks. Take materiality as a case in point. Everyone is now swooning over the new concept of dynamic materiality - which in my view is a poor compromise to enable everyone to have a seat at the table without resolving underlying issues of how materiality is determined. Instead of creating yet another way to describe what materiality is, why has no-one one come up with a fool-proof comparable auditable methodology to help companies determine what represents material impacts from a sustainability standpoint? The new iteration of the GRI Standards, that has recently been in Exposure Draft did not do this, and GRI has never done this. "GRI is the disclosure tool, we do not prescribe the methodology" said GRI. But heck, if your entire disclosure concept is based on materiality, why wouldn't you offer a methodology for how to create it?  And this, in my view, has been the single biggest gap in sustainability reporting standards to date, and is the reason that so many other standards have sprung up. By asking companies to disclose material topics, without understanding or being able to reasonably audit what those material impacts are, comparability and rigor in sustainability disclosure were effectively destroyed. SASB stepped in and said, hey, we can do it. And they spent millions of hours and dollars creating sets of prescriptive metrics for different sectors, but even that doesn't do the job, as companies still select from SASB metrics based on their own, possibly arbitrary, definition of material topics. 

Back to square one. Cue the accountants. Forget materiality. Everyone should be accountable for certain things in the same way. Let's cut and paste from as many existing frameworks as we can find, and call it The Enlightenment. So I think that's bad. I think it's a perpetuation of all that's wrong in the current sustainability disclosure landscape where every player is focused more on differentiating their own approach than on taking the higher view of how we can work together and build on what is and agree to make real change for the greater good. The WEFers may have pick'n'mixed from GRI, SASB, and all the rest. So what. The bicycle is new. Companies will have to learn how to ride it. Just when they were getting used to riding their current model. All we need now is for Larry Fink to send a letter to all the CEOs of companies in Blackrock's portfolio saying they must report disclose using SASB, TCFD AND the WEF metrics. Won't that be fun? So much for alignment, harmonization, simplification. 

And as for the core metrics, well, they are almost all based on GRI General or Topic-specific Disclosures. Why just not direct IBC members to report those GRI metrics? What was the point of creating an entirely new framework that just recycles the current best practice? Also, why some metrics were selected and others omitted is not so clear. Waste, for example, is not included in the Planet Core Metrics. But I would have thought that waste is absolutely core for most companies. And some metrics are rather useless. For example, in the People category, under "Skills for the Future", the metrics are average number of training hours and training expenditure. This is so old school. The number of training hours or the amount you spend on training is hardly an indicator of whether you are building skills for the future. In any event, many companies are moving away from formal traditional training programs in favor of other types of personal and professional development, so training hours is becoming an increasingly incomplete measure. So, by picking and mixing, the accountants may have come up with a set of core metrics that are comparable and auditable up to a point, but, frankly, what's the value add here? Not much.

And what are metrics? Hint: Only a part of the story of a company's impacts and overall role in society. The context, the journey, the strategy, the targets, the process, the culture, the examples of practice, the insight, the accountability, the people  .... all these are important in sustainability disclosure. This framework is an accounting tick-box by accountants for accountants. Something that makes sense to them because it can be quantified, stuck into categories, computed and converted into theoretical evaluations and risk assessments that may help investors know how rich they can get. Is this what sustainable development has become? A set of monetizable compartmentalized scores? This may be the story of sustainability disclosure promoting itself into obsolescence. Precisely because sustainability has been so successfully (yes, not perfectly) addressed and disclosed over the years, the money markets woke up. Now, they are trying to reframe it in ways that fit with what they know. Like the country farmer who visited the Empire State Building and asked: how many sheep does it hold? Well, not everything that glitters is gold and not everything that's a number is meaningful. 

 

My assessment is that the WEF framework will not go mainstream as such, beyond the IBC members, if they even bother to apply it, even though the accountants will hype it. Companies that already disclose GRI, SASB, CDP and TCFD may well find themselves hitting many of the WEF metrics in any case, so they will sort of deliver the WEF indicators by default. If Larry Fink suddenly decides that this is the new Holy Grail, then he can probably get it without companies adding too much in the way of new disclosures. Some eager-beavers may start including a WEF index alongside all their other indices that support their reporting. What's another download, anyway? And let's not get started on the competitive scramble around Core and Expanded....can't you just see the Press Releases? "XXX company demonstrates global leadership in radical transparency in its new Sustainability / Annual Report by meeting all the requirements of the Expanded Metrics of the WEF ESG disclosure framework." Wowee.

  

If only the humanity could be saved by the proliferation of reporting frameworks…. 😂🤣😂 … we would all be able to spend more time trying out new ice cream flavors and enjoying days on the beach, wearing an "SDG Been There Done That" T-shirt.

Note: October 2, 2020: This post originally stated in error that there were 22 core indicators - there are 21. This has been corrected.

elaine cohen, CSR consultant, Sustainability Reporter, HR Professional, Ice Cream Addict. Owner/Manager of Beyond Business Ltd, an inspired Sustainability Strategy and Reporting firm having supported 107 client reports to date; author of three books and several chapters on Sustainability Reporting and the Human Resources connection to CSR; frequent chair and speaker at sustainability events and judge in several sustainability awards programs each year. Contact me via Twitter , LinkedIn or via Beyond Business

 

Materiality: from meaningless to differentiating

Pretty much anything that's important these days is material. High material, medium material, low material... material for the business, material for stakeholders.. materiality assessments, materiality analyses, materiality matrices. We can't get enough of materiality. In fact, materiality has become so commonplace that it's almost materially meaningless. Since the coming-of-age of materiality via G4 in 2013, and the subsequent move to GRI Standards published in 2016, you are not on the map if your map is not material. While companies publish a list of material issues, at whatever level of granularity they (arbitrarily) choose, by and large, in many, many cases, the list does not really influence sustainability strategy, stakeholder relationships or sustainability reporting. It's often a list of broad-brush, carefully-massaged any-company issues that can be universally relevant. So what's the point of conducting a materiality assessment, if all you are going to come up with is what everybody already knows?

We love it when we have a nice matrix. If it's on a matrix, it must be right, right? The matrix surely indicates that companies have embraced materiality and that give us great comfort. The matrix must be a result of something, the company must have done the work, they must have truly understood what's important in terms of their impacts on society. Yes, materiality matrices inspire the warm fuzzies about a company and its reporting. If there's a matrix, all is well with the world.

So who are we kidding? I am reminded of Woodie Allen's well-known observation that "80% of success is showing up", and this certainly appears to be the driving motivator for many materiality matrices. The remaining 20% is the differentiator. A materiality matrix without this 20% is like an iPhone without IOS.

80% of the outcome of any materiality process is a known given before the process even starts. This is why:

• There are topics that are universally relevant - climate change, energy consumption, employee rights, anti-corruption - this is just a selection of issues that are relevant for any company anywhere. 
• There are topics that are business or sector-relevant - if you have an extended supply chain with tons of outsourced suppliers, ethical supply chain will always be material for you. 
• The markets speak to you - a company, in the natural course of business maintains interactions with the market that make it clear what the markets wants and where the market is dis/pleased with performance. Just ask Abercrombie and Fitch.
• The watchdogs woof at you - Check out Oxfam and its Behind the Brands ranking, or Know the Chain's food company rankings, or any of the ranking and rating analyst companies - they woof their message and any company on their radar cannot fail to hear.    

So, 80% of the issues are predictably material and do not need extensive analysis paralysis to determine. Engaging stakeholders then becomes an exercise that helps determine the remaining 20%, or fine-tune the prioritization. That is, of course, if you actually engage... and if you engage with stakeholders that are relevant. Not all stakeholders are created equal and not all should be represented with equal voice. Sending out a survey may sound like fun, and 500 responses may sound robust, but if the 500 voices are a random mix, and if the survey is the only tool you use, then it's quite possible that your outcome will not reflect a differentiating set of issues for your company.


GRI Standards, the most widely used sustainability reporting framework, has in part been responsible for creating this  double-edged sword. On the one hand, the notion that companies should focus on what's most important/impactful (material) makes absolute sense. On the other hand,  what's the point in going through a whole process to articulate the obvious? Maya Angelou is quoted as saying: "Ask for what you want and be prepared to get it." (This works well for me at the ice cream store). GRI asked for a list of material priorities - and that's exactly what GRI is getting in GRI Standards-based reports (and G4 reports before them). But is that really what GRI wanted? A generic list of material topics that are relevant to any company? While GRI Standards also ask for disclosures about stakeholders engaged and topics raised by them, responses by companies to this disclosure are often template-ish and not necessarily correlating to the final list of material topics presented.

Let's recap - my assertion is this:

• Materiality is the crux of sustainability strategy and relevant reporting.
• Material sustainability issues are 80% predetermined and 20% differential
• The material differentiators are business or sector specific.
• Most companies take a blanket approach to materiality - everything goes in the mix and every stakeholder has equal voice. What comes out the other end is a blanket list of material topics that could apply to most companies.
• The process of determining material impacts lacks specificity and robust structure. 

So this is what I am thinking:

There should be a harmonized standard baseline of disclosures that are relevant to all companies -  some will be more critical than others for different companies - but they are relevant - and material - for all. I call this Operational Materiality.

Then we should have materiality that is precise enough to differentiate - focusing on the specific aspects of a company's impacts that are a directly relevant to its business, the locations it operates in and the influence it has on society.  Let's call that Precision Materiality.

I recently came across a framework which shows how this Operational Materiality part might work. It was via an interesting interview on Forbes by Christopher P Skroupa of Evan Harvey, the Global Head of Sustainability for Nasdaq. Evan Harvey explains: "Nasdaq published an ESG Reporting Guide for our European markets in March, 2017. The Guide is meant to provide an overview of the “business case” for sustainability strategy, management and performance disclosure. We identify 33 different metrics across the ESG space — the common denominators in global reporting frameworks, the most revealing and insightful measurements of company vitality — and make the justification for each. Reaction has been almost uniformly positive, and many investors have thanked us for helping to declutter a crowded data landscape." I looked at this guide, which I hadn't seen before.

The guide is primarily written to help companies traded on Nasdaq provide the information that investor markets need. The guide presents a set of 33 "Operational Materiality" metrics that all companies should report.

 For each metric, there is an explanation, following the format;

• What does it measure? 
• How is it measured? 
• Why should it be reported? 
• How does this metric correlate with other major sustainability frameworks? 
• Research Notes

Now, the great thing about this guide is that is does not replicate the detail provided by other leading frameworks. It leaves the detailed metrics definition to the expert standards developers such as GRI and leaves the choice of which framework to use to the reporting companies. BUT, it elevates the most universally relevant metrics for all publicly-traded companies (and why would this not apply also to privately owned companies?) into a clear, well-worded and well-explained document that any corporate exec can understand, not just the ones with a post-doctorate in sustainable development. No jargon. Just plain, clear, straightforward language. This is a good start-point for what I call Operational Materiality.

(The Singapore Stock Exchange (SGX) also hints at this approach. While it does not strictly prescribe reporting topics, but rather adherence to a known framework, it does include guidance as follows: "In broad terms, environmental factors would include materials, energy, water, emissions, effluents and waste as well as environmental complaint mechanisms. Social factors would include health and safety, employment practices and labour rights such as collective bargaining, as well as product responsibility, anti-corruption and supplier assessments. The framework chosen is likely to have additional factors that the issuer would report on." 

If we accept that the Nasdaq selected indicators together form a sensible "common denominator", then companies are freed up to focus their materiality discussions on their "precision" topics. Precision topics go beyond the common denominator baseline to the real difference the company makes in our society. Such a process would be efficient. By doing precision, engagement becomes targeted on a smaller number of issues at a deeper level. An example might be a pharma company referencing access to medicine, or a casino company referencing responsible gaming or a food company referencing nutrition or an Indian bank discussing local access to finance. Instead of debating whether water is more of a priority than energy or otherwise,  you get to spend your time reviewing topics that have a differentiating impact, and you target stakeholders to engage with specifically on these topics, such as subject-matter experts, local communities, watchdogs etc. What we need is a process for determining Precision Materiality. 

Let's do the litmus test. I randomly picked a few reports that use GRI Standards (selected using the GRI Sustainability Disclosure Database).  

CapitaLand 2016 Global Sustainability Report: The "critical" material topics could easily be part of a common denominator of Operational Materiality. "Stakeholder engagement" has not been defined by GRI as an impact - it is a principle and process - but there's no rule to say that it couldn't be material, if the process of engaging stakeholders actually delivers an impact in society as well as being necessary to understand stakeholder perspectives. This could be precision. In the moderate and emerging section, building materials and construction waste are hints of business specific areas and could be precisionally material.

Fauji Fertilizer Company Corporate Sustainability Report 2016: Top-right quadrant topics listed are all Operational Materiality with the exception of Farmer Advisory which is definitely business-specific for agri companies. The other quadrants of the matrix are also fairly Operational. I might have expected to see something related to sustainable agriculture or groundwater contamination as material for a company in the fertilizer industry.

Hershey 2016 Corporate Responsibility Report: Wow. So many issues plotted in such detail. How long did THAT take? The red blobs indicate the most material priorities. "Product Ingredients and Transparency" is a clear precision topic for the food business, as are "Consumer Wellness", and "Food Safety". "Global competitiveness" is matched by Hershey to GRI Standard Anti-Competitive Behavior and is therefore operational not precision. "Supply Chain Sourcing" is also highly relevant to a food company - which includes, according to Hershey, "topics related to supplier management, supply chain transparency, sustainable and ethical sourcing, and practices to ensure supply chain continuity. This issue also includes our agricultural sourcing practices and support for farmers."  So, in a precision matrix, where all the operational priorities are removed, Supply Chain Sourcing could probably become two or even three precision issues - Sustainable Raw Materials, Agricultural Practices and Supplier Management. Hershey's report covers these topics in detail.

Target 2016 Corporate Responsibility Report:  Operational topics in the main, though "Better Products" and "Better Services and Experiences" are precision topics expressed in a not-very precise way. What does "better" mean? And does this refer to all products? All services? All experiences? "Resilient and Vibrant Communities" could also be precision, if it's more specific than general community contribution and employee volunteering. "Forest" is an interesting one - Target has a new Forest Products Policy - this could well be precisionally material as well. So, if you strip off the Operational Materiality from this list, you are left with a much shorter, focused, precise list that differentiates Target and its business. Together with  operational disclosures, that would make for a clearer focus and strong presentation of materiality and reporting. 

Wacker 2015/2016 Sustainability Report: There are 32 dots on this matrix (3 fewer than the Hershey matrix). Compliance, Product Safety and Plant Safety stand out as being the most significant topics. Compliance doesn't feature in the Nasdaq 33 metrics explicitly, and probably that's an omission. Every company must be compliant, that's a basic prerequisite for all sustainability initiatives and performance. However, stakeholders can benefit from understanding processes the company uses to ensure compliance, train its people and the outcomes of compliance (or non-compliance). I would call this Operational Materiality and include it as metric number 34. Plant Safety is operational. Product Safety is precision -  in this case, it relates to chemical products where safety may be critical. As for the rest, there is not much that's not operational.

So, in this very brief review, we can see that just a fraction of the material issues are truly material in a very specific sense. Most of the issues labeled "material" are direct impact accountability as defined by 33 metrics - or a few more if required. Why spend so much time debating things that we all know to be a given? How many more hours will we waste moving dots around on a matrix? Yes, I hear you saying that some companies may not have as big an impact on energy, water, waste or other areas and therefore these issues are not universally material. I disagree. I think every company of a certain size must have accountability for its resource consumption, for its people management and for its governance practices and should report performance. Where companies have a greater impact in these areas, their disclosure can be more extensive.

I think there is an opportunity to simplify and harmonize sustainability disclosures in this way and use a standard set of fundamental, universally relevant operational disclosures to form the basis of sustainability reporting. The Nasdaq guide is based on recommendations from the World Federation of Exchanges (WFE) so we know this would resonate with an investor audience and be a good core for inclusion in integrated reporting. Beyond this, Precision Materiality would enable us to understand the company specific impacts, the area where added value is generated and/or where specific risks are managed.

In considering the next evolution of GRI Standards, in particular the Core / Comprehensive options, which are not terribly helpful, GRI might consider encouraging reporters to report all Operational Material Metrics (with policies, goals and targets etc in line with current GRI standards) as the GRI Standards Baseline Material Reporting Option. Each company would report on all of these metrics, using the relevant individual GRI Standards and the General Disclosures (GRI 102) to frame their reporting as now. In addition, companies would select additional business/company/sector specific topics using input from internal and external expert stakeholders, to disclose on precision material issues as the GRI Standards Advanced Material Reporting Option. In this way, companies won't be able to hide behind a materiality matrix filled with things that are relevant to everybody, but will need to elevate their focus to the things that are relevant to them and their specific stakeholders.

Phew. That turned out to be rather a long ramble that I hadn't intended. I haven't mentioned things like impact assessments and outcomes reporting - or even all those capitals that it's so sexy to talk about these days -  more on these on another sunny day - it's all relevant to materiality. But in the meantime, this could be a way of demystifying of black-box materiality to satisfy multiple stakeholders. Wondering if anyone thinks it's too much and I need a vacation? (preferably one where there is lots of ice cream)



elaine cohen, CSR Consultant, Sustainability Reporter, former HR Professional, Trust Across America 2017 Lifetime Achievement Award honoree, 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 Twitter (@elainecohen)  or via my business website www.b-yond.biz  (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm).  Need help writing your first / next Sustainability Report? Contact elaine: info@b-yond.biz 

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)

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)

How do you measure sustainability?

How do you measure sustainability ? I have been fortunate to gain a little preview of the input supporting the soon-to-be-released report offering answers to this very question. The report has been compiled by  Ethical Corporation and is called "Social and economic impact: measurement, evaluation and reporting: A must-have guide for companies operating in emerging markets and vulnerable communities". This  report promises to offer answers to many of the questions that most CSR practitioners and observers have been seeking. If only there were a way to capture all of a Company's sustainability impacts in a clear and consistent measurement methodology, we would all be much wiser, and probably, much more sustainable. The Ethical Corp report promises to include "a break-down and analysis of impact measurement methods, tools and processes currently available" based on insights from a survey of 116 CSR professionals worldwide, 30 in-depth interviews, a review of 60 Sustainability Reports and will include case studies from Henieken, Vodafone. SAB Miller, Tata, Unilever, Nike and more. There have been some spectacular impact assessments produced, such as Unilever's economic impacts in Indonesia, published in 2005 and further studies in South Africa and Vietnam.  In fact, Unilever measure quite a lot, including their water footprint and more.

This focus on metrics and measurement is certainly welcome, as, beyond carbon footprinting and community giving, most companies haven't a clue as to how to calculate their sustainability impacts.

Some early results show that:   

67% of the 116 survey respondents said their do measure their company's impacts.

73% of respondents said they measure impacts primarily for the purpose of communicating to stakeholders.

72% of respondents said they measure impacts as a way to build reputation.

The top three indicators that are measured by comanies include (1) economic impact on communities, (2) community impact and employee engagement in volunteering activities within the community and (3)  job creation. Oops, only 9% measure gender equality.

There are many different measurement models out there, some more relevant than others, some partial, some more comprehensive, though there is very little consensus on metrics methodologies  that can be perceived from Company disclosures in the current state of CSR and sustainability communications.  However, I won't continue now. I will review this promising Ethical Corporation report when it is published and share more insights at that time.

In the meantime, what is YOUR company measuring ?

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