Context Is King

GRI’s reporting guidelines are highly laudable. And insufficient.

By Mark W. McElroy and Jo M. L. von Engelen

Previously, we called attention to three rules for sustainability performance put forward by the famous ecological economist Herman Daly, all of which deal only with impacts on natural capital. Here we want to address the question of whether or not there can be rules of a similar kind for impacts on anthro capital. Indeed we think there can be. Before explaining what we think they are, however, here again are Daly’s rules for impacts, as neatly summarized in Beyond the Limits to Growth by Donella H. Meadows, Dennis L. Meadows, and Jørgen Randers: “In order to be physically sustainable [a] society’s material and energy throughputs would have to meet Daly’s three conditions: Its rates of use of renewable resources do not exceed their rates of regeneration; its rates of use of nonrenewable resources do not exceed the rate at which sustainable renewable resources are developed; its rates of pollution emission do not exceed the assimilative capacity of the environment.”

Daly’s rules hinge on the distinction that can be made between renewable versus non-renewable natural capital resources. The first and third rules deal with renewable resources; the second deals with non-renewable ones. In the case of anthro capitals, they are all, in a sense, renewable, since they are all human-made and can be re-made or expanded in supply at will. Because of this, there is only one rule required to characterize sustainable performance in the case of anthro capitals. That rule, we propose, is as follows: In order to be socially sustainable, anthro capital production and/or maintenance must not fall below levels required to ensure human/stakeholder well-being.

The rates referred to in this formulation are allocated rates. In other words, the standard of performance for social sustainability—which, again, includes economic sustainability, since we regard economic sustainability as merely a form or type of social sustainability—is to produce and/or maintain anthro capital resources at levels that are fair and proportionate to an organization’s place in the broader population responsible for preserving, producing and/or maintaining them. In some cases, the broader population will include other parties, in which case an organization’s share of the overall responsibility for producing and/or maintaining anthro capitals will be a partial one; in other cases, an organization will be the sole party responsible for such capitals, in which case its share of responsibility for them will be exclusive and absolute.

Context, Context, Context
By some accounts, approximately half of the now thousands of corporate sustainability or CR (corporate responsibility) reports produced each year by organizations around the world are prepared in accordance with the GRI guidelines. As we’ve noted before, the GRI framework is reflective of the triple bottom line, and includes sections, therefore, that call for the measurement and reporting of an organization’s social, environmental and economic impacts. In that regard, GRI is highly compatible with the approach put forward in our book.

Of greater importance, however, is the extent to which GRI explicitly advocates for the inclusion of context in sustainability reporting, a position it has taken since it was first deployed in 2000. To be clear, then, the necessity to include context in sustainability measurement and reporting is advocated by the leading international sustainability reporting standard in the world, and has been so advocated for more than a decade. Why, then, is the inclusion of context in mainstream sustainability reports, including in the thousands of so-called GRI-compliant reports prepared each year, so rare, if not virtually non-existent?

Below we offer our own perspective on this question, let’s consider the manner in which GRI actually advocates for the inclusion of context in reporting, what specifically it has to say about that, and how we could or should interpret it. Here is what GRI has to say about context:

SUSTAINABILITY CONTEXT
Definition: The report should present the organization’s performance in the wider context of sustainability.
Explanation: Information on performance should be placed in context. The underlying question of sustainability reporting is how an organization contributes, or aims to contribute in the future, to the improvement or deterioration of economic, environmental, and social conditions, developments, and trends at the local, regional, or global level. Reporting only on trends in individual performance (or the efficiency of the organization) will fail to respond to this underlying question. Reports should therefore seek to present performance in relation to broader concepts of sustainability. This will involve discussing the performance of the organization in the context of the limits and demands placed on environmental or social resources at the sectoral, local, regional, or global level. For example, this could mean that in addition to reporting on trends in eco-efficiency, an organization might also present its absolute pollution loading in relation to the capacity of the regional ecosystem to absorb the pollutant.

GRI: A Closer Look
Here we would like to comment on each statement made in the quotation above, starting with the opening definition referencing the “wider context of sustainability.” Of course we agree with this claim, the truth of which can be demonstrated with a simple example. Imagine two different companies, one located in water-rich New England and the other in the comparatively dry southwestern United States. Let us assume, further, that the two companies involved are alike in every respect—size, revenue, facilities, number of employees, products produced, volume of production, etc.—and that they also consume the same amount of water from local sources each year. According to the way in which most companies report their sustainability performance today (i.e., in a context-free fashion), the water-related sustainability performance of these two companies would be reported as identical. But this couldn’t possibly be the case, since the background water conditions at the two locations are dramatically different.

Indeed, the company in New England might be using water at rates that, if generalized to the population as a whole, fall well within the rate of water replenishment or regeneration each year , whereas the company in the southwest with the same rate of consumption might be contributing to the rapid decline, or even disappearance, of water resources there, even if its rate of consumption is falling. For all we know, the volume of water resources in the southwest might be declining at three times the rate of the company’s own decreasing consumption, thanks to a combination of dry weather and a rapidly growing population.

Background conditions of these types matter greatly when attempting to assess and/or report the sustainability of water use, as do background conditions of many other kinds in other areas of sustainability performance. As GRI separately explains in the Technical Protocol section of its guidelines: “Organizational performance [should be assessed] in relation to information about economic, environmental, and social conditions in relevant locations, e.g., discussing water consumption in relation to available supply in a particular location.”

Sustainability reporting that fails to take such factors explicitly into account is no sustainability reporting at all. Rather, it begs the question.

The GRI statement continues, with the imperative that, “performance should be placed in context.” Again, we agree with this statement for the same reasons discussed above. Furthermore, it should be clear that GRI’s use of the word “should” establishes a normative requirement for reporting, in cases where the GRI standard is being used. Every report prepared under the auspices of GRI that does not conform to this requirement is arguably not in compliance with GRI to the required extent. Still, it is worth noting that reports prepared in accordance with GRI’s guidelines can receive a rating of A+ from GRI itself, even it such reports are entirely context-free. Here we begin to see why context, or sustainability context as GRI calls it, is so conspicuously missing from mainstream reporting. Why go to the trouble of including it when top-level ratings for the content of a report can be obtained without it? The requirement to include context is simply not enforced in this regard.

(Editor’s note: Since the writing of the book from which this article is excerpted, GRI’s introduction of the G4 Guidelines has placed greater emphasis on “materiality” in reporting.)

The inclusion of context in reporting also has the added benefit of helping to mitigate the possibility of false positives or negatives in terms of how content is interpreted. Water consumption rates that are steadily declining over time, for example, could be misinterpreted as a positive result when in fact the availability of underlying supplies might be decreasing at twice the right (e.g., due to drought conditions, increases in human population, climate change, etc.).
Next comes a more specific indication of what GRI means by context: “The underlying question of sustainability reporting is how an organization contributes, or aims to contribute in the future, to the improvement or deterioration of economic, environmental, and social conditions, developments, and trends at the local, regional, or global level.”

Here again, we agree with GRI, but let us try to put a finer point on things. The specific “economic, environmental, and social conditions” GRI speaks of here should be interpreted as vital capitals in the world (i.e., the required levels of their stocks and flows), upon which people at the “local, regional, or global level” depend for their well-being. The “developments” and “trends” GRI further refers to should, in turn, be interpreted as developments and trends related to the quality or sufficiency of such capitals. If, as we allege, the sustainability performance of an organization is a function of its impacts on vital capitals, then it must be vital capitals—and the carrying capacities of their flows—that comprise the specific local, regional, or global conditions of interest to us when we measure and report an organization’s sustainability performance, as well as the demands placed on them as GRI also points out.

As Far as It Goes… It should be clear by now, then, that our interpretation of GRI’s treatment of context as a requirement for reporting is that it is consistent with our own position on the subject, as far as it goes. That said, GRI simply does not go far enough in terms of explaining context further, much less in providing guidelines for how to operationalize it. The term capital itself, for example, when used in the GRI standard only occurs in the narrow economic sense. There is no discussion of natural capital, human capital, social capital, or constructed capital, despite the foundational importance of these concepts to sustainability performance and to the inclusion of context in related reporting. Exactly how to include context is largely left to the user’s imagination, with or without capital theory to go by.

This, in our view, constitutes another major reason why GRI reports so often, if not always, omit context: there are simply no guidelines for how to do it. Given the utterly foundational and fundamental importance of context to sustainability measurement and reporting, though, it is hard to understand why the absence of such guidelines has been allowed to persist for so long. The consequence? Every GRI report—or every sustainability or CR report, for that matter—in which context is missing (i.e., the majority of reports ever prepared) necessarily fails to achieve the one thing it sets out to do: report the sustainability performance of the organization it describes. Again, this is a little bit like issuing income statements for financial reporting that systematically exclude costs, and which therefore never really report profits or losses. Instead of triple bottom line reporting, a better description for this kind of disclosure might be triple top line reporting—no real sustainability reporting going on at all.

GRI continues as follows: “Reporting only on trends in individual performance (or the efficiency of the organization) will fail to respond to this underlying question.” Again, we completely agree with this statement. Of particular importance to its phrasing is its use of the term efficiency, which in sustainability management circles is more often referred to as eco-efficiency, a term first coined by the World Business Council for Sustainable Development (WBCSD) as follows: “Industry is moving toward ‘demanufacturing’ and ‘remanufacturing’—that is, recycling the materials in their products and thus limiting the use of raw materials and of energy to convert those raw materials. It is the more competitive and successful companies that are in the forefront of what we call ‘eco-efficiency’.”

As already mentioned, there is a world of difference between measures of efficiency and measures of sustainability. The first is a measure of resource use relative to some normalizing variable, such as water used per unit of production or per year; the second is a measure of resource use relative to resource supply. That the two are not the same is easily understood by contemplating a case where water efficiency, for example, is improving through conservation measures even as background water supplies are dropping at three times the rate. To say that an organization’s use of natural resources is efficient or even optimal is not to say that its use is sustainable.

Jevons’ Paradox
In The NEXT Industrial Revolution, William McDonough and Michael Braungart (1998) make the same point in more dramatic terms: “Eco-efficiency is an outwardly admirable and certainly well-intended concept, but, unfortunately, it is not a strategy for success over the long term, because it does not reach deep enough. It works within the same system that caused the [environmental] problem in the first place, slowing it down with moral proscriptions and punitive demands. It presents little more than an illusion of change. Relying on eco-efficiency to save the environment will in fact achieve the opposite—it will let industry finish off everything quietly, persistently, and completely.”

The point here is that limited natural resources are still limited no matter how efficient their use is; and, further, that advances in efficiency can easily be offset by even greater advances in overall consumption. To improve efficiency where steadily decreasing natural resources are concerned is to simply delay the inevitable—like putting unsustainability in slow motion: the same outcome is assured, just postponed for a bit.

There is also the not so insignificant matter of Jevons’ Paradox, a name given to the observation that consumption tends to increase, not decrease, as efficiencies improve. As Jevons himself put it in his own investigation of fuel consumption patterns in the mid-1800s century: “As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. . . . Now the same principles apply, with even greater force and distinctness, to the use of such a general agent as coal. It is the very economy of its use which leads to its extensive consumption.”

As gains in efficiency are made, including in eco-efficiency in business, demand for related products and services rises, thereby also increasing, not decreasing, the flow of natural resources in the economy—not to mention the production of wastes. Left unchecked, then, eco-efficiency can lead to lower, not higher, levels of sustainability performance, contrary to popular belief.

That said, managing for efficiency—or eco-efficiency—can be an important tactic for helping organizations to achieve sustainability. Using water resources more conservatively, for example, can contribute to a decrease in overall water use, such that the resulting levels of consumption fall within a sustainable range. Determining the sustainable range, however, requires something more than what the principle of eco-efficiency brings to the table; namely, a reference to context, which in the case of water involves things like watershed location and size, annual precipitation levels, human population size, and so forth. Eco-efficiency, of course, brings none of that to bear—it is entirely context-free. And that is why it, alone, cannot lead to sustainability and more often leads to the opposite.

It should also be clear that although eco-efficiency (when combined with a context-based perspective) can be an important contributor to achieving sustainability, it can only do so with respect to the environmental bottom line. Why? Because the capitals involved in social and economic sustainability (human, social and constructed) are completely different from the capital involved in environmental sustainability (natural).

Similarly, marginal improvements in social or economic impacts—measured in terms of what we might call socio-efficacy – also require context in order to be sustainable. To say that there is less poverty in the world, for example, is not to say that the levels involved are less enough. The same goes for education levels, employment, housing, and so forth. Here again, there are thresholds to consider—dividing lines, if you will, between sustainable conditions on the one hand and unsustainable conditions on the other. Marginal measures tell us nothing about any of that.

The Capacity Question
Next in the GRI text comes the following statement: “Reports should therefore seek to present performance in relation to broader concepts of sustainability. This will involve discussing the performance of the organization in the context of the limits and demands placed on environmental or social resources at the sectoral, local, regional, or global level.”

This is about as close to the capital-based theory of sustainability as GRI gets. Of particular importance here is the manner in which context is explained in terms of “the limits and demands placed on environmental or social resources.” In our own formulation of context, we have used different words to express a similar idea: that organizations are, to one degree or another, responsible for preserving and/or producing vital capitals of importance to stakeholder well-being. Specifically, we said that context in sustainability is determined by following a three-step procedure:
Carrying capacities of capitals: First we identify the vital capitals (stocks) and their carrying capacities (flows) an organization is having impact on in ways that can affect stakeholder well-being, as well as capitals it should be having impact on in order to ensure stakeholder well-being;

Responsible populations: Next we determine who the responsible populations are for ensuring the quality and sufficiency of such stocks and flows;

Organizational allocations: And last, based on the first and second steps above, we allocate proportionate shares of available stocks and flows (in the case of natural capital) and/or burden shares for producing and/or maintaining them (in the case of anthro capital) to individual organizations.

As indicated in this particular explication of context, we took the position that the vital capitals we refer to yield flows of valuable goods and services required for human well-being, and that the volume or size of such flows can be expressed as the carrying capacities of capitals and can be measured as such. This concept does not appear at all in the GRI standard, but it is at least suggested or alluded to in the language quoted above in which the “limits” of “environmental and social resources” are mentioned. Limits quantified in what way, one might ask. By their carrying capacities, we would reply.

It is our contention, therefore, that the principle of sustainability context in GRI can be operationalized by embracing a combination of the capital-based theory of sustainability and the related concept of carrying capacity it simultaneously entails. In that sense, we can say that the context-based approach to corporate sustainability management that we put forward builds on the principle of sustainability context otherwise advocated by GRI and is completely compatible with it.

The Wastewater Example
The final statement in the GRI text quoted above is, once again, as follows: “For example, this could mean that in addition to reporting on trends in eco-efficiency, an organization might also present its absolute pollution loading in relation to the capacity of the regional ecosystem to absorb the pollutant.”

This statement, of course, is intended to provide an illustration of what the inclusion of context might look like in a case involving the emission of a pollutant, such as wastewater. In our terms, the illustration can best be understood as (a) one that refers to impacts on natural capital, and (b) one that specifically involves the carrying capacity of natural capital as expressed in Daly’s third rule, which he explained as follows: “…assimilative capacities [to absorb human wastes] must be treated as natural capital, and failure to maintain these capacities must be treated as capital consumption, and therefore not sustainable.”

Thus, we can say that a body of water into which a wastewater stream is emitted has a limited assimilative capacity to withstand such emissions, beyond which the capacity is exceeded and the ecological integrity of the resource will be compromised. This, in turn, might put human well-being at risk, and that—by our definition—is precisely what makes related behaviors (and their impacts) unsustainable.

On this particular point where the assimilative capacity of water resources is concerned, it might also be useful to point out that many of the wastewater permitting systems in force in the U.S. and elsewhere are context-based regulatory systems writ large. This is true in the sense that individual wastewater permits are typically reviewed by regulators in the context of the so-called receiving waters that an emitter plans to use as a drain or sink for his or her wastes. The volume and toxicity of a would-be emitter’s wastes are systematically compared to the carrying capacity of receiving waters (i.e., their assimilative capacity to safely absorb the wastes), and permits are thereby approved or denied, accordingly, depending on the outcome of related calculations. In this regard, we have had context-based sustainability management going on all around us for decades now, albeit mainly on the regulatory front.

To conclude, the principle of sustainability context is nothing new to sustainability measurement and reporting and has been advocated by GRI, the leading international standard for sustainability reporting in the world, for more than a decade now. Despite its advocacy for the inclusion of context in sustainability measurement and reporting, GRI has (a) failed to provide guidelines for how to do so, and (b) failed to enforce the requirement to do so while simultaneously granting superior ratings to reporters (and their reports) who don’t. The principle of sustainability context can—and should—be articulated in terms of the capital-based theory of sustainability and the concept of carrying capacity that it entails. Taking the capital-based view would make it possible to operationalize the concept of sustainability context, as countless environmental regulatory and permitting systems have been doing for years.

In light of the above, we believe the time has come for GRI to take the sustainability context principle to the next level, and to codify guidelines that preparers of corporate sustainability reports can follow in practice. Until or unless that happens, corporate sustainability reporting will continue to fall short of its most basic purpose, which is to disclose the true sustainability performance of organizations in the social, environmental and economic sense of the term. An activity is sustainable if and only if its impacts on vital capital resources in the world can continue indefinitely without putting human well-being at risk. A sustainability report should inform readers accordingly. Most, however, do not. And so as an institution, sustainability reporting has thus far failed to deliver, thanks entirely, we believe, to the chronic absence of context in related ‘best’ practices and the willingness of leading international standards organizations, such as GRI, to put up with it.

Mark W. McElroy, Ph.D. is the founder and executive director at the Center for Sustainable Organizations in Thetford Center, Vermont. Jo van Engelen, Ph.D. is a full professor at the University of Groningen in The Netherlands, and also serves as chair of Integrated Sustainable Solutions at Delft University of Technology.

Posted August 21, 2013 in Compliance & Governance