Two questions (for two papers)

amhs2000

07._ch_9.pdf

Home >Business & Finance homework help >Management homework help >Two questions (for two papers)

chapter 9

External sustainability reporting and verification

It is critical to collect and analyze information on sustainability for improved resource allocation decisions. This information should then be included in internal sustainabil- ity reports to improve managerial decision-making regarding processes and products. How companies perform on sustainability is also an important factor for external stake- holders since they are affected by corporate strategies and actions. Sustainability disclo- sure is valuable because it helps a company demonstrate that it is managing its risks and has a track record of paying attention to its sustainability performance. Surveys reveal that a positive sustainability reputation adds an extra layer of protection, leads to higher total returns, and such companies are more likely to enjoy a lower cost of capital. The 2011 global survey by the CDP (Carbon Disclosure Project), for example, reported that companies in its CDLI (Carbon Disclosure Leadership Index) and CPLI (Carbon Performance Leadership Index) provided double the average total return of the Global 500 between January 2005 and May 2011.1

The empirical evidence to date most strongly suggests that:

l The average investor is paying attention to sustainability when things go wrong and the company is in the limelight and usually under duress

l It is likely that the investor reaction to negative sustainability events will con- tinue to increase as more investors pay attention and increasingly understand what these events can mean for a company

l Disclosure of sustainability performance can partially protect against drops in shareholder value when things do go wrong2

For this reason, all elements of the Corporate Sustainability Model (inputs, processes, outputs, and outcomes) should be measured and reported for improved management decisions and actions and for improved accountability to stakeholders.

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 9/19/2014 6:02 PM via COLORADO STATE UNIVERSITY - GLOBAL CAMPUS AN: 642566 ; Epstein, Marc J., Rejc Buhovac, Adriana.; Making Sustainability Work : Best Practices in Managing and Measuring Corporate Social, Environmental, and Economic Impacts Account: ns125356

9. external sustainability reporting and verification 225

Massey Energy: stock price reaction to poor safety

On April 5, 2010, there was an explosion at Massey Energy’s Upper Big Branch mine in Montcoal, West Virginia, killing 29 miners. At that time, Massey Energy was the fourth largest producer of coal in the US and the largest coal producer in Central Appalachia. The stock fell 11% on April 6, and by the end of April was down by 33%. Facing estimated costs of US$80–150 million to compensate the families of the fallen miners and pay insurance deductibles and possible legal fees, as well as about US$62 million worth of equipment and mineral rights impacted by the disaster, Massey’s financial performance deteriorated rapidly. As evidence of a poor safety record was unearthed, pressure on senior management increased, leading the CEO Don Blankenship to retire in December 2010. On January 28, 2011, shareholders of Alpha Natural Resources—known for a focus on safety—agreed to buy Massey Energy for US$7.1 billion, and the stock price jumped 10%. The Massey accident brought the consequences of shortchanging safety for the sake of profit to the fore in the coal mining industry, which has since been in decline due to cheap natural gas and increased regulation.3

Various pressures have caused companies to increase their social, environmental, and economic disclosures in corporate annual reports, and the quantity and quality of disclosure in separate environmental, social responsibility, or sustainability reports. Corporate responses to increased stakeholder demands for information on corporate sustainability performance vary widely. Some companies have issued social and envi- ronmental reports for each operating division or geographic area, some for the entire corporation only, and some have included this discussion in corporate annual reports. In the Fortune Global 250 study, 20% of the companies included a sustainability section in their annual reports, while 54% published a separate sustainability report.4 Another study by SIRAN (Social Investment Research Analysts Network) found that:

l 79% of the S&P 100 companies have sections on their websites for sharing sustainability policy and performance information

l In 2005, a dozen new companies issued sustainability reports for the first time

l Forty-three of the S&P 100 companies issue annual sustainability reports5

Many reports began as only environmental reports; however, more companies have broadened their reports to include social and economic issues as well. Also, more com- panies are including governance and legal aspects in their reports. One of the first sustainability reports was published in 1998 by Royal Dutch Shell—Profits and Princi- ples: Does There Have to Be a Choice?—with an unprecedented level of information on environmental, social, and governance issues. Along with the sustainability reporting and the GRI (Global Reporting Initiative), the mid-1990s were also characterized with another movement—integrated reporting. The integrated reporting movement empha- sizes integrating sustainability information in annual reports showing their impact on each other. More than 80 of the world’s largest global companies are piloting integrated reporting, including Coca-Cola, Microsoft, Volvo, Philips, and Unilever. Novo Nordisk,

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

226 making sustainability work 2

the Danish pharmaceutical company, has been issuing integrated reports since 2005, and the US-based United Technologies Corporation, a US$60 billion revenue diver- sified company that provides high-technology products and services to the building and aerospace industries, has done so since 2009.6 Unlike GRI, which developed into global sustainability reporting standards adopted by the majority of S&P 500 compa- nies, actual standards for integrated reporting are under development (for more on the standards for sustainability reporting, see the subsequent section).

The rise in reporting of sustainability performance goes hand-in-hand with stake- holders’ demands for reliable and credible information from management. Managers and external stakeholders must have the information they need to make better deci- sions, and it is important that the information is of high quality, reliable, relevant, and intelligible to likely readers. To provide confidence among stakeholders, companies should demonstrate that the sustainability performance metrics disclosed are integral and representative of actual efforts and achievements. General Mills, the American food giant, explained in its 2010 CSR report why the company did not meet its kilo- watt hours of energy per metric ton of production. Its energy consumption has incre- mentally decreased over the past few years, but General Mills experienced a surge in demand for breakfast cereals and granola bars. The products General Mills makes today are cooked or toasted, which requires more energy than when the company first started measuring its overall energy usage. And they are also less dense, which skews energy use per metric ton of production upward.7 A 2005 survey of stakeholders indicated that formal external verification was the most important factor contributing to credibility.8 It can improve the reliability of the information and the accountability to stakeholders.

In this chapter we will look at:

l The standards for sustainability reporting

l The content, format, and distribution of reports

l External disclosure of sustainability measures

l Verification

l Internal and external sustainability auditing

Standards for sustainability reporting

GRI The most prominent approach to standardized environmental reporting began with Ceres (originally Coalition for Environmentally Responsible Economies). Ceres is a nonprofit organization composed primarily of public-interest groups, social invest- ment professionals, and environmental groups promoting responsible activity. The Ceres Principles were an attempt to standardize information and emphasized the importance of both internal and external evaluations of sustainability performance.

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 227

Spearheaded by Ceres in partnership with UNEP (United Nations Environment Program), the GRI was established in 1997 with the mission of developing globally applicable guidelines for reporting on the economic, environmental, and social per- formance of corporations, governments, and NGOs. GRI incorporates the active par- ticipation of corporations, NGOs, accountancy organizations, business associations, and other stakeholders from around the world.

First released in 2000, the GRI’s Sustainability Reporting Framework provides guidance for disclosure about sustainability performance, and gives stakeholders a framework to understand disclosed information. The GRI’s Sustainability Report- ing Guidelines represent the first global framework for comprehensive sustainability reporting. Launched in 2011, G3.1 completed the content of the G3 guidelines released in 2006. G3.1 featured expanded guidance on local community impacts, human rights, and gender. In May 2013, GRI launched its latest version of reporting standards, the G4 guidelines. The main features of the G4 guidelines include an emphasis on what is material, which encourages organizations to provide only information that is criti- cal to their business and stakeholders. This means organizations and report users can concentrate on the sustainability impacts that matter, resulting in reports that are more strategic, more focused, more credible, and easier for stakeholders to navigate. Other important features include up-to-date disclosures on governance, ethics and integrity, supply chain, anticorruption and GHG emissions, and a generic format for disclosures on management approach. GRI will continue to recognize reports based on the G3 and G3.1 guidelines for up to two full reporting cycles. However, reports published after December 31, 2015 should be prepared in accordance with the G4 guidelines.

The GRI’s framework consists of the Sustainability Reporting Guidelines and Sector Guidance. The guidelines assist in the preparation of sustainability reports by organi- zations, regardless of their size, sector, or location. The guidelines offer an interna- tional reference for all those interested in the disclosure of governance approach and of the environmental, social, and economic performance and impacts of organizations. The guidelines are useful in the preparation of any type of document which requires such disclosure.9

Although it is critical to report performance to stakeholders, companies must first develop a strategy to implement sustainability. External reporting can provide impor- tant feedback but should be seen as part of credible accountability rather than merely a public relations exercise. The primary focus should be on improving sustainability and financial performance and then reporting on progress to various internal and external stakeholders.

IRIS, GIIRS, and B Lab A growing community of impact investors, who deliberately invest for social and environmental impact, cannot fully evaluate impact investment with GRI. The NCIF (National Community Investment Fund) and the IRIS (Impact Reporting and Invest- ment Standards) initiative managed by the GIIN (Global Impact Investing Network), a US-based nonprofit organization, have harmonized their respective metrics to increase impact investors’ use of standardized social metrics. The resulting IRIS provide a com- mon reporting language for impact-related terms and metrics. By defining terms,

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

228 making sustainability work 2

impact reporting is consistent (for example, it stipulates how to calculate a metric ton of carbon), and it also serves as a repository of aggregated IRIS-compliant data to enable benchmarking across companies. Funds and direct investors can use these standards to credibly track and report social and environmental performance, and companies raising capital can attract investors by measuring and reporting both financial and non- financial performance by IRIS performance measures.10

Impact investors increasingly require an independent third-party impact rating to make investment decisions. IRIS does not provide an overall impact rating for com- panies or funds, or comparability among alternative investment opportunities. GIIRS (Global Impact Investing Rating System), on the other hand, is a comprehensive and transparent system for assessing the social and environmental impact of market com- panies and funds with a ratings and analytics approach. GIIRS uses IRIS definitions whenever a metric in the IRIS taxonomy corresponds to the metric being assessed in a GIIRS rating. GIIRS offers a company seeking investment capital a rating of its social and environmental impact, including: (1) an overall rating; (2) ratings in approximately 15 subcategories; (3) key performance indicators (KPIs) relevant to the company’s industry, geography, size, and social mission; and (4) benchmark data highlighting a company’s performance as compared to its peers.11

GIIRS is powered by B Lab, a US-based nonprofit that leads the initiative of build- ing a community of Certified B (Benefit) Corporations. Certified B Corporation is a certification conferred by B Lab and declares that a company has met a high stand- ard of overall social and environmental performance.12 Through the leadership of the community of certified B Corporations, laws have been passed in 19 states (as of July 2013) creating a new type of corporation—the Benefit Corporation—that best meets the needs of entrepreneurs and investors seeking to use business to solve social and environmental problems. Benefit Corporations operate in the same way as traditional corporations but with higher standards of corporate purpose, accountability, and trans- parency. They give business leaders legal protection to pursue a higher purpose than profit, and they offer investors and the public greater transparency to protect against pretenders. Benefit Corporation is thus a legal status administered by the state. Benefit Corporation legislation requires officers and directors to consider all stakeholders in major business decisions, and it provides increased accountability. Each state’s legisla- tion differs somewhat from the model Benefit Corporation draft, but all of them meet the bar of providing for an overarching general public benefit obligation, accountabil- ity to all stakeholders, and impact transparency. While certified B Corporations have access to a portfolio of services and support from B Lab, Benefit Corporations do not. Benefit Corporations, however, do not need to be certified.

California’s B Corp legislation took effect alongside a new law creating the FlexC (Flexible Purpose Company), which allows a firm to adopt a specific social or environ- mental goal, rather than the broader obligations of a B Corp. Another option in North America is the low-profit limited-liability (L3C) company, which can raise money for socially beneficial purposes while making little or no profit.

In South America, Sistema B has been established in 2012 in partnership with B Lab to certify South American social enterprises called Empresa B.13

B Lab also has partners setting up their own B Lab offices in Canada (MaRS Discov- ery District), Australia (Small Giants and Net Balance), and in Europe.

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 229

SASB and IIRC While GRI is global and provides hundreds of generally applicable indicators, for selection by the reporter in preparing a sustainability report, sustainability accounting standards are US-focused and industry specific, designed for use in integrated disclo- sure in the Form 10-K and 20-F. These standards are being developed by the SASB (Sustainability Accounting Standards Board), a US-based nonprofit, and will enable comparison of peer performance and benchmarking within an industry. SASB is cur- rently developing standards for 88 industries in ten sectors.

The key objective of integrated reporting is to demonstrate the linkages between an organization’s strategy, governance, and financial performance and the social, envi- ronmental, and economic context within which it operates. The IIRC (International Integrated Reporting Council), a global coalition of regulators, investors, companies, standard setters, the accounting profession, and NGOs, is leading the creation of the globally accepted International <IR> (Integrated Reporting) Framework that elicits from organizations material information about their strategy, governance, perform- ance, and prospects in a clear, concise, and comparable format.14

Industry guidance on sustainability reporting GRI’s sector supplements are versions of the Sustainability Reporting Guidelines tailored for specific industry sectors which make reporting more relevant and user- friendly for organizations in diverse sectors. Sector supplements have been developed for ten different sectors: airport operators; construction and real estate; electric utili- ties; event organizers; financial services; food processing; media; mining and metals; NGOs; and oil and gas. GRI’s recommendation is to use sector guidance when prepar- ing a sustainability report, if available. The contents of the ten GRI sector supplements available by May 2013 have been reorganized to fit the G4 guidelines’ content, struc- ture, and requirements. It is presented in the May 2013 GRI sector disclosures docu- ments, in a new format, to facilitate its use in combination with the G4 guidelines.15

In addition to GRI’s sector supplements, there is also industry-specific guidance on sustainability reporting, such as Oil and Gas Industry Guidance on Voluntary Sustain- ability Reporting, which does not establish an industry standard but rather serves as a resource for interested companies. It was established by IPIECA (the former Interna- tional Petroleum Industry Environmental Conservation Association, now the global oil and gas industry association for environmental and social issues), API (American Petroleum Institute), and OGP (International Association of Oil & Gas Producers) in 2005 and revised in 2010. The guidance is designed as a “stand-alone” reference tool and differs from GRI G3 guidelines in four ways. First, it is designed to provide flex- ibility to meet the reporting needs of a variety of organizations in the petroleum indus- try, such as multinational majors, national oil companies to smaller international and domestic companies. Second, the guidance captures industry consensus on the mate- rial sustainability issues faced by oil and gas companies, accompanied by appropriate

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

230 making sustainability work 2

indicators and reporting elements for these significant issues. Third, the guidance shares oil and gas industry-specific good practice, including greater technical depth on quantitative performance tracking, particularly on environmental, health and safety issues, with practical options for qualitative reporting, especially on economic and social issues. Fourth, it is aligned with recommendations from other good practice and guidance documents published by IPIECA, API, and OGP for their members.16

Let everyone know how you’re doing For years, reporting was often based on mistrust, as senior management questioned the willingness of outsiders to handle corporate information responsibly.17 Today, the premise is not just that senior management should base their reporting communica- tion policy on trust in order to be more accountable; organizations can also expect tan- gible benefits from fair and broad disclosure of sustainability outputs and outcomes. Different groups have interests in disclosure:

l Owners primarily rely on financial reporting to assess the current financial condition of the organization, its financial performance over time, and its prospects. However, current and prospective owners have interests beyond the relative transparency of an entity’s material costs and liabilities, and expect information on all organizational issues, including sustainability

l Creditors have a particular vested interest in complete and timely disclosure of organizational risks, to assess credit risks and potential joint liability for loans secured by, for example, contaminated properties

l The list of external audiences for sustainability reporting also includes cus- tomers, suppliers, and communities (interest groups, media, the scientific community, and the general public)

Communication with stakeholders or investor relations is one of the most impor- tant corporate governance aspects investors monitor before making an investment.18 Public-interest groups and customers have also gained senior managers’ attention. Organizations see increasing pressure for greater transparency, mandatory or volun- tary, and a better alignment of externally reported information with the information that is reported internally to senior management for decision-making. Stakeholders expect and demand increased sustainability disclosure to improve both monitoring and decisions. This requires effective external reporting of the social, environmental, and economic issues the organization is facing, and of the management team’s plans to capitalize on emerging opportunities or to minimize the risk of failures.

There are corporate accounting methods that can be used to hide social, environmen- tal, and economic liabilities in reports. They include hiding big issues in the footnotes, delaying the quantification of liabilities, avoiding meaningful qualitative disclosure, disaggregating social, environmental, and economic liabilities, and employing artificial time horizons.19 Each of these methods is legal but can be used to keep important and

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 231

material information from stakeholders. However, leadership companies will want to disclose information on social, environmental, and economic liabilities in a way that is accessible and comprehensible to stakeholders.

To increase transparency and stakeholder trust, organizations may want to disclose broader organizational outputs and outcomes to external audiences. This approach may be especially important, because external constituents expect disclosure of how the organization is prepared for and manages sustainability. With appropriate sustain- ability structures and processes, organizations can enhance corporate image and win the trust and loyalty of those outside the organization: customers, shareholders, suppli- ers, and others they depend on to conduct business. The content, format, placement, distribution, and communication of external reports are important considerations in an organization’s reporting framework.

The content of external reports When deciding what to report externally, managers should choose from the data that it has already collected for its internal reports. A study found that stakeholders, par- ticularly social investors, prefer indicators that are simple, easily collected, and readily available.20 The UN Global Compact recommends that companies use measurement and reporting systems already in place and report only some of that information to stakeholders. The ISO 14031 standard makes no recommendations about which met- rics a company should use or report. However, it lists almost 200 topics from which companies can select metrics that comprehensively describe their sustainability impacts. But companies must take care to be selective and balance a desire for more complete information with a need to keep it understandable and useful. In many cases, the presented data is so extensive that it is difficult to get a clear understanding of sus- tainability performance.

Generally, senior management must assure stakeholders that sustainability pro- cesses and impacts are well managed. External information users recognize that lead- ing nonfinancial performance measures should link strongly to the organization’s future performance. Key input, process, and output measures are leading indicators, and can be used to forecast future results. For example, fines and penalties may be a leading indicator of corporate reputation, the amount of a company’s toxic emissions suggests future environmental costs, and employee turnover is a leading measure of future recruitment and training costs.

Some companies are reluctant to report internal performance indicators, especially if the news is not entirely favorable. However, just as the disclosure of information in corporate reports can signal good performance, it can also be used to soften the impact of poor performance. Companies reporting a deficiency can use the opportunity to discuss steps they have undertaken to improve performance. And disclosures should reflect the results of past sustainability performance as well as the strategies and sys- tems in place to improve future performance. Once they begin to increase their volun- tary disclosure, companies are acknowledging their acceptance of greater responsibility and accountability on an ongoing basis, engendering trust and building credibility with stakeholders—whether the news is good or bad. That credibility is important to all stakeholders, including investors who value improved information for decision-mak- ing. For example, Bayer, a global healthcare enterprise headquartered in Germany with

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

232 making sustainability work 2

over 100,000 employees, disclosed in its sustainability report not only environmental incidents and transport accidents that are classed as major ones, but also incidents that came to the attention of stakeholders (Table 9.1).21

Location of the incident Description Explanation

1 Bayer MaterialScience, Tarragona, Spain

January 11, 2012 Leak in gas pipeline

During roadworks at the production site, a digger damaged a gas pipeline and caused a leak. This was plugged by an emergency team. No one was hurt and there was no environmental damage.

2 Bayer CropScience, Haelen, Netherlands

March 31, 2012 Fire in operations room of Research & Development (R&D) Department

In an operations room in the R&D building, a faulty freezer cabinet caused a fire. The fire protection measures were initiated right away. The fire depart- ment extinguished the fire immediately. No one was hurt and there was no environmental damage.

3 Bayer MaterialScience, Krefeld-Uerdingen, Germany

April 3, 2012 Burst waste gas line

For reasons still unknown, a waste gas line in the nitro-benzene wastewater treatment plant burst under pressure. No one was hurt and there was no environmental damage.

4 Bayer MaterialScience, Dormagen, Germany

May 14, 2012 Deflagration

A deflagration occurred in a hydrogen drying tower. The building sustained material damage, but no one was hurt. No substances were released into the environment.

Table 9 .1 Bayer discloses environmental incidents and transport accidents observed by stakeholders

Source: Excerpt from Bayer (2012) Sustainable Development Report

There is growing consensus that external sustainability reports should contain more comprehensive information than just that required by regulatory agencies. Stakehold- ers say they want to see human rights, energy- and eco-efficiency, and health and safety in reports (see Fig. 9.1).

A five-part test devised by Zadek and Merme can help to decide what information a company should disclose.22 The five areas cover the following areas for disclosure:

1. The report covers the traditional direct short-term financial impacts of sus- tainability performance, such as carbon emissions

2. The company discloses performance associated with declared policies, regard- less of short-term financial consequences

3. The company discloses similar information of its market peers

4. Stakeholder concerns are addressed. Are companies disclosing information that is likely to impact stakeholder behavior?

5. Aspects of performance that might not be currently regulated but could be regulated in the future are discussed

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 233

Selection: “very important" (data in %) n = 495

Human rights

Energy-/eco-efficiency

Health & safety

Climate protection

Environmental management of the production process

Environmental policy

Corporate governance

Standards in developing countries

Environmental management system

Avoiding soil and water contamination

Bribery and corruption

Supply chain standards for social issues

Environmentally sensitive design

Waste treatment/recycling

Equal opportunities

Social policy statements or guidelines

Business case for CSR

Education and training

Risk management

Consumer protection

Sources of energy used

Freedom of association

Use of natural resources by suppliers

Research and development

Macroeconomic aspects of business activity

Quality management

Corporate citizenship

Basic business/financial information

Demonstration of value-added chains

Investments/ shareholdings

61.4%

61.0%

60.4%

59.4%

58.9%

58.8%

56.8%

56.6%

53.9% 53.9%

52.7%

51.1%

50.7%

49.5%

49.1%

48.9%

48.5%

48.3%

46.9%

46.1%

43.2%

40.0%

39.6%

38.2%

35.2%

34.7%

34.5%

33.5%

33.3%

26.3%

Figure 9 .1 CSR issues in reports: what stakeholders want to see

Source: Pleon (2005) Accounting for Good

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

234 making sustainability work 2

This five-stage test provides a basis for determining what information is material. Stakeholders and corporate managers can apply it to see how the company’s reporting is evolving and where it needs to go in the future.

The content of external sustainability disclosures should be customized to the com- pany context and issues. For example, the supply chain and employer relations are intently watched in the apparel and sporting goods industry. Nike was the first com- pany in its industry, in 2005, to provide a complete list of the factories that it contracts with to make Nike brand products, detailing the number of employees, workforce information, as well as addresses and contact information.23 Similarly, adidas Group reports results from its factory audits, including number of audits divided by region and type (Table 9.2), number of warning letters issued (Table 9.3), and number of busi- ness relationship terminations (Table 9.4) . The company also reports the number of training sessions given to suppliers to help them comply with adidas health, safety, and labor standards, and key labor noncompliance findings.24

Companies often provide information that enables analysis against targets or other benchmarks such as industry standards. They can also provide data that compares performance over time. In both cases, and especially in the latter, it is particularly important to provide some guidance to the reader to aid in evaluating the impact and relevance of the disclosure (for example, the effect of emissions on the community).

Other information reported by companies includes:

l Inputs, such as material, energy, and other natural resource use

l Processes, such as management systems and policies, including goals, targets, and accountability systems; risk management methods, accident and safety data, and stewardship practices; product data such as life-cycle analyses, product-packaging changes, and remanufactured products

l Outputs, such as waste and emissions, stakeholder identification, social, envi- ronmental, and economic impacts and concerns, and stakeholder reactions

l Outcomes, such as financial data on reactive versus proactive spending, capi- tal and operational expenditures, charitable contributions, and costs avoided

Increasingly, companies are indicating specifically when they are reporting GRI indi- cators. With the GRI Content Index included at the end of the report, a company lists every G4 guidelines’ disclosure addressed in its report. It communicates which GRI disclosures have been reported, and the reason why certain disclosures have not been reported. The Index is a gateway for finding all reported sustainability information. It should have clear and direct referencing and, if used online, can be an interactive navi- gation tool. By using the Index, report users should easily find the specific GRI data of interest. In its 2012 Sustainability Report, Volkswagen Group takes full account of the reporting guidelines of the GRI. Selected indicators and the degree to which they are reported are disclosed as shown in Table 9.5.

To confirm the amount of GRI standard disclosures a company has addressed in its sustainability report, companies can apply for GRI Application Level Check. GRI thus confirms that a sustainability report has the required set and number of disclosures to meet the organization’s self-declared Application Level. Table 9.6 shows a State- ment of the GRI Application Level Check for Volkswagen Group’s Sustainability Report 2012. It states that Volkswagen Group’s Sustainability Report 2012 fulfils the require- ment of Application Level A+. Application Level A, intended for advanced reporting

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9 . external sustainability reporting and verification

235

Table 9 .2 Number of supplier audits in adidas Group in 2012

Source: adidas Group (2012) Sustainability Progress Report: Performance Counts

Table 9 .3 Number of warning letters issued to adidas Group suppliers in 2012

Source: adidas Group (2012) Sustainability Progress Report: Performance Counts

Co py ri gh t © 2 01 4. B er re tt -K oe hl er P ub li sh er s. A ll r ig ht

s re se rv ed . Ma y no t be r

ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

236 m aking sustainability w

ork 2

Table 9 .4 Number of business relationship terminations in adidas Group in 2012

Source: adidas Group (2012) Sustainability Progress Report: Performance Counts

Co py ri gh t © 2 01 4. B er re tt -K oe hl er P ub li sh er s. A ll r ig ht

s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

9. external sustainability reporting and verification 237

Table 9 .5 Volkswagen Group’s Sustainability Report 2012 includes GRI Content Index

Source: Excerpt from Volkswagen Group (2012) Sustainability Report

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

238 making sustainability work 2

organizations, applies to sustainability reports of companies that have executed a thor- ough materiality process in consultation with their stakeholders. As a result, these reporters are able to “report or explain” to the fullest extent (all profile disclosures, all disclosures on management approach, and all core performance indicators). “+” reveals that Volkswagen Group has had its reporting externally assured (Fig 9.2).

Disclaimer:

SStatattememeemennntttt

GRI hereby y sstates that has presentnted its rreport “Suep stainability lity Report 2012”201 to GRI’s

2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013

Figure 9 .2 GRI Statement of the GRI Application Level Check for Volkswagen Group’s Sustainability Report 2012

Source: Volkswagen Group (2012) Sustainability Report

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 239

The format of external reports How long should a sustainability report be? The most important thing is that compa- nies should provide stakeholders with all pertinent information. A survey of stakehold- ers (Fig. 9.3) found that, if a sustainability report has the appropriate content, then length doesn’t matter. However, more than 60% of the respondents disliked reports of more than 50 pages. The survey also found that two-thirds of respondents spend no more than 30 minutes and most read only selected parts, so companies should highlight the parts that they really want stakeholders to pay attention to. This would probably be a clear and concise discussion of sustainability performance and important processes and outputs in language written for a general audience. Additional detail can be included where appropriate.

Up to 15 pages

16–30 pages

31–50 pages

51–80 pages

81–100 pages

The length doesn’t matter

Not specified 1.8%

1.8%

7.9%

27.9%

24.0%

25.9%

10.7%

Figure 9 .3 Length of sustainability report

Source: Pleon (2005) Accounting for Good

Because of the rise of the internet and the trend toward electronic dissemination of financial and other information on websites, concerns about the organization of information may change. Users of corporate websites have greater control over which portions of the report to review and which to disregard. As these technologies develop, the sequence of information in a traditional paper annual report and the length of the report might become increasingly less important, but providing the information in an easily accessible format and language remains critical.

Distributing external reports Large companies now increasingly produce separate sustainability reports in addition to their corporate annual reports. However, the president’s letter in annual reports, along with other voluntary disclosures, should offer a brief overview of the organiza- tion’s performance on key sustainability issues.

Generally, the communication strategy may include analyst meetings, press confer- ences, formal documents, and other channels of communication, such as the inter- net or websites. Some may access the information in electronic form, but others will continue to want information on paper.

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

240 making sustainability work 2

Dell maintains a robust, multifaceted approach to reporting on its corporate respon- sibility priorities, goals and impact. In addition to its annual Corporate Responsibility Report that complements the company’s Annual Report, it provides a link within the corporate responsibility section on www.dell.com to Dell’s comprehensive GRI A-level Report produced using the GRI Sustainability Reporting Guidelines. It also maintains extensive content within the corporate responsibility section of its website to provide stakeholders with current, detailed information. This includes case studies, policies, interactive tools, opportunities for feedback, and learning resources—on a wide range of Dell’s corporate responsibility activities, all organized by corporate responsibility action areas. This ongoing reporting on Dell’s website complements the more focused “snapshot in time”—such as content presented in Dell’s annual corporate responsi- bility reports. Moreover, since 2003, Dell has provided a detailed report each year on its carbon emissions to the CDP—the largest database of primary corporate climate change information in the world. Dell requires its Tier 1 suppliers to report their emis- sions to the CDP. Dell also reports and participates in the Investor CDP, CDP Supply Chain and CDP Water.25

For its 2012 Sustainability Progress Report, DuPont shortened the printed (pdf ) report but expanded the content on the website. The printed report makes references to where additional information can be found on the website. ScottishPower has chosen to use the internet as its sole method of communicating in its 2005/06 Corporate Responsi- bility Report. The new format is intended to be more user-friendly and to enable the company to make more frequent updates. Avon enables its internet users to build their own Avon Corporate Responsibility Online Report by checking the boxes for the pages the user would like to include in his or her very own pdf report. Whichever method is practiced, the reporting objective should be to provide a sound basis for external audi- ences to assess sustainability performance and actions.

External disclosure of sustainability performance measures Companies that adopt a broader set of performance measures for internal decisions— measures that flow from strategy and point to profitability—and that integrate internal and external reporting, can be more accountable to their constituents.26 Beyond the benefits of greater accountability, such as enhancing the corporate image and engen- dering trust among stakeholders, disclosing sustainability performance measures to external stakeholders has been shown to boost company valuation as it reduces investor uncertainty.

Demand for more disclosure is growing, from Wall Street to Main Street. Financial analysts indicate they want more nonfinancial data from corporate external reports, including the annual report.27 More complete information could help them diagnose company problems and make more accurate valuations. Just as managers need broader

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

www.dell.com

9. external sustainability reporting and verification 241

sets of indicators to better understand their company’s performance and to improve their decision-making, analysts and other “outsiders” need similar information to eval- uate prospects for future earnings and share value.

Many companies now report broader financial performance metrics than the tradi- tional metrics of the income statement, balance sheet, and cash flow statement. Among them are measures of economic profit or shareholder value, and, increasingly, leading measures of financial performance.

Since 1994, Baxter Healthcare has been issuing its annual Environmental Financial Statement that details environmental revenues, control costs, and the financial impact on the company of its environmental actions from preceding years (Table 9.6). This is one of the more creative and detailed disclosures of environmental impacts and an example of how companies can improve accountability through voluntary external disclosures. In calculating savings and cost avoidance for resource reduction activi- ties, Baxter assumes that production and distribution grow at the same rate as the company’s cost of goods sold, and that resource use and waste generation increase at that same rate in the absence of reduction initiatives. Baxter determines this rate by calculating the average annual increase in the company’s published cost of goods sold over the past six years. It then adjusts this number for new acquisitions and changes in inventory, and subtracts inflation, which is calculated as an average of three major, relevant US producer price indexes. The company then rounds the resulting growth rate down to the nearest whole number to conservatively report performance.28

Novo Nordisk, the Danish insulin producer, used the IIRF (International Integrated Report Framework) proposed by the IIRC to report on its financial, social, and environ- mental performance for 2011. By following this format, Novo Nordisk is trying to bring together information in a way that reflects the commercial, social, and environmental context of a business. It believes that this approach allows the company to better under- stand, manage, and report on multiple dimensions of value, and helps managers make better decisions and manage in a way that creates shared value. The company reports additional information online.29 Key figures for 2012 are provided in Table 9.7.

Understanding and creating customer value is also a priority for top management and a key performance driver at many companies. A number of companies use and report a customer satisfaction metric, but others go further, releasing leading measures of customer satisfaction and performance. Ford Motor Company focuses on a long-term view of customer satisfaction, and has measured and reported customer satisfaction after three months, and then after three years, of product use. Allstate Insurance has reported marketing and advertising expense data, internet and phone accessibility for customers, and sales to specific demographic groups, such as working- and retirement- age customers.

The sustainability processes companies must excel at to deliver value to customers are wide-ranging, encompassing purchasing, manufacturing, distribution, and social and environmental management processes and actions. Equally wide-ranging are the process-related disclosures companies make, including information on supplier rela- tionships, material usage and disposal, operational performance, productivity, work- place safety, waste generation and disposal, and social investments.

Companies also report metrics about activities that typically stress reskilling, systems development, change procedures, and the development of personal and organizational

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

242 making sustainability work 2

Table 9 .6 Baxter Environmental Financial Statement

Source: Excerpt from Baxter (2012) Environmental Financial Statement

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 243

Table 9 .7 Novo Nordisk 2012 integrated report: performance highlights (continued over)

Source: Excerpt from Novo Nordisk (2012) Annual Report

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

244 making sustainability work 2

Table 9 .7 (from previous page)

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 245

capabilities. Table 9.8 lists several innovative measures disclosed in external reports. Some of these measures relate directly to sustainability, while others are nonfinancial measures that would be of use to some stakeholders. Companies can look at those examples and develop a list of additional measures they could report that would be of value to their stakeholders.

Measures Company

Economic profit Coca-Cola

Market value of real-estate assets Rouse Company

Recycling income Baxter International

Purchases from minority businesses Procter & Gamble

Number of customer complaints The Co-operative Bank

Global image survey results BP Amoco

Consumption per capita Coca-Cola

On-time delivery performance Analog Devices

Packaging reduction Baxter International

Number of sites with environmental certification Unilever

Sources of energy BC Hydro

IT expense as a percentage of administrative expense American Skandia

Employee turnover–voluntary and involuntary Dow Chemical

Number of jobs posted and filled internally Dow Chemical

Training expense per employee Milliken

Technology coverage Allstate Insurance

Environmental, health, & safety capital expenditures Alcoa

Transportation incidents Dow Chemical

Recycled materials ABB

Marketing and advertising dollars Allstate Insurance

Table 9 .8 Disclosed sustainability measures of nonfinancial measures in external reports

Source: Adapted from Epstein and Wisner (2001) “Increasing Corporate Accountability”

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

246 making sustainability work 2

Verifying sustainability performance and reporting Independent verification is an important component of external reporting. In 2005, 30% of sustainability reports of the Global 250 included assurance statements. Major accounting firms issued 60% of the statements, with various other consulting and specialized verification firms issuing the balance.30 One of the major challenges in auditing social, environmental, and economic performance is that there is little stand- ardization of sustainability management systems, performance measures, and report- ing structures. Correspondingly, there are no generally accepted worldwide auditing or reporting standards. There is, however, some guidance on reporting social, environ- mental, and economic performance provided by the GRI and other organizations, as discussed earlier. And, just as demands for disclosure of sustainability performance fostered the increase in reporting, they should also drive the scope and nature of the underlying assurance process.

The AA1000 Assurance Standard launched by AccountAbility in 2003 is based on an assessment of reports against three assurance principles:

l Materiality. Does the sustainability report provide an account covering all the areas of performance that stakeholders need to judge the organization’s sustainability performance?

l Completeness. Is the information complete and accurate enough to assess and understand the organization’s performance in all these areas?

l Responsiveness. Has the organization responded coherently and consistently to stakeholders’ concerns and interests?

The AA1000 framework has several important attributes. It helps organizations define goals and targets, measure progress against targets, and audit and report perform- ance. It also provides a means for others to judge the validity of reported performance. Guidelines established by industries and other organizations can also be used simul- taneously. British Telecom, a leading provider of communications solutions and serv- ices, is one of the largest companies to apply the AA1000 Standard. However, it uses AA1000 in conjunction with the GRI guidelines and the Ten Principles of the United Nations Global Compact. Another advantage is its focus on continuous improvement. Companies using AA1000 gradually increase their level of assurance over time and the standard requires that companies indicate how they will meet future standards and expectations.31

ISO 14001 requires that organizations conduct periodic EMS audits to determine whether the EMS has been properly implemented, and the results of the audit are then reported to management. The ISO standards provide guidance on the general princi- ples for conducting a social, environmental, and economic audit, criteria for selection and composition of audit teams, and the qualifications of internal and external auditors. In 2006, ISO added a guideline specifically addressing the accounting and verification of GHG emissions. The purpose of this standard is to promote consistency, transpar- ency, and credibility in GHG quantification, monitoring, reporting, and verification.

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 247

A corporate sustainability reporting and verification system usually involves internal and external reporting and audits. Through extensive internal auditing processes, com- panies can identify areas of concern and improvement and gather information to aid in managerial decision-making. They can monitor processes and performance and report progress to relevant managers.

Internal sustainability audits Since the 1970s, various researchers and companies have pioneered methods of “social auditing,” a term that has come to mean various combinations of account- ing for, reporting on, and verifying sustainability performance. A few companies in the 1970s did develop and implement well-developed models, but the systems were soon dropped. Social auditing did not fully develop in the 1970s because companies never adopted it as an integral tool for defining strategy, improving performance, or delivering value. Among the most prominent advocates of the social audit, Abt Associ- ates, a consulting firm based in Cambridge, Massachusetts, produced a social balance sheet and income statement in 1973. The Abt statements divided benefits and costs, in dollars, by stakeholders, and then computed net social income. The company also worked with many prominent clients on the measurement and reporting of social, environmental, and economic impacts and production of both internal and external social reports.32

Currently, in most organizations, a social and environmental or sustainability inter- nal audit program is well developed and routine. It is typically conducted by some com- bination of central staff from the sustainability department and staff from the facilities or business units, with wide variation in reporting responsibilities. Many companies send the results of the audits to the business unit managers who set the action plans and the schedules for reporting deficiencies. Others report to a central sustainability office (and senior management) which coordinates social, environmental, and eco- nomic improvements.

A report should be made to the head of sustainability, to a member of the senior management team, and to a member of the board of directors, as well as the business unit manager. In addition, the audit should be part of a more comprehensive program of evaluating the social, environmental, and economic performance of the business unit, the facility, the business unit manager, and other management and staff. It also should be part of a comprehensive performance evaluation system in the organiza- tion to provide the incentives necessary to motivate improved corporate sustainability performance.

Many companies have created internal auditing frameworks and checklists to record and evaluate social, environmental, and economic performance. Using these frameworks and checklists enhances audit reliability and also the comparability of the information, both over time and between units of the company. Honda uses an Environ- mental Audit System which includes internal and external auditors (Fig. 9.4). Internal

Co py ri gh t © 2 01 4. B er re tt

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

248 making sustainability work 2

auditing is carried out to confirm that factories are implementing the environmental management system correctly and to ensure that targets are being met. Honda has also established a Mutual Visit Environmental Audit Team. This audit is implemented by peer factories to confirm compliance with legal regulations and the progress made in achieving targets based on company policy. For example, Honda North America, Inc., a subsidiary of Honda Motor Co., Ltd., serves as auditor, helping to ensure that Honda’s various subsidiary companies and its affiliated suppliers in the North America region are in compliance with all applicable environmental laws and regulations. At the same time, Honda North America uses a third-party evaluator to conduct environ- mental audits of participating dealers and recommend strategies for reducing their energy use.33

Figure 9 .4 Honda Environmental Audit System

Source: Honda (2006) Environmental Annual Report

Corporate internal audits can be conducted for compliance with government regula- tions, corporate goals, procedures, and practices and to monitor, evaluate, and control company risks. However, some companies have expanded the internal audit role to proactively identify points in the organization’s processes that impact environmental, social, and economic performance, identify the risks involved and measure the current or potential damage, and evaluate and suggest organizational changes to mitigate these risks. Social and environmental, or sustainability auditing practices vary widely among organizations depending on the objectives of the audit and the types of social, environ- mental, and economic risks faced. Among the types of audits are:

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 249

Compliance audit. The most common internal sustainability audit is the compliance audit. The compliance audit procedure includes a detailed, site-specific audit of cur- rent, past, and likely future operations.

Social and environmental management systems audit. As companies become more certain that they are in compliance with regulations, the audit emphasis shifts to sus- tainability management systems. To assess the many elements of the sustainability management systems, different types of performance indicators should be used. These might be selected from the sample indicators identified in Chapter 8 and customized to company needs.

Due diligence audit. Due diligence or transactional audits are conducted to assess the social, environmental, and economic risks and liabilities of land or facilities. These are typically conducted prior to a real-estate or business acquisition but can be com- pleted at any time.

Treatment, storage, and disposal facility audit. Companies that produce hazardous waste material may contract with other companies to store, treat, or dispose of that material. Some companies conduct audits on the facilities they own and on facilities that handle hazardous waste material with which they contract.

Pollution prevention audit. Pollution prevention audits are designed to minimize waste at the source rather than at the “end of pipe.” Companies conduct these audits because they recognize that eliminating or reducing the production of waste is usually much less expensive in total environmental and company costs than cleaning it up at the end of the production process.

Social and environmental liability accrual audit. These internal audits address the issues of reasonable, probable, and estimable in determining the social and environ- mental liabilities to be accrued for financial reporting.

Product audit. Some companies perform audits on specific products to determine whether more should be done to make them socially and environmentally friendly and to confirm that product and chemical restrictions are being met.34

Social and environmental, or sustainability auditing should be a proactive exercise that drives continuous and breakthrough improvement. When conducting audits, companies should:

l Reconsider strategy

l State objectives

l Pinpoint critical success factors

l Devise measures that gauge success among appropriate stakeholders

l Evaluate impacts on company stakeholders

l Work the measures into the remaining steps of the Corporate Sustainability Model to drive high performance

By following these steps, audits are conducted in the context of the overall strategy of the company and results can be integrated into the organization.

Internal sustainability audits can be critical elements of the management of proc- esses, products, and projects to improve corporate sustainability (see Chapter 8). They

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

250 making sustainability work 2

can provide important information to aid in the evaluation of the impacts of both sus- tainability and financial performance. These internal sustainability audits also provide essential information to facilitate the external reporting and verification of sustainabil- ity processes and performance.

External sustainability audits Earlier in this chapter, we discussed examples of the rapid rise in the quality and quan- tity of sustainability disclosures and attempts at standardizing these disclosures. Con- currently, companies have also found it desirable to obtain independent verification and attestation of progress toward improved sustainability management and perform- ance. It is likely that stakeholder demands for increased external sustainability reports and audits will influence the number of corporations providing them. A report found that 59% of stakeholders want sustainability reports to be “verified by a professional assurance or verification body,” with financial analysts and investors most strongly favoring verification statements.35 Many consulting firms and accounting firms have begun performing external environmental audits and we describe some examples of audit reports below. The level of detail of the investigation and the external verification and assurance vary significantly.

British American Tobacco had its 2012 Social Report reviewed by Ernst & Young. Throughout the report, where appropriate, Ernst & Young provides assurance com- ments (Fig. 9.5) to indicate areas that are supported by underlying evidence.

Figure 9 .5 British American Tobacco report’s assurance comments from Ernst & Young

Source: Example from British American Tobacco (2012) Sustainability: Why it Matters – Sustainability Summary 2012

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 251

Verification should not seem to be just an extra step in the process; it should increase stakeholder trust in the reporting process. Therefore, any discrepancies and sugges- tions for improvement should be reported. Ernst & Young (along with the other major international accounting and auditing firms) has been involved in social and environ- mental, or sustainability audits. The company evaluated BP’s Sustainability Review 2012 on the basis of ISAE30001 (International Federation of the Accountants’ Interna- tional Standard for Assurance Engagements other than Audits or Reviews of Histori- cal Financial Information) and to meet the requirements of assurance engagement as defined by AA1000AS (2008). To form its conclusions, Ernst & Young completed the following steps:

1. Interviewed a selection of BP executives and senior managers to understand the current status of safety, social, ethical, and environmental activities, and progress made during the reporting period

2. Reviewed selected group level documents relating to safety, social, ethical, and environmental aspects of BP’s performance to understand progress made across the organization and test the coverage of topics within the report

3. Reviewed BP’s approach to stakeholder engagement through interviews with employees with responsibility for managing engagement activities at group and local business level, and reviewed selected associated documentation

4. Carried out the following activities to review health, safety, and environment (HSE) and community investment data samples and processes:

– Reviewed disaggregated HSE data reported by a sample of five businesses to assess whether the data had been collected, consolidated, and reported accurately

– Reviewed and challenged supporting evidence from the sample of businesses

– Tested whether HSE data had been collected, consolidated, and reported appropriately at group level

– Reviewed community investment data at group level

5. Reviewed BP’s processes for determining material issues to be included in the report

6. Reviewed the coverage of material issues within the report against the key issues raised by BP’s stakeholder engagement activities, material issues and areas of performance covered in external media reports, and sustainability reports of BP’s peers, as well as the topics discussed by BP’s SEEAC (safety, ethics and environment assurance committee)

7. Reviewed information or explanations about selected data, statements, and assertions regarding BP’s sustainability performance36

Figure 9.6 provides Ernst & Young’s observations and areas for improvement. PwC (PricewaterhouseCoopers) is another of the major firms offering reporting and

assurance of nonfinancial information. Their service has four main components:

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

252 m aking sustainability w

ork 2

Figure 9 .6 BP assurance statement (continued opposite)

Source: Excerpt from BP (2012) Sustainability Review: Building a Stronger, Safer BP

s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

9 . external sustainability reporting and verification

253

Figure 9 .6 (from previous page)

s re se rv ed . Ma y no t be r

ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

254 making sustainability work 2

1. Reporting and communication planning and strategy. Helps define the reporter’s goals, audience, and the information that the readers will need. PwC helps select and develop performance measures to address stakeholder concerns for transparency and accountability

2. Review and improvement of governance, systems, and reporting processes. Helps companies review and establish governance structures, management and information systems

3. Obtaining external assurance of nonfinancial information. Evaluates and measures the quality of the company’s information. Figure 9.7 displays their assurance process

4. Reporting analysis and feedback. Reviews reports and disclosures; helps com- pany obtain feedback through surveys and focus groups

Gather information about business, operating companies, historical reporting

Access control processess and environment

High High/Low reliance?

Perform tests of controls

Perform substantive

tests

Document results and provide report/opinion

Low

Figure 9 .7 PricewaterhouseCoopers reporting and assurance process

Source: PricewaterhouseCoopers (2005) Corporate Responsibility

To ensure credibility of the report contents and reporting procedures, Samsung has received third party assurance for its 2011 Sustainability Report from PwC. This report was independently assured in accordance with the ISAE3000 and AA1000 Account- Ability Assurance Standard (AA1000AS Type II Assurance) (Fig. 9.8).

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 255

Figure 9 .8 PwC assurance statement for Samsung

Source: Excerpt from Samsung (2011) Sustainability Report

While some companies employ these large accounting and auditing firms for exter- nal assurance, others use firms that specifically focus on sustainability. Coca-Cola com- missioned FIRA Sustainability BV, Netherlands, to provide external assurance on its 2011/12 Sustainability Report. FIRA conducted the verification process in accordance with international assurance standards. Coca-Cola applied its own sustainability per- formance reporting criteria, derived from the GRI’s Sustainability Reporting Guide- lines. FIRA reviewed Coca-Cola data and claims against Coca-Cola reporting criteria and the GRI, including explanatory notes related to disclosed performance information.

For years, the Dow Chemical Company believed that external assurance was impor- tant, but it did not hire an outside auditor to verify any data. By 2012, it was the fifth time that Dow had included assurance as a part of the Annual Sustainability Report. Dow has engaged Environmental Resources Management (ERM), one of the world’s leading

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

256 making sustainability work 2

providers of environmental consulting services, to review its 2011 Annual Sustainability Report (see Fig. 9.9).

Some observers have wondered whether, as with financial auditors, verifiers should act as both consultants and auditors and whether independence is jeopardized by the relationship. For both internal and external audits, companies should make sure that the independence of the audit is not compromised.

Other organizations and individual experts have become involved in verification of external sustainability reports. For years, Canon has had its sustainability reports reviewed by two stakeholder organizations, ASrIA (Association for Sustainable & Responsible Investment in Asia) and the Wuppertal Institute for Climate, Environment and Energy. They were invited to assess the appropriateness of the content, the quality of the treatment of individual topics, and the overall quality, balance, and relevance of the report. They were also invited to use the principles of the AA1000 Assurance Stand- ard to inform their thinking. From 2008, Canon has received third-party opinions from an expert from the Wuppertal Institute. As a result, the expert is able to offer opin- ions from a medium- to long-term perspective on how well the information in Canon’s report meets expectations, the quality of performance it conveys, and its usefulness for substantial engagement. Canon reflects the expert’s suggestions in the report to the greatest extent possible (see Fig. 9.10). This third-party comment, however, is the personal view of the expert and is not a verification of the report’s contents or data. The comment also does not imply any endorsement from the expert’s organization.

Ford Motor Company employed Ceres and a team of external stakeholders to review its Sustainability Report. The stakeholder team, selected by Ceres, was an independent group drawn primarily from the Ceres coalition, which has expertise in environmental, social, and governance issues. In reviewing the report, the team considered whether Ford adequately reported on its sustainability performance and key impacts, including goals, targets, systems, data, and initiatives. Through this review process, the stake- holder team provided feedback to the company, which was considered in the prepara- tion of the final version of the report.

Some companies choose not to have any outside firm perform independent verifica- tion. Honda states that it has not obtained any external verification because no guide- lines have been established for external verification, and the qualifications required of the verification organizations are not clear. Other companies have chosen to avoid external verification for other reasons, including cost.

Though there are no generally accepted international standards for the reporting or verification of sustainability performance or processes, auditors can verify the reli- ability and the fair representation of selected performance data. As shown in the above examples, this verification is done by reviewing management processes, interviewing employees, sample-testing key performance indicators, and reviewing other evidence to ensure compliance with all applicable laws and management directives. AA1000 and the GRI guidelines are also aiding auditors in verification and establishing bench- marks to compare reporting across companies.

Sustainability auditing and verification can create significant legal and operational benefits for organizations. The benefits include:

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 257

Figure 9 .9 Dow’s independent assurance statement by ERM

Source: Dow (2011) Annual Sustainability Report

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

258 making sustainability work 2

Figure 9 .10 Canon independent third-party opinion

Source: Canon (2013) Sustainability Report

l Ensuring compliance with applicable laws and regulations

l Ensuring compliance with management directives and procedures

l Proactively identifying areas of potential or actual noncompliance

l Minimizing the risk of civil and criminal liability to the corporation and to its employees

l Ensuring accurate certifications

l Ensuring accurate regulatory disclosures

l Raising employee consciousness about the importance of compliance

l Providing independent verification of a program, which some companies use as a public relations or marketing tool

l Assessing the potential impact of new or expected regulation

l Helping to standardize systems and measures in multiple facilities by provid- ing a common framework for assessment37

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

9. external sustainability reporting and verification 259

Summary The growth of social, environmental, and economic costs and corporate managers’ recognition that they need to better manage corporate sustainability impacts have dra- matically increased the demand for both internal and external sustainability reports. Improved internal audits are necessary to monitor and reduce the impacts, but external audits provide additional benefits. External audits:

l Increase stakeholder confidence in the quality of corporate sustainability con- trols, planning, and performance

l Provide senior management with an independent verification and analysis of the strengths and deficiencies of the sustainability program

l Provide additional confidence that hazards and violations will be minimized

Additionally, stakeholders want more verification of corporate sustainability. They want to understand corporate plans and processes to reduce social, environmental, and economic impacts. Shareholders and financial analysts want more information to better assess a company’s future social, environmental, and economic liabilities. Man- agers need more information about these issues to develop a corporate sustainability strategy and manage impacts more effectively.

Companies and their stakeholders need to ensure that the flurry of activity created by external sustainability reporting and external environmental auditing is supported by actual company progress. External reporting is an opportunity for a company to tell the story of its performance. The external report should not, however, precede the integration of social, environmental, and economic considerations into product cost- ing, capital investment decisions, company processes, product design, or performance evaluation.

In the final chapter we look at the significant benefits accruing to corporations and society by making sustainability work.

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .

chapter 10

The benefits of sustainability for corporations and society

Global companies are increasingly faced with difficult dilemmas. There is significant pressure to reduce costs in the supply chain, yet switching to lower-cost suppliers may increase social, environmental, and economic impacts, and reactions from various stakeholders, including employees, customers, regulators, and community activists, may have a detrimental effect on financial performance. Senior management often faces complex decisions about facility location that in simpler times could be made by examining differentials in labor, shipping, and raw material costs. Now social, environ- mental, economic, and political risk must become part of the calculus.

Business unit managers are regularly told by the CEO about the importance of sus- tainability, yet they receive daily pressure to increase short-term profitability. And their bonuses are typically based entirely on profits. Making the decisions (and these are often trade-offs) about achieving excellence in both sustainability and financial per- formance is a big challenge.

Though much has been written and discussed in both the academic and the business press about the motivations for sustainability and how to formulate a sustainability strategy, much less has been said about how to implement sustainability. Managers have often been frustrated by the challenges of execution in complex business organi- zations. Even the most socially concerned senior corporate and business unit managers find it difficult to simultaneously meet social, environmental, economic, and financial goals. In addition, senior environmental, community affairs, and sustainability execu- tives are often frustrated by their inability to obtain the resources they need to execute programs that they are convinced create societal and organizational value.

This book has focused on how to implement sustainability in complex organizations. The question facing most senior general managers and most sustainability, commu- nity affairs, and EH&S managers is not whether to improve sustainability performance but how to do it in their global corporation given the strategies, structures, systems, culture, people, and pressures that already exist. Based on extensive research from

-K oe hl er P ub li sh er s. A ll r ig ht s

re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d

un de r U. S. o r ap pl ic ab le c

op yr ig ht l aw .