The announcement this April 12 of the Ceres-ACCA 6th Annual Sustainability Reporting Awards brings to light the growing attention to sustainability reporting. In this feature CRO addresses the current trends, continuing challenges and future of the reporting process.

By Ken Stier

Twenty years after the challenge of sustainability squeezed its way onto a crowded global agenda through the 1987 Brundtland Commission Report, “Our Common Future,” corporate reporting on this complex bundle of issues seems to have become mainstream among leading multinational firms.

Advocates contend that these sustainability reports (also referred to as corporate social responsibility [CSR] reports, global citizen reports, corporate responsibility reports and a myriad of other names) go beyond mere risk mitigation—although this is increasingly critical to cope with new vulnerabilities, such as the effects of climate change—and should help companies uncover new opportunities. At its best then, reporting can also be a value-added exercise, reflecting a growing convergence of stakeholder concerns and balder shareholder interests.

However, reporting quality varies widely. Hence the value of programs such as the North American contest sponsored by Ceres and the U.K.-based Association of Chartered Certified Accountants (ACCA), which highlights best practices for other corporations eager to raise the quality of their own reporting. For many though, the question of how closely any company comes to genuine sustainability and how well current reporting is advancing actual performance remains open, especially when the definition of sustainability keeps expanding—now to include such issues as governance and lobbying. In short, the evolution of sustainability reporting remains messy, just as in any other front for social progress.

A Growing Trend

But for those in the trenches of this movement, the glass is more than half full. “There was a time a couple of years ago when people thought it was being rejected and that it was going to go away,” says J. Emil Morhardt, Director of the Roberts Environment Center at Claremont McKenna College in California, who together with his students, probably evaluates more reports than any other single institution. “And there were a few papers predicting that, but I think just the opposite is happening; it is our impression that reporting continues to increase in quality and more and more companies are doing it rather than fewer.”

Indeed, in its 2005 “International Survey of Corporate Responsibility Reporting,” KPMG noted a steady rise in separate corporate responsibility reporting—from 45 percent in 2002 to 52 percent in 2005 among Global 250 companies. Just as important, in 2002, approximately 70 percent of reports were essentially environmental, health and safety (EHS) reports, while three years later, almost 70 percent were
broader-gauged reports that embraced social, environmental and economic impacts.

According to the KPMG study—the fifth, conducted triennially—the two countries with the highest percentage of reports were Japan (80 percent) and the United Kingdom (71 percent), with a number of European countries showing significant growth. Companies with high environmental impacts tended to be lead reporters; almost 80 percent were utility, automotive, oil and gas, or electronic and computer companies. The financial sector posted the biggest gains in reporting. “This indicates that business leaders see a growing business case for sustainability reporting, which can reduce risk and the cost of capital, help attract and retain customers and staff, as well as support engagement of stakeholders and create new business opportunities,” observed a recent PricewaterhouseCoopers publication.

The advent of the latest reporting guidelines (called the G3) issued November 2006 by the Global Reporting Initiative (GRI), the leading sustainability reporting standard, seems likely to encourage more first-time reporters, in part because the new standards have been simplified and verification has been made easier. “[Reporting is] a trend that is here to stay, it’s definitely growing and G3 has definitely given this whole issue of reporting a new level of energy,” notes Eric Israel, KPMG Forensic Managing Director, Advisory Services, who has been active in this area since 1988.

His firm has seen a recent spike in interest—especially among major U.S. companies—for assistance in preparing sustainability reports and for ensuring that reporting systems can stand up to the outside scrutiny involved in external verification. “Companies want to make sure it is verifiable on two levels: internally, they want to make clear that the information is reliable, because those reports still have a very high exposure—the CEO, COO, the CFO is usually quoted in those reports—but they also want to prepare themselves for external verification, which is another indication that companies are preparing that this report becomes more mainstream,” Israel explains.

KPMG’s 2005 report noted that just one report among 32 issued by American firms had been verified by a third party, “despite the SOX requirements for transparency in corporate affairs and governance.” A recent article in the Journal of Accountancy opined that as the uptake of sustainability reports using GRI guidelines continues, “stakeholders for all public companies will come to expect these reports at some point in the future.”

Adding New Dimensions

Another trend in corporate reporting is the move away from solely compliance-related risk disclosure to including a larger scope of information that is now more widely regarded as material to both the company’s longer-term financial performance as well as to its broader sustainability challenge. This reflects a growing congruence of interests between shareholders and stakeholders.

“Increasingly, what you are seeing is more companies reporting not just to what I call the bunny huggers, but regarding their stockholders and stakeholders as basically one big crowd and that stockholders are as concerned about their management of ESG [environment, social, governance] issues as stakeholders are,” says Julie Gorte, Vice President and Chief Social Investment Strategist at Calvert Group, one of the nation’s largest socially responsible mutual fund firms with more than $13 billion in assets under management. “They are seeing that their governance and the quality of management is reflected not just in their financial statements but in the way that they manage all the places that they interact in their world—the workers, the communities, the planet—and more and more investors are starting to look at the way companies manage those interactions and take that as an indicator of the quality of management.”

The Ceres-ACCA awards program favors reports that reflect this approach of addressing both sustainability and long-term financial performance, placing a premium on the completeness and relevance of company disclosures. “We don’t think you can really even understand performance—measure it, benchmark it, or reward it—unless you first have this underlying level of disclosure that allows external stakeholders to judge whether or not a company is performing,” explains Brooke Barton, Manager of Corporate Accountability Programs at Ceres. This is the fifth year that Ceres has undertaken the competition with ACCA, the world’s largest professional accountancy body, which has held similar competitions for 15 years, first in the U.K. and now in some 20 countries.

Drivers of Reporting

Many companies find that just the process of collection and analysis of data for reporting is beneficial—since measurement is often the first step toward improvement. “The purpose of this report—the key reason we produce it—is that it’s a great management tool that ensures continuous improvement of our social, environmental and economic performance,” notes the Vancity Group, the British Columbia-based banking entity, in its 2004-05 accountability report, which is this year’s overall sustainability winner of the Ceres-ACCA competition. A report also serves as an important platform from which the company can communicate with multiple audiences, including potential employees, staff and stakeholders.

It’s little wonder, then, that this area is becoming increasingly competitive. “People aren’t investing these huge amounts of money in sustainability reporting because they think it’s good for the planet. A lot of companies are doing it because it supports their competitive position in some way,” says Matt Loose of SustainAbility, the London-based think tank and consultancy. He cites BP’s sustainability reporting as providing important “proof points” the company uses in its high-profile advertising campaign. “There are very strong commercial reasons for doing this and for doing it in a leading fashion, so they are going to push the agenda, but it makes sense for them to do so.”

Globalization is also pushing this agenda, as companies shift more of their operations to developing countries where standards are playing catch up. Globalization can accentuate a company’s vulnerability, as local problems reflect on an entire brand. As more complex supply chains snake around the globe, this has required more robust social reporting, which has long trailed more empirical environmental reporting.

Stinging criticism of Asian sweatshop conditions spurred Nike to make “game-changing” supply-chain enhancements for the apparel industry. Wal-Mart Stores, a bellwether company, has begun reporting on its sustainability issues—an indication of how mainstream sustainability reporting is becoming.

In its latest report, General Electric addresses its struggles with globalization and raising the standards of its huge supplier network. With almost 600 employees trained to conduct supplier assessments, in 2005 GE turned up 12,045 “findings” (i.e., problems) at some 1,480 approved suppliers.

While suppliers were given a reasonable timeframe for correction, more than 272 ended up being terminated for poor performance. This year, GE reports it will focus on improving suppliers’ “overall management of an issue rather than just correcting the specific finding.” The GE example suggests that although the number of multinational companies issuing sustainability reports is relatively small (less than 5 percent worldwide), they are typically leading companies with a disproportionately large influence for setting standards.

Criticisms of the Process

To some, sustainability reporting efforts still focus too narrowly on reputational risk rather than embracing the potential value that a focus on sustainability can bring about. “The corporate sustainability/corporate responsibility field has largely come out of the discourse of risk, so a lot of the tools and processes companies use are about risk management, and the corporate responsibility manager will largely be talking about risk management,” notes SustainAbility’s Loose. “But increasingly, we see companies jumping into this much more exciting space where they are actually saying that sustainability is adding considerable value to the bottom line and to the future growth potential of the company.”

He cites as an example the recent turnaround by U.K. chain Marks & Spencer, achieved in good measure through a “green repositioning” that included not only embracing sustainable fish but also investing substantially to create awareness and generate more demand for the seafood. “We are very excited about the opportunity side because we think risk management will only take you so far,” says Loose. “We are not going to save the world taking risk management approaches.”

Increasing focus on these kinds of opportunities also minimizes some of the “greenwashing” that occurs in current reporting. “Just because you are disclosing more information doesn’t mean you are a top performer in your industry. There is not necessarily a correlation between those things and to the extent that people are conflating them, that creates problems,” argues David Hess, a business professor at the University of Michigan in Ann Arbor. British American Tobacco, for instance, consistently gets good marks for its social reporting without really demonstrating that they are reducing teen smoking or cancer rates worldwide, he argues.

Beyond the GRI

Mandatory reporting might address some of the current weaknesses of sustainability reporting by creating uniform standards, but few signs point to widespread required disclosure of non-financial information. Even where there has been some required reporting, for example, for asset managers and listed companies in South Africa, France and the Netherlands, the guidelines are either not very strict or are without enforcement sanctions. Even governments with national sustainability plans (such as the United Kingdom) are not doing enough to promote such planning in the private sector, argues Roger Adams, ACCA’s Executive Director-Technical, who has been involved in the GRI since its beginning.

“We have a financial reporting model that is creaking a bit, we have a sustainability reporting model that is still at a very early stage in development. I would simply like governments to be more proactive in promoting sustainability reporting with their respective corporate sectors…and I am not sure anywhere in Europe I really see the dialogue between the government, GRI and the corporate sector being fulfilled,” he says.

In fact, there are distinct signs of governments moving away from the GRI. The U.K.’s ministry of environment has devised its own sustainability reporting guidelines, and Australia is also considering developing its own. The British CSR community is still smarting over Downing Street’s abrupt abandonment in late 2005 of plans for basic mandatory reporting requirements in favor of more modest Europe-wide measures, which are roughly equivalent to the Management Discussion and Analysis (MD&A) required for shareholders of U.S. companies. “It would sadden me if governments chose to disregard the output the GRI has managed to create over 10 years,” says Adams.

The impending climate change crisis might seem a powerful rationale for mandatory company reporting. Voluntary disclosures about carbon emissions and discussions about the issue are on the rise, but these are a far step from corporations developing full climate change strategies. A review of the utility industry by Claremont College showed that two-thirds of companies assessed discuss climate change, but only 15 percent mention carbon capture technology. On a brighter note, the proposed buyout of TXU, which includes plans to cancel building of eight of 11 conventional coal-fired plants may well have been influenced by Ceres’ work with U.S. utilities.

Clearly, reporting is not an end in itself. Even good reporting does not necessarily result in improved sustainability. The same is true of financial reporting. Improved performance is wrung from owners holding management accountable. The aim of the GRI is to provide sufficiently detailed non-financial performance indices to make corporate activity transparent and measurable over time, so stakeholders can hold the company to account if there is not an improvement.

“Non-financial reporting should improve performance, provided that information recipients have some sort of power in the relationship with corporate or organizational management,” argues Adams. “Maybe that aspect of this debate has not been played out fully yet… how do non-shareholder
stakeholders exert power and how can they use public reporting tools to enable them to do that?”

Ken Stier is a freelance writer who has written for Fortune, TIME and Newsweek. He can be reached at kenstier@earthlink.net.