The Global Reporters
           2004 Survey of Corporate
           Sustainability Reporting




Risk & Opportunity
Best P...
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                                     Risk & Opportunity is The Global Reporters 2004
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Risk

  1. 1. The Global Reporters 2004 Survey of Corporate Sustainability Reporting Risk & Opportunity Best Practice in Non- Financial Reporting
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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