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  • 1. The Global Reporters 2004 Survey of Corporate Sustainability Reporting Risk & Opportunity Best Practice in Non- Financial Reporting
  • 2. Forewords 02 Risk & Opportunity is The Global Reporters 2004 Survey of Corporate Sustainability Reporting. The Global Executive Summary 04 Reporters research programme would not be possible without the financial support of companies dedicated 1 Introduction 06 Towards Stage 3 Reporting to evolving the accountability and reporting agendas. For the 2004 round, we express our sincere thanks 2 Governance 10 The Hottest Topic to our major sponsor Pfizer, and to the twelve other supporters ABN Amro, Credit Suisse, Co-operative 3 Methodology 17 Selection & Benchmarking Insurance Society, The Co-operative Bank, the US Environmental Protection Agency’s Climate Leaders 4 Global Reporters 20 2004 Program, Ford Motor Company, Johnson & Johnson, Novo Nordisk, Rohm and Haas, Shell, Starbucks Coffee 5 Assurance & 32 Materiality Company and Telecom Italia who ensured the project took wing. Sponsors were updated on progress but did 6 The GRI 38 A Perspective not have any form of editorial control. 7 Global Reporters 43 2010 8 Conclusions & 50 Recommendations
  • 3. Risk & Opportunity 01 Risk & Opportunity considers the question: Is the glass of non-financial (and wider sustainability) reporting currently half full, as enthusiasts might argue, or half empty, as some critics allege? The evidence suggests a positive assessment, though there are still major gaps to be closed in the linked fields of disclosure, reporting and communication. ‘It’s half full’ Several thousand The leading edge of companies, including reporting is expanding many of the world’s to embrace the wider largest, now report economic bottom line Corporate governance 2004 sees a raft of is now firmly on new entrants and rapidly the agenda climbing scores ‘It’s half empty’ Well over 50,000 However high the 2004 multinational companies scores, the focus is still on still fail to report reports rather than action Few companies link Very few boards yet their ‘non-financials’ understand the connections with their ‘financials’ between corporate governance and the triple bottom line agenda
  • 4. Risk & Opportunity 02 Forewords SustainAbility foreword We hope that the results of this latest Forewords benchmark survey will be both interesting Risk & Opportunity marks both the and useful to reporting companies and tenth anniversary of our first report report-users alike. SustainAbility routinely benchmarking survey with the United assesses whether it ought to draw a line Nations Environment Programme — under its reporting and benchmarking and the beginning of a new era. For many activities, on the basis that we have pushed years, corporate environmental, social it as far as it can be pushed. But each time, and sustainability reporting have been to date, we have concluded that there is struggling to establish themselves as considerably more potential — and that legitimate components of market disclosure other players are unlikely to fill our niche. and communication. Now that they are That, at least, is our analysis. Tell us what established, as the results of this latest you think. An e-mail address is given below survey demonstrate, the question is: How for each of the primary authors. can corporate disclosure, reporting and communication be further evolved to help SustainAbility would like to extend our markets engage and manage new risks thanks to the sponsors of this research; and opportunities? without their support the project would not have gone ahead. Throughout, our work has been driven by three hypotheses about corporate John Elkington transparency, disclosure and reporting. elkington@sustainability.com These are that: Judy Kuszewski — Sustainable development is more likely, kuszewski@sustainability.com and likely to be achieved more effectively and efficiently, where there are high Nick Robinson levels of trust. robinson@sustainability.com — Trust in business and in markets is likely to be strongest and most resilient where Standard & Poor’s foreword there are high levels of transparency and accountability. We are delighted to have been asked to participate in this research project in — Triple bottom line reporting is most likely conjunction with SustainAbility and the to evolve rapidly if the process is made United Nations Environment Programme. competitive, with a combination of At Standard & Poor’s our primary mission voluntary reporting standards and bench- is providing high quality and independent marking. Imposing legal requirements data, analysis and risk assessments to too early, we argue, would trigger global financial markets. We view robust defensive reactions in business. transparency and disclosure as key components of a healthy financial marketplace, and also recognise the growing importance of non-financial disclosure in the overall assessment of a company’s risk profile. John Elkington Judy Kuszewski Nick Robinson
  • 5. Risk & Opportunity 03 Forewords We are still at the beginning of a journey UNEP foreword Current activities under the GRI to to address sustainability factors more develop sector supplements and a special systematically in our own analytical Since the 1990s there has been a growing introductory handbook for small and processes, with a view to relating these effort to improve our ability to quantify medium-sized enterprises (SMEs) are meaningfully to our risk assessments. the economic, environmental and social important milestones as we move into We contributed to this project a list of performance of companies. As Risk & a new era of disclosure, reporting and our credit ratings to correspond with Opportunity shows, the sustainability communication. The support of the the list of the companies benchmarked. reporting pioneers are now breaking new United Nations Foundation and others However, Standard & Poor’s did not records. And they are being followed by in this is greatly appreciated. participate in the identification or the growing numbers of companies from all ranking of those companies in this study parts of the world embarking on Let me also thank the SustainAbility team from the perspective of sustainability sustainability reporting. for their excellent research and analysis. reporting. They have enabled us to meet the high UNEP is pleased to see the dominance expectations associated with our joint Our involvement in this project largely of GRI reporters and Global Compact Engaging Stakeholders and Global Reporters focused on dialogue with our friends at participants in the Top 50 reporters. survey programs. The insights from SustainAbility regarding the different The Global Reporting Initiative (GRI) has Standard & Poor’s have also been extremely language and concepts used by no doubt played a key role in providing a valuable in providing an insider’s view from professionals in operating in the areas of standardised framework or compass along the rating and financial sector. Finally, our sustainable development and the financial the journey. Whilst engaging early movers thanks to the members of the International markets. Without diminishing the overall in a multi-stakeholder process to define Selection Committee for their expertise complexity and richness of sustainability, internationally recognisable beacons, it also and insights. one specific way where this language gap helped newcomers to cut transaction costs can be bridged is to view this as an area as they find their way in the sustainability Monique Barbut of risk management for the purposes of landscape. But much work remains to be Director, Division of Technology, companies and investors. Though it is also done. Despite tremendous uptake in triple Industry and Economics, clear that principles have a fundamental bottom line reporting and GRI use, a mass United Nations Environment Programme role to play as well. of companies out there are not doing sustainability reporting as yet. Some adopt Again, this is a journey, and we expect a wait and see strategy. Others have that progress will be made to bridge the concerns related to resources and capacity. worlds of sustainable development and the If we are to enter a new era in which financial markets. Both worlds still have financial reporting and sustainability much to learn from each other, and we look reporting becomes part of an integrated forward to participating in further dialogue package, we must enable newcomers and and research in this area. smaller companies to leapfrog — to take shortcuts to reporting and managing George Dallas what is material. Managing Director Standard & Poor’s George Dallas Monique Barbut
  • 6. Risk & Opportunity 04 Executive Summary The financial sector — insurers, reinsurers, — Corporate governance is an area where Executive lenders, investors, analysts — is beginning the quality of coverage has jumped to wake up to a range of non-financial strikingly. But it seems that boards do Summary issues. Even the best current non-financial not yet grasp the evolving links between reporting by companies may not yet meet corporate governance and the triple their needs, but the convergence of the bottom line agenda. financial and non-financial worlds is now under way. This is a key conclusion of — With the growing focus on corporate Risk & Opportunity, SustainAbility’s sixth governance (pages 10—16), the spotlight benchmark survey of corporate non- is often on compliance and on financial financial reporting with UNEP — and our integrity, rather than on the ‘beyond first in partnership with Standard & Poor’s. compliance’ agenda — including wider ethical, social and environmental issues. The good news is that this latest survey finds that some companies have made — Interestingly, the overwhelming majority Surveying a sample of 100 reports from massive progress in responding to demands of our Top 50 companies also have around the world, Risk & Opportunity for improved transparency on key issues of investment grade credit ratings (pages benchmarks an independently selected corporate responsibility. Underscoring the 13 & 21). While it would be inappropriate sample of 50 of the best, the ‘Top 50’. trend, the Top 50 rankings are rocked by a to suggest causation here, it is striking We also briefly discuss the ‘Other 50’ massive influx of new entrants (Figure 01 that enhanced transparency and on pages 29—30. and pages 20—29). But the bad news is disclosure via sustainability reporting that most companies still fail to identify is so clearly linked to companies that material strategic and financial risks and display strong levels of credit quality, a opportunities associated with the economic, widely-recognised indicator of operating social and environmental impacts captured and financial stability. by the ‘triple bottom line’ agenda. — Even the best reports suggest continuing, Risk & Opportunity considers the question: fundamental weaknesses in companies’ Is the glass of non-financial (and wider governance and, most particularly, in sustainability) reporting currently half full, their ability to identify, assess and as enthusiasts might argue, or half empty, manage priority non-financial issues. as some critics allege? The evidence suggests a positive assessment, though there are still major gaps to be closed in The Top 50 the linked fields of disclosure, reporting and communication. The 2004 results show a number of striking shifts. Record numbers of companies now score above 50% in our rating (page 22), Key Conclusions highlighting a substantial improvement in the overall quality of the reports Key findings of the 2004 survey include: benchmarked — and indicating that reporting has stepped up a gear in — Leading companies have made significant many organisations. improvements in the quality of their non-financial reporting since 2002. For the first time we have one company, Co-operative Financial Services, passing the 70% mark on our benchmark, with other companies — Novo Nordisk, BP, British American Tobacco, BT, BAA, Rabobank, Rio Tinto, and Shell — following very close behind. Corporate governance is an area where the quality of coverage has jumped strikingly.
  • 7. Risk & Opportunity 05 Executive Summary Twenty-six (52%) of the Top 50 are new Meanwhile, ‘materiality’ has emerged as 01 The 2004 Top 50 Companies entrants to the survey, a reflection of one of the biggest conceptual challenges growing energy and sophistication across for corporate reporters and stakeholders in Company Score Rank the board, and of new and innovative recent years (page 35). A company’s process % approaches to reporting. While those for identifying material issues is generally companies that have dropped out of the complex, and this is likely to be the focus Co-operative Financial Services 71 1 Top 50 from previous surveys are in most of considerable energy and research in the Novo Nordisk 69 2 cases still publishing high-quality reports near future. BP 66 3 and even in some cases improving, the British American Tobacco 64 4 results show that they are not improving Our analysis reveals that most companies BT Group 64 4 as quickly as the field in general. fail to give any real insight into what they BAA 63 6 are reporting on and why they are doing so. Rabobank 61 7 With materiality in mind, a refined analysis Rio Tinto 60 8 The GRI Rules of the Top 50 produced striking results: an Royal Dutch /Shell Group 60 8 average 9% drop in scores and a significant Companies using the Global Reporting reshuffling of the rankings (page 36). HP 59 10 Initiative (GRI) sustainability reporting Unilever 59 10 guidelines to shape their reporting Anglo American 58 12 dominate the sample. Forty-seven (94%) Global Reporters 2010 Statoil 55 13 of companies in the Top 50, and 45 (90%) Kesko 54 14 of companies in the Other 50 are openly Our final section looks at the future of Manaaki Whenua 52 15 referencing GRI. reporting (pages 43—49), charting four Natura 51 16 possible trajectories and spotlighting some BHP Billiton 51 16 It is clear that GRI has been enormously of the risks and opportunities likely to be United Utilities 51 16 successful in achieving the widespread associated with each. Briefly stated, the Veolia Environnement 51 16 adoption and acceptance of the guidelines. four trends are: Ford Motor Company 51 16 However, with non-financial reporting reaching critical mass, GRI is at a critical — Standardisation Lafarge 50 21 stage in its evolution (pages 38—42). An accelerating shift towards common Bristol-Myers Squibb 49 22 Increased standardisation of reporting formats for non-financial reporting SABMiller 49 22 brings both risk and opportunity — — Consolidation Volkswagen 49 22 opportunity to influence hundreds more An energetic shake-out of the concepts, KarstadtQuelle 48 25 companies than previously, coupled with content and language of non-financial MTN Group 48 25 risks in the form of lower rates of reporting RWE Group 48 25 innovation. — Regulation Sasol 48 25 The emergence of government mandated Diageo 47 29 non-financial reporting Novartis 47 29 Assurance & Materiality — Integration adidas-Salomon 47 29 Growing attempts to merge, or blend, General Motors 47 29 At a time when trust in business is still much of non-financial reporting with ING Group 47 29 low, many reporting companies look to financial reporting assurance service providers to help restore Cadbury Schweppes 46 34 stakeholder confidence. The great majority Of these, the first two are likely to proceed Matsushita Electric Group 46 34 of reports in the Top 50 (39 or 78%) include much faster than the last two, but all four Chiquita Brands International 45 36 a discussion of external assurance (pages will be strikingly evident over the next Suncor 45 36 32—35). However, there is great variety in decade. Risk & Opportunity concludes by Total 44 38 their approaches to assurance. Where used, offering a total of 10 recommendations Daiwa Securities 43 39 emerging standards — notably the AA1000 for four groups of people (page 52): CEOs Philips 43 39 Assurance Standard — appear to have a and corporate boards; CFOs and investor British Airways 43 39 positive impact on the quality and utility of relations people; corporate responsibility assurance statements. and sustainability professionals; and Baxter 42 42 investors and other stakeholders. Carrefour 42 42 Starbucks Coffee Company 42 42 Sony 41 45 Deutsche Telekom 41 45 Ito Yokado 40 47 Barclays 39 48 Premier Oil 39 48 Gap 39 48
  • 8. Risk & Opportunity 06 Introduction Risk & Opportunity reveals that striking The selection of reports for our Top 50 Introduction progress has been made in both corporate (page 21) and Other 50 (page 24) was the reporting and assurance. No fewer than 26 responsibility of an international panel.02 Towards Stage 3 companies break into our Top 50 (page 21) Once again, our methodology has been for the first time. And record numbers of updated, as described on pages 17—19. Reporting companies are scoring well above the 50% But the process has been carefully managed mark, while the first company breaks in such a way as to ensure comparability through the 70% barrier. between the 2002 and 2004 benchmark results. In the ten years since SustainAbility and UNEP launched our first international This year, for the first time, we also benchmark survey of corporate non- introduce a new tool — the ‘Materiality financial reporting, the number of reporting Multiplier’ — to adjust the rankings to 1 companies has exploded, the overall quality better reflect companies’ coverage of their of reporting has improved considerably internal processes of issue identification Major changes are shaking up our and the range of issues addressed has and prioritisation (pages 35—37). The Top 50 and the evidence suggests that broadened spectacularly. This last trend results are striking. The average drop in the pace of change will increase as we is highlighted by the fact that our 1994 scores after the Multiplier was applied move towards Stage 3 accounting benchmark survey focused on corporate was 9%. and reporting. environmental reporting, whereas from 2000 the focus has been squarely on Our cover image, with the non-financial corporate sustainability reporting. reporting glass seen as either half full or half empty, reflects a number of Risk & Opportunity is our sixth benchmark dichotomies. For example, is the real survey, all of which were undertaken with challenge here to get companies to UNEP, and the third in our ‘Global improve their processes — or is it to get Reporters’ series. Each survey has aimed them to improve their performance? both to reflect current realities and to Or, alternatively, is this area about push the envelope: risk management or is it about new opportunities? As is often the case, — In 2000, Global Reporters introduced it’s not either/or but both/and. a new benchmarking methodology, and explored the non-financial In terms of the first dichotomy, Risk & (or ‘sustainability’) reporting agenda Opportunity largely focuses on processes, in the context of globalising markets. as with corporate governance (pages 10— 16) or materiality (pages 35—37), in the — In 2002, Trust Us looked at the role of conviction that if we can get the processes reporting in the context of declining right the performance will follow. Indeed, levels of trust in the wake of the collapse we think it is extremely unlikely that of the ‘New Economy’ and high-profile companies would penetrate our Top 50 corporate scandals. without achieving excellent performance in at least some parts of their businesses. — In 2004, working alongside both UNEP But that is an hypothesis which needs and Standard & Poor’s, we began to be — and will be — tested. the task of addressing two sides of the accountability coin, risk and opportunity.01 02 Reporting Eras Stage 1 Stage 2 Stage 3 Timescale 1500s — waning 1990 — ongoing 2010 — onwards Focus Single bottom line, profit A world of fission, with Fusion world, focusing on and loss, externalisation experimentation on multiple reintegrated bottom line of costs bottom lines, coupled with (e.g. blended value 04); new understanding of externalities increasingly externalities and risk internalised Cutting edge Accountants Civil society To be determined
  • 9. Risk & Opportunity 07 Introduction The Wider Context Some governments, for example, began to But the first round of reporting produced force corporate disclosures in new areas, as relatively few reports and what did appear We also look at the bigger picture. One of with the US Toxic Release Inventory (TRI), was relatively weak in quality. No company the most important drivers of the reporting introduced by the Emergency Planning and at that point fully complied with the law 06 agenda since 1997, for example, has been Community Right-to-Know Act of 1986 — nor do they now. the Global Reporting Initiative (GRI). (EPCRA) and expanded by the Pollution The fact that over 500 companies now Prevention Act of 1990.03 In the UK, meanwhile, publicly quoted report along GRI lines is encouraging — companies will have to produce an and suggests that we are close to achieving Partly as a result of such pressures to Operating and Financial Review (OFR) critical mass in this crucial area of market disclose — and partly as a result of from 2005.07 Some 1,300 companies will transparency and accountability. increasingly effective NGO campaigns — be required to provide a balanced, ‘Stage 2’ corporate reporting and comprehensive and forward-looking review That said, GRI still faces major hurdles communication began to take off from of the company’s development and in driving the group of GRI-reporting 1990. For years, companies had said they performance, together with the main companies to between 1,500 and 2,000 wouldn’t, couldn’t report on environmental trends and factors likely to affect its (pages 38—42). Nor should we be or social issues. The logjam began to break prospects. Not a revolution, particularly complacent on reporting generally. up with the publication of voluntary since environmental and social issues will When confronted with statistics on the environmental reports by Monsanto and only need to be covered ‘as necessary’, sheer number of companies not reporting Norsk Hydro. By 1993, when we produced but at least a supportive framework in any form, it is easy to conclude that the our first report on company environmental while non-financial reporting is being reporting glass is half empty. But it is worth reporting, Coming Clean,05 we were able introduced into company law. thinking of these trends in a wider context. to identify just over 70 such reports. We increasingly think in terms of three These early experiments, in turn, ushered Governance is Issue No.1 great eras of accounting and reporting. in a new era of intense experimentation in As Figure 02 suggests, 500 years of single accounting for and reporting on multiple If initiatives like the OFR requirement bottom line accounting and reporting dimensions of corporate value added. can be made to work, similar regulatory began in 1494 with the publication of the Concepts like the triple bottom line took requirements are likely to be introduced work of Fra Luca Pacioli, the ‘Father of root and spread like wildfire. The fact that at European Union level during the next Accounting’. His ‘ledger’ included assets — the triple bottom line agenda was first decade. The pace of change in most parts receivables and inventories — liabilities, introduced in 1994, exactly 500 years after of Africa, Asia and South America is likely capital, income and expense accounts. Pacioli’s Stage 1 revolution, was no more to be much slower, however. For centuries, this ‘Stage 1’ accounting than a happy historical accident, but and reporting helped spur the spread symbolised the new era of accountability, But life is full of surprises. As a reality and evolution of capitalism. reporting and assurance just getting into check on the conclusions and predictions its stride. presented in Risk & Opportunity, Figure 03 Then, from the 1960s, a growing range revisits the ‘Ten Transitions’ we forecast of civil society organisations began to Eventually, many aspects of current in 1996, in Engaging Stakeholders. Overall, explore ways to capture wider social voluntary reporting will need to become the predictions seem to have been sound — and environmental aspects of company incorporated in mandatory disclosure even if progress has not always been as performance. Most of these initiatives requirements, but the process will not fast as we might have liked. failed, but they prepared the ground for be smooth. Scandinavian countries are later work. already fairly well advanced in this area. One of the biggest jumps between 1996 In France, too, the NRE (Nouvelles and 2004 has been in the area of our Régulations Économiques) law came into seventh transition, corporate governance force in 2003 and requires listed companies (pages 10—16). to report against a range of social and environmental indicators. Record numbers of companies are scoring well above the 50% mark, while the first 01 In 2002, Trust Us spotlighted what we saw as emerging ‘clusters of risk and company breaks through the 70% barrier. opportunity’. 02 Selection panel members are listed on page 19. 03 www.epa.gov/tri/ 04 www.blendedvalue.org 05 SustainAbility, DTTI & IISD, Coming Clean, 1993. 06 Utopies, SustainAbility & UNEP, The Impact of Mandatory CSR Reporting in France, 2003. 07 www.dti.gov.uk/cld/financialreview.htm
  • 10. Risk & Opportunity 08 Introduction While a surprising number of CEOs still 03 Ten Transitions dispute any significant connection between the worlds of corporate governance and Established focus Emerging focus Status Status non-financial disclosure and reporting, a 1996 2004 growing number of companies acknowledge the potential connections in their latest 1 One-way, passive Multi-way, active dialogue reports. communication The challenge is to convince not just CEOs 2 Verification as option Assurance10 as standard but also the boards, trustees, company secretaries and chief financial officers that there are duties of diligence and care 3 Single company progress Benchmarkability which require them to align their strategies reporting both with future market trends and wider societal priorities. As Bob Massie, of CERES 4 Management systems Life-cycles, business and GRI told us, ‘board members need to be models,11 strategy fitted with the equivalent of night-vision goggles to take them beyond the landscape 5 Inputs and outputs Impacts and outcomes of immediate returns.’ One issue not directly covered in Figure 03 6 Ad-hoc operating standards Global operating standards is the spread of reporting generally. We have covered the issue of non-reporting,08 but as far as the penetration of reporting 7 Public relations Corporate governance into the business mainstream is concerned, the evidence is fairly positive — or, to put it another way, the non-financial reporting 8 Voluntary reporting Mandatory reporting glass appears to be half full. In terms of overall levels of reporting, 9 Company determines Boundaries set through when KPMG carried out a survey of reporting boundaries stakeholder dialogue corporate sustainability reporting in 2002, they concluded that of the top 10 Environmental reporting Triple bottom line 250 companies in the Global Fortune performance 500, almost half (45%) had produced an environmental, social or sustainability report.09 And in a parallel survey of 19 countries it was found that just under a third (28%) of the Top 100 companies were producing such reports. These results Significant compare with 35% and 24% respectively in progress 1999. Beginning to make progress Little progress Columns 1 and 2 are from Engaging Stakeholders, 1996 11 The phrase ‘business design’ was used 08 SustainAbility & UNEP, The Non- in 1996, by which we meant what would Reporting Report, 1998. now be described as ‘business models’. 09 KPMG, International Survey of 12 ACCA & Corporate Register, Towards Corporate Sustainability Reporting, with Transparency: Progress on Global the University of Amsterdam, 2002. Sustainability Reporting, 2004. 10 This was originally ‘verification’ in 13 The triple bottom line refers to economic, 1996, but we have broadened the term to social and environmental value added — ‘assurance’ since it better fits the or undermined — by business or other emerging reality (see page 32). human activities.
  • 11. Risk & Opportunity 09 Introduction By 2003, some 1,500 annual report series None of this will be easy. In many Reporting had been documented,12 although the ways, Stage 3 is going to be even more The key focus of reporting has often been evidence suggests that the rate of progress challenging to get right than Stage 2 to provide a ‘one-stop shop’ for information is slowing in some areas. As ACCA and multidimensional accounting and reporting needed both by companies and by their Corporate Register concluded in 2004, has been. A key part of the task will be to stakeholders. This area has been the main ‘growth [in reporting] in Europe is slowing integrate triple bottom line and blended focus of our benchmarking work. And some and in North America it is becoming static, value thinking into business models and of the best practice reports featured in but in Japan and Australasia it remains brand-level communication with customers, Risk & Opportunity draw on data that were dynamic.’ consumers and investors. originally compiled to meet government or other disclosure requirements. In the short term, we see a growing desire on Where next? Disclosure, Reporting and the part of business to stem the flow of Communication questionnaires and other demands for triple Some future trends in reporting are bottom line information. The London Stock discussed in Chapter 6 (pages 43—49) and One area of confusion in corporate Exchange proposal to provide a ‘one-stop our conclusions and recommendations can accountability is that the term reporting shop’ for data that would otherwise be be found on pages 50—52. Needless to say, is used to cover many disparate areas and gathered by a multiplicity of investment having coined the term Triple Bottom Line activities. To help mitigate some of this funds and other questionnaires is one of (TBL),13 we remain committed to continuing confusion, we offer here three linked terms: a likely flood of initiatives designed to our work on the TBL agenda and the Disclosure, Reporting and Communication. simplify the reporting challenge for development of related concepts and tools. These are not ‘new’ terms, but we would companies. That said, we conclude that the next like to suggest that they can be used to decade, from 2005 through 2015, will draw more concrete distinctions between Communication probably see an accelerating process of different forms of information sharing. But the longer-term challenge will be convergence and consolidation in this area. to exploit every form of corporate Figure 02 may show 2010 as the take-off Disclosure communication — including web-based, point, but this mega-transition will take Disclosure can be thought of as broadcast, brand association, point of sale decades to effect. information, generally standardised and and other channels, to inform and engage easily comparable, that companies are both internal and external stakeholders. On the basis of ongoing discussions with required to make public — whether via Communication encompasses a wide array leading corporate reporters, we believe regulation or custom. Such information of opportunities to inform, respond to and that Stage 3 accountability and reporting does not vary between companies. engage stakeholders. The challenge here will increasingly focus on the integration Disclosure is based on people's right will be to evolve today's ‘one-stop shop’ of different forms of value creation to know, regardless of the specific reports into the more targeted, informative (underscoring, in the process, the growing circumstances of individual companies. products and processes that 21st-century importance of business models). We are Often, disclosure involves information markets will demand. likely also to see increased interest in companies would rather not share. The related approaches to accounting, range of triple bottom line disclosures is Different lenses reporting, assurance and, crucially, likely to grow in coming years, as efforts to Later on in Risk & Opportunity we feature corporate and market valuation. develop standard indicators and a number of impressionistic images of requirements continue at national and where the transparency revolution might regional levels. take us (pages 44, 46 and 48). We wondered what it would be like if citizens and consumers could use a device that presented them with 360° information on products and services. Once akin to science fiction, such tools are likely to be everyday reality within a decade or so.
  • 12. Risk & Opportunity 10 Governance JE The debate about corporate govern- JE George, before we get on to your Governance ance is white hot. We predicted its take on why and how all of this emergence as an issue in 1996, but even impacts corporate risk, when — and why — The Hottest Topic so the speed of recent developments has did Standard & Poor’s get involved in been extraordinary. Peter, in 2001 you corporate governance? worked with Jane Nelson of the Inter- national Business Leaders Forum (IBLF) GD We got involved because we provide on the growing overlap between corporate independent risk analysis to financial governance and the wider stakeholder stakeholders. These include — in one agenda.14 What’s going on — and what form or another — creditors, shareholders are the links with corporate reporting? and insurers. The assessment of risks to financial stakeholders inevitably involves PZ The immediate pressure is the series considerable financial analysis of earnings, 2 of corporate scandals, but the agenda cash flows, balance sheets and off balance has been building for some time. As a sheet risk exposures. Much of this analysis What links corporate governance, result, investor surveys routinely confirm is quantitative in nature. At the same time market risk and sustainable development? shareholders’ interest in assessing corporate a more ‘holistic analysis’, which we would SustainAbility Chairman John Elkington JE governance performance and indicate a do to assess credit ratings, also focuses explores the agenda with George Dallas,GD willingness to pay a premium for well- significantly on more qualitative aspects Managing Director of the Standard & governed companies.15 of company performance, including the Poor’s Corporate Governance Practice, assessment of country influences, industry SustainAbility Executive Director Improved disclosure and reporting are factors, competitive dynamics, and Peter Zollinger PZ and Shell Chairman prerequisites for improved governance. company management and policy — Jeroen van der Veer. JV Key functions of mainstream corporate all with regard to their impact on the governance include setting strategic quality and sustainability of a given firm’s direction and board oversight, and ensuring operating and financial performance. a framework for accountability and risk management. As we concluded in our 2001 Among these various qualitative factors, report The Power to Change, sustainable the assessment of a company’s development increasingly cuts across these management and governance is possibly functions. No new responsibilities need to the most subjective to incorporate be added to already over-burdened boards. meaningfully into an objective analytical Instead, the context of existing ones needs process. It is in this context that Standard to be broadened and sustainability & Poor’s has begun to address more priorities embedded.16 systematically the linkage between a company’s management and governance In 2002’s Trust Us 17 we noted that corporate processes and its overall financial risk governance was becoming an increasingly profile. We formed a specific corporate important component of sustainability governance unit in 2000 to provide reporting. Leading corporate reporters, such comprehensive evaluations and bench- as SABMiller, pioneered by including details marking of corporate governance to of their governance processes. Today, this financial stakeholders. But I should stress trend has evolved dramatically among our that our approach to governance analysis Top 50 companies (page 21). is underpinned ultimately by principles rather than rules; we cite the OECD principles of fairness, transparency, accountability and responsibility as our guiding stars in this regard. George Dallas Peter Zollinger
  • 13. Risk & Opportunity 11 Governance JE What information sources do you These constraints do not relate simply to Results from the 2004 benchmark survey rely on? And where do social and the need to comply with prevailing laws indicate that reporting by companies on the environmental factors fit in? and regulations; they also relate to the sustainability context of their operations need to maintain constructive relations and their respective commitments has GD In our corporate governance analysis, with key non-financial stakeholders. improved 19%, which is impressive. our assessment of stakeholder relations focuses on key non-financial Whether you want to minimise operational Most reporters now appear to accept stakeholders, including employees, risks or maximise sustainable competitive that no meaningful approach to the customers, suppliers and local communities. advantage, it’s important to recognise sustainability agenda is possible without We mainly want to get a sense of the that non-financial stakeholders have an clarity on a company’s most fundamental quality of the company’s transparency important role to play in the success of a principles and values. Key aspects of what and disclosures relating to social and firm — and in the quality of an investment could be called the ‘constitutional level’ environmental issues, and we also look opportunity it presents to financial of a firm’s governance are the mapping for evidence where these issues may have stakeholders. So even for those wedded of board and committee structures, been managed poorly. to a classical economic approach it can memberships and responsibilities. Almost be argued that stakeholder issues are not all (94%) of the Top 50 reports now refer Our approach to date is fairly limited; we ‘externalities’; rather they can be viewed to corporate governance — and the topic recognise scope for growing sophistication. as critical ‘internalities’. is mentioned in many CEO forewords. Information sources include: annual reports, websites, regulatory filings, internal and In practical terms, for example, we see this JE But what’s the quality of that external social impact reports, media embodied in Johnson & Johnson’s mission reporting? coverage, NGO reports and independent statement, which cites the satisfaction assurance reports, if they exist. of the needs of doctors, nurses, patients, PZ We could ask three linked questions: employees, suppliers and communities Are companies doing a good job For busy analysts who are trying to narrow as preconditions for the achievement of in explaining the implications of the down (not add to) the driving factors economic returns for shareholders. In this sustainability agenda for their business behind an investment decision or risk regard the relations that a company has prospects, long term strategy and assessment, social and environmental with its key stakeholders can be critical valuation? Are they discussing emerging analysis of stakeholders’ interests in to its own long-term financial and risks — or opportunities — in a meaningful some cases might at best be viewed as an operational sustainability — and not just way? And are they convincing shareholders ‘immaterial’ diversion — and at worst as a that of society more broadly. of their capabilities to cope with the ever distraction. In other cases, however, this more demanding global business can be an important factor, and we are environment? trying to become more systematic about Financial Markets Not Yet Seen as flagging situations where these issues Key Audience Based on the 2004 results, the answers may be of greatest importance. to all three questions must be no. JE OK. So, Peter, do the 2004 Global Disappointingly, explicit and clear So here’s a way to think about that. Reporters results give you any references to long term strategy and risk While the classical theory of the firm views confidence that leading companies are management in the particular language of a company as a profit maximising entity, really tackling these issues in ways that these disciplines are rare, even among the theory also recognises that profits are will help financial markets get a handle Top 50 reporters. The thinking simply isn’t inevitably maximised subject to practical on the relevant risks and opportunities? joined up. It’s very hard to see whether constraints. But constraint functions exist, sustainability touches directly on the tasks though they may be challenging to PZ There’s hardly a report among our of these mainstream governance bodies and articulate. Top 50 which does not present a core functions of direction and oversight. company’s core values or ‘The Way We Generally, it seems, sustainability is dealt Do Business’. Information on basic policies, with elsewhere in the companies, as if committees and management systems these worlds never touch one another. has also greatly improved since 2002. The thinking simply isn’t joined up. It’s very hard to see whether sustainability touches directly on the tasks of these mainstream governance bodies and core functions of 14 SustainAbility & International Business Leaders Forum (IBLF), The Power to Change direction and oversight. Generally, it seems, — Mobilising board leadership to deliver sustainability is dealt with elsewhere in the sustainable value to markets and society, 2001. companies, as if these worlds never touch 15 McKinsey, Global Investor Opinion one another. Survey on Corporate Governance, 2002. 16 SustainAbility & IBLF, The Power to Peter Zollinger Change, 2001. 17 SustainAbility & UNEP, Trust Us, 2002.
  • 14. Risk & Opportunity 12 Governance We have to conclude that mainstream And Gap, Rio Tinto, SABMiller and Statoil Companies Don’t Link investors, regulators and other key all demonstrate how to integrate sustain- Sustainability With Risk stakeholders with an interest in good ability into core corporate governance corporate governance performance are processes at board level. BAA and Unilever JE Peter, your thoughts on materiality? not high on the minds of those who write also offer convincing strategy discussions, today’s sustainability reports. As a result, while Philips signals inclusion of its supply PZ From a corporate governance point little help is given to investors in terms of chain by giving its chief procurement of view, risks are material if they have understanding the meaning of social and officer, who is also a member of the Group the potential to affect valuation, credit- environmental performance in a financial — Management Committee, a leading role worthiness, longevity and vulnerability let alone a wider economic — context. in integrating sustainability. to litigation and operational disruption — or intangible assets, such as brand value While companies go to great trouble to JE That’s certainly progress from a and reputation. It can be safely assumed explain what we might call their 2002 perspective. George, you have that most companies identify, assess and governance for sustainability from a broad already mentioned the M-word, material, manage such risks to the extent that they stakeholder perspective, they almost never which surfaced in both our 2002 and 2004 are aware of them. articulate the relevance to shareholders. surveys. We’ll get into more detail on And such reporting on governance for materiality in Chapter 5, but where does However, only a few publicly acknowledge sustainability as there is rarely lives up materiality fit in for S&P? that ‘non-traditional’ risks have the to its potential because we learn so little potential to be significant. Even among our about process and practice in real terms. GD Even if we can reliably identify good Top 50, most shy away from mentioning Generic descriptions and repetitions of or bad social and environmental those risks and explaining them, confirming commitments, structures and systems performance through company disclosure the results of an earlier study of FTSE 100 are almost interchangeable. and related analysis, we have to ask: How companies which SustainAbility undertook important is this in the context of the many in collaboration with an institutional GD Exactly. We also feel that we are other risk factors that are traditionally more investor.18 challenged with the ability to separate rigorously addressed by financial analysts — form from substance in sustainability particularly when the company appears to Regulators and stock market authorities reporting. Our analysts are often frustrated be in nominal compliance with prevailing such as the UK Financial Service Authority with regard to the interpretation of laws? How should sustainability issues (FSA), through its Combined Code on sustainability reports. Many appear the affect a company’s credit rating, equity Corporate Governance, have broadened the same, laden with wholesome images and discount rates and insurance underwriting? notion of risk, embracing wider issues and platitudes. There is a notable tendency for This is the area addressed by discussions making boards accountable for effective such reports to read like public relations of materiality. internal control.19 Companies are required polemic rather than risk assessment reports. to identify, evaluate and manage their The answers are likely to be company or significant risks, including environmental, JE Fine, but let’s try to be positive. case specific. I should also warn that, at social, probity and reputation risks. Boards Who are 2004’s top scorers in terms this point in time, and to the extent that of directors are also called upon to review of corporate governance? And which positive or negative conclusions can be regularly reports on the effectiveness of reports struck you as representing clearly reached, there is likely to be a the system of internal control in managing emergent best practice? greater tendency for analysts to penalise key risks, and to undertake an annual poor social and environmental performance assessment. PZ I would like to mention Novo Nordisk, — as a risk factor — rather than to give with its Novo Nordisk Way of positive credit for good performance. Sustainability reports would be the Management, a convincing approach to This is likely to be the case until there is natural vehicle to use in moving beyond embedding sustainable development in clearer empirical evidence linking social compliance. However, the latest reports the company’s culture and corporate and environmental factors as drivers in a stick narrowly to generic language, saying governance. company’s out-performance relative to that companies are ‘compliant’ with best peers. practices on internal control. We have to conclude that mainstream investors, regulators and other key stakeholders with an interest in good corporate governance performance are not high on the minds of those who write today’s sustainability reports. Peter Zollinger
  • 15. Risk & Opportunity 13 Governance We see simple statements noting that JE And what would ring the alarm bells? PZ The Holy Grail in all of this would ‘no risks considered material have been be to find a direct link between a identified’. For example, BT’s 2003 report GD Let’s take the same four areas. company’s financial performance and its states that ‘We currently identify no social, Alarm bells would ring if there was competence in sustainability reporting, environmental or ethical risks that would no or minimal social reporting. This would hopefully with a link back to its governance have a material impact on our business.’ be particularly negative for companies that structure. Frankly, we are still a long way operate in sectors that have significant off. That said, we thought we should at It can be done differently. Suncor, for social or environmental impacts. We would least start the ball rolling. Initially we example, stands out by estimating its also be concerned if there was evidence compared the Top 50 companies’ bench- maximum cost exposure through green- that a company’s public reporting was mark scores with the data from Standard house gas emissions, as does Chiquita — distorting its performance with regard to & Poor’s report on Transparency and which includes a complete environmental social and environmental issues to present Disclosure, 20 which uses a rigorous risk assessment in its report. a more positive image than justified by methodology to give a score on company its processes and track record. transparency and disclosure activities. JE George, in terms of risk management, what would S&P like to see a Second, warning signs would include Because the S&P study does not include company doing? evidence that the company had not specific information on sustainability, identified material social and environmental we thought it would be interesting to see GD Four things. First, in our assessment risks — and that it lacks processes and whether companies who rate highly on of stakeholder relations we encourage controls to manage and govern itself with the T&D study also rated highly on our good public reporting on key areas of regard to these risks. Equally worrying are benchmark. Unfortunately, the results were employee, community and environmental cases where it is clear that board oversight inconclusive, though there was a small activities that address concerns of non- of social and environmental issues is either positive correlation between the two. financial stakeholders. Top reporters will non-existent or minimal. One key problem: our relatively small either use the framework of the Global sample size. Reporting Initiative or report in a similar Third, cases where there is a documented fashion to this framework (see pages 38— history of employee disruption, However, when we looked at the S&P credit 42). environmental litigation or conflicts with ratings of our Top 50, we did discover that local communities — particularly where — for the 41 (82%) with a credit rating, the Second, we look for evidence that the these potentially have a material impact average rating was A-, compared to the company has identified material social and on the company’s finances or operations. average credit rating of B- for companies in environmental risks and has introduced And, fourth, cases where a company fails general. And all our Top 50 companies with processes and controls to manage and to maintain proactive programs to address ratings beat that average rating. [See Figure govern the company with regard to these stakeholder interests, with evidence that 08 on page 21 and Figure 20 on page 29 for risks. These matters should have explicit this is harming the company’s reputation credit ratings for the Top 50 and Other 50 board oversight. or long-term performance. companies.] Third, we would be nervous to see evidence But what does this tell us? Perhaps it’s of problematic relationships with non- Transparency Can Add Value simply that Top 50 companies are mainly financial stakeholders that could impair successful large companies with the longer-term performance. JE And now, Peter, the $64 billion resources needed to produce reports. question? What links have we found Or, more optimistically, it could be that And, fourth, we look for evidence that the between our work on reporting and S&P’s well-governed companies also are more company maintains proactive programs to work on risk, rating and valuation? likely to both see the value in public address interests of legitimate stakeholder reporting and attract high credit ratings. interest groups. The fundamental principle Cause and effect are difficult to separate underlying these factors is that of here, though over time that should responsibility. get easier. Alarm bells would ring if there was no or minimal social reporting. This would be particularly negative for companies that operate in sectors that have significant social or environmental impact. George Dallas 18 Friends, Ivory & Sime and SustainAbility, Governance, Risk and Social Responsibility — Snapshot of Current Practice, 2001. 19 See ‘Combined Code’, www.fsa.gov.uk 20 Standard & Poor’s, Transparency and Disclosure Study, 2002.
  • 16. Risk & Opportunity 14 Governance JE So that sounds like a picture of some 04 Governance and Sustainability: — elements of an effective governance progress, coupled with the usual plea Missing Links framework for further research! Peter, George, a few — rights of shareholders and key final words? For most observers and practitioners, ownership functions corporate governance is about improving — equitable treatment of shareholders PZ Disclosure is a prerequisite of board structures and procedures to make — role of stakeholders in corporate effective corporate governance. a company more accountable to governance Without it, shareholders cannot take shareholders. The concept covers areas — disclosure and transparency effective decisions, nor can they exert such as financial disclosure, transparency — responsibilities of the board.23 control over management’s performance and audit, risk management, and, specifically, its exercise of fiduciary remuneration of directors, the separation The last three areas refer to corporate duty. Similarly, other stakeholders are of powers and shareholder rights. The responsibility and sustainability, and not in a position to make a fair assessment seminal UK Cadbury Report on Corporate demonstrate their links to the mainstream of a company’s performance without Governance defined corporate governance governance agenda. In contrast to the effective, material disclosure. as, ‘the system by which companies are sterile stockholder-versus-stakeholder directed and controlled’.21 debate, the OECD sees it to be in the Reverting to the virtue of ‘corporate enlightened self-interest of shareholders responsibility’ has emerged as the preferred The global scene is characterised by the to understand and respond to wider response of corporate leaders in their lack of universal rules or standards in this stakeholder interests. attempts to re-build trust after a scandal area. Instead, myriad national codes and or crisis. This implies a commitment to regulatory frameworks have emerged, Corporate governance does not lend itself uphold basic principles such as honesty, reflecting the many different legal, to easy assessment. Approaches focused fairness, integrity, accountability, economic and cultural environments.22 on quantitative and ‘tangible’ information transparency and checks and balances in Nevertheless, a set of emerging global (i.e. tick-box exercises) risk missing the their professional relationships with all guidelines and principles of good practice point as real performance largely depends stakeholders. The future does not look good are emerging. The OECD corporate on corporate cultures and practices, plus for sustainability reporting as a stand-alone governance guidelines, updated in 2004, personal interpretation by the people exercise. Instead, leading companies will are often taken as a reference point. They involved. Thus, corporate disclosure, incorporate non-financial reporting in the are broad enough to allow comparisons reporting and communication must also management of their businesses on a day- across governance environments and, address such aspects if it is to contribute to-day basis. more importantly, to overcome potentially to effective corporate governance. contentious, prescriptive approaches. The GD Building on that, an ongoing revised guidelines cover: challenge facing analysts, investors, stakeholders — as well as the company itself — is to identify aspects of social and environmental performance that are potential keys to a firm’s sustainable competitive advantage or the potential source of material risks to its operations, financial performance, reputation and valuation. Sustainability reporting can help in this context, but there is also huge scope for improvement in helping financial stakeholders better understand these issues as financial risks — to facilitate incorporation into traditional credit analysis, equity analysis and insurance underwriting. A more detailed analysis of the links between governance, risk and sustainability by George Dallas is available at Equally worrying: cases where it is www.sustainability.com /risk-opportunity clear that Board oversight over social and environmental issues is either non- existent or minimal. George Dallas
  • 17. Risk & Opportunity 15 Governance Lessons Learned: Jeroen van der Veer In terms of our ongoing commitment, let That review will lead to important me be very clear. Recent events have only improvements in how we organise and The Shell Report scores well in surveys, reinforced the importance of embedding execute our controls and assure including this one, but even attentive sustainable development consistently in compliance. readers were shocked by the recent reserves our systems, processes and behaviour. scandal. Shell’s new chairman, Jeroen van JE Do you see any need for corporate der Veer, explores some implications for JE Some critics have argued that an governance systems and processes accountability and governance. This is an over-emphasis on sustainable to evolve to create and maintain a greater excerpt of a longer interview available at development could have distracted Shell climate of openness and accountability — www.sustainability.com/risk-opportunity from the real issues. or will it be business as usual? JE Jeroen, in the 2003 Shell Report JV People who accuse us of getting JV ‘Business as usual’ are not words that you note that readers will see Shell’s distracted by sustainable development leap to mind when I think about the sustainability performance ‘in the context miss the mark. Indeed, I am heartened to coming 12 to 24 months! We have a lot to of our reserves restatement in early 2004’. see growing awareness in the financial do to rebuild trust and improve perform- What impact has the restatement had on community that companies — especially ance. A full-scale review of our structure how people perceive Shell’s sustainability energy companies — ignore sustainable and governance is under way to identify commitments and performance? development concerns at their peril. ways to improve decision-making, accountability and the effectiveness of JV The restatement of our [oil and gas] If you want to continue to succeed as an leadership. The committee is looking at all reserves in early 2004 was deeply energy company in the coming decades, options including various forms of unified regrettable. Some have called into question you need to understand and meet people’s boards to which a CEO would report. not only our financial performance but also expectations for environmental and social Nothing is being ruled out. the behaviour and values that underpin the performance, as well as delivering good way we work. Our reputation has been technical and financial performance. That We are also revamping our scorecard so dented. means putting solid business principles, that staff in all parts of Shell have a stake including sustainable development, at the in the success of Shell as a whole, not just We face a considerable challenge to re- heart of how you do your business. their part of it. Sustainable development establish credibility and trust with our continues to represent a fifth of our stakeholders. It will take time, persistence JE The reserves restatement episode scorecard. and leadership. At the same time, I am might appear to suggest that a heartened by the number of stakeholders company can have ambitious business JE What role do you see for The Shell who have been able to put the events of principles, proactive stakeholder relation- Report? the past year into context in relation to our ships and rigorous internal controls — and ongoing work on sustainable development. yet that these can still be undermined by a JV We have seen how, if done honestly, This is particularly true for those who have few individuals. What, in that case, is the reporting forces companies to publicly worked with us and have seen from close value of having these internal controls in take stock of their environmental and social up how serious our efforts are to make the first place? performance, to decide improvement sustainable development an integral part priorities and deliver through clear targets. of how we do our business. They know how JV The value of having these controls Our reader surveys confirm that people serious our commitment is and have seen in place is not in question for me. receiving our report come away with a the emotional shock and deep But nor is the fact that they clearly need to significantly greater sense of trust in Shell. disappointment people across Shell have be improved. We have already tightened our felt at the reserves restatement. controls around reserves reporting and are in the midst of a wide-ranging review of our systems and controls for ensuring compliance with all our policies and standards. 21 The Committee on the Financial Aspects of Corporate Governance. Report of the Committee (The Cadbury Report), London Stock Exchange, 1992. 22 European Corporate Governance Institute (www.ecgi.org) offers a comprehensive list of links to the major corporate governance codes around the world. 23 Organisation for Economic Cooperation and Development (OECD), Principles of Corporate Governance, 2004. John Elkington Jeroen van der Veer
  • 18. Risk & Opportunity 16 Governance JE As they did last year, Friends of the 05 Corporate Governance: — If so, how has the company responded Earth (FOE) UK has published an The S&P Way to these relationship problems? ‘alternative’ report.25 FOE draws a direct — Does the company maintain an active connection to the reserves issue, repeatedly To give a sense of what rating agencies policy of engagement to investor and highlighting ‘the link between Shell’s look for, Standard & Poor’s company stakeholder interest groups? exaggerated oil reserves fiasco and its specific analytical components are: — Have the company or its senior officials exaggerated claims about its social and — Ownership structure and been convicted of offences relating to environmental performance’. Fair criticism? external influences. its social or environmental activities? — Shareholder rights and — What is the company’s relationship JV I understand the desire to make the stakeholder relations. with government regulatory bodies? link, but it just doesn’t stand up to — Transparency, disclosure, — Are there any NGOs or public interest scrutiny. The issues we have had with local audit. groups that oppose the company’s communities at some of our operations pre- — Board structure and activities? What is the substance of date and, to be a blunt Dutchman for a effectiveness.24 their opposition? moment, simply have nothing to do with — Do shareholder resolutions exist that the restatement of our reserves. We operate Within this framework, S&P’s assessment relate to social and environmental several hundred large industrial facilities of stakeholder relations is guided by the matters? worldwide. There are problems at some of following questions: — How extensive is the company’s own these locations as we openly acknowledge — How are social and environmental social and environmental reporting? in The Shell Report. These are rooted in a issues identified and managed by the Does it fully or partially disclose in history of either unsatisfactory environ- company’s management? What is the accordance with the Global Reporting mental performance or poor engagement role of the board with regard to Initiative? with the local communities at these sites oversight in this domain? — To the extent that the company does or, in some cases both. We don’t shy away — Is there evidence of problematic provide disclosure with regard to its from that, and certainly aren’t trying to relationships with key non-financial social and environmental performance, sweep it under the carpet. I want those stakeholder groups? This can include how do these external controls link to problems solved and we will solve them. lawsuits, strikes, public protests or how the company is managed on a boycotts, defamatory employee or day-to-day basis? What reports, if any, Nor does the claim that we have interest group commentary. does the board receive on social and exaggerated our social and environmental environmental performance? performance hold up. We go to great pains to ensure that our reports are accurate. Independent experts and community panels give their own, uncensored views in The Shell Report at many of the sites listed in JV Sustainability reporting is still in its On the negative side, most reports are far the FOE report. Given the care we take in infancy. We have published only our too long — and more or less unreadable checking and verifying our facts, I was seventh Shell Report last year, and more for anyone but specialists. There is still disappointed by the factual errors and than 90 annual reports. So naturally too much ‘cherry picking’. Even amongst misleading statements found in the sustainability reporting is still changing other reporting leaders, I still see too little alternative Shell Reports. fast. I’m particularly pleased to see more willingness to talk about failures and too substantive performance information little input from credible, and sometimes JE Finally, Shell has been a leading coming into reports that in the past were critical, third parties. The whole area of reporter for years, but other mainly anecdotal — and welcome more use information quality, including internal companies are making rapid gains. What of the GRI. In that sense, I’ve never been controls to make sure the data provided do you make of the competition? particularly competitive when it comes to is reliable, is another area where further reporting. Our aim has always been to work is needed. report transparently and honestly on the issues of most concern to our stakeholders, In short, it is time to pull sustainability not to win a race. reports out of the hands of PR departments. In short, it is time to pull sustainability reports out of the hands of PR departments. Jeroen van der Veer 24 George S. Dallas, Governance and Risk, Standard & Poor’s, 2004. 25 www.foe.co.uk/resource/reports/ behind_shine.pdf
  • 19. Risk & Opportunity 17 Methodology As the quantity and quality of reports Pre-selection Methodology increases, so the task of selecting the Top 50 gets progressively harder. For Once the submission deadline had passed, Selection and each of the three Global Reporters each report was assessed by SustainAbility’s surveys to date, we have selected 100 benchmarking team using the seven criteria Benchmarking interesting reports out of the many listed in Figure 06. These criteria helped to hundreds gathered and submitted — and narrow the field of submitted reports down then pruned these down to the Top 50. to 202. These were then given to our Which makes the process sound simple: independent Selection Committee to it is anything but. choose the Top 50 and Other 50. Collection Selection 3 The process of report identification The final selection was the responsibility A brief account of how the process works. operates partly on self-selection (with of an international committee of experts companies submitting their latest efforts), (see Figure 07). Using the same questions part collection (for example, at conferences) that had guided the pre-selection, the final and part recommendation. Early in 2004, 50 were identified. It was no easy task for we sent out the call for reports via the Selection Committee, and the panellists SustainAbility’s network, website, relevant did not always agree. A few reports made publications and word of mouth. In parallel, the final cut over the objections of one or we searched for the latest reports from more dissenting panellists, and various companies that had been included in the reports failed to make it into the Top 50 Top 50 and Other 50 in 2002. We also even though one or more panellists gathered reports that had been shortlisted continued to champion their cause. in international reporting surveys and awards schemes. In addition to the criteria listed above, the Selection Committee suggested an eighth, Companies were invited to submit their credibility. The question was: Would a corporate sustainability website, their reasonably well-informed reader find the report, or both for consideration. By the right issues and concerns presented in the end of the submission period, we had report in a balanced way? This was in received 351 reports (either in the form response to the concern that a company’s of printed reports or corporate report might cover a wide range of issues Subsequent to our selection sustainability websites) in total. but perhaps not the most important ones and benchmarking of the Top (such as convenience foods and obesity, or automobiles and climate change). 50 reports, a small number This discussion led to some healthy debate of the companies during both the selection and subsequent benchmarking processes. benchmarked released their latest reports. We have noted the year of publication for all reports listed among the Top 50.
  • 20. Risk & Opportunity 18 Methodology 06 Criteria for Report Selection The consensus of the selection panel — and We enlisted the help of five external of the benchmarking team — is that these analysts to carry out the benchmarking 1 Does the report include elements of reports represent an exciting sample of of our reports. Each analyst was given environmental, social and economic international best practice that will serve intensive training on the history and reporting? to advance the field of sustainability mechanics of the methodology. They 2 Does the company present a coherent reporting globally. worked closely with each other and with vision of sustainability? members of the SustainAbility core team. 3 Are the company’s key sustainability challenges clearly stated and Benchmarking prioritised? Methodology 4 Is the company’s sustainability strategy Although the Global Reporters methodology clear? has evolved over the years, benchmarking As already mentioned, our methodology 5 Is there a balance to the 50 reports is still a time- and brainpower- has evolved as reporting itself has evolved. environmental, social and economic intensive task. As reports have improved in Following our 2002 survey, for example, performance data presented? quality, the time required for benchmarking we received some extremely useful 6 Does this report represent innovation has inevitably increased. On average, it now feedback on our report assessment in a particular area of reporting? takes a well-trained analyst between two methodology — including some criticism — 7 Does the report use various forms of and three days to complete a benchmark which we have begun to address this year. assurance, including stakeholder for a single company’s report and website. To help us think through the current comments, verification and other Much depends, though, on the report’s challenges presented by the methodology external reviews? design. One analyst compared the and benchmarking process, we also invited experience of benchmarking two reports: 2002’s ‘Magnificent Seven’ companies 26 GM’s report, while long, was structured to meet, share views and discuss proposed so that it was very quick to benchmark; changes. Their insights were hugely helpful. Carrefour’s report, while shorter, was much harder to access and analyse. Probably our biggest challenge with the 2004 benchmark survey involved addressing The 2004 benchmarking process followed the issue of materiality, whose absence in four key steps: our 2002 survey was the subject of some criticism. We go into this issue in detail 1 Reading In-depth review of the report on pages 33—37. As yet, we have not and material on websites developed a wholly acceptable way to 2 Analysis and scoring Scoring of reports recognise materiality in our scoring, but against 48 individual criteria we do feel that this year’s benchmarking 3 Quality control Peer review of the process illuminates both the issues and analysis likely future trajectories. We welcome 4 Finalisation Updating scores and companies’ many attempts to explore the collating data. issue and strongly encourage further discussion of our approach.
  • 21. Risk & Opportunity 19 Methodology Broadly, however, the comments received — Social and Ethical Performance 07 2004 Selection Committee during and after the development of our An organisation’s impact on society 2002 methodology were supportive. generally and specific issues; including, Stanislas Dupré As a result, the 2004 methodology remains for example, health and safety, human Utopies mostly unchanged from the one used in rights and diversity. France 2002. We have fine-tuned it by adding, removing or merging criteria in ways that — Environmental Performance Toshihiko Goto respond to identified needs or external An organisation’s impact on the Environmental Auditing Research Group feedback received. We believe that these environment; including, for example, Japan adjustments do not invalidate attempts water use, air emissions and biodiversity. to compare year-on-year changes. Debra Hall — Multi-dimensional Performance CERES Overall, the methodology comprises four An organisation’s performance on issues USA distinct sections, containing 48 criteria: that cover a combination of economic, environmental and social impacts; Jonathan Hanks Context & Commitments includes, for example, product impacts, University of Cape Town How the company describes its business, compliance, fines and liabilities, and South Africa key sustainability issues and challenges, social and environmental reporting. view of the future and commitment Cornis van der Lugt to sustainable development. Accessibility & Assurance UNEP The methods used to ensure that the France Management Quality information reported is understandable, Kenya The processes in place by which the accurate and credible. company carries out its stated Nick Robins commitments. The full methodology is available on our Henderson Global Investors website: www.sustainability.com/risk- UK Performance opportunity. 27 As always, we welcome Description of the company’s historic feedback, advice and perspectives on performance against key economic, how we can improve this increasingly social and environmental factors: complex evaluation process for future rounds of the survey. — Economic Performance An organisation’s impact on the economy generally and specific stakeholders; including, for example, governments, employees and local communities. 26 In alphabetical order, BAA, BP, BT Group, The Co-operative Bank, Novo Nordisk, Rio Tinto and Royal Dutch / Shell Group. 27 The SustainAbility report assessment methodology is made available to increase understanding and improve the report assessment process, and may not be used for any commercial purpose without the express written consent of SustainAbility Ltd/Inc.
  • 22. Risk & Opportunity 20 Global Reporters 2004 Early attempts at integrated reporting Global Reporters The Top 50 across multiple dimensions are patchy, leading one of our analysts to talk in terms 2004 The most striking feature of the 2004 of ‘Frankenstein’s Monsters’. We take a results is that just over half (26) of the look at this area in Figure 32. Top 50 are new to our survey. The full Top 50 results are shown in Figure 08 including which companies are included in the Rising Scores: CFS Breaks Through Top 50 for the first time. Our Selection 70% Ceiling Committee’s choice of so many newcomers reflects the very high level of sophistication The overall average report score of the apparent across the board, as well as new Top 50 has risen to 50%, an increase of 7% and innovative approaches. While those relative to 2002 (42%) and 2000 (43%). 4 companies that have slipped from the Top Another encouraging reflection of overall 50 are in most cases still publishing high- improvement is the number of reports We introduce the Top 50 group of best quality reports and in many cases even breaking the 50% mark this time round practice reporters and briefly review improving, they are not generally improving (Figure 09). In 2004, 42% of the Top 50 progress among The Other 50 reporters. as quickly as others, leaving newcomers reports did so, compared with 14% in both to jump the queue and take their places 2002 and 2000. Strikingly, too, and for the in the Top 50. first time since the Global Reporters benchmark surveys began, we have one The other striking feature is the significant company, Co-operative Financial Services, increase in Top 50 reporting scores, (CFS) breaking the 70% mark. including the first score in excess of 70%. In terms of overall rankings, 8 companies It is worth noting that criteria in the that featured in 2002’s Top 50 have benchmark have reduced in number by 1, improved their ranking, though it is worth from 49 to 48. This change may have a very noting that 11 have fallen, 13 places on small impact on the percentage scores average. companies achieve. With European companies continuing to perform well in the rankings, it is also Europe Back in the Lead interesting to note that both environmental and economic reporting continue to evolve While our sample size constrains our ability strongly — but the dimension that has to analyse differences in the quality of shown most progress is social reporting. reporting by geographic region, reporting by European companies outperforms that of other regions, with 7 of the top 10 reporters based in the UK. 29 These ratings were in effect as of end of close 23 September 2004. For more information on Standard & Poor’s credit rating refer to Standard & Poor’s Criteria Topics: Corporate Ratings Criteria, 2001. Long-term credit ratings are divided into several categories ranging from ‘AAA’, 28 Industry groups are based on the reflecting the strongest credit quality, to Global Industry Classification Standard ‘D’, reflecting the lowest. Long-term (GICS®). Effective after the close on ratings from ‘AA’ to ‘CCC’ may be modified 30 April 2003, the Global Industry by the addition of a plus or minus sign to Classification Standard consists of ten show relative standing within the major economic sectors aggregated from 24 rating categories. industry groups, 62 industries and 132 30 For a small number of companies in the sub-industries. Top 50 credit ratings were not available.
  • 23. Risk & Opportunity 21 Global Reporters 2004 08 The 2004 Top 50 Companies Company Country Industry Group 28 S&P 29 Report Score Score Rank Rank Credit Year 2002 2004 2002 2004 Rating % % Co-operative Financial Services UK Diversified Financials n/a 30 2003 61 71 1 1 Novo Nordisk Denmark Pharma & Biotech A- 2003 60 69 2 2 BP UK Energy AA+ 2003 53 66 7 3 New British American Tobacco UK Food, Drink & Tobacco BBB+ 2002/3 — 64 — 4 BT Group UK Telecom Services A- 2004 58 64 4 4 BAA UK Transportation A+ 2003/4 59 63 3 6 New Rabobank Netherlands Diversified Financials AAA 2002 — 61 — 7 Rio Tinto UK/Australia Materials A+ 2003 55 60 5 8 Royal Dutch / Shell Group UK/Netherlands Energy AA+ 2003 53 60 6 8 New HP USA Technology Equipment A- 2004 — 59 — 10 Unilever UK/Netherlands Food Staples & Retailing A+ 2003 38 59 32 10 New Anglo American UK Materials A- 2003 — 58 — 12 New Statoil Norway Energy A 2003 — 55 — 13 Kesko Finland Food Staples & Retailing n/a 2003 39 54 30 14 Manaaki Whenua New Zealand Services & Supplies n/a 2003 41 52 22 15 New Natura Brazil Household Products n/a 2002 — 51 — 16 New BHP Billiton Australia Materials A+ 2003 — 51 — 16 United Utilities UK Utilities A- 2003 42 51 20 16 New Veolia Environnement France Utilities BBB+ 2003 — 51 — 16 New Ford Motor Company USA Automobiles BBB- 2002 — 51 — 16 New Lafarge France Materials BBB 2003 — 50 — 21 Bristol-Myers Squibb USA Pharma & Biotech A+ 2003 49 49 8 22 SABMiller UK Food, Drink & Tobacco BBB+ 2004 48 49 9 22 Volkswagen Germany Automobiles A- 2003/4 48 49 12 22 New KarstadtQuelle Germany Retailing BBB 2003 — 48 — 25 New MTN Group South Africa Telecom Services n/a 2003 — 48 — 25 RWE Group Germany Utilities A+ 2003 37 48 34 25 New Sasol South Africa Energy BBB 2000-2 — 48 — 25 New Diageo UK Food, Drink & Tobacco A 2003 — 47 — 29 Novartis Switzerland Pharma & Biotech AAA 2003 39 47 31 29 adidas-Salomon Germany Consumer & Apparel n/a 2003 29 47 50 29 General Motors USA Automobiles BBB 2003 40 47 29 29 New ING Group Netherlands Diversified Financials A+ 2002 — 47 — 29 New Cadbury Schweppes UK Food, Drink & Tobacco BBB 2004 — 46 — 34 Matsushita Electric Group Japan Consumer & Apparel A+ 2003 41 46 22 34 Chiquita Brands International USA Food, Drink & Tobacco B+ 2002 43 45 18 36 New Suncor Canada Energy A- 2003 — 45 — 37 New Total France Energy AA 2003 — 44 — 38 New Daiwa Securities Japan Financial Services n/a 2003 — 43 — 39 New Philips Netherlands Consumer & Apparel BBB+ 2003 — 43 — 39 British Airways UK Transportation BB- 2002/3 41 43 26 39 Baxter USA Health Care A- 2002 45 42 15 42 New Carrefour France Food Staples & Retailing A+ 2003 — 42 — 42 New Starbucks Coffee Company USA Food Staples & Retailing n/a 2003 — 42 — 42 Sony Japan Consumer & Apparel A+ 2003 34 41 45 45 Deutsche Telekom Germany Telecom Services BBB+ 2003 37 41 26 45 New Ito Yokado Japan Food Staples & Retailing AA 2003 — 40 — 47 New Barclays UK Diversified Financials AA 2003 — 39 — 48 New Premier Oil UK Energy n/a 2002 — 39 — 48 New Gap USA Consumer & Apparel BB+ 2003 — 39 — 48
  • 24. Risk & Opportunity 22 Global Reporters 2004 09 The Top 50 Reports Score % 2000 Survey 2002 Survey 2004 Survey 70—100 1 60—70 2 8 50—60 7 5 12 40—50 23 20 26 30—40 18 22 3 00—30 2 1 It is particularly exciting to see a Brazilian 17 of the companies breaking through company breaking the 50% barrier. the 50% mark are headquartered in Europe, compared with just 2 in North America, and 1 each from Australia, New Zealand and Brazil.
  • 25. Risk & Opportunity 23 Global Reporters 2004 In 2002, by contrast, we had noted that 10 Performance By Region North American reporters were leading by a hair. Most significantly, perhaps, 17 of the Region Breakdown of Score / Total Score % companies breaking through the 50% mark are headquartered in Europe, compared World 12 9 22 7 50 with just 2 in North America, and 1 each from Australia, New Zealand and Brazil. Europe 13 9 22 7 51 North America 12 8 20 7 47 Movers and Shakers: France and Brazil Other OECD 11 8 20 6 45 Anyone who believes that legislation dulls the reporting spirit should take a look at Non-OECD 13 7 22 7 49 France. New French legislation, in the form of les Nouvelles Régulations Economiques (2001),31 has imposed mandatory reporting on all companies listed on the Paris Stock Exchange,32 significantly boosting the quality of reporting there. Although a recent survey33 reported that only a quarter of the companies surveyed were providing Context & Management Reporting on Assurance & at least half of the indicators requested by Commitment Quality Performance Accessibility the law, there was no company providing them all. In 2002, we had two French reporters, 11 Average Scores By Region while in 2004 there are four. Veolia Environnement (51%), Lafarge (50%), Europe % Carrefour (42%) and Total (44%) are all newcomers to this survey, and all score 2000 45 well. This is a striking trend, given the country’s slow start. Other late starters 2002 43 in reporting should take heart: most of these companies have only recently 2004 51 begun triple bottom line reporting. Reporting in the ‘emerging economies’ category is also on the increase with North America % reports from Brazil and South African in our Top 50. It is particularly exciting to 2000 38 see a Brazilian company breaking the 50% barrier. Natura, Brazil’s leading ‘natural’ 2002 45 cosmetics company, scores 51%, alongside long-time reporters like Ford 2004 47 and United Utilities. Other OECD % 2000 42 2002 40 2004 45 Non-OECD % 31 www.admi.net/jo/20020221/ JUSC0220073D.html 2000 41 32 www.euronext.com 33 Utopies, SustainAbility & UNEP, État 2002 41 du reporting 2003 sur le développement durable. Version française de l’étude 2004 49 Global Reporters SustainAbility & PNUE, 2004.
  • 26. Risk & Opportunity 24 Global Reporters 2004 The GRI Rules the Roost Just pick up the reports of Co-operative Financial Services, Novo Nordisk or BP, for Triple Bottom Line Scorecard In 2002, we found a 60:40 ratio in GRI to example, and even a cursory look will show non-GRI companies. This year, by contrast, that both the white space and the text size Our 2004 analysis of each of the seven the GRI is the only show in town. In the have been crunched, leaving some of our major categories of reporting criteria is Top 50, 47 (94%) of the reports are openly benchmarkers blinking and cross-eyed. outlined in the Performance Scorecards in using the GRI, of which 12 (24%) are A large majority of companies (72%) are Figures 13—19. In 2002, we found that reporting ‘In Accordance’ with the GRI using detailed GRI index tables to help companies were rocketing up the social (Figure 12 & page 38). Among the ‘Other readers navigate their reports, with performance learning curve, a trend that 50’, 7 (14%) report In Accordance with GRI companies such as Barclays and HP continues in 2004 with an impressive 19% while, overall, 45 (90%) referred to the GRI leading the way. improvement in scores in this category. in some way or other. But data-lovers will be relieved to hear that the carpet-bombing goes on in a different Context & Commitments Honey, I Shrunk the Text! realm, the internet. Most printed reports are now backed by websites, some of them While not the section showing the biggest One result of the growing concern about voluminous to the point where our analysts improvement, there are signs in the 2004 ‘carpet-bombing’ 34 reports has been an sometimes wondered whether they mightn’t Top 50 reports that companies are effort on the part of many reporters to rein be about to become too vast, equivalent beginning to report more openly about in the size of their publications. On average, to corporate ‘black holes’ — with virtually what they see as their sustainability printed sustainability reports covered in our infinite gravitational conditions from which challenges. BP is the top scorer in this 2004 survey weighed in at a fairly hefty data-hunters would find no escape. category. And, as part of their efforts to average of 72 pages, but slightly down address the corporate governance agenda, from the super-size proportions recorded in More seriously, the breadth and depth of growing numbers of companies are 2002 (an 86-page average). reporting on the web has now grown to describing the values and principles that such an extent that it is making the job of drive and inform their CR commitments Like well-seasoned travellers with their analysing and benchmarking printed reports and performance. baggage, many of our top reporters are extremely problematic. Through numerous becoming more adept at squeezing more links, a company’s sustainability activities A key step in this process, and one data into the same number of pages. are being spun into intricate webs. In some repeatedly stressed in previous editions cases, the effect — intended or not — is to of this survey, is issue identification. give the impression that a company is doing While this area is still relatively weak, much more than it actually is. companies are beginning to be more systematic in identifying and prioritising their key environmental, social and economic impacts. Co-operative Financial Services is probably the best example of such reporting, clearly identifying each issue and providing useful contextual information on why it is considered a priority. We explore the interplay between issue identification and materiality on pages 33—37. 12 Use of GRI by Reporters in the Top 50 Average Score % In Accordance 55 GRI 48 Non-GRI 48
  • 27. Risk & Opportunity 25 Global Reporters 2004 Management Quality 13 Context & Commitments BAA leads the way with outstanding Category Total Score % / Change in Score 2002—2004 % reporting on its systems in place to manage its environment, social and economic issues, Average Score 57 +9 while HP takes its report one step further by providing detailed discussion of its role Highest Score 80 0 in the ICT industry and its activities to improve its performance. Lowest Score 35 +7 Corporate governance emerges as one of Top Scores Total Score % the defining issues of 2004’s Top 50 (pages 10—16). And, perhaps not surprisingly, there BP 80 have been some major improvements in the quality of reporting in this area. BHP Novo Nordisk 78 Billiton provides a considerable range of detail on its Health Safety and Environment BAA 78 Committee’s governance structures and roles, as well as the most detailed account CFS 75 of its progress against the UN Global Compact Principles of the survey. Rio Tinto 75 As predicted in our 2002 survey, reporting Rabobank 75 on supply chain management has also become another major hotspot of activity. Companies such as adidas-Salomon, Chiquita, Gap, BT and Starbucks are vying for leadership in this area. A particularly sensitive area is company lobbying and political activity. This is an CFS Co-operative Financial Services issue that has been raised with increasing frequency in recent years, with the result that we are beginning to see companies opening up their thinking and positions 14 Management Quality on key issues and their associated political activity. While Lafarge is selective in the Category Total Score % / Change in Score 2002—2004 % issues it addresses it does discuss its public policy activities in relation to climate Average Score 48 +7 change. The global cement company’s declared stance may not be to everyone’s Highest Score 83 +14 liking, but at least it is clear what it is. Lowest Score 28 +9 Top Scores Total Score % BAA 83 HP 72 Novo Nordisk 69 A particularly sensitive area Rabobank 69 is company lobbying and BAT 67 political activity. CFS 67 BAT British American Tobacco 34 See SustainAbility & UNEP, CFS Co-operative Financial Services Trust Us, 2002.
  • 28. Risk & Opportunity 26 Global Reporters 2004 15 Economic Performance Reporting on Economic Performance Category Total Score % / Change in Score 2002—2004 % Reporting seems to be gaining traction in the relatively uncharted terrain of Average Score 47 +10 wider economic issues and performance (Figure 15), particularly among European Highest Score 71 0 companies. Top-scoring food retailer Kesko goes to great lengths to detail the Lowest Score 21 +13 economic benefits the 20 different regions it operates in receive, including real estate Top Scores Total Score % taxes and purchasing through its supply chain. Novartis’ integrated annual and Kesko 71 sustainability report sits its financial performance alongside its programs on Novartis 71 access to medicines, providing a sense of scale of the programs. Natura 67 It is pleasing to see the majority of oil BT Group 69 & gas companies in our 2004 sample reporting — to varying degrees — in CFS 63 line with the UK Extractive Industries Transparency Initiative.35 Anglo American Rabobank 63 emerges as the best of the bunch in this category stating payments to governments Rio Tinto 63 alongside summaries of each of its operations across the globe. Reading the small print, Anglo American also notes that the figures are likely to be underestimates. CFS Co-operative Financial Services Another reason for the increase in scores in this area is the growing attention that investors are enjoying in company reports. As the size of socially responsible 16 Social & Ethical Performance investment (SRI) funds grows, alongside the increased interest of some major Category Total Score % / Change 2002—2004 % mainstream investors in critical CR issues, leading companies have responded with Average Score 50 +19 more detailed reporting on share performance, SRI ratings and, in the case Highest Score 82 +15 of Lafarge, the three questions asked by shareholders at the 2003 Annual Lowest Score 21 +21 General Meeting. Top Scores Total Score % Rabobank 82 BT Group 75 CFS 71 BAT 71 Novo Nordisk 71 BAT British American Tobacco CFS Co-operative Financial Services
  • 29. Risk & Opportunity 27 Global Reporters 2004 Reporting on Social & Ethical 17 Environmental Performance Performance Category Total Score % / Change 2002—2004 % Social and ethical reporting emerges as the big winner in this year’s benchmark Average Score 47 +1 (Figure 16), with an average 19% improvement since the 2002 survey and an Highest Score 89 +11 even more impressive 21% gain in lowest score. A newcomer to this benchmark, Lowest Score 7 -18 Rabobank emerges as the top scorer in this category. The report introduces SD Top Scores Total Score % implications and characteristics of each of its products, giving details on why the Unilever 89 product was introduced, including public policy issues associated with the SD issue BP 86 the product is tailored to meet. CFS 68 A controversial top performer here is likely to be BAT (British American Tobacco). Rio Tinto 68 While many would dispute its inclusion in this list because of the nature of its BAA 64 business and products, the company’s reporting on human rights and community Novo Nordisk 64 development is world class. Reporting on Environmental Performance In the 2002 survey, we interpreted a falling score for environmental performance CFS Co-operative Financial Services reporting (2002 scores dropped 9% against 2000) as an indication of waning corporate interest. The results of the 2004 survey (Figure 17), however, suggest a somewhat 18 Multi-Dimensional Performance different analysis. We now see more and more companies reporting on what they Category Total Score % / Change 2002—2004 % consider to be their most important environmental impacts, and leaving out Average Score 36 0 reporting in detail on less critical issues. Highest Score 67 -8 One indicator of this trend is the number of companies (21) scoring 4 on our Lowest Score 0 methodology for certain environmental criteria, suggesting full integration in the Top Scores Total Score % reporting company’s management of the issue and its core decision-making. CFS 67 HP 67 Novo Nordisk 67 Baxter 58 35 The Extractive Industries Transparency Unilever 58 Initiative was announced by UK Prime Minister Tony Blair at the World Summit on Sustainable Development in Johannesburg, September 2002. Its aim is to increase transparency over payments by companies to governments and government-linked entities, as well as transparency over revenues by those host country governments. www2.dfid.gov.uk/news/files/ CFS Co-operative Financial Services extractiveindustries.asp
  • 30. Risk & Opportunity 28 Global Reporters 2004 19 Accessibility & Assurance Where the 2004 crop of reports gains significant ground in this category is in Category Total Score % / Change 2002—2004 % relation to the impacts of their products. Two financial reporters, Co-operative Average Score 56 +6 Financial Services and Rabobank, clearly link their products and services to specific Highest Score 83 0 social issues and impacts. Although reporting may not yet meet all relevant Lowest Score 29 +4 stakeholder needs, we now see high profile companies tackling the impacts of their Top Scores Total Score % products on climate change (BP), health and nutrition (Unilever) and alcohol CFS 83 responsibility (SABMiller) in considerable detail. Shell 79 BT Group 75 Performance Scorecards — Accessibility & Assurance United Utilities 75 Assurance has emerged as a critical area in reporting, in terms of the very different methodologies used, and in terms of the cost-benefit balance. As predicted in 2002, assurance and verification has become big business for reporters and their auditors, though there is great controversy surrounding which forms of assurance add most value. This is an area we explore in greater depth in Chapter 5 (pages 32—35). CFS Co-operative Financial Services Shell Royal Dutch / Shell Group Of the 2004 Top 50 reports 39 (78%) include some form of external assurance or review, and the number of companies including in-depth assurance statements Of our leaders, Unilever achieves the top Reporting on Multi-dimensional has grown substantially. The GRI guidelines score in this category. Particularly notable Performance (see pages 38—42) feature heavily in the is its reporting on water and materials, majority of reports, with substantial effort while BP displays considerable expertise Most companies are still reluctant to given to indexing each indicator to pages in interpreting its impact on global CO2 provide a core set of accounts of their in the relevant report. Our Top 5 scorers in emissions at a corporate, national, site and, environmental and social impacts, apart this category are all GRI ‘In Accordance’ for the first time, product level. Climate from Novo Nordisk — which offers detailed reporters. change is now a dominant concern for environmental and social accounts. While many of our leading reporters, reflecting not in among the high scorers, Matsushita continuing pressures in this area. A number Electric Group carries on the Japanese of companies scored full marks for their tradition of providing detailed environ- reporting on climate change: BAA, BP, mental accounting, this time integrated Bristol-Myers Squibb, Ford, Rio Tinto, throughout its report — instead of the RWE, Total, Unilever, United Utilities, more usual (and somewhat boring) table Veolia and Volkswagen. of numbers in the report’s appendix. We now see high profile companies tackling the impacts of their products on climate change (BP), health and nutrition (Unilever) and alcohol responsibility (SABMiller) in considerable detail.
  • 31. Risk & Opportunity 29 Global Reporters 2004 Virtual Reporting 20 The Other 50 Companies It’s extraordinary to think that in 1994, Company Country Industry Group Credit when we began our report benchmark Rating 37 surveys, the internet was still a novelty to most people — and the explosive growth in ABB Switzerland Capital Goods BB+ corporate reporting over the web had not Abbott Laboratories USA Pharma & Biotech AA begun. When it did, many expected virtual ABN Amro Real Brazil Diversified Financials n/a reporting to render printed reports extinct. AEON Co Japan Food & Staples A- Not so. For those interested, this is an Agilent USA Technology Equipment BB area we explored in our 1999 survey, Alcan Canada Materials A- The Internet Reporting Report.36 Alcoa USA Materials A- Allianz Group Germany Diversified Financials AA- Most of our 2004 reporters (both Top 50 Anglo Platinum South Africa Materials n/a and Other 50) now supplement their Aracruz Celulose Brazil Materials BBB- reporting by using their corporate internet Autostrade Italy Transportation A sites, some more energetically than others. Aventis France/USA Pharma & Biotech A+ Good examples of closely integrated print BASF Germany Materials AA- and web-based reporting include BP, HP BC Hydro Canada Utilities AA- and Shell. Of the Top 50, only 12% were BMW Group Germany Automobiles n/a solely web-based reports, of which BAA, Camelot Group UK Hotels & Leisure n/a BT, Rio Tinto and Unilever scored best. Canon Japan Consumer & Apparel AA City West Water Australia Utilities n/a It seems that paper-based reporting has DaimlerChrysler Germany Automobiles BBB still got life, with many companies heavily ENDESA Spain Utilities A gearing their printed reports for addressing Fuji Xerox Japan Technology Equipment A key issues and concerns, leaving the web Gaz de France France Utilities AA to hold the flesh and bones of their Grupo Eroski Spain Utilities n/a sustainability performance. This caused Hydro-Quebec Canada Utilities A+ some serious confusion and frustration IBM USA Technology Equipment A+ for our analysts. Intel Corporation USA Technology Equipment A+ Melbourne Water Australia Utilities n/a Merloni Elettrodomestici Italy Consumer & Apparel n/a Mirant USA Utilities D The Other 50 mmO2 UK Telecom Services BBB MTR Corporation Hong Kong Transport AA- Selecting 50 reports for benchmarking Nippon Oil Corporation Japan Energy BBB- proved a difficult task for our Selection Novozymes Denmark Pharma & Biotech n/a Committee (page 17). It may be a Old Mutual UK Banks n/a surprise to some — and it will surely be PotashCorp Canada Materials BBB+ a disappointment to others — that some Severn Trent UK Utilities A of the longer established reporters have Suez France Capital Goods A- slipped out of the Top 50 — but still remain Swiss Re Switzerland Diversified Financials AA in the Top 100 — and should be considered Sydney Water Australia Utilities AAA examples of best practice. These Talisman Energy Canada Energy BBB+ experienced reporters are still producing Tata Steel India Materials n/a strong reports; however, with so many Telecom Italia Italy Telecom Services BBB+ companies now producing reports, Tesco UK Food & Staples Retailing A+ competition for slots in the Top 50 The Dow Chemical Company USA Materials A- is intense. Toyota Motor Corporation Japan Automobiles AAA VanCity Canada Banks n/a Vodafone Group UK Telecom Services A Watercare Services New Zealand Utility A+ Westpac Australia Banks AA- Weyehaeuser Company USA Materials BBB 36 SustainAbility & UNEP, The Internet Reporting Report, 1999. 37 For some companies in the ‘Other 50’ credit ratings were not available.
  • 32. Risk & Opportunity 30 Global Reporters 2004 In the chemical sector, for example, BASF Australia and New Zealand manage a Aracruz Celulose integrates its annual and The Dow Chemical Company may be creditable 5, while South Africa — emerging and sustainability reporting. The forestry the world’s largest chemical companies, as a fascinating laboratory in terms of and paper products company’s detailed but they no longer represent the cutting corporate accountability, manages 2 entries. reporting on both wealth generation and edge of reporting. Brazil, a member of the BRIC group of the allocation of economic resources is countries,38 also achieves two entries. world class. Our Selection Committee felt that although such companies are still — Anglo Platinum of South Africa very producing excellent reports, they have not Emerging Economy Reporters nearly outshines the report from its big yet addressed the key issues of the industry brother, Anglo American. Of particular head-on. They are still in defensive mode. The emerging economies countries,39 interest is its direct reporting against That said, it should be noted that BASF and represented here by Brazil, India and South the requirements of the South African Dow have both made moves to consolidate Africa, did quite well in 2004, with a total Mining Charter, providing insightful their reporting, with BASF integrating its of seven entries in the Top 100, with a reporting on local development issues annual and sustainability reporting, a move Brazilian company and two South African and labour rights. Old Mutual South away from its three-volume approach companies in the Top 50 — both Brazil and Africa represents the financial services benchmarked in previous surveys, while South Africa achieving two entries in the sector, continuing South African Dow has focused on internet-based Other 50. Stand-out features of these reporters’ strong history in reporting reporting. reports — and the MTR Corporation report on corporate governance. Usefully, the from Hong Kong — included: report also includes a set of key issues Other long-time Top 50 reporters which that sit along the bottom of each page. have dropped into the Other 50 include — Tata Steel provides one of the strongest Attached to each is the key indicator and BMW and DaimlerChrysler. Particularly reports from emerging economy an historical summary of the bank’s disappointing is DaimlerChrysler’s approach countries reports and is definitely India’s performance. to climate change. The company’s 2004 top reporter. It is a bit like a Japanese report devotes more space to photographs report with its detailed numerical data, — Hong Kong-based MTR Corporation of handshakes than it does to the but the report contains an extensive set produces what must be the top report discussion of climate change, which is now of stakeholder concerns and issues, series in South East Asia. In line with one a key area of risk and opportunity for linking them with the company’s of the key themes of Risk & Opportunity, anyone involved in the mobility business. response and strategic objectives. MTR produces an insightful table on the company’s key risks. European reporters again figure strongly — From Brazil, ABN Amro Real and Aracruz among the Other 50: 20 of the Other 50 are Celulose both provide excellent accounts from Europe, with the UK again in the lead, of their sustainability performance. ABN followed closely by Germany and then by Amro Real’s report adopts a novel France and Italy. North America comes structure, dictated by a customer enquiry second, with a total of 14 (8 from the USA, about interest rates. The report is shaped 6 from Canada). In Asia, with 7 entries, around the query, detailing the impacts Japan leads (5), with 1 entry each from of its products and services. India and Hong Kong. Tata Steel provides one of the strongest Brokerage firms recommend that corporate reports from emerging economy managers and board directors ‘include countries reports and is definitely social, environmental and governance India’s top reporter. reporting in their annual reports and financial statements’.
  • 33. Risk & Opportunity 31 Global Reporters 2004 21 Equity Research Analysts Regarding reporting and disclosure, They ask companies to ‘to take a Call for Better Disclosure these companies make the following leadership role by implementing observations: environmental, social and corporate The pioneers of the socially responsible governance principles and policies and investment (SRI) movement have shown ‘The majority of analysts noted difficulties provide information and reports on the way in making the business case for in comparative analysis due to the range related performance in a more consistent the inclusion of sustainable development of reporting practices.’ and standardized format. They should and stakeholder interests in company identify and communicate key challenges research and valuation. Using shareholder Jointly, these brokerage firms recommend and value drivers . . . Such information activism, institutional investors are that corporate managers and board is best conveyed to financial markets successfully bridging the fields of directors ‘include social, environmental through normal investor relations sustainable development and corporate and governance reporting in their annual channels . . .’ 44 governance in the long-term interest reports and financial statements’. of their members. Progress on the implementation of the And they encourage governments and recommendations of these two reports More recently, an impressive number regulatory bodies to revise current will be monitored for the UN Global of leading financial services firms — definitions of fiduciary duty and financial Compact by the UNEP Finance Initiative. represented through teams of ‘sell-side’ materiality to include sustainability affairs brokers 40 and analysts — have confirmed and update disclosure rules accordingly.42 the material relevance of governance and sustainable development performance on In a separate report under the auspices of equity valuation. Companies such as ABN the UN Global Compact, a similar group of Amro, Deutsche Bank and Goldman Sachs finance organisations considers inclusion are calling on investors, asset managers of social, environmental and governance and financial markets in general to aspects to form part of the fiduciary include these non-traditional aspects duty for investors, pension fund trustees in their decision-making.41 and others.43 41 United Nations Environment Programme Finance Initiative (UNEP-FI) Asset Management Working Group (AMWG), 38 BRIC: Brazil, Russia, India, China. The Materiality of Social, Environmental 39 SustainAbility and other partners in and Governance Issues to Equity Pricing. this project intend to produce a short 11 sector Studies by Brokerage Analysts, publication on reporting in the emerging 2004. economies. 42 Ibid, page 5. 40 A financial analyst who works for a 43 UN Global Compact, Who Cares Wins — brokerage firm and whose recommend- Connecting Financial Markets to a ations are passed on to the brokerage Changing World, 2004. firm’s customers. 44 Ibid, page iii.
  • 34. Risk & Opportunity 32 Assurance and Materiality The upward trend in companies using What Do We Mean by Assurance? Assurance & some form of external assurance or review has been relentless, with 39 (78%) of our All this flags up the need for some ground Materiality Top 50 including a discussion of external rules. The term assurance is a very broad assurance this year.45 The decisions one. It’s best summed up as: ‘steps taken companies make in relation to their to increase confidence in a report’. These assurance options signal powerfully how steps can be many and various, and no they view their accountability — and the single view prevails as to what must be role of their reporting. included in an assurance review, but it often encompasses one or more of the We should note here, however, that while following: the overall trend in the use of assurance has been steadily upward, in some places — verification of (specified) reported data 5 companies have begun to question the — quality of systems and processes that value or utility of the process, even generate (specified) data Assurance and verification were ‘Hot occasionally stepping away from external — effectiveness of management systems Topics’ in 2002 and earlier surveys. One assurance for a time. The individual related to particular issues new feature of the landscape: materiality. experience of assurance is extremely varied, — materiality of reported information 46 We apply our new Materiality Multiplier and its role and relevance is still far from — completeness of the sustainability to the Top 50, with striking results. clear. Equally, the financial stakes can be picture on which a report is based high: companies submitting their reports — responsiveness of the company to to us for inclusion in the survey consistently stakeholders’ needs note assurance as one of the biggest — stakeholders’ opinions on the costs associated with reporting. For a appropriateness of a company’s reporting large company, this cost can run into on an issue. millions of dollars. Each of these provides a different type of The growth in assurance has begun to assurance to different readers, and they mirror the growth in reporting, with each have a role to play. For the purposes one notable difference: development of of our benchmarking, we don’t evaluate assurance has for the most part been the assurance process as such; we can organic, whereas reporting more generally only evaluate what an assurance statement has benefited from the GRI guidelines has to say about that process. and other frameworks. Until the AA1000 Assurance Standard was released in 2003, almost no external assurance statements The Playing Field were based on a named standard of any kind — and most still aren’t. With respect to the content of assurance statements, there are some real differences This means that it can be very difficult to between the approaches used by this compare one company to the next in this year’s Top 50, and in respect of who’s respect, as one company’s ‘assurance’ may doing them (Figure 22). bear little resemblance to another’s, even if they operate in the same sector. 22 Average Benchmark Scores for Different Styles of Assurance 23 Use of Assurance Standards 4.0 3.0 2.0 1.0 Don’t Do Stakeholder Big Four Non-Big Average AA1000AS ISAE / Average Assurance 47 Opinions Four Users Accounting Standards Users
  • 35. Risk & Opportunity 33 Assurance and Materiality 24 Outstanding Examples of Assurance Company Assurance Provider(s) Standard(s) of Reference Notes BAA ERM AA1000AS, Very detailed opinion, including reporting GRI and performance against key issues BP Ernst & Young AA1000AS, Very detailed statement, with transparent GRI In Accordance and specific feedback BT Group Lloyd’s Register AA1000AS, Varied approach, presented alongside views Quality Assurance GRI In Accordance, of the independent Leadership Panel on BT’s GRI Telecommunications strategy and performance Sector Supplement Chiquita Brands Rainforest Alliance, Rainforest Alliance, Multi-faceted approach focusing on specific International COVERCO, Independent SA8000 performance aspects, targeted at the company’s Monitoring Group of most exposed issues El Salvador Co-operative JustAssurance AA1000AS Specific and straightforward statement, Financial Services linked closely to expert views on company performance Novo Nordisk Deloitte AA1000AS, Review covers reliability of data collection, ISAE appropriateness of reporting, GRI 'In Accordance' status. The full management letter and company response are included on website Premier Oil Corporate Citizenship AA1000AS Open and challenging statement, with insight Unit, Warwick Business into the progress in implementation of Premier School Oil’s CSR strategy and programs Sony PricewaterhouseCoopers — Clear areas for improvement, with interesting discussion of Sony’s Global Warming Potential exposure Suncor PricewaterhouseCoopers Standards for Assurance Identifies key areas for improvement, with Engagements (CICA) clear verification of Suncor’s sustainability performance indicators 45 This includes any evidence of a systematic process to assess the quality of reports or data. 46 The principles of Materiality, Completeness and Responsiveness are the basis of the AA1000 Assurance Standard. www.accountability.org.uk/aa1000/ default.asp?pageid=52 47 It is worth noting that a few companies not currently engaging in external assurance of their reports nevertheless discuss the issue and, in a few cases, their future plans in this regard.
  • 36. Risk & Opportunity 34 Assurance and Materiality Of the 39 reports that provide some form There are also examples of reports using Like the term sustainability itself, of external assurance or review, 16 (41%) both the AA1000 Assurance Standard and materiality strikes many people as pretty make use of one of the Big Four audit and the International Standard on Assurance nebulous, so it’s perhaps a bit surprising consulting firms (Deloitte, Ernst & Young, Engagements, and the result can be that it has caught on as well as it has. KPMG and PricewaterhouseCoopers); powerful: Novo Nordisk, for example, uses The definition used nowadays by reporting four (10%) of statements are provided this approach (including the company’s practitioners comes out of the financial by stakeholder organisations or experts; response posted on its website) and accounting tradition, and goes something and 19 (49%) come from assurance achieves a full 4-point score. Others using like this: Something is material if it has the professionals at smaller or boutique firms this combination of standards include RWE potential to affect your perception of the (such as ERM, JustAssurance and CSR and Rabobank, although in their cases company and any decisions you might take Network). somewhat less effectively. as a result.48 But the most significant differences come Given the effort that assurance entails for In terms of understanding the basic to light when we look at the standards used companies — and the faith many place in concept, we’ve come a long way, but in by assurance providers. The two frameworks it to improve their processes or reputation reality we have made a few small steps in common usage are: — we would very much like to be able to in a long journey. As the concept has risen evaluate more than assurance statements in prominence for sustainability reporters, — Accounting Standards alone. In the future, it’s vital that better there have been efforts to find new Generally the International Standard on information be developed on how different definitions for materiality that properly Assurance Engagements issued by the assurance approaches affect cost, and the capture non-financial issues (see, for International Auditing and Assurance impact on reputation or credibility. For this example, AccountAbility’s report, Redefining Standards Board, but also the German to happen, however, companies and their Materiality,49 and the GRI Boundary Protocol IDW PS820 and Canadian CICA assurance providers will need to lift the draft 50). These efforts, however, will not Standards for Assurance Engagements lid on their processes. result in anything quite so simple as a list of indicators a company should consider — AA1000 Assurance Standard material. That is because materiality Specifically aimed at assurance of The Materiality Debate requires a process of decision-making in sustainability reports full knowledge of the company context — Materiality has emerged as one of the which is constantly changing. While some assurance statements mention biggest conceptual challenges for corporate frameworks such as the GRI guidelines or reporters in recent years. And not before Material issues are easy to spot in SA8000 standard as a consideration for the time. The pressures on companies to make hindsight, especially when something review of reports, we do not consider them their reports ever more complex have been goes wrong at a company. But this is a here, as these are not meant to be used as growing: 2002, for example, saw the release major problem for anyone wanting to report assurance standards, and do not of a new version of the GRI guidelines, with assess future risks and opportunities at a provide guidance on assurance of reports. a considerably expanded indicators section; company: you’d need a crystal ball to be then there was the drafting of the AA1000 able to predict the circumstances under Things become interesting when we look at Assurance Standard; and, by no means which any particular bit of information the relative scores (Figure 23). Users of the finally, our own identification of the becomes key to your assessment; the one AA1000 Assurance Standard hold a distinct ‘carpet bombing syndrome’ struck a chord. thing that could have made the difference lead over those using the accounting comes to light after the fact. standards, and an even bigger lead over the Reports risk becoming cluttered with Top 50 on average. Clearly, AA1000 users information of little apparent use to are able to provide much more information readers, while missing out on the big in their assurance statements than others picture risks and opportunities. Practitioners do, and this significantly raises the value and readers alike need to find a way to of their statements for readers. assess what really matters most, and focus effort on those areas. 25 Materiality is a journey Stakeholder Governance: Issue identification opinion: boards and and prioritisation company and executives industry context Reporting Information Issue management tracking and and engagement review
  • 37. Risk & Opportunity 35 Assurance and Materiality 26 Calculating the Materiality Multiplier Original Revised Figures shown are for Company X Scoring Scoring Step 1 Benchmark all 4 Sections Section I Context & Commitments 24 (48 Criteria) of the report Section II Management Quality 31 according to the standard Section III Reporting on Performance 36 Benchmark Methodology Section IV Accessibility & Assurance 12 Total 103 Step 2 Calculate Materiality Multiplier Economic Issue Identification 1.00 by averaging Issue Identification Social Issue Identification 2.00 scores Environmental Issue Identification 3.00 Stakeholder Issue Identification 1.00 Materiality Multiplier 1.75 Step 3 Divide all Reporting on Performance Economic Impact to Employees 4.00 1.00 Criteria scores by 4 Human Rights 2.00 0.50 Water Use 3.00 0.75 Product & service impacts 1.00 0.25 Step 4 Apply Materiality Multiplier to Economic Impact to Employees 1.75 x 1.00 1.75 all Reporting on Performance Human Rights 1.75 x 0.50 0.87 Criteria scores Water Use 1.75 x 0.75 1.31 Product & Service Impacts 1.75 x 0.25 0.43 Step 5 Calculate revised Reporting on Section III Reporting on Performance 18 Performance Section score from revised Performance Criteria scores Step 6 Add revised scores of 4 Sections Section I Context & Commitments 24 of Benchmark Methodology to Section II Management Quality 31 calculate revised total Section III Reporting on Performance 18 Section IV Accessibility & Assurance 12 Total 85 Step 7 Calculate percentage score by % 44 dividing revised total score by the total possible score (192) 48 For example, the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Concepts, No. 2, Qualitative Characteristics of Accounting Information defines materiality as: ‘the magnitude of an omission or 49 Simon Zadek & Mira Merme, misstatement of accounting information Redefining Materiality: Practice and Public that, in the light of surrounding Policy for Effective Corporate Reporting, circumstances, makes it probable that the Institute of Social and Ethical judgement of a reasonable person relying AccountAbility, 2004. on the information would have been 50 www.globalreporting.org/ changed or influenced by the omission or guidelines/protocols/boundaries/ misstatement.’ BoundariesExposureDraftFinal.pdf
  • 38. Risk & Opportunity 36 Assurance and Materiality 27 Impact of Materiality Multiplier on Top 50 What is important in such complex situations is not the specific fact or detail Company Materiality Original Revised Original Revised that went misreported or unreported, it Multiplier Score % Score % Rank Rank is the system of internal controls that a company has in place for managing risks BAA 3.5 63 61 6 1 on an ongoing basis. Therefore, materiality Novo Nordisk 3.25 68 58 2 2 is not an end state — it is a process, and BT Group 3.25 64 58 4 2 a governance process at that (page 12). Co-operative Financial Services 2.75 61 53 1 4 BP 3 66 53 3 4 HP 2.75 59 53 10 4 Benchmarking Materiality Rabobank 3.25 61 51 7 7 British American Tobacco 3 64 51 4 8 Indeed, materiality may be the single most Unilever 3.5 59 50 10 9 important governance process at any United Utilities 2.75 51 49 16 10 company. If good corporate governance Kesko 2.75 54 47 14 11 is about creating the conditions for full Manaaki Whenua 2.5 52 47 15 11 accountability, to shareholders as well as Royal Dutch / Shell Group 2.5 60 47 8 11 other stakeholders, the process by which SABMiller 3 49 46 22 14 a company reviews issues and impacts to Veolia Environnement 2.75 51 44 16 15 determine the most important risks and Lafarge 2.75 50 43 21 16 opportunities they present is fundamental. BHP Billiton 2.75 51 43 16 16 MTN Group 2.5 48 43 24 16 Because no one has the gift of foresight Rio Tinto 2.25 60 43 8 16 sufficient to predict how an issue that may ING Group 2.5 47 43 28 16 not be top of mind might threaten the very Cadbury Schweppes 2.5 48 43 33 16 foundations of a major company, we need adidas-Salomon 2.75 47 42 28 22 to rely on the robustness and transparency Anglo American 2.75 58 42 12 22 of that process. If we can understand Diageo 2.75 47 42 28 22 and trust the issue identification and Suncor 2.75 45 42 35 22 prioritisation process, we can assess RWE Group 2.25 48 42 24 22 whether a company’s report is sufficiently Bristol-Myers Squibb 2.25 49 41 22 27 informed by it. Philips 2 43 41 38 27 Statoil 2.25 55 41 13 27 This is the focus of our benchmarking KarstadtQuelle 2.5 48 41 24 27 when it comes to understanding materiality. Sasol 2.5 48 40 24 31 We think a reader’s ability to judge how Ford Motor Company 2.25 51 39 16 32 a company’s leadership assesses material Volkswagen 2.25 49 39 22 32 risks and opportunities is captured by the Daiwa Securities 2 53 38 38 34 following cluster of criteria: Carrefour 2.25 42 35 41 35 — economic issue identification Chiquita Brands International 1.75 45 35 35 35 — social issue identification Total 2.25 45 34 37 37 — environmental issue identification Natura 1.75 51 33 16 38 — stakeholder involvement in issue Starbucks Coffee Company 1.75 42 33 41 38 identification and prioritisation.51 Matsushita Electric Group 2 46 33 33 38 British Airways 1.75 43 33 38 38 If reporting on these four areas is robust, PremierOil 2 39 32 48 42 readers will be well equipped to judge for Novartis 1.5 47 32 28 42 themselves the quality of the company’s Ito Yokado 2.25 40 31 47 44 issue identification as a governance Gap 1.75 39 31 48 44 function — whether or not they agree Sony 1.25 41 30 44 46 with the way the company prioritises General Motors 1.75 47 30 28 46 risks as a result. Barclays 1.75 39 30 48 46 Baxter 1.5 40 28 41 49 DeutscheTelekom 1 41 26 44 50
  • 39. Risk & Opportunity 37 Assurance and Materiality Even in the financial accounting field, Step 3 28 Big Falls, Small Falls where materiality has been a recognised The scoring scale is revised for all criteria issue for decades, there is no simple answer in the Reporting on Performance Section — Reports from the following companies to the question, what is material? In fact, usually 0/1/2/3/4 points — down to all lost at least 15% off their scores to the extent that financial accountants 0.25/0.50/0.75/1.00 points, by dividing using the Materiality Multiplier: have attempted to address the issue at all, the report's score for each criterion by 4. it has been through relatively crude rules This means scores are kept within the — Anglo American of thumb. 0 to 4 points range when the Materiality — Daiwa Securities Group Multiplier is applied. — Deutsche Telekom Because financial accountants don’t have — General Motors any simple, consistent tool for assessing Step 4 — Natura materiality based on issues and share- Each of the revised scores in the — Novartis holders’ opinions, they tend to designate Reporting on Performance Section is — Rio Tinto. a financial threshold — perhaps 3% or 5% multiplied by the Materiality Multiplier of revenues — below which things are not calculated in Step 2. considered financially material. This is not While the reports from these companies because they are in fact not material (in Step 5 lost no more than 3%: that they do not have the potential to The new total for the Reporting on affect investors’ opinions of the company), Performance Section is summed. — BAA it is simply because that's the only way — Philips an accountant can easily exclude issues Step 6 — SABMiller without actually having to spend a lot Using the scores taken from the initial — Suncor of time thinking about them. benchmark, the total scores for the — United Utilities. outstanding three Sections (Context & Commitments, Management Quality, and The Materiality Multiplier Accessibility & Assurance) are added to the new revised score for the Reporting on We wanted to know how the Top 50 Performance Section are added together. would fare if the quality of issue identification could fundamentally Step 7 alter their scores. So we conducted an The new revised benchmark total is experiment of our own, using a device divided by the maximum score a company we call the ‘Materiality Multiplier’. can receive on the methodology (192) to give us the final score in percent. The idea is that reports should only score Movers and Shakers well on reporting their performance impacts Using this method, a company can still if they have demonstrated through good score a maximum of 4 points on each of In terms of our rankings, the Materiality issue identification that these impacts the performance reporting criteria, but Multiplier certainly reshuffles the pack: CFS are important (indeed, material). only if it also scores 4 on each of the issue is knocked off the top spot by BAA, while identification-related criteria. It’s by no high scorers Rio Tinto and Anglo American Step 1 means perfect — poor results can come drop considerably — 8 places and 17% for The report is benchmarked as normal. from either issue identification or Rio Tinto, and 10 places and 16% for Anglo performance reporting, and our tool can’t American. The biggest loser is Natura, Step 2 say which it is for certain. To mix our however, with a drop of 22 places and 18%. The Materiality Multiplier is derived by metaphors, it may prove to be a bridge calculating the average scores on the too far, but its application certainly turns But what can we infer from these figures? issue identification criteria in Section I — up some interesting food for thought. This is in no way a scientific exercise, and Context & Commitments of the it’s still only a very limited tool for judging benchmark methodology. The most important result of this materiality. But what it does tell us is that experiment is that no company’s overall the sort of companies that lose the most score improves as a result (nor can it — the off their scores are the ones we called Materiality Multiplier can only revise final ‘carpet bombers’ in 2002. They report in scores downward). On average, companies great detail on a multitude of performance lose 9% from their total scores, notionally aspects without giving the reader the tools wiping out the 10% increase in scores to evaluate them or to evaluate how since our 2002 survey. relevant they are. 51 Refer to SustainAbility’s Global Reporters Sustainability Reporting Assessment Methodology. www.sustainability.com/risk-opportunity
  • 40. Risk & Opportunity 38 The GRI The Global Reporting Initiative (GRI) has But when it comes to detailed The GRI been catalytic in the rise of sustainability benchmarking and analysis, a company’s reporting in recent years. The GRI reliance on the GRI guidelines does little to A Perspective organisation is at a critical moment in differentiate it from others. Drawing this its history, with the next 12 months distinction more clearly is, we believe, the likely to define its future powerfully. chief contribution of our surveys. The question is: what path will GRI take? Since our 2002 survey, GRI has steadily Status Check continued its progress in developing and encouraging the use of consistent It’s been seven years since the GRI concept guidelines for sustainability reporting. first coalesced in Boston, and for many The number of companies known to use or observers that means the honeymoon is 6 reference the GRI’s sustainability reporting over. To secure its place in the corporate guidelines 52 currently stands at 571,53 a accountability hall of fame, the GRI needs Virtually all our Top 50 reports use the significant advance from the 140 54 two to be seen to be delivering on its early GRI, in one way or another. So where years ago. Virtually all (47) of the Top 50 promises. The GRI has evolved enormously is the Initiative headed? make some visible use of the GRI guidelines, from its early form. It is no longer a quirky including 12 reporting In Accordance but compelling little campaign: it’s an with the guidelines.55 institute with great ambitions to formalise, professionalise and standardise the field of The role of the GRI — and its guidelines — sustainability reporting. It’s not yet at the with respect to this survey is complex. level of a true professional institute, but Whereas GRI focuses on broad, general it’s on its way. acceptance of sustainability reporting and adherence to consistent methods, From where we stand, GRI has to date Risk & Opportunity — like all previous enjoyed a degree of success against most SustainAbility/UNEP surveys — focuses on of the early goals it set itself, more strongly best practice and innovation in reporting. in some areas than in others. Some of the key points of progress include: The companies showing best practice, as highlighted here, are clearly influenced by the deepening acceptance of sustainability Strong progress reporting, and the GRI has had a powerful role to play in stimulating this trend. Indeed, the fact that so many companies Broaden the appeal of sustainability have stepped forward with high-quality reporting and the number of companies sustainability reports — including many participating in it. from developing countries — owes much The rise of the GRI guidelines has coincided to GRI’s tireless efforts. with a significant increase in the number of companies providing sustainability reports. GRI’s own targets regarding numbers of corporate users of the guidelines (600 reporters by year end 2004) are well on track to being met. ‘The GRI arose because many different voices — corporate executives, environmental activists, human rights campaigners, investors, and labor leaders, to name just a few — shared the same goal: the creation of a generally accepted standard for the disclosure of sustainability performance. The adoption of the GRI by more than 500 companies, and GRI’s current work to bring together thousands of global stakeholders in preparation for the next version, shows that we are moving steadily toward that goal.’ Bob Massie
  • 41. Risk & Opportunity 39 The GRI Moderate progress Weak progress This does not mean that reporting leaders depend any less on the GRI guidelines now than they ever did, but what they get from Clarify and demonstrate consensus on Simplify and streamline requests the guidelines is of a different nature today the broad expectations of company for information about corporate than it was a few years ago: GRI is now sustainability reports. sustainability. much more a part of the background, the Beginning with the earliest version in While many of the potential audiences ‘wallpaper’ of reporting — it’s there, we 1999, the GRI guidelines have steadily for corporate sustainability reports are know it’s there, but we just don’t think gained in clarity and standing as defining increasingly aware and supportive of GRI about it all that much. a broad consensus on how companies reporting, specialised questionnaires and should prepare sustainability reports. It is requests for information have not, in the currently used as a major source of input main, decreased. However, having said that, The Invisible Hand into the reporting process for hundreds of recent advances in dialogue with SRI companies. A serious gap remains, however, organisations are encouraging in To an extent, this is exactly what GRI had in understanding and responding to the this area. planned all along. Where it once was new challenge of the Reporting Principles and exciting, GRI has become customary included in the guidelines, in many ways and familiar. And this is exactly what’s far more ambitious than the report Expand the use of reports by required for GRI to achieve the same level content, but the subject of less focus.56 companies and stakeholders. of penetration that financial reporting We have yet to see real evidence that enjoys today. potential users of GRI reports — including Raise the level of consistency, NGOs and most investors — read, However, the GRI’s evolution from a highly comparability and generally accepted understand and use reports regularly to visible organisation to an increasingly practice evident in sustainability help them with their work. This may be one invisible one is not without its problems, reporting. area where the goalposts have moved over and indeed each has its strengths and More companies are reporting with the years: not only does the use of reports weaknesses. By seeking deeper linkage somewhat greater consistency — in terms require a substantial proportion of the to financial accounting and legal of broad content, and, in some cases, corporate sector to provide them; the requirements, GRI will become more indicators and protocols. But specific landscape is further complicated by the automatic — and reach more companies — comparability remains elusive. growth of the broader framework of but less strategic. If GRI remains the stuff standards, guidelines and codes related to of a few leadership companies’ CEO corporate responsibility and sustainability — speeches it will be more individualistic — Establish an effective institution to of which GRI is a part. This framework and perhaps more profound for those shepherd sustainability reporting into itself may require clarification in the minds companies — but less widespread. the future. of users before substantial progress can Since becoming an independent be shown. Perhaps most significantly, GRI’s organisation in 2002, GRI has worked hard organisation, governance structure and at setting up its institutional structures, business model evolved at a time when developing a strong business plan and, The process of institutionalising GRI leadership companies were a more powerful at the same time, pushing forward the has been intentional right from the very driver of the reporting agenda than they guidelines revision process. Much, however, beginning. In its earlier form, GRI was are today, and may need further evolution remains to be accomplished. largely the focus of ‘leadership’ companies, before they are up to the task of servicing but the centre of gravity has shifted to a more embedded professional standards reflect the rise of reporting among institute. Most of all, GRI needs a diverse companies of all types, backgrounds range of stable income sources. and abilities. 52 www.globalreporting.org/ — Ensure the report is consistent with guidelines/2002.asp the guidelines’ reporting principles. 53 www.globalreporting.org/ — include a GRI content index, allowing guidelines/reports/search.asp readers easily to cross-check against the 56 The GRI Guidelines include a section on as at 13 October 04. guidelines. Reporting Principles, which are: 54 Trust Us. — include a statement from the board or transparency, inclusiveness, auditability, 55 ‘In Accordance’ status requires CEO declaring the report to be in completeness, relevance, sustainability companies to: accordance with the GRI guidelines, context, accuracy, neutrality, — Report on all numbered elements and and to represent ‘a balanced and comparability, clarity and timeliness. indicators in the core guidelines, with reasonable presentation of our General definitions of these principles are either the requested information or an organization’s economic, social and provided, but clarity on how they work in explanation for its absence. environmental performance’. practice is, to date, thin on the ground.
  • 42. Risk & Opportunity 40 The GRI At present, there is much reliance on GRI’s — Professional service providers. — Certain GRI governance structures Organisational Stakeholders (OS). These Because there is no fee to use the need significant attention to help are GRI’s ‘members’, including companies, guidelines, it may be tempting to believe them come up to speed, including the NGOs, service providers and others, who that the guidelines and the process that Stakeholder Council and the Technical pay a modest annual participation fee. supports them are ‘already paid for’. Advisory Council. In the former example, In addition, subscription and fee-for- a better definition of their role, and service offerings could provide important If this state of affairs continues, it will raise possibly a more regional basis to revenues. And it is vital that the reporting some pretty fundamental challenges for their operation, would go a long way. guidelines themselves attract support to GRI. For instance, it may be necessary to In the latter, which is not yet operational, the institution that provides them. rethink the guidelines as free to use for a clear interplay of roles with other everyone. This would be a significant governance bodies needs to be This latter point is a perpetual problem for departure from GRI’s historical commitment established to enable all parties to initiatives that provide a service to many, to inclusivity — for small companies, for participate fully in the next revision to often referred to in the natural resources NGOs, for those in developing countries, the guideline and build a strong area as the ‘tragedy of the commons’. just as much as for major multinationals. organisation for the long-term. If ‘everyone’ benefits, no one assumes any It could become necessary for GRI to special responsibility for it. With so many scale back massively on its worldwide Additionally, the GRI guidelines are only stakeholders participating in and benefiting engagement activities, in order to keep one piece of the puzzle for companies from the GRI guidelines, no one group has costs down. when it comes to sustainability and been properly motivated to take ownership accountability to stakeholders — other for the organisation’s financial success: In the most severe scenario, GRI may be voluntary initiatives, such as any forced to consider a merger with another forthcoming ISO CSR standard, the — Business organisation, such as ISO or IASB. Any of AA1000 Assurance Standard and specific With hundreds of companies using the these outcomes would be undesirable, as performance validation (e.g. SA8000 guidelines and participating in their the result would be to undermine the open, compliance), all add depth to the overall development, it is tempting to think accountable structure GRI has innovated. architecture of standards and frameworks. that ‘someone else’ has a bigger budget In the worst case, the weakening of the GRI GRI is clearly well positioned to figure or lower bureaucracy, and a single and guidelines that might ensue could strongly in how this overarching company’s contribution makes no herald a return to the bad old days of accountability framework develops and difference. standard-less, free-for-all reporting — deepens, and should continue to devote in no one’s interest. time and energy to making this happen. — NGOs Given that NGOs are generally less well For all of these reasons, we believe it is heeled than companies, it is tempting vital to support GRI’s efforts — or risk the to think that those companies should be consequences of failure. But continuing the ones to fund GRI, not NGOs. slow progress on the financial front suggests several issues needing careful — Governments attention, in particular: Because sustainability reporting will not benefit any one country more than any — Some companies have not been other, the specific motivation to provide convinced by the ‘value’ of being an financial support to GRI can be difficult Organisational Stakeholder (OS). to create. While the specific benefit is to be able to elect a portion of the GRI board, we believe large companies are more interested in the development and positioning of the guidelines. There must be a way to parlay this into an opportunity to increase financial support. For all of these reasons, we believe it is vital to support GRI’s efforts — or risk the consequences of failure.
  • 43. Risk & Opportunity 41 The GRI GRI in the Top 50 We put this question to a number of In What this very small sample would tend to Accordance reporters in the Top 50, and tell us is that the reasons for reporting In All this may be interesting background, but here’s what they had to say: Accordance are more idiosyncratic than we what does it add up to? Is the GRI helping might have thought. What they share is a to change the way companies think about ‘We believe supporting a strong, credible general sense of ‘support’ for GRI as a their impacts and relationships with international standard, such as the GRI, global, voluntary, common framework for stakeholders, and creating conditions for enables us better to meet the expectations reporting. accountability? And are GRI-based reports of our stakeholders. Ensuring that we are really any better than their non-GRI applying the highest standard available was There is a certain structural similarity to counterparts? the basis for our decision to be an In many of the reports based more obviously Accordance reporter. It makes you ask the on the GRI guidelines, in that section titles As we noted earlier, nearly all of the Top tough questions and requires real internal and order can be similar between reports. 50 are using the GRI guidelines in some commitment and alignment on the breadth In a few cases, such as Natura, the way, and this trend has been steady since of issues the GRI covers.’ guidelines come through in an almost 2000. Given this, it’s difficult to assess Dianne Humphries, Suncor question-and-answer fashion. More any meaningful difference between GRI- interesting differences are apparent when and non-GRI-based reports, so instead ‘As part of making our recent switch from you look at the so-called GRI Content Index we focus on those companies reporting “environmental and social” to broader required of In Accordance reporters. ‘In Accordance’ with the GRI guidelines. “sustainability” reporting, we decided to report In Accordance with GRI because it The way companies treat deviations from At the time of writing, 41 companies have made sense to align with a single, the guidelines is often very enlightening. declared themselves to be reporting In international, standardised approach to Contrast, for example, Royal Dutch / Shell’s Accordance with the guidelines, including non-financial reporting. In practice, this GRI content index, including clear symbols 12 from our Top 50. The difference in scores made little difference to our planned representing the extent to which their tends to indicate a moderate advantage for content, although if we hadn't had external reporting responds to the guidelines, the In Accordance reporters (Figure 29). auditors check whether we met the GRI with that of General Motors, where lapses requirements, we'd have felt less are more often than not explained with But beyond the scores, what difference can comfortable signing off on it. We're keen a simple ‘not applicable’ or, more we see between In Accordance reporters to promote a good standard of reporting significantly, ‘not required’ (pertaining to and the others? Frankly, not a lot, especially across our industry, and GRI is a good non-‘core’ guidelines). In the latter case, in light of the fact that the top 10 include starting point for that.’ this example arguably betrays a mindset plenty of both. Even the survey’s leader, Bill Boyle, BP rather more concerned with compliance Co-operative Financial Services, is not than with accountability. reporting In Accordance (although at the ‘Before the launch of the current guidelines, time of writing, the company was ‘working we noted in our June 2002 report that towards’ In Accordance status). And several when the new guidelines were released strong reporters appear to be reporting later that year, we would report in in an ‘In Accordance’ fashion, but simply accordance with them. This was before not declaring their reports as such (e.g. the GRI had even designated the phrase BAA and Kesko). Moreover, there is no “In Accordance”! When the guidelines discernible difference between the two in were subsequently published we suddenly terms of the ‘fullness’ of the sustainability found ourselves with a commitment we picture they paint. Why, then, would a hadn't expected. We had been long time company bother? supporters of GRI and decided it was easier simply to do it than to try to explain what we might have meant by the term “in accordance”. ’ Chris Tuppen, BT 29 Use of GRI by Reporters in the Top 50 Average Score % In Accordance 55 GRI 48 Non-GRI 48
  • 44. Risk & Opportunity 42 The GRI The Best and the Rest Where Next? This compliance-versus-accountability split As the relatively short history of the appears to be an emblematic difference GRI has already demonstrated, what is between some reporters and others, and in considered ‘leadership’ practice now will fact indicative of the extent to which they eventually become standard practice in the view the guidelines in the ‘invisible’ or future; so even as the base of reporting ‘visible’ paradigm. An invisible GRI is companies continues to expand, they will worked into the background fabric of what continue to be influenced by today’s best companies are required to do; a visible GRI practice reporters. It is in the nature of is a challenging and inspiring framework for good companies to innovate — and the creating innovation and improved reporting area should be seen as no accountability. exception. The Top 50 include many examples of this innovation. As the GRI is broadly interpreted by companies at present, it’s a great tool to Where the GRI once filled a niche as a help companies meet basic expectations. It platform for some of that innovation, it has, distils the central challenges to an in working towards its mission, given way apparently straightforward framework; it to a focus on raising common standards builds a certain credibility for a company’s expected of ordinary businesses. Will it be approach to sustainability. But it is still up the place to go for best practice in the to the individual companies to demonstrate future? There is no reason why it cannot — real accountability for understanding and and a new focus around the reporting acknowledging their impacts; to develop a principles could provide real opportunity full set of competencies to deal with them; space. However, we suspect that the and to demonstrate that stakeholders’ overriding focus on standardisation will views really matter. And if what we see continue to be GRI’s highest priority for among the Top 50 is anything to go by, some time to come. there are massive differences between companies’ approaches to these. But the need for innovation remains, so we expect companies and stakeholders The most important way in which the will eventually find a way to pick up where GRI can help companies radically improve GRI leaves off in galvanising leadership their reporting is by focusing considerably companies and redefining best practice. greater energy on developing the eleven And in that event, we should welcome Reporting Principles that make up a ongoing experimentation and pioneering, significant part of the guidelines. These even as we continue to support and principles have the potential to drive encourage GRI on its present path. Efforts companies’ accountability efforts in at both ends will always be necessary. important new ways, but have not been the subject of much further study or discussion since they were developed. We believe that a deeper understanding of these principles and their application is one major distinction between the top scorers and other reporters, but much work remains to be done to translate this best practice into improved common practice. An invisible GRI is worked into the background fabric of what companies are required to do; a visible GRI is a challenging and inspiring framework for creating innovation and improved accountability.
  • 45. Risk & Opportunity 43 Global Reporters 2010 With over 1,500 companies reporting, many One result of this darker scenario would Global Reporters of them huge businesses with vast supply be the extinction of a growing number chains, the reporting agenda rests on much of reporting lines at companies, coupled 2010 more robust foundations than in 2000, let with re-energised and — in this case — alone 1990 — when the first voluntary Machiavellian activity in such fields as corporate environmental reports appeared. corporate public relations and advertising. As a result, Risk & Opportunity concludes A realist would probably look at the that the field is reaching critical mass. That demographic, economic, political and said, the future may be characterised by the technology trends and conclude that, while continuing fragmentation of interests and we will see ups and downs, the pressures efforts (what we might dub the ‘fission’ on companies to become more transparent, scenario) or, more optimistically, by ‘fusion’ more accountable and more responsible, 7 — with the integration of non-financial and and — ultimately — to help supply chains financial reporting helping to drive a range and economies to become more sustainable Where will reporting be 20 years after of social and environmental priorities deep can only grow. the first voluntary reports appeared? into the heart of 21st century capitalism We feature three impressionistic images and markets. But, while the realist might accept that the of where the transparency revolution ultimate outcome would probably be closer might take us: we wondered what it Our vision of the accounting and reporting to the optimistic scenario, he or she would would be like if citizens and consumers future assumes a transition from Stage 2 certainly dispute the significance of our could use a device that presented them fission to Stage 3 fusion (page 06). The Top 50 or Top 100 in 2010 achieving with 360° information on products and obvious question is: Are we on the cusp of average scores in excess of 70%. Although services. Once akin to science fiction, something really new, with the reporting this scenario may very well be possible, it such tools are likely to be everyday field set to undergo radical changes, or are would still leave behind the vast majority reality within a decade or so. we entering a decade of consolidation and of companies, most of them much smaller standardisation? Our crystal ball is suffering than the ones covered in this survey. from a bit of static, but we suspect that we Most, intentionally or not, will continue will see both — a mix of transformation and to operate largely in ‘stealth’ mode. And standardisation. who can blame them, given that without major changes to today’s market signals, tomorrow’s incentives will be too weak Half Full or Half Empty? to drive the scale of change likely to be needed.57 An optimist would hope that if we were to run this survey again in 2010 we would At the end of our sixth benchmark survey find that the average report score would be we find ourselves somewhere between approaching, or even in excess of, today’s the optimistic and realistic stances on top score (71%). If so, it would be a credit the future of reporting. On the one hand, to the companies in the survey who have research by CorporateRegister underscores continually pushed, innovated and striven the extraordinary growth in corporate to be the best in reporting, and a credit to non-financial reporting since 1990. But the voluntary reporting movement. history shows that very little in human affairs keeps going in a straight upward A pessimist might argue that the corporate line forever. Indeed, the figures for hard responsibility movement of recent years copy, or printed reports, had clearly hit will prove to have many of the same some sort of plateau by 2003, at least weaknesses of the much-vaunted New for the moment. Economy, imploding under its own weight. A pessimist might argue that the corporate responsibility movement of recent years will prove to have many of the same weaknesses of the much-vaunted New Economy, imploding under its own weight. 57 See SustainAbility’s report for the UN Global Compact, Gearing Up: From Corporate Responsibility to Good Governance and Scalable Solutions, 2004.
  • 46. Risk & Opportunity 44 Global Reporters 2010
  • 47. Risk & Opportunity 45 Global Reporters 2010 30 Corporate Non-Financial Reports 1990—2003 Printed reports Electronic reports 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: CorporateRegister.com October 2004 (based on a sample of 4478 printed and 4472 electronic reports) This trend could reflect a number of — Mainstreaming — Shareholder activism other trends: Or, thirdly, maybe the results are a Groups like CERES, which helped kick- leading indicator of the emergence start both the early round of corporate — Fatigue of Stage 3, integrated accounting, environmental reporting and the GRI, After a fast-and-furious 14-year run, disclosure, reporting and communication. are increasingly focusing on financial maybe the reporting trend has reached actors (such as pension fund trustees) some form of stasis, either caused by All three trends are almost certainly at as potential allies in the drive to force the growing complexity of the agenda, work, nor are they mutually exclusive. corporate change. This trend is likely or stalled by an understandable dis- Indeed, Stage 3 accounting and reporting to accelerate and could well help drive inclination among smaller or lower will increasingly address the issue of the much greater financial market interest profile companies to invest the necessary growing complexity of non-financial in issues as various as climate change resources. reporting (perhaps now best symbolised by and access to modern technologies like the use of indexing in the Top 50 reports) medicines. — Virtuality by using the extraordinary power of the Again, perhaps the growing use of internet, intranets and new knowledge — Assurance electronic formats (also indicated by the management technologies, including As we argue on pages 32—35, this is an CorporateRegister data) is taking over advanced data-mining. area in need of fairly radical innovation. from hard copy reporting. If so, this trend The cost of current forms of assurance could be powered by the much greater In terms of where we see this agenda will be one of the factors discouraging flexibility of electronic communication. headed over the rest of the first decade of wider reporting, a trend worsened when the 21st century, here are some pointers: research suggests that the cost:benefit ratio for some forms of traditional assurance is questionable.
  • 48. Risk & Opportunity 46 Global Reporters 2010
  • 49. Risk & Opportunity 47 Global Reporters 2010 31 Four Trajectories Trajectory Risks Opportunities Standardisation — Indicators proliferate — Benchmarkability of reports is greatly Shift towards common format accounts — ‘Tick box’ approaches and mind sets expanded prevail — Learning increases on performance, — Emerging issues ignored outcomes and implications for — GRI-style innovation overtaken by big, company valuation more conservative partner like ISO Consolidation — Many niche players in the reporting — As language is consolidated reports The shake-out begins area are marginalised become accessible to more readers — Some of the pressure on business — Sustainable development is built-in evaporates rather than an add-on — Loss of ‘storylines’ in reporting, — Language becomes less complex, together with some emotional appeal more mainstream Regulation — Narrower reporting — Higher levels of disclosure overall Governments mandate reporting — Reporting energy falls — Silent sectors and companies begin — Focus is increasingly on compliance, to report rather than experimentation — Corporate governance structures are forced to embrace a growing range of non-financial issues Integration — Even narrower audiences for reports — Information more persuasive for all Non-financial and financial concepts — Softer issues lost due to lack of audiences, not just financial actors merge evidence or inadequate understanding — Business case easier to articulate or metrics — Non-financial priorities deeply — More Frankenstein’s Monsters embedded in company strategy (Figure 32) — Regulations Take XBRL,58 or eXtensible Business On this basis, while our crystal ball cannot The early response to some of the new Reporting Language, which is an evolving tell us what reporting will look like in 2010, legislation in this area, for example global standard for electronically tagging we are reasonably confident that there will France’s NRE law, has been disappointing data in such a way that it can be still be a great deal of activity to discuss (page 07). Equally, the response to the UK automatically processed for collection and benchmark. Operating & Financial Review or OFR and reporting. Computers can treat requirement (page 07) may be less XBRL data intelligently, recognising it The UN Global Compact’s decision to dramatic than some proponents hope. in documents, analysing it and then encourage signatory companies to report But some such initiatives will open up presenting it in a variety of ways along GRI lines is welcome — and will help new frontiers of experimentation, with automatically, depending on the user’s drive the reporting agenda into new world leading companies using them as part of requirements. As the need for more regions and countries. Longer term, it their business case to invest in the disclosure on sustainability data should be made a mandatory requirement leading edge of transparency. And, where increases, such tools will greatly reduce for members of all such consortia and such experiments demonstrably work, the internal resources necessary for networks. But the biggest step forward forward-thinking governments — at least generating and using reports. of all in this area will come when the in the developed world — will swing into International Chamber of Commerce (ICC), action to ensure that best practice Finally, to set some of the likely outcomes representing a much larger number of spreads. of these trends in context, Figure 31 companies around the world, moves in the spotlights some of the risks and same direction. Stranger things have — Technology opportunities likely as the processes happened. New developments in information of report standardisation, market technology will make the job of consolidation, regulation and the accessing all of this information much integration of at least some forms of easier — and, in many cases, much non-financial and financial accounting more challenging for companies. and reporting proceed. 58 XBRL International is a not-for-profit consortium of approximately 250 companies and agencies worldwide working together to build the XBRL language and promote and support its adoption. www.xbrl.org
  • 50. Risk & Opportunity 48 Global Reporters 2010
  • 51. Risk & Opportunity 49 Global Reporters 2010 32 Beyond Frankenstein’s Monsters In Stage 2, there are clearly sacrifices to — Prioritisation be made in moving towards an integrated Sustainable development brings up a Stage 3 reporting is struggling to be born. report. Space in an annual report is prime raft of issues for most companies, so In response to the increasing burden of real estate, so the amount of space many get lost in the blizzard. Since reporting, a number of companies have available for sustainable development- space and stakeholder mindshare are begun to integrate their annual and related information is going to be limited. limited, indexing will be overtaken as a sustainability reports into one integrated While an integrated report will present central challenge by strategic priority volume. However, unlike an organ the information to a new set of setting. This is where the overlap with transplant where the donor organ and the stakeholders, particularly investors and corporate governance will be at its recipient are physiologically matched, shareholders, some Stage 2 audiences for most energetic, with boards most of today’s integrated annual and standalone triple bottom line reports risk increasingly drawn into the fray. sustainability reports are uncomfortable being left behind. For integrated Stage 3 combinations. Indeed, one of our analysts reporting to work, three things will be — Context exclaimed that analysing such reports was critical: Stage 3 reporting will see an expanded a bit like dealing with Frankenstein’s single bottom line, but developed and Monster. — Language ‘read’ in a wider context. Progress — Plain speaking is going to be key in or the lack of it — will need to be set Like Dr Frankenstein’s handiwork, stitched presenting sustainability information in in the context of wider societal goals, together from ill-matched parts and the integrated format, with an including government and sectoral sparked into life by a bolt of electricity, emphasis on mainstream language as targets, and the extent to which the first generation of integrated reports the connector between the two worlds. initiatives have the potential to ‘go to are not always pretty to look at. But the Say goodbye to ‘issues’ and ‘challenges’, scale’. field is likely to be jolted into action — say hello to ‘risks’ and ‘opportunities’. and life — as pressures for corporate But, inevitably, new jargon will also accountability grow alongside emerge as the processes of integration accelerating concern around issues like work through. One term that is winning climate change, an expanding range of wider currency, for example, is blended human rights, diverse health issues (from value.59 Like sustainability and HIV/AIDS and SARS through to obesity- materiality, blended value is something related diseases) and corruption. of a Holy Grail, but likely to be central to the Stage 3 era. 33 The Soup Starts to Bubble For years, we have been besieged by During the course of the 2004 benchmark software developers claiming to have round, we worked with California-based Early on in our work on corporate found the Holy Grail, the one-stop shop Natural Logic 61 to test our ICT sector reporting, we predicted that once a reporting software package. Our response results for evidence of real-world global soup of data on non-financial has been increasingly sceptical, but now performance improvements. Focusing in performance had formed, new species there are signs that real progress is on on British Telecom, Deutsche Telekom, HP, would evolve to feed on it. The socially the horizon. IBM, Matsushita Electric, Philips, Ricoh responsible investment (SRI) funds and Sony, the team found it possible to represent one life-form that has benefited First, there is the new XBRL language develop comparative time series data in from the growing availability of data, option, described on page 47. This open such areas as greenhouse gas emissions but in the process companies have source language will be used by growing and non-hazardous waste flows. begun to protest that they are inundated numbers of companies and consultants by questionnaires and other requests to draw together digital data on financial The next question: How accurate and for data. and non-financial performance into relevant are the results? This will need integrated packages. GRI, too, is planning further testing. But the process One solution proposed to tackle that to be totally digital by the 2006 underscored how critically important it problem comes from the London Stock guidelines revision. Meanwhile, an is for all reporting companies to provide Exchange (LSE), which hopes to centralise approach gaining traction is that normalised, sector-relevant information. data-gathering for UK-listed companies. advanced by OneReport, 60 which promises Inadequate data won’t stop analysts Useful, probably, but such institutions are to: cut the cost of reporting; streamline analysing, ranking and rating your often naturally conservative, which might reporting processes; and ‘deliver more company, but you may not like the blunt the pace of progress. So what might timely and accurate information the results of their work. drive the pace of continuing evolution? research and rating organizations deem Some clues are beginning as the ‘soup’ important’ to assessing your company. starts to seethe with new initiatives. 59 www.blendedvalue.org 60 www.one-report.com 61 www.natlogic.com
  • 52. Risk & Opportunity 50 Conclusions & Recommendations We stand on the threshold of a new era His latest environmental endeavour has Conclusions & in corporate disclosure, reporting and him involved in the move by eight US communication. Stage 2 experimentation in states, including New York, to sue five US Recommendations multidimensional reporting has taken root, power companies — responsible for 10% is spreading around the globe and — on the of US carbon dioxide emissions — to force basis of what companies tell us — is helping them to take action. drive real performance improvements. The Top 50 reports give us reason to be hopeful. Spitzer himself may be a hero or a loose cannon but, regardless, he stands ready to Provided the Global Reporting Initiative push companies where they are unwilling (pages 38—42) can resolve its challenges, or unable to go on their own. We need we are optimistic that it will continue to more champions like him and companies drive the spread of reporting — as will the ignore the Spitzer factor at their peril. 8 new integrity initiatives adopted by the UN Given the growing relevance of sustain- Global Compact for signatory companies, ability reporting to the fundamentals of A growing field of companies are making which include a strong encouragement to governance and business value, the stakes real progress in sustainability reporting, report according to the GRI guidelines.62 for reporters can only become higher. which is reaching critical mass. Now comes the hard part. But even if a company were to gain a perfect score against our methodology Ten Challenges (pages 17—19), this would still be no guarantee of the sustainability either of In 2002’s Trust Us we concluded that its immediate operations or of its wider there were two new priorities at that time: supply chain. Perfect scorers could also be integration and materiality. As this report blind to the second element of our title, noted above, we do sense the potential Opportunity. for real progress on both of these fronts. To help the reporting community think Although the current challenges cluster through what needs to be done before around issues of risk, governance and 2010, here are ten challenges we see as materiality, the longer term challenge will vital to shaping the reporting agenda: be to position companies, their business models and their upstream and downstream 1 activities to exploit market opportunities Keep up the momentum created by sustainable development in a While the Top 50 and Other 50 include timely, efficient and effective manner. plenty of exciting new reports — from a wide range of sectors and world regions — there is no guarantee that the trend will Enter Spitzer continue, or strengthen much further. Market conditions must continue to Voluntary reporting, by promoting demand and reward reporting — and begin competition, has driven progress, but to do so where this motivation is currently voluntarism will never be enough on its absent. This will require effort on the own. And in some quarters, patience is multiple fronts of disclosure, reporting already wearing thin: witness the often and communication. breathtaking audacity of New York Attorney-General Eliot Spitzer, one of the leading proponents of the law as an agent of social change. Perfect scorers could also be blind to the second element of our title, Opportunity.
  • 53. Risk & Opportunity 51 Conclusions & Recommendations 2 5 But wider risk management issues, Clarify and consolidate the language Keep up the effort on the economic including threats to business continuity, We must watch our words. Philips, for bottom line are creeping in (see Natura). This is hugely example, says its report deals with the A number of reporters address the important to engaging the financial sector ‘full spectrum of triple bottom line economic bottom line, but this is still — and the corporate mainstream — around activities’ which, it argues, are ‘also known frontier country. Diageo discusses economic issues of sustainability. as sustainable development, corporate impacts at some length and companies social responsibility (CSR), corporate like Novo Nordisk now devote substantial 9 citizenship, corporate responsibility, space to the economic agenda. That said, Corporate governance is the big issue — corporate accountability or ‘people, planet, the relevant concepts, indicators and and there’s nothing simple about it profit’’. While individual companies may be expectations need considerably greater Recent events have driven key corporate more comfortable with some terms than clarity and practical application for competencies, culture and decision-making with others for reasons of their own history companies to respond to them effectively. to the top of the agenda for many and culture, the assumption that they are observers. But current approaches to one and the same potentially breeds 6 understanding and reporting on governance confusion and suspicion. Broad agreement Explore the business case — but are simplistic and risk missing the point. on the language and concepts is of recognise that it is a limited tool Clarifying what behaviours and skills boards paramount importance. A growing number of reporters dedicate and executives need to lead successful, significant space to the business case for accountable companies represents a 3 action. We welcome this trend, and see it tremendous opportunity space. Communication begins where as essential to capturing the attention of reporting ends management and analysts alike. However, 10 One clear impact of the GRI guidelines the business case in a simplistic sense The framework of standards, codes and has been to encourage more reporters to will never capture the full complexity of norms must be tightened include more detailed indexes in their business value. Continued research is While initiatives such as the GRI, AA1000, reports — Westpac, Barclays and HP are needed on this front, in parallel with efforts the Global Compact and Kimberly Process some of the leading indexers in this year’s to develop more sophisticated notions of may individually enjoy a degree of success, crop. This makes it easier for users looking value, wealth and sustainability. their impact will be vastly expanded by for specific information to find what they closer alignment. In addition, the different need. But the next stage will require 7 roles for voluntary schemes, mandatory companies to take their reports back The growing focus on governance requirements of all sorts, and professional to their constituent messages, and find and value drivers will lead to more services such as assurance need clarity elegant and effective ways to bring these advanced business models and a greatly improved body of evidence messages to key users. The one-stop-shop Various companies in the Top 50 discuss to go beyond niche practices. report serves a purpose, but a limited their business models, including HP and one, given that most users need more Novo Nordisk. Greater detail and targeted communication. sophistication around business impacts In terms of the bigger picture, we conclude will eventually lead to the need to explore that the transition to Stage 3 disclosure, 4 at a more fundamental level how a reporting and communication will be Internet reporting must become company’s basic design generates value. well under way by 2010. Indeed, a few more functional Understanding business models is key to leadership companies are already talking It is clear that the rapid rise of internet- assessing sustainability. in terms of significant innovations in this based reporting hasn’t wiped out printed area in their 2005 reports. reports — nor is it likely to anytime soon. 8 However, most reporters’ internet-based Talk to the financial markets in language The crux of the matter will be that these reports offer little in the way of they understand companies will increasingly try to integrate functionality over their hard-copy brethren. It’s a rare report these days, at least among their financial and non-financial thinking But there is great potential to make our Top 50, that doesn’t devote a fair and decision-making, in order better information more accessible and usable amount of space to the socially responsible to understand and manage the dynamics to ‘data-miners’ using tools like XBRL investment sector’s view of the relevant of both. (page 47). company. 62 SustainAbility & UN Global Compact, Gearing Up, 2004.
  • 54. Risk & Opportunity 52 Conclusions & Recommendations Recommendations Corporate Responsibility and Sustainability Professionals We offer the following recommendations for several groups of people who will play 6 Boards central roles in building the Stage 3 Encourage your CEO, board and chief agenda — and in making it an everyday financial officer (CFO) to review the business reality. company or organisation’s disclosure, reporting and communication strategy in the context of the trends and expectations CEOs and Corporate Boards reviewed in Risk & Opportunity. 1 Test 7 Risk Assess whether your company or Help your internal risk management people organisation’s professionals and business to identify and prioritise the main non- units are responding to the most material financial risks. Try applying the Materiality priorities — and whether they understand Multiplier (page 35) to your reporting. and can respond to the emerging risk assessment, reporting and assurance 8 Opportunities agendas. Engage your business development people to understand the relevant opportunity — 2 Embed and growth-related thinking in your Ensure that emerging priorities are reporting and communication — and in adequately addressed in balanced other key areas of the business. scorecards and other incentive schemes. Investors and Other Stakeholders CFOs and Investor Relations 9 Respond 3 Rethink Read at least a sample of Top 50 reports Work out how to blend your company or in sectors of interest. Compliment and organisation’s non-financial accounting, challenge reporting companies. Given the reporting and assurance activities with its relatively low rates of response to reporting mainstream financial counterparts. companies, even small numbers of informed comments can have major impacts. 4 Review Learn from the latest rating tools — such 10 Encourage as the risk assessment frameworks used Pressure companies to report on non- by financial analysts — to evaluate your financial risks and opportunities with (at disclosure, reporting and communication least) the same rigour as they conduct their activities. traditional financial reporting. Compliment them when they do — and encourage non- 5 GRI reporters to begin the process. Help build the infrastructure by getting actively involved in the development of the Global Reporting Initiative (pages 38—42), ensuring that it maintains momentum and that its work meets the needs of financial stakeholders and other users. And, finally, if there were to be an ‘Eleventh Commandment’, it would probably be: Remember that reporting is a necessary condition for engagement and action, not a substitute.
  • 55. SustainAbility Clients 2002—2004 Publication Details Interviewees Roger Adams Top 50 / Other 50 Engaging SustainAbility Risk & Opportunity: Bill Boyle Companies Stakeholders Clients Best Practice in Non- Dianne Humphries Members Financial Reporting Chris Tuppen First Edition 2004 Jeroen van der Veer ABB Member ISBN 1-903168-12-0 Simon Zadek Abbott Laboratories Member Client ABN Amro Real Client © 2004 SustainAbility Ltd and the Review Team Alcan Client United Nations Environment Sir Geoffrey Chandler Allianz Group Programme (UNEP). All Rights George Dallas Anglo American Member Client Reserved. No part of this Franceska van Dijk Aracruz Celulose Client publication may be reproduced, Cornis van der Lugt Aventis Client stored in a retrieval system or Bob Massie BASF Member Client transmitted in any form or by Sophia Tickell Baxter Member any means: electronic, BHP Billiton Member electrostatic, magnetic tap, Producer / Editor BP Member photocopying, recording or Nick Robinson Bristol-Myers Squibb Member otherwise, without permission BT Group Client in writing from the copyright Proof Reading Canon Client holders. Designations employed Susannah Wight Chiquita Brands International Member Client and the presentation of s.wight@ntlworld.com City West Water material in this publication do DaimlerChrysler Client not imply the expression of any Information Design Deutsche Telekom Member opinion whatsoever on the part Rupert Bassett Ford Client of UNEP concerning the legal T +44 (0)7958 629 290 Gaz de France Client status of any country, territory, General Motors Member city or area or of its frontiers or Photography HP Member Client boundaries. Moreover, the views Jeroen van der Veer portrait ING Group Client expressed do not necessarily by Shell Photographic Services, Intel Corporation Member represent the decision or the Shell International Limited Mirant Member stated policy of UNEP nor does Novartis Member Client citing of trade names or Paper Novo Nordisk Member Client commercial processes 130gsm Revive Silk Philips Member constitute endorsement. 75% de-inked Royal Dutch / Shell Group Member Client post-consumer waste SABMiller Member Client Writing Team 25% mill broke. Sony Client John Elkington Starbucks Coffee Company Member Client Judy Kuszewski Print Statoil Client Nick Robinson Calverts Co-operative Suez Client Peter Zollinger T +44 (0)20 7739 1474 Swiss Re Member Client Telecom Italia Client Report Benchmarking Publisher The Dow Chemical Company Member Client Daniel Bussin SustainAbility Ltd Toyota Motor Corporation Client Ishani Chattopadhyay 20—22 Bedford Row Unilever Client Susanna Jacobson London WC1R 4EB VanCity Client Therese Nicklasson United Kingdom Volkswagen Member Client Patrin Watanatada T +44 (0)20 7269 6900 F +44 (0)20 7269 6901 www.sustainability.com In the interests of full disclosure, we have indicated which of the reports in the Top 50 and Other 50 are from SustainAbility’s Engaging Stakeholders program members or are clients.
  • 56. Sponsors ABN Amro Credit Suisse Co-operative The Co-operative US EPA’s Climate Ford Motor Insurance Society Bank Leaders Program Company Johnson & Johnson Novo Nordisk Rohm and Haas Shell Starbucks Coffee Telecom Italia Company Major Sponsor Pfizer Standard & Poor’s SustainAbility Ltd United Nations Environment 20 Canada Square 20—22 Bedford Row Programme — Technology, Industry London E14 5LH London WC1R 4EB and Economics Division United Kingdom United Kingdom 39—43 Quai André Citroën T +44 (0)20 7826 3800 T +44 (0)20 7269 6900 75739 Paris Cedex 15 France F +44 (0)20 7826 3790 F +44 (0)20 7269 6901 T +33 (0)1 4437 1450 www.standardandpoors.com www.sustainability.com F +44 (0)1 4437 1474 www.unepie.org

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