Tomorrow’s Value The Global Reporters 2006 Survey of ... · 2006 Survey of Corporate...
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Tomorrow’s Value The Global Reporters 2006 Survey of Corporate Sustainability Reporting
Transcript of Tomorrow’s Value The Global Reporters 2006 Survey of ... · 2006 Survey of Corporate...
Tomorrow’s ValueThe Global Reporters2006 Survey of Corporate Sustainability Reporting
SustainAbility disclosure
In the interests of full disclosure we list below which companies referenced in Tomorrow’s Value are SustainAbilityclients and/or members of the EngagingStakeholders program:
UNEP disclaimer
Designations employed and thepresentation of material in thispublication do not imply the expressionof any opinion whatsoever on the part ofUNEP concerning the legal status of anycountry, territory, city or area or of itsfrontiers or boundaries. Moreover, theviews expressed do not necessarilyrepresent the decision or the statedpolicy of UNEP nor does citing of tradenames or commercial processesconstitute endorsement.
Contents
Executive Summary
Forewords
Introduction
The Corporate DNA Test
Buy. Hold. Sell.
Methodology
Results and Analysis
Materiality
Communication
Influence
Non-OECD Reporting
Value
The Future of Sustainability Reporting
Conclusions and Recommendations
About this report
Tomorrow’s Value presents the results of the 2006 Global Reporters survey ofcorporate sustainability reporting. TheGlobal Reporters research program wouldnot be possible without the financialsupport of companies and organisationsdedicated to high quality corporatetransparency and disclosure. We express our sincere thanks to our major sponsorsPfizer and The Skoll Foundation, and tothe ten other supporters, ABN AMRO, BHP Billiton, the US EnvironmentalProtection Agency’s Climate LeadersProgram, The Coca-Cola Company, Co-operative Financial Services, FordMotor Company, Natura, Novo Nordisk,Starbucks Coffee Company and TelecomItalia, who together ensured that the 2006 round happened. The Skoll Foundationcontribution came as part of our three-yearSkoll Program on Entrepreneurial Solutionsto Sustainability Challenges. All sponsorswere updated on progress, but they did nothave any form of editorial control.
What do you call your report?
The answer varies by region, by industry and by company, over time. Among currentfavourites: corporate responsibility, CSR,extra-financial, GRI-style, environmentalsocial and governance (ESG), non-financial,social and environmental performance, andsustainability reporting. “There is no perfectanswer,” said one of our advisors. “This feelslike the old battle between the accountantsand the environmentalists,” said another.“Words like ‘non’ and ‘extra’ imply theaccountants are core — and activists havelost the battle.” In response one analystsuggested if it was non-financial, he’d beout of a job. Yet another observed, “It wouldbe good to see consensus on a preferrednomenclature.” With the launch of theGlobal Reporting Initiative’s G3 guidelinessustainability reporting seems to havegathered some support. In this report weuse sustainability reporting and talk morespecifically of ESG disclosures when weexamine the needs of investors.
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3M CompanyABN AMROABN AMRO Real AlcanAnglo AmericanAracruz CeluloseAstraZeneca BAABASFBHP BillitonBPBTChevronFordGap GSKHP
HSBC HoldingsIntel CorpMTRNikeNissan MotorNovo NordiskO2PhilipsShell Group StarbucksSwiss ReinsuranceTokyo Electric PowerUnileverVodafoneVolkswagenWal-Mart
1Tomorrow’s Value
Signs of spreading illumination
— The pack of new entrants storming up our 50 Leaders chart, suggesting that theappetite for innovation in reportingcontinues to grow.
— Value creation is increasingly surfacing as a theme in reports and their titles, asin the 2005 Philips report Creating Value.
— Our top-scoring company defines the ‘third generation’ business case asfocusing on the marketplace, solutionsand support for competitive bids.
— Leading corporate reporters are now expanding their coverage to embraceemerging economy issues, but they arebeing outflanked by a small but growingnumber of non-OECD companies whichhave ambitions to develop powerfulbrand positions as they break intointernational markets.
— As a result, companies seen to be overly focused on accountability and risk couldfind themselves marked down as laggardsat a time when mainstream markets areswitching on to challenges like climatechange and carbon trading.
— True, robust risk reporting is increasingly the baseline expectation of investors, but alongside downside risks, financialanalysts are becoming more interested inupside opportunities for market growth,market share and profits.
— The 2006 pack score relatively low in terms of their efforts to educate theinvestment community on the value of sustainability-related performance,but at the same time new types ofentrepreneur, in ‘cleantech’, ‘greentech’and social enterprise, are attractinggrowing support not only fromphilanthropists but also from venturecapitalists and financial institutions.
— So, at a time when some of the fizz may be going out of corporate reporting,how can business leaders recharge the agenda, and communicate theircommitment to innovation and scalablesustainability solutions? This challengewill be addressed in more detail in aseparate Global Reporters publication,due out in 2007.
Lightbulbs are switching on in CEO brains. In the two years since our 2004 benchmarksurvey Risk & Opportunity, the spotlight has expanded to encompass not onlycorporate risk but also market opportunity.Companies like BT, General Electric and Wal-Mart are helping change the game by beginning to build sustainability factors into their competitive strategy.Tomorrow’s Value signals the start of the coming race to demonstrate thatsustainability strategies, performance andreporting can deliver — and are delivering —value and competitive benefits.
2Tomorrow’s Value
Tomorrow’s Value, SustainAbility’s fourthinternational benchmark of corporatesustainability reporting, has once againbeen developed in partnership with theUnited Nations Environment Programme(UNEP) and Standard & Poor's. This year we introduce a revised methodology,developed in close consultation withexperts and leading corporate reporters,and — in line with our sense that the focus also needs to shift beyond disclosureand reporting to communication — we have adopted a portfolio approach.Tomorrow’s Value is the flagship documentin a suite of publications exploring wideraspects of reporting, including commun-ication with financial analysts and thewider innovation agenda.
The field is currently extremely dynamic,with new entrants making up half of the 50 Leaders (Figure 1). Strikingly, half of the Leading 50 companies are completenewcomers, including four entrants fromnon-OECD countries. The pressures drivingimproved sustainability reporting continueto grow, with the Global ReportingInitiative’s recently launched G3 guidelinesproviding renewed impetus in terms ofinternational standardisation. In parallel,the slow, grudging awakening of financialmarkets is being accelerated by growingconcerns around climate change.
Tomorrow’s Value asks the question: How far has the value lightbulb switchedon in corporate brains and boardrooms? On current evidence, the answer is that thelinks between the evolving sustainabilityagenda and wider market opportunities are now better understood — with a smallnumber of companies reporting therelationship with value in increasinglyinteresting ways. Partly as a result, someparts of the financial community aregearing up their use of non-financial, extra-financial and/or sustainabilitydisclosures to better understand emergingenvironmental, social and governance risks. Nonetheless, our expert panel (page 9) concluded that most companiesare still missing an important opportunityto communicate with financial analysts and institutions.
Conclusions
Key findings of the 2006 benchmark survey include:
Yesterday’s risks are mutating intotomorrow’s opportunities for valuecreation. Leadership companies — including BP, BT, GE and Philips — areshifting the focus of their sustainabilitystrategy towards a more progressive and entrepreneurial approach that seeks to identify opportunities for strategicinnovation and market building. Thepioneers are still a minority, representing a quarter (28%) of our Leading 50,compared to 60% who demonstrate a more conservative, risk focused approach,but their numbers will likely grow.
Financial markets welcome — andchallenge — sustainability disclosures. Cutting-edge sustainability reports areframed as a key component of — andplatform for — a portfolio of informationavailable to both socially responsibleinvestment (SRI) funds and, increasingly, to mainstream investors. Our panel offinancial experts agreed that their sector’sappraisal of stock volatility and long-term value is now benefiting significantlyfrom heightened corporate transparency.Although around two-thirds (70%) ofcompanies report some interaction withinvestors on sustainability matters, manyreports still lack the hard targets andforward-looking information that makesrequired reading for analysts.
Sustainability drills into core businessprocesses. Most so-called sustainabilityreports only constitute steps in thatdirection, but there has been a leap in the proportion of companies reporting the integration of sustainability-relatedfactors into core decision-making. A central concept has been ‘materiality’,helping companies sort the critical risks and opportunities from the backgroundnoise. This year at least 80% of companieswere rated as integrated on at least oneaspect of their reporting, though this result leaves many gaps to be bridged.
Executive Summary
Disclosures on public policy initiativesremain precariously weak. Despitegrowing pressures, under half of corporatereporters fail to sufficiently discuss and link their sustainability initiatives andcommitments to the lobbying activities they undertake — and to the widerinfluence they exercise, either directly orthrough lobbying and trade organisations.Only around a quarter (28%) of the Leading50 reporters covered this area meaning-fully. That said, this result is a majoradvance on previous years.
International frameworks provide contextand synchromesh. True sustainabilityreporting will require company-levelreporting to be linked with value chain,sector and economy-level targets andreporting. Tomorrow’s Value spotlights —and encourages — an emerging effort by some leading businesses to link theirindividual targets and activities withbroader macro-frameworks, to provide a sense of scale and to help measure the relative impact of individualcontributions. The Millennium DevelopmentGoals (MDGs) are used in this way by over 20% of the Leading 50 reporters, a trend we see as likely to grow as we move towards the MDGs’ 2015 deadline.
The 50 Leaders
The 2006 results show BT head-and-shoulders in front of the main pack ofleading reporters. They come in sevenpercentage points ahead of the secondgroup — Co-operative Financial Services,BP, Rabobank and Anglo Platinum — all of which achieve impressive scores ofover 70%. A small but growing group ofnon-OECD companies make an excellentshowing, with two companies ranking inthe top 10, compared with zero in 2004.
The future of sustainability reporting
While the GRI’s G3 guidelines indicate agrowing degree of standardisation, thereare also signs of a degree of splintering in the sustainability reporting field. Somecompanies are looking to broader frame-works, like the Millennium DevelopmentGoals, to frame their reporting, while others are already straining at the leash and pondering what a G4 set of guidelinesmight look like — hoping for a furtherupgrading of the materiality components.As for the future of reporting we sketch a number of trajectories. These include: a progressive hardening of sustainabilityinformation requirements; a greateremphasis on value chain performance; a steady but irresistible shift in the centreof gravity of the field towards non-OECDcountry issues and perspectives; and agrowing focus on value creation, businessmodels and scalable, entrepreneurialsolutions to sustainability challenges.
Key recommendations
Tomorrow’s Value concludes withrecommendations for practitioners, CEOs and boards, and investors. Keyrecommendations include:
Corporate Responsibility Practitioners:Simplify. Develop and apply robustmateriality processes to produce tighter,more focused disclosures on responsibility,accountability and sustainability targetsand performance.
CEOs and boards: Rethink. Review theways in which the sustainability agenda islikely to change the competitive landscape,as through the growing involvement ofcompanies like Wal-Mart. As the spotlightshifts to scalable solutions, how is thecompany’s strategy and portfolio ofinitiatives aligned?
Investors: Recalculate. Scrape aside the language issues and identify the keyvalue drivers. Challenge companies toarticulate the long and short term valuecreation potential of their sustainabilityactivities. Watch out for our first briefingfor analysts, due out early in 2007.
3Tomorrow’s Value
The 50 Leaders
Figure 1
Rank
BTCo-operative Financial ServicesBPAnglo PlatinumRabobankUnileverMTRVodafoneShell GroupNikeNovo Nordisk
ABN AMRO RealBHP BillitonPhilipsABN AMROHPAnglo AmericanGSKRio TintoWestpac Banking
adidas GroupBritish American TobaccoKeskoWatercare ServicesFordGeneral ElectricNaturaStatoilLafarge
MecuBAAVeolia EnvironnementPotashCorpBBVADaiwa Securities GroupDSMGapSASMigrosVancity
SuezEnelHenkelNedbank GroupFuji Photo FilmSonyKarstadtQuelleSeven and I HoldingsNissan MotorTelus
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5453535352525252525151
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4Tomorrow’s Value
SustainAbility Foreword
Tomorrow’s Value is the fourth benchmarksurvey of corporate reporting completedunder the SustainAbility and UNEP GlobalReporters research program. We aredelighted to have the continuing support of Standard & Poor’s.
The 2006 round marks a point of departure.We have updated our methodology torecognise the growth and increased rigor of the sustainability reporting field, rewardreporters focusing on issues of relevance —and, as far as possible, to adapt it to thegrowing interest in value reporting andbetter engage financial markets.
Our work is driven by four hypotheses:— Sustainable development requires rapid,
structural changes in the globaleconomy.
— Harnessing markets to deliver change is a necessary condition to deliver therequired scale and pace of change.
— Corporate transparency and disclosure enable stakeholders to hold companies toaccount and supports the identificationof value creation opportunities.
— Successful companies integrate their responses to these three challenges intotheir core competitive strategies.
We hope that the survey helps signpost the way for reporting companies and reportusers alike. Your feedback allows us toassess how well we are meeting this goal.Given that we plan future benchmarkingrounds, please tell us what you think.
We thank our sponsors and AdvisoryCommittee for their generous support.
John [email protected]
Katie Fry [email protected]
Matt [email protected]
Standard & Poor’s Foreword
We are delighted to continue ourpartnership with SustainAbility and UNEPthrough the Global Reporters Program.
At Standard & Poor’s, our primary interest is providing high quality and independentanalysis, risk assessments and data toglobal financial markets. We view robusttransparency and disclosure as keycomponents of a healthy financialmarketplace and recognize the importantrole of non-financial disclosure.
While our friends at SustainAbility shouldbe given full credit for the benchmarkingexercise and general report creation, ourown involvement has been to contribute to the program’s Advisory Committee and to discuss more generally the role of environmental, social and governanceinformation in financial markets andmainstream financial analysis.
A key feature of this report is its focus on sustainability factors as they relate to fundamental business practices in thereporting companies. This is a practicalapproach and we believe this report will be of interest not only to firms investingwith a specific social agenda, but also tomore traditional investors that are lookingfor indicators of management quality.
We congratulate the 50 leading companiesthat have been recognized for the quality of their sustainability reporting, as well as the remaining 50 firms given an‘honourable mention’. At Standard & Poor’swe look forward to participating in furtherdialogue and research in this area.
George DallasManaging DirectorStandard & Poor’s
UNEP Foreword
Corporate accountability and transparencyare vital ingredients for gaining publicconfidence and a societal ‘license tooperate.’ Our latest benchmark surveyfollows the launch of the third generation of the Global Reporting Initiative (GRI)guidelines. The G3 framework is set to drive further improvements in the quality of sustainability reporting world-wide. As these improvements go mainstream,terms such as ‘non-financial’ and‘externalities’ should finally becomemuseum pieces.
One of the G3’s ten reporting principles is that of ‘sustainability context’. Withleading companies putting greateremphasis on value creation in theirreporting, let us remind ourselves of theimportance of putting reported activities in context. Reports like UNEP’s GlobalEnvironmental Outlook provide valuableinternational references for highlightingsustainability context and relatedchallenges in different parts of the world.We encourage companies to make use of these sources in their efforts to definemeasurable contributions to the goals of the Millennium Declaration and theJohannesburg Plan of Implementation.
It is only by putting operations in contextthat companies will achieve greater use of their sustainability reporting, in additionto improving the connections made withfinancial reporting. With the GRI G3framework companies now have a clearchoice — to be part of the solution or partof the problem. The new benchmark surveyshows that GRI users continue to dominatethe sample of leading reporters globally. We urge more reporters and newcomers to converge towards this standard. UNEP also looks forward to continueexploring improved ways of measuring and communicating progress under the Global Reporters Program withSustainAbility, with whom we have workedsince 1993 in examining the evolution of best practice in corporate reporting.
Achim SteinerUN Under Secretary GeneralExecutive Director, UNEP
John Elkington Katie Fry Hester Matt Loose Achim SteinerGeorge Dallas
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Tomorrow’s Value spotlights rapidprogression in sustainability reporting. This year sees 25 new reporters pushinginto our 50 Leaders group — and wecongratulate the leading companies bothon their achievements and high scores. That said, our analysis suggests thatsustainability reporting has reached a key point in its evolution.
Since our last benchmark study in 2004, the number of companies producingsustainability reports has begun to plateau,although reporting hot-spots in SouthAmerica and Asia still show strong growth.Sustainability reporting has now hit critical mass among leading multinationalcompanies, with no fewer than 75 of theGlobal 100 reporting.1 Increasingly, too, we see reports of remarkable sophisticationand scope. As a result, reports continue to get longer, partially offsetting effortsmade to address materiality in reporting.
In response to these trends — and in closeconsultation with experts and reportingcompanies — several key changes have been made to the Global Reporters Programand methodology:
— First, we have moved away from a nomination-based approach to theselection of reports for benchmarking.Instead, we now based our sample onpublished awards and benchmarks ofsustainability reporting.
— Second, we have renamed the top group the ‘50 Leaders’, to reflect our goal thatthe 50 companies should be reflective of global best practice, rather thanconstituting the definitive list of the 50 best global reporters.
— Third, we have undertaken a significant evolution of the benchmarkingmethodology, a process described on pages 11—12.
Tomorrow’s Value contains twelve sections:
2 The Corporate DNA test examines the degree that reportingshows sustainability integrated into core management processes.
3 Buy. Hold. Sell. explores investor perceptions.
4 Methodology introduces the revised Global Reporters methodology.
5 Results and Analysis presents the results of the 2006 Global Reporters benchmark survey.
6 Materiality investigates the application of the materiality concept among the 50 Leader reports.
7 Communicationassesses leading practice in thecommunication of sustainabilityperformance.
8 Influence discusses the coverage of corporateinfluence over business partners, industry and public policy.
9 Non-OECD Reporting takes a look at reporting in non-OECD markets.
10 Value describes the evolution of reporting on value creation.
11 The Future of Sustainability Reporting presents some thoughts on where all this may be headed.
12 Conclusions and Recommendations provides headline recommendations forpractitioners, boards and investors
Over the next year, alongside this mainprogram report, we plan to publish a seriesof documents drilling deeper into theresults — and examining the implicationsfor specific audiences. We plan to publish:— a briefing on corporate reporting
on innovation.— a briefing for the analyst community.— a practitioner’s guide to
issue identification.— an analysis of current reporting on
public policy activities.
Tomorrow’s Value
Section 1Introduction
1 Data from CorporateRegister.com
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Top reporting companies often argue thatreporting helps drive internal change. But the fact remains that reading acompany’s sustainability report is a poorsubstitute for getting in close and carryingout a professional audit. And even the bestaudits are snapshots, poor substitutes forknowing a company or industry inside outbecause you work there — and know wherethe business model’s real flaws are. So, twopoints to remember: first, evaluating areport is not the same as evaluating abusiness. And, second, the reportedintegration of sustainability targets,however good the metrics and howeveraccurate the reporting, does not guaranteethat a company is making a net positivecontribution across the triple bottom line ofsustainable development.
More positively, our research suggests thatsustainability thinking is not onlyincorporated into reporting at leadingcompanies, but is also filtering into boards,brands and business models. The latestrevision of our methodology was designedto capture these trends.
The highest score, 4 is defined as‘integrated,’ with the top ranked companiesachieving nearly half of their overall scoresat this level. Despite this good performanceby leading companies, overall we saw aslight dip in the number of 4 scores from2004 (11%) to 2006 (almost 10%).
Some areas of integration are welladvanced. Take ‘stakeholder engagement’(2.90 average score), with nearly a third ofthe 50 Leaders achieving a 4. Companies asdiverse as BAA, Enel, Ford, Kesko, Naturaand Vodafone scored 4 by providingdetailed information on how stakeholdersare identified and engaged, and — critically— how their comments and feedback areused to shape decision-making andperformance. If stakeholders are giving theright advice, that is real progress.Operational management procedures alsoscored well (2.50), as did ‘value chainmanagement’ (2.34) and ‘performancemanagement and training’ (2.50).
Also crucial is the explanation of howbusiness strategy links with long-termsustainable development (2.50). A quicklook at how some of the top scorers addressthis area:
Tomorrow’s Value
2 One Planet Business, WWF (Forthcoming 2007).
3 www.walmartstores.com/files/21st%20century%20leadership.pdf
4 Charles Fishman, How many lightbulbs does it take to change the world? Fast Company, September 2006.
5 Full disclosure: Wal-Mart is a SustainAbility client.
Level of integration of sustainability issues into managementAverage score / Criteria
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Section 2The Corporate DNA Test
7Tomorrow’s Value
— Novo Nordisk describes its vision for tackling chronic disease and diabetes,together with how the company’sstrategy is designed to work towards this.
— Veolia aligns its vision squarely behind environmental protection, asserting that‘environmental solutions are ourbusiness’.
— Philips describes how its business strategy links to work it is doing indifferent markets, and how it isinnovating to improve its contributionsto sustainable development.
A number of business processes scoredpoorly overall, however, with ‘integration ofsustainability issues into public policy andregulatory affairs’ averaging just 1.70 and‘investor relations’ even lower at 1.46, thelowest scoring criterion (just ahead oflearning and knowledge management at1.52).
Considering the importance of the‘influence agenda’ (see page 23) integrationin these areas will have to progress quickly.
So progress overall, but as the resource useof the global economy moves beyond thelimits of the planet’s capacity 2 integrationat these levels will not ensure a sustainablefuture, either for these companies or forwider society. Genuinely sustainablebusiness will need to operate withinintegrated market and government policyframeworks. As discussed in our Wal-Martcase study (see below), supply-chaindimensions need much greater attention. Inparallel, financial markets must work outhow to reward long-term value creation.And governments need to re-engineersubsidy and incentive regimes, evolving newmarket mechanisms and pricing signals.Business has a key role to play here, asargued on page 23.
Integration
So are companies walking their talk? Somesense of the levels of integration ofsustainability thinking and practices in our50 Leaders can be gleaned from Figure 2,which shows the highest score (2.90) forstakeholder engagement and — worryingly,given the value theme of this year’sbenchmark survey — the lowest score (1.46)for investor relations. When we assessedthe top 3 issues for reporting companies inmajor sectors (see Figure 3), economicissues were most dominant in banking,social issues in the apparel sector andenvironmental issues for heavy industry.Among key issues, labour standards andhuman rights rate top for the apparelsector, climate change for the extractive,transport and heavy industries and accessfor the banking sector.
Recently, SustainAbility tookpart in a World Economic Forumsession on the 2007 Davossummit agenda — and a WEFstaffer noted that in theirconversations with majorcompanies this year, sustain-ability had been the ‘800-poundgorilla in the room’. Similarly, aswe talked to companies, Wal-Mart has been a loomingpresence — because its publiclydeclared intention to green itssupply chain 3 is resulting in agrowing pressures on its60,000-plus suppliers.
It all began in 2005, when Wal-Mart CEO Lee Scott announcedthat the giant retail companyplanned to begin the process ofgoing green. Sceptical observerswondered whether this wasn’tsimply more public relations, inresponse to intense campaign-ing by communities, unions,environmentalists and others,but Scott stressed the companyhad reached a tipping point.
Hurricane Katrina had comethrough Wal-Mart’s geograph-ical backyard, and Scott hadexperienced an epiphany —waking up to the fact thatenvironmental issues are prettymuch ‘Katrina in slow motion’.For a sense of the implicationsof all this for scalable solutionsto sustainability challenges,check the coverage of Wal-Mart’s strategy on compactfluorescent light-bulbs. 4
We asked Harriet Hentges,Senior Director, StakeholderEngagement at Wal-Mart, four questions about thecompany’s plans: 5
What is driving Wal-Mart toreport? SRI investors have beenasking Wal-Mart to report for a number of years, includingthrough shareholder resolutions.With Lee Scott’s announcementin October 2005 of environ-mental goals and the steps weare taking to deliver on them,the timing is right to report onour progress in 2006.
We have reports on a number of efforts elsewhere, forexample on diversity and ethicalstandards in sourcing, but we haven’t collected all theseinitiatives into one place. We recognise there’s a valueinternally to doing this — that it helps clarify what we areabout for our associates, but it also is important to all of our stakeholders.
Who will your reporting beaimed at? We have engagedalready with many internal and external stakeholders — and it’s clear that the scale ofWal-Mart’s business means wehave relationships with a ratherunique range of stakeholders.For example, we have over60,000 suppliers and millions of customers in manycommunities in the US andabroad. Our suppliers are eagerto learn more about what wedo. We hope that some willreplicate what we are doing and that others will learn more about us.
What’s your ambition?We think sustainabilityreporting can be a lot morepowerful as a driver of changethan it currently is. We don’tnecessarily want to follow thepack — and won’t shy frombreaking new ground. I suspectthat means we won’t producean 80-page report filled withtext and data. Our reportingshould be transparent, readable,accessible and consistent withthe Wal-Mart culture. It needsto tell the story of our journeyon sustainability.
How will you know you’rebeing successful? That’s really hard to say — we are still designing our reportingapproach. But a key indicatorwill be seeing others replicatingor building on our approach sothat we all get better at makingbusiness decisions that benefitsociety writ large.
Wal-Mart: reporting’s 800-pound gorilla
8Tomorrow’s Value
Value Revolution
An early contender for the title of thisbenchmark survey was Buy. Hold. Sell.Perhaps unsurprisingly, several financialcolleagues felt this was potentially a caseof over-promising in terms of the investorutility of current corporate reporting. But the original intent of the title remainscentral to our analysis and conclusions:there is a revolution starting in reportingand it will focus on value. Just as we oncetracked a shift from compliance reportingto wider sustainability reporting, we nowsee the beginnings of a shift towardsreporting on what the 2005 Philips reportcalled the processes of ‘Creating Value’.Here we look at how far the field hasmoved towards that goal — and test theutility of current reporting with a panel of leading financial experts.
Third generation business case
Many leading corporate reporters try toaddress the issue of investor relations byincluding the logotypes of — or interviewswith — socially responsible investmentfunds. This focus is somewhat surprisinggiven that SRI investors often represent less than 1% of the shareholder base.
BT, our top-scoring reporter, includes theDow Jones Sustainability Indexes andFTSE4Good logos alongside its Chairman’sletter. Interestingly, though, if you gothrough to the linked website,6 and click on the Investor Centre button, you will finda list of FAQs (frequently asked questions),none of which addresses the sorts ofsustainability issues covered in BT’s socialand environmental performance report. But this may well change as BT pushestowards ‘third generation’ business casethinking and reporting (Figure 4).
Investors and financial analysts arebecoming more interested in a range of risk and opportunity drivers — particularlyin such areas as climate change. But onlyrarely do they find what they are lookingfor in today’s reports. As explained inSection 10, particularly in Figure 20, our 50 leading reports are still skewed towardsrisk management rather than towardsopportunities for value creation.
Understandable, perhaps, since sound risk management is a pre-condition forsuccess in exploiting new opportunities, but we also find that reporting on targetsand forward-looking information remainsan area of striking weakness in mostreports. The disappointing conclusion: even many leading companies are missingthe opportunity to connect with investors,though the sense among members of ourfinancial panel is that significant changesare coming.
Business case evolution
ProtectorsHealth and safetyCorruptionPrivacyEthical procurementCustomer exclusionPollutionDiscrimination
1st 2nd 3rd
BuildersFlexible workingDiversityCommunity investmentCharity supportResource efficiency
InnovatorsSustainability solutionsMarketplace diversityStrategic relationshipsBid support
Generation
Value drivers Market place innovation
Employee motivation
Cost reduction
Licence to operate / Reputation
Risk management
Figure 4
Source: BT
6 www.bt.com/betterworld 7 Facilitated by Peter Zollinger, who heads
SustainAbility’s Capital Markets Practice.8 Call to end quarterly guidance
‘obsession’, Francesco Guerrera, Financial Times, 24 July 2006.
9 Alfred Rappaport, 10 ways to create shareholder value, Harvard BusinessReview, September 2006.
10 www.unpri.org 11 www.enhanced-analytics.com
Section 3Buy. Hold. Sell.
9Tomorrow’s Value
True, none of 50 Leader companies wouldsee their sustainability reports as theprimary vehicle for communicating withinvestors, though many would argue thatthey represent a critical starting point — or gateway — for investors and otherfinancial stakeholders wanting a wider,deeper view. But our experts underscoredthe growing need for an over-archingmaster-plan for disclosure, reporting andcommunication. Within the overall plan,relevant data and information on materialissues will be repackaged for differentaudiences, investors and financial analystsamong them.
Expert roundtable
To stress-test our process and conclusions,we convened a virtual panel of investmentexperts — some of whose comments can befound in the rest of this section.7 They were:
— George Dallas Managing Director, Analytical Policy and Research, Standard& Poor's. A provider of independentresearch on credit and equity.
— Marc Fox Global Investment Research, Goldman Sachs. Goldman Sachs’environmental, social and governance(ESG) research works to integrate ESGissues with industrial analysis andvaluation on a sector-by-sector basis,and to identify investment themesrelated to alternative energy, water, and other emerging ESG issues.
— Dominique Habegger Vice President Research, Asset4. Provides integratedfinancial and extra-financial informationby monitoring over 250 specificeconomic, environmental, social andgovernance factors.
— Ivo Knoepfel Managing Director, onValues Ltd. Provides independentinvestment advice to a whole range of institutional clients. Is in charge ofmonitoring the quality of ESG investmentresearch for the Enhanced AnalyticsInitiative.
— Colin Melvin Chief Executive, Hermes Equity Ownership Services Limited.Decides whether to engage or disengagewith companies on behalf of his clients,rather than recommending buy or selldecisions.
Some conclusions
Pulling together our analysis of bestpractice reporting with the outputs of theroundtable, we identified six conclusions in terms of the prospects for the future of reporting.
Reporting is a basic requirement
“Today nobody really debates the need forreporting,” said Dominique Habegger ofAsset4. “Instead, the real debate is abouthow to achieve better reporting. Reportingthat is targeted to the specific issues — andcomparable between companies and overtime.” The ‘uncertainty risk’, which isobviously linked to a company’s lack oftransparency on its ESG dimensions, leadsin general to excess volatility andoverreaction in particular on the occurrenceof an unexpected event.
It’s financial — or it hardly counts
Current reporting is seen as stronger on‘soft’ information than on the sort of ‘hard’data analysts need and expect. But ColinMelvin of Hermes noted that, “These reportshave become more important as our clientinterest grows and pressure on pensionfunds increases.” As Marc Fox of GoldmanSachs put it, “company disclosure on ESGperformance is critical to our analysis. We incorporate ESG data from publiclydisclosed sources including annual reports,sustainability reports, proxy statements andcompany web sites. If you look at therecent developments within the financialcommunity, ESG is increasingly a part ofmainstream finance. What we have seen to date is only the beginning of themainstream financial community beingasked by clients to integrate ESG issues.”
To encourage further ‘hardening’, ourmethodology emphasises areas such as thebusiness case, governance responsibilitiesand structures, risk management, andinvestor relations. Note, however, that thelowest average score (1.52 out of 4) in the2006 benchmark survey was awarded inrespect of the extent to which companiestry to educate the investment communityon the value of sustainability-relatedperformance. Exceptions tend to be insectors that are now very clear about their most material issues and the extent to which they are potential value drivers, for example the energy sector with climate change, or the apparel sector with human rights.
It’s about long term drivers of value
Short-termism is getting a bad name, even in the short sighted world inhabited by many investors. In particular, there is growing concern among companies,analysts and fund managers about theimpact of quarterly earnings guidance —based on evidence that as chief executivesbecome increasingly obsessed with meetingquarterly forecasts they potentially damagethe interests of shareholders and underminesound corporate governance. One indicationof this trend was the call by the BusinessRoundtable Institute for Corporate Ethics(part of an organization representing some160 US CEOs) and the CFA Institute(grouping more than 80,000 analysts andfund managers) for quarterly guidance tobe scrapped.
Some major companies, including Intel,Motorola and Pfizer, have already stoppedfocusing on short-term, self-imposedtargets.8 Remarkably, even the father of the shareholder value concept — AlfredRappaport — recently criticized thewidespread top executive focus on short-term earnings.9 The focus, he said, should be on long-term profit maximisation.
10Tomorrow’s Value
Investors are increasingly interested —but can’t find what they want
If you accept that long-term value creationshould be the focus, then a range of factorscurrently labelled ‘non-financial’ or ‘extra-financial’ become relevant. Investors, as aresult, could become more interested inforward-looking reporting, an area in whichcurrent sustainability reporting is weak. In parallel, chief financial officers who have been totally absorbed in ensuringcompliance with new rules — particularlythe US Sarbanes-Oxley Act — arecomplaining about its backward-lookingnature and paying more attention to thelinks between corporate governance andstrategic choices. These are often labelledESG (environmental, social, governance)factors. Institutional investors and fundmanagers who have endorsed the UNPrinciples for Responsible Investment 10
represent investment funds valued at more than $4 trillion. They argue that ESG considerations are essential to goodbusiness — and fall well within theobligations of fiduciary duty.
It’s value — and ESG, ‘stupid’
As the links between ESG and businessperformance become increasingly clear, sowe see growing efforts to understand andquantify those links. Consider the EnhancedAnalytics Initiative (EAI), an internationalcollaboration between asset owners andasset managers aimed at encouragingbetter investment research, which has builtin ESG considerations from the outset.11
Ivo Knoepfel, who advises EAI, noted that,“Reports have become more meaningful for specialist ESG investors, but are still not very appealing for mainstream analysts, too much prose, too much text, not enoughdata, not enough facts. [Mainstreamanalysts] still mainly look to other sources.”
50 Leader companies like BHP Billiton andKesko use their reports to explain how theynow engage with the investor communityon the sustainability agenda. BT alsoincludes Henderson Global Investment ontheir Leadership Panel and uses investorquestions to guide their materiality process.In contrast to the investor site, the BTsustainability pages have a specific sectionfor investors, including a presentation onthe business case. BT has been an exceptionthough — the focus of corporate reportingis still primarily on risk.
George Dallas of Standard & Poor’scommented, “It is easier to see where therisks manifest themselves. It’s more difficult[for analysts] to factor [ESG issues] in onthe upside. Until we get more researchwhich links ESG with the upside, investorsare going to focus on risk. [Standard &Poor’s] have looked at corporate governance(CG) for a long time now, and it is a raresituation when, all things being equal, good CG can improve a credit rating. It’s far more likely that bad CG could hurt a credit rating. Similar sentiments willprevail around ESG issues until there is aclearer empirical foundation in researchlinking ESG issues with value creation.” But companies need to be much morespecific in this area. “Companies have a lot to gain in explaining in more detail howESG risks are managed and why they arebetter at it than competitors,” Ivo Knoepfelexplained. And Marc Fox added, “Those who produce ESG reports often come fromPR, communications or environmentalbackgrounds. We find that lack of strategicand financial experience can impedeintegration of ESG issues. We are lessinterested in company PR initiatives andmore interested in how ESG impactscompany performance.”
Capitalist tools
For disclosure, reporting andcommunication on sustainability issues toprovide a seriously useful set of tools forcapitalism, various things need to happen.According to Ivo Knoepfel, “ESG issues mustbe explained in the context of a company’soverall strategy, competitive positioningand new markets. George Dallas agreed,noting that, “sustainability reports canserve as a platform, but other documentsneed to apply a stakeholder-specificmateriality filter. From an investor’sperspective, it is interesting to learn whenan ESG factor is breaking into a company’sTop 5 material risk issues overall.”
And all our experts had something to say on the need for sector-specific reportingguidelines and reporting. “The number one thing we’d like to see,” said Marc Fox, “is more companies within a sectorcoordinating reporting in a consistentfashion. Companies need to understandwhat performance indicators investors are looking for. Interestingly, we are nowseeing the first companies re-stating andupdating ESG performance data andtargets.” Over the long term, he argued,“companies that demonstrate superiormanagement quality with respect to ESGissues are likely to lead their sectors. But we also look at valuation, performanceand traditional industrial outlooks. I cringeat the expression ‘extra-financial.’ If ESGissues were not material to financialperformance — I’d be out of a job.”
What investors really want – consistency and comparability
Our experts stressed a few key things thatinvestors and analysts want (see Figure 5below). The Communication section on page21 looks at how reporters are balancingneeds of investors with those of otherstakeholder groups.
What investors really want
1Time horizonswhich extend wellbeyond 12 months
Figure 5
2Meaningful rawdata sets, reportedconsistently overtime and comparableat least withinsectors
3Limited, focusedcommentary,explaining themateriality of issuesin financial terms
4Information onprocesses foridentifying andmanaging risks
5Targets andforward-lookingstatements
6Focusedcommentary onpast performance
11
Introduction
You have a right to know how the rankingsshown in Tomorrow’s Value were achieved.Unlike most benchmark surveys, the GlobalReporters Program is characterized bytransparency. The heart of the assessment isthe methodology, which is publicly availableand open-source. There is no black box,indeed we invite comments from allinterested parties on how we mightimprove the methodology for futurebenchmarking.
Given that the methodology is published onour website,12 this section of the reportoutlines how the methodology has evolvedfrom the 2000 version — and explains how‘The 50 Leaders’ and ‘Other 50’ reports wereselected. The Global Reporters Program isoverseen by an independent AdvisoryCommittee (see inside back cover).
Evolution
SustainAbility began work on reporting in 1992, publishing its first survey report(Coming Clean) in 1993 and its firstbenchmark survey with UNEP (CompanyEnvironmental Reporting) in 1994. The shiftto sustainability — or triple bottom line —reporting came in 1996, with EngagingStakeholders, and the methodology wasrevised for a third time (to a lesser extent)in 1998. The next revision came in 2000, tobetter address the emerging practice ofsustainability reporting, and thatmethodology was repeated in 2002 and2004.
With Risk & Opportunity in 2004, wespotlighted the growing use of ‘materiality’as central to issue identification insustainability reporting. It has become acentral organising principle for leadingreporters. This is important, since the issuescovered in reports by banks, for example,bear little resemblance to the issues thatmust be covered by pharmaceuticalcompanies. Focusing on a standard set ofissues makes little sense — and, worse, canencourage what we dubbed ‘carpet-bombing’, with companies covering everyconceivable issue to ensure they benchmarkwell.
This year, in consultation with our AdvisoryCommittee, international experts andreporting companies, we have furtherupdated methodology. It is now better ableto assess reporting on core businessprocesses — and test how these addressrelevant issues. This year, for example, BPshowed up well in relation to climatechange — which is captured in multipleareas of our methodology (Figure 8).
The response to the revised methodologyhas been very positive. A few final points tomake here are: (1) the methodology iscomplementary to the GRI guidelines andparticularly the Reporting Principles of theG3 guidelines; (2) we are agnostic onlanguage — be it CR, CSR, corporatecitizenship, ESG, non-financial, extra-financial — as long as the relevantunderlying issues are addressed; (3), thenew methodology is designed to promotegood quality reporting and communicationto audiences that are both informed onbasic business and sustainability issues (e.g.investors, opinion-formers, NGOs,employees) and have a stake in the businessand (4) the methodology measures thequality of reporting, not performance.
Tomorrow’s Value
Methodology development2000—2004
Performance reportingon specific sustainabilityissues and if/how theseare integrated intobusiness thinking
Climate change, humanrights, materials use,wages and benefits
2006
Generic ‘businessprocesses’ and if/howthese take into accountsustainability issues
Issue identification, riskmanagement, entre-preneurial and innovationefforts, marketing andsales, external affairs
Focus
Examples
Figure 6
Methodology scoring system
Score
0
1
2
3
4
Finding
Nothing
Sketchy
Systematic
Extensive
Integrated
Figure 7
12 www.sustainability.com/globalreporters
Section 4Methodology
12
Methodology: content and scoring
1 Governance and strategy (12 criteria)Assesses (1) how well a company explains its activities and their associatedeconomic, environmental and socialimpacts, (2) the governance of sustain-ability performance and (3) theintegration of sustainability into business strategy.
2 Management (9 criteria) Evaluates howwell a company reports on implement-ation processes. The focus here is on the extent to which (1) reporting demon-strates alignment between internalsystems and declared intentions, and (2) the report explains the influence ofthe company on external stakeholdersand market conditions.
3 Presentation of performance (4 criteria)Designed to assess how well a givencompany explains its performance onmaterial issues.
4 Accessibility and assurance (4 criteria)Finally, we examine how successfulcompanies are in designing theirreporting approach to meet the needs of key audiences. This includes anassessment of efforts to give readersconfidence in the information presented.
Selection process
The process for selecting the 50 Leaderreports had four main elements.
1 Report identification Due to growinginterest in the Global Reporters bench-marks, we have moved from a submissionprocess to one based on publiclyavailable information. The selection ofreports is now based on performance inthird-party rankings from a global reviewof reporting award schemes, benchmarks(e.g. the AccountAbility Rating andnational benchmark schemes) and otherpublished indicators relating to thequality of disclosure of sustainabilityinformation (e.g. Dow Jones Sustain-ability Index) with a view to identifyingglobal reporting leaders. This year, theprocess yielded approximately 100reports.
2 Classification and selection Reports areidentified and classified by sector andgeography. The selection of reports isbased on performance in third-partyrankings and then balanced to reflectsector and geography, based on inform-ation provided by CorporateRegister.com.An initial check was carried out to ensurethat all reports proposed for inclusion inthe 50 Leaders were of a sufficiently highstandard. The current company report atthe 19 June cut-off date was considered.Where a new company report waspublished before the end of the researchphase (end August 2006), the later reportwas benchmarked, where possible.
The 50 LeadersWe have renamed the sample of 50companies benchmarked to better reflectour aspirations — that this group ofreporters represents a sample of leading,global reporting companies.
It is quite possible that companies notlisted among the Leaders, or among theOther 50, would score well in comparisonto some or all of the companies listed.
3 Benchmarking This process is central. Each year the task grows in complexity,in parallel with the sophistication of thecompanies reporting. On average, areport benchmark takes a speciallytrained analyst two to three days tocomplete, depending on the complexity,organisation and length of the report. We recruited a team of four researchanalysts to deliver the report bench-marking, supplemented by expertise from the wider team. Each researcherwas given intensive training on reportingand the mechanics of the methodologyand each benchmark was reviewed by acore member of SustainAbility staff. The process ran as follows:
— Reading In-depth review of reports and material on websites.
— Analysis and scoring Scoring of reports against each of the 29 benchmark criteria.
— Quality control Peer review of the analysis.
— Finalisation Updating of scores and records.
4 Finalisation Once the benchmarking was completed, a thorough review of the50 Leaders was conducted — and of eachsector. Where the total score of a reportwas under 50%, and the report scoredunder 50% in each benchmark section, itwas replaced with an appropriate reportfrom the Other 50.
Tomorrow’s Value
Methodology: issue treatment
1. 01Companyand industryprofile
Issue treatment of climatechange in the reportBP Making energy more:sustainability report 2005
Governance and strategy 1. 07SD imple-mentationchallenges
1. 06The businesscase
Management
1. 10Compliancemanagement
2. 04Personnelmanagement,training anddevelopment
2. 01Managementprocedures
Presentation of performance
2. 07Industryinfluence
3. 04Target setting
3. 01Performanceand strategyalignment
4. 1AssuranceAccessibility and assurance 4. 4
Accessibility ofinformation
1. 04Principles,values andpolicies for SDaccountability
1. 02Topmanagementstatement
1. 08Governancestructure andresponsibilities
2. 02Supply chainmanagement
1. 11Meetingtomorrow’sneeds
2. 05Learning andknowledgemanagement
3. 02Measuring SDperformance
2. 08Philanthropyand socialinvestment
4. 2Reportingcommitment,policy andstrategy
1. 03Issue identifi-cation andprioritization
1. 09Risk manage-ment
1. 05SD visionand businessstrategy
1. 12Customerinfluence andmarket shaping
2. 06Public policyand regulatoryaffairs
2. 03Stakeholderengagement
2. 09Investorrelations
3. 03Context andinterpretation
4. 3Reportingstandards
1. 01Company andindustry profile
1. 05SD vision andbusiness strategy
1. 12Customer influenceand market shaping
3. 1Performanceand strategyalignment
Figure 8
13
Global report outputReports / Year
2000
1500
1000
500
Figure 9
95 0500
100
80
60
40
20
South AmericaNorth AmericaEuropeAustralasiaAsiaAfrica / Middle East
Global report output by regionPercentage of reports / Year
Figure 10
95 0500
Tomorrow’s Value
The 50 Leaders
Now for the serious part. Sustainabilityreporting is a highly dynamic — and highlycompetitive — area of business thinking and action. Reporting levels continue togrow (Figure 9), although the pace ofgrowth seems to be slowing, partly perhapsbecause the hurdles for new entrants areconstantly increasing. That said, no fewerthan half (25) of our 50 Leaders are new to the 50 and four of these break into the Top 10: Anglo Platinum, MTR, Vodafone and Nike. Non-OECD reporters also make a good showing, with two in the Top 10(none in 2004). Despite the revision of thebenchmark methodology, overall scoresincreased from 2004 — with BT emerging as the clear leader, with a seven-point lead.The methodology changes make it difficultto compare the 2006 results with those for2004 or earlier, but we include the relevant2004 rankings as a guide.
The Other 50
The selection of the 50 Leaders as arepresentative balance of sectors andgeographic regions excluded many excellent reports. Therefore, alongside the 50 Leaders, we selected a further group of 50 reporters considered worthy of note. Where appropriate, we have drawn from this wider sample in reachingand presenting our findings.
UK leads pack
Strikingly, the three leading companies are from the United Kingdom. ContinentalEuropean reporters also put in a goodshowing, with the Netherlands providingfive of the top 50 reports. We also seestrong contributions from the US andJapan, though Japanese reporters struggleto break the 50% mark — the exception being Daiwa Securities. MTR (Hong Kong),Anglo Platinum and Nedbank (South Africa),Natura and ABN AMRO Real (Brazil)demonstrate that non-OECD reporters are scoring highly and impacting thereporting agenda.
Banking sector breaks through
In terms of sectors, whereas in past yearsthere was a dominance of players in theextractive, heavy industry and pharma-ceutical sectors, the banking sector hasbroken through — with nine companiesfrom the sector among our 50 Leaders.
Global Reporting Initiative
The GRI has had a profound influence on our 50 Leaders. All these reporters at least make reference to the GRI, with 24 reports formally ‘in accordance’ (adoubling from the 12 recorded in 2004).The recently launched G3 guidelines willhave three ‘application levels’ which, it ishoped, will increase their use by companies,particularly those outside of this leadershipgroup. For comparison, Figure 14 shows the proportion of all reports internationallyusing the GRI Guidelines.15 For the most up-to-date information on the uptake of GRI reporting visit the GRI andCorporateRegister.com database ofreports.16
Based on a survey ofover 11,000 reports
Data for Figures 9–10 and 13–15provided by CorporateRegister.com
13 Due to the changes made in the benchmarking methodology we have not compared 2006 scores with those from 2004. But we indicate rankings in the 2004 survey.
14 Industry classifications were provided by CorporateRegister.com based on the FTSE classification system.
15 Reporting in accordance with GRI, or including a GRI content index
16 http://www.globalreporting.org/reportsdatabase/
Section 5Results and Analysis
The 50 Leaders 13
Figure 11
Rank2006Industry 14
ReportYearCountry
New
NewNew
New
New
New
New
New
New
New
New
NewNew
New
NewNewNew
NewNewNewNewNew
NewNewNew
Rank2004
BTCo-operative Financial ServicesBPAnglo PlatinumRabobankUnileverMTRVodafoneShell GroupNikeNovo Nordisk
ABN AMRO RealBHP BillitonPhilipsABN AMROHPAnglo AmericanGSKRio TintoWestpac Banking
adidas GroupBritish American TobaccoKeskoWatercare ServicesFordGeneral ElectricNaturaStatoilLafarge
MecuBAAVeolia EnvironnementPotashCorpBBVADaiwa Securities GroupDSMGapSASMigrosVancity
SuezEnelHenkelNedbank GroupFuji Photo FilmSonyKarstadtQuelleSeven and I HoldingsNissan MotorTelus
UKUKUKSouth AfricaNetherlandsUK/NetherlandsHong KongUKUK/NetherlandsUSDenmark
BrazilAustraliaNetherlandsNetherlandsUSUKUKUK/AustraliaAustralia
GermanyUKFinlandNew ZealandUSUSBrazilNorwayFrance
AustraliaUKFranceCanadaSpainJapanNetherlandsUSSwedenSwitzerlandCanada
FranceItalyGermanySouth AfricaJapanJapanGermanyJapanJapanCanada
Telecommunication ServicesBanksOil & GasMiningBanksFood Producers & ProcessorsTransportTelecommunication ServicesOil & GasHousehold Goods & TextilesPharmaceuticals & Biotechnology
BanksMiningElectronic & Electrical EquipmentBanksInformation Technology HardwareMiningPharmaceuticals & BiotechnologyMiningBanks
Household Goods & TextilesTobaccoFood & Drug RetailersWaterAutomobiles & PartsDiversified IndustrialsPersonal Care & Household ProductsOil & GasConstruction & Building Materials
BanksTransportSupport ServicesChemicalsBanksSpeciality & Other FinanceChemicalsGeneral retailersTransportFood and drug retailersBanks
Diversified IndustrialsElectricityPersonal Care & Household ProductsBanksMedia & PhotographyElectronic & Electrical EquipmentGeneral RetailersGeneral RetailersAutomobiles & PartsTelecommunication Services
2005/62004200520052005200520052005/6200520042005
2003/420052005200520062005200520052005
20052005200520052004/52006200520052005
20052005/6200520042005200520052004200520052003
200520052005200520052005200520052005/62005
413—7
10——8—2
—1639—
1012—8—
294
14—
16—
161321
—6
16——
39—
48———
—————
4525———
123446779
1010
121212151517171717
212121212525252529
3031313334343434343939
41424244454647484950
Score%
8073727070676666656464
616161606059595959
585858585757575755
5453535352525252525151
49484847474543424139
Company
Tomorrow’s Value 14
15
Print or pixels?
Despite the use of the materiality concept(page 19), the average length of leadingreports is still increasing. While onlinereporting makes the exact page length hard to assess, the average report lengthamong the 50 Leaders in 2006 is just over 90 pages (up from 72 pages in 2004).This is significantly higher than the 45pages CorporateRegister.com shows for all reports. Most (42) of the 50 Leadersmake additional information availableonline. Best practice here includes BP(excellent mapping tools), BHP Billiton(well-structured website) and O2 (buildyour own report).
Governance and strategyTop scoresBT, BP, MTR, Philips, Rabobank
In 2004 we flagged corporate governanceas growing in importance. While the spacedevoted to corporate governance hasincreased in the latest round, the degree of sustainability integration has not. But wesee progress in the fact that many reportsfocus on the board’s role, membership andstructure (including the number of non-executive directors), even though discussionof specific accountability for sustainabilityissues at the board level remains limited.Companies that do a good job in this areainclude: Anglo Platinum, BT, Ford, GSK,Nedbank, Nike and Rabobank.
The 2006 BT report offers a comprehensiveaccount of the company’s values andbusiness principles — and discussion of how they are implemented and monitored.There is good coverage of how stakeholderengagement is used to identify materialissues, an overview of how sustainabilityissues are integrated into risk management,and a clear mapping of how accountabilityis allocated across the group hierarchy. In terms of strategy, the report explainshow BT’s plans for its ‘21st CenturyNetwork’ links to issues like energy use and carbon reduction.
The Other 50
Figure 12
IndustryCountry
3MAlcanAracruz CeluloseAstraZenecaBarclaysBASFBC HydroBMWBritish American TobaccoBritish LandCarrefourChevronCitigroupDexiaDofascoEDPEisaiÉlectricité De FranceESBExxonMobilHolcimHSBCIntelITVLandcare ResearchLloyds TSBNational GridNorsk HydroO2OmronÖsterreichische KontrollbankOttoPeugeotPricewaterhouseCoopersProcter & GambleSasolSeiyuSevern TrentSodexho AllianceStandard CharteredStarbucksSTMicroelectronicStorebrandSuncorSuntorySwiss ReinsuranceTata SteelTelecom ItaliaTokyo Electric PowerVolkswagen
USCanadaBrazilUKUKGermanyCanadaGermanySouth AfricaUKFranceUSUSBelgium/LuxembourgCanadaPortugalJapanFranceIrelandUSSwitzerlandUKUSUKNew ZealandUKUKNorwayUKJapanAustriaGermanyFranceUKUSSouth AfricaJapanUKFranceUKUSFranceNorwayCanadaJapanSwitzerlandIndiaItalyJapanGermany
Diversified IndustrialsSteel & Other MetalsForestry & PaperPharmaceuticals & BiotechnologyBanksChemicalsElectricityAutomobiles & PartsTobaccoReal EstateFood & Drug RetailersOil & GasBanksBanksSteel & Other MetalsElectricityPharmaceuticals & BiotechnologyElectricityElectricityOil & GasConstruction & Building MaterialsBanksInformation Technology HardwareMedia & PhotographyOtherBanksElectricityOil & GasTelecommunication ServicesInformation Technology HardwareBanksGeneral RetailersAutomobiles & PartsSupport ServicesPersonal Care & Household ProductsMiningGeneral RetailersWaterFood Producers & ProcessorsBanksLeisure, Entertainment & HotelsInformation Technology HardwareSpeciality & Other FinanceOil & GasDiversified IndustrialsInsuranceSteel & Other MetalsTelecommunication ServicesElectricityAutomobiles & Parts
Company
Tomorrow’s Value
16Tomorrow’s Value
One of the best examples of integratedstrategy is BP’s low-carbon energy business,BP Alternative Energy, aiming to invest $8 billion over ten years in generating andmarketing cleaner power from solar, windhydrogen and gas sources. BP AlternativeEnergy seeks to grow five- to ten-fold overa decade. By 2015, BP Alternative Energyhopes to reduce forecast GHG emissions by 24 million tonnes a year, the equivalentto making a city the size of Berlinemissions-free.
Similarly, GE reports on its evolving‘Ecomagination’ growth strategy to helpmeet customer demand for more energy-efficient, cleaner products. The productpipeline increased by more than 75% in the year reported. GE also predicts that60% of its growth will come from emergingmarkets, and describes its strategy to addvalue in these regions.
ManagementTop scoresBT, Co-operative Financial Services, GSK, HP, Natura, Nike
Leading reporters are pushing beyond the description of traditional managementsystems to a clearer articulation of how they manage material issues. Again, BT leads in this category, with aparticular strength in its management of(and influence upon) customers, suppliers,stakeholders, industry peers and the public policy agenda.
The new methodology includes two newcriteria: personnel performance andknowledge management, intended to give the reader a sense of how wellemployees are equipped to addresssustainability issues and how well thecompany is positioned to retain itsintellectual capital. While scores on these criteria are generally low across the 50 Leaders, GSK gets full marks in each of them.
As noted in 2002 and 2004, reporting in the area of supply chains continues to gaintraction. Companies in the apparel (adidas,Gap, Nike) and electronics (BT, HP, Philips)sectors excel in this category. Nike’sdisclosure of its factory base in 2005 was ahuge step. In addition to detailed charts ofviolations of their codes of conduct, thesecompanies use tools such as ‘integratedsourcing scorecards’ to make purchasingdecisions. Some have used root-causeanalysis to analyse — and begin to shift —the relationship between productiondeadlines and working conditions.
Management of stakeholder engagementhas become a reporting staple. Leadingreporters provide examples of howengagement has influenced businessdecisions and processes. For example,stakeholder engagement is embedded inShell’s project impact assessment process, is a key component of Rio Tinto’s ClosureStandard, and is distributed throughoutNatura’s corporate functions.
Uptake of GRI guidelinesPercentage of reports / Year
25
20
15
10
5
03 050402
2005 report outputPercentage of reports / Sector
Figure 13
Tran
spor
t
Bank
s
Electr
icity
Mining
Chemicals
Oil / GasConstruction / Building Materials
Electronic / Electrical Equipment
Support Services
Automobiles / Parts
Fore
stry
/ Pa
per
Tele
com
mun
icat
ion
Serv
ices
Dive
rsifi
ed In
dust
rials
Stee
l / O
ther
Meta
ls
Engin
eering /
Mach
ineryIT HardwareFood Produce / ProcessPharmaceutical / Biotech
Water
Multi-Utilities
General Retailers
Beverages
Others
6%
5%
4%
3%
2%
1%
Average page countPages / Year
50
40
30
20
10
95 0500
Figure 14 / Figure 15
17Tomorrow’s Value
Presentation of performanceTop scoresAnglo American, Anglo Platinum, BT, Co-operative Financial Services,Rabobank, Shell
If early reporting focused on promises,policies, management systems andstakeholder processes, the performancecomponent has become central for ourleading reporters. The challenge, however, is working out how to report on perform-ance in a meaningful way. The aim of thissection of our methodology is to assess how well a company explains itsperformance in relation to materialsustainable development issues. It looks at how companies report performance on their material issues — and at how links are made with core business strategy.This linking is an area where reports remain fairly weak: no one scored the topmark of 4. In the case of Ford, for example,Bill Ford identified headcount reductionand reskilling as key issues in his CEOstatement, but actual performance in these areas was not included in thesustainability report.
Reporting on performance against materialissues is somewhat better handled, withWatercare Services and Anglo Platinumboth scoring 4. Anglo Platinum is notablefor its discussion of how performanceagainst its Mining Charter commitmentsimpacts its business strategy. Overall,however, even our 50 Leaders tend to beweak in terms of the reporting of theirtargets — and in the provision of forward-looking performance information. Indeed,four companies among the Leaders scorezero in this area.
While reporting on operational performanceis generally quite strong, companies areweaker in reporting on product and serviceimpacts. Growing numbers of oil and gascompanies, for example, are setting cleartargets on operational greenhouse gasemissions. On the other hand, targets on product or portfolio issues are muchweaker or even completely absent both in this sector and in others. Given the long-standing problem of the missingsynchromesh — in the sense that corporatereporting often fails to link to sectoral,value chain, national or internationalreporting — it is interesting to see someleading companies exploring wider sectoral,national or international frameworks.
Among a growing number of examples are the Millennium Development Goals(MDGs) and South Africa’s Mining Charter.Over half (28) of the 50 Leaders mentionsome sort of external standard used inframing their reporting. Shell is one of thecompanies that has taken this approachfurther than most. It provides a detailedtable outlining each MDG, explaining howtheir core business impacts on the relevantissues, indicating the level of the socialinvestments they make, and outlining thedialogues and policy activities they areinvolved in.
The following performance reporting self-assessment tool (Figure 16) can be used by companies to assess howcomprehensive their performance reporting on priority sustainability issues is — and to identify areas for improvement.Our starting point — that for each of acompany’s priority sustainability issues,reporting should disclose both performancein the management of risk and also howwell it is managing the opportunitiespresented. For each issue, tick the boxes to indicate your current practice, the gaps highlight areas for improvement.
Aspects of Assurance
Aspect Comment Example
Materiality
Reportingstandards
Assurancestandards
Data
Assertions
Context andresponse
Findings andconclusions
Testing whether keymaterial issues arecovered
Testing application ofexternal standards
Using standards to guideassurance process(AA1000AS, ISAE3000)
Testing processes usedto collate data andaccuracy of information
Cross-checkingstatements made
Providing insight intopurpose of assuranceand use of findings
Providing insight intoassurance results
BAA ERMNike Report ReviewCommittee
BP Ernst & YoungVodafone Deloitte
BP Ernst & YoungVodafone Deloitte
BAA ERMMecu URS
BP Ernst & YoungRabobank KPMG
GSK ERMUnilever URS
Gap Public ReportingWorking GroupMecu URS
Figure 17
Self-assessment tool
1
Context
Performance onvalue creation
Priority sustain-ability issues
Operationalperformance
Implications of corebusiness strategy
Product/serviceimpact
Nature/scale ofR&D activity
Scale of potentialmarket opportunity
International stan-dards contribution
Target set
Risk managementperformance
Compliance withlaws and standards
2 3 4 5
Figure 16
18Tomorrow’s Value
Accessibility and assuranceTop scoresAnglo Platinum, BAA, BHP Billiton, BP, BT, Co-operative Financial Services,Vodafone
BP leads on accessibility. There are stronglinks between their 64-page report andwebsite, with the latter adding real value.Efforts have also been made with access-ibility for disabled readers, including speechversions of data charting tools. The report is also available in a range of languages.Indeed, around half of the 50 Leadersproduce their report in more than onelanguage. A few reporters stand out in this respect: CFS with 13 languages, for example, and Rio Tinto with 21. US-based reporters are less inclined to offer translations.
Of our 50 Leaders, 17 issue regional or local reports. Energy and extractivecompanies have led in terms of site and/orregional reporting, but similar approachesare emerging in other industries, e.g. BAA, Daiwa, DSM, Nedbank, Sony andVodafone. There are many examples ofissue-focused reports. For examples, Fordrecently released a report focused onclimate change while GSK providedadditional information on access tomedicine.
Several leading 50 companies use (or advocate) GRI sector supplements or other sectoral guidance to focus their reporting. BHP Billiton, for example,applies the Mining and Metals Sectorsupplement and Anglo American commitsto using it from 2007. BT has piloted the telecommunications supplement. Nike and Gap discuss their advocacy for a supplement for apparel and footwear,while MTR leads a trade associationworking towards reporting standards for the public transit sector.
Assurance
This area remains one of the most dynamicin the reporting field. Our leading reportersare testing a variety of approaches,suggesting that ultimate convergence and standardisation are still some way off. In fact, in 2006 we see an increase in the number of companies adopting a ‘portfolio approach’ to assurance –choosing specific types of assurance tomeet specific stakeholder demands and/orto serve different issues and types of data. Figure 17 takes seven dimensions ofassurance and links out to best practice.
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New, new thing
It’s an obvious question: are reportersidentifying and reporting on the rightissues? In 2004 materiality 17 was the new, new thing, sold as one of the greatbreakthroughs in the reporting field. 18
Since then it has continued to gainprominence, featuring as a key principle inthe G3 version of the GRI guidelines 19 andsurfacing as one of three principles formingthe backbone of the AA1000 AssuranceStandard. But, at least in private,practitioners note that the concept remainsdifficult to implement.
So how are our 50 Leaders doing in thisfield? Most still find it difficult to balancecompeting demands from diversestakeholder groups. While the average scorefor ‘issue identification and prioritisation’ isfairly high (2.56 out of 4), confirming thatmost companies have systematic orextensive reporting in this area, evencompanies that excel in issue identificationtend to encounter problems when it comesto prioritization, to materiality.
At the most basic level, there are still widediscrepancies between the issuesspotlighted in CEO letters in annual reportsand sustainability reports. Some of ourleading group of reports still adopt thebasic triple bottom line approach, givingequal weight to each of the GRI indicators.As a result, our analysts often struggled toidentify the ‘Top 3’ issues in each report.They noted, wryly, that some companieshave tried to resolve the issue byprioritizing broad groups of importantissues under the headings of ‘environmentalfootprint’, ‘community impact’ and‘financial results’ (see Figure 3).
So how do analysts do this in the financialmainstream? They often set a numericalthreshold — perhaps 5% of a company’srevenue — to determine financial material-ity. Such a calculation would be impossibleto duplicate for the array of sustainabilityissues a typical company faces. It is notdifficult to see why ‘carpet-bombing’ hasbecome so prevalent in sustainabilityreporting. Demands for information havesoared, with few usable tools available tosort the ‘wheat’ of information andknowledge from the ‘chaff’ of data.
But progress is certainly being made. A fewleading reporters are beginning to break outof their environmental-social-economicsilos and are focusing on their mostmaterial issues, among them BP, BT, Ford,HP, Shell and Vodafone. While levels oftransparency vary in this area, thereappears to be a fair degree of consistency inhow this small group of leading companiesare pursuing the materiality ‘grail’. Forexample, in this year’s crop of reports BP,BT, Ford and Shell all follow a similarprocess:
1 Identify issues from external stakeholdersand wider society, e.g. via media reviews,website hits, reader surveys, SRI reports,stakeholder interviews/dialogues, peerbenchmarks and external commitments.
2 Use internal risk and opportunity identification systems. Refer to corporatepolicies, values, principles and externalcommitments.
3 Determine which issues will have the greatest business impact, using toolssuch as risk analysis, financial impact,business strategy, impact assessments,internal policies, management systems,etc.
4 Prioritize the issues according to the level of external/society concern — andthe potential impact on the companyand/or its ability to control/influence the issue.
Tomorrow’s Value
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Materiality matrix
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Figure 23
17 The concept of materiality is derived from the field of financial auditing, where it isdefined as, ‘the magnitude of an omissionor misstatement of accounting inform-ation that, in the light of surroundingcircumstances, makes it probable that thejudgment of a reasonable person relyingon the information would have beenchanged or influenced by the omission ormisstatement’. Statement of FinancialAccounting Concepts No. 2, QualitativeCharacteristics of Accounting Information,Financial Accounting Standards Board(FASB).
18 Risk & Opportunity, Best Practice in Non-Financial Reporting, SustainAbility,UNEP and Standard & Poor’s, 2004.
19 The G3 version of the GRI includes ‘Relevance and Materiality’ as a reportingprinciple. It states, ‘The information in areport should cover issues and indicatorsthat would substantively influence thedecisions of the stakeholders using thereport.’
Section 6Materiality
20Tomorrow’s Value
5 Plot the issues on a ‘materiality matrix’ and review (with internal and/or externalparticipants) to ensure accuracy andbalance (Figure 23).
6 Report on material issues in printed sustainability reports and/or online,depending on their priority.
7 Continue to manage material issues. Set strategy accordingly, feeding key findings back into the issueidentification process.
Three dilemmas
The diagrams look neat enough, but thedevil, as always, will be in the details. Hereare three key dilemmas that challenge themateriality processes outlined above:
Dilemma 1: Thresholds and weightingStep 4 in the process above encouragescompanies to prioritise the issues, but howis this best done? The analysis must takeinto account the credibility of the source(s)that have identified the issue, as well thefrequency and energy with which the issueis raised. Which stakeholders care and howmuch? What if they disagree? And what if they, too, are blind to emerging issues —how can companies amplify ‘weak signals’?The analysis also needs to consider thematurity of the issue (Figure 24), withissues approaching the ‘Expansion’ stage needing active risk management.Finally, the time frame in which thematerial issues will likely impact thecompany must be considered.
By their very nature, most sustainabilityissues have longer time-frames thantraditional business issues. Interestingly,Ford’s materiality matrix establishesgreenhouse gas emissions (long-term issue)as more material than the cost of employeehealth care (a shorter-term issue, butnonetheless with major impacts).
Dilemma 2: Risk and opportunityFor sustainable businesses to achieve scale, companies must increase their focuson how sustainability can add value to thetop line (see page 27). Currently, mostmateriality processes are geared towardmeasuring risks, and even among theleading reporters the integration of material sustainability opportunities is rare. As Vodafone puts it in its CSR report,‘A process based on asking externalstakeholders to identify issues always tendsto emphasize negatives over positives. We accept this as a reality of how peopleengage with global companies. Our internalmateriality assessment focuses on theopportunities that our technology brings to society.’ BP also stresses in its descriptionof how its materiality process wasexpanded in 2005 that it took care tocapture positive issues as well as negativeones. Not surprisingly, perhaps, the banking sector prioritizes opportunities to a much greater extent than moreresource intensive sectors.
Dilemma 3: Confidentiality and the‘materiality iceberg’ Finally, as companiescome to view sustainability as a source ofcompetitive advantage, we might expectthat they will be increasingly reluctant tobe transparent about key results of theirmateriality assessments.
Only Ford actually reports the issues thatfall into all quadrants of its materialitymatrix. Other companies focus onexplaining their process, leaving theirmatrices blank. So while the issues in theupper right-hand quadrant of their matricesare included in their reports, readers areactually only seeing the tip of the iceberg.The bulk of the issues, including thosefollowing the escalation curve and likely to surface shortly, remain hidden fromreaders — and competitors.
The journey continues
In closing, we have only taken the firstcouple of steps on the materiality journey.Most companies still have a way to go inidentifying, prioritising and managing theirmost material issues. The Global ReportingInitiative’s (GRI) new G3 guidelines putmateriality at the heart of their reportingprinciples, encouraging companies not toreport on indicators if they are deemed not material. AccountAbility’s forthcomingreport —Materiality: Aligning Strategy,Performance and Reporting — promises to be a welcome addition to the corporatepractitioners’ toolbox.
While analysts and other stakeholders waitfor the next steps in materiality reporting,they will have little option but to rely fairlyheavily on assurance statements, preferablyproduced by those who know the industrywell and are not afraid to challenge theirclient’s reporting on its omissions and other weaknesses.
Issue escalation and typical corporate response
Figure 24
Zone of influencePinch-point emergingLow media profileCompanies often ignoreTime of most influenceMap the common ground
Risk managementPinch-point is establishedPolarization takes placeCompanies prioritise issueHarder to agree commonground
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Local activists NGOs Media Opinion-formers Regulators
ConsolidationPinch-point on mainstream agendaSubject to wide review and regulationNGOs can step back with the job doneCompanies must shape regulationsExplore strategies to regain trust
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21
The central challenge is not to report,but to communicate, engage and learn.
Despite our criticism of ‘carpet bombing’approaches to reporting in 2002, the size of reports has continued to grow, as Figure 15 demonstrated. And the size of thereports currently offered by our 50 Leadersis even bigger, averaging over 90 pages. Our working hypothesis is that thereporting agenda will morph significantly in the coming years, partly driven by theincreased emphasis on materiality, partly by the growing interest in value creation,and partly because sustainabilityexpenditures are likely to come underpressure — whether because of recession,mainstreaming or market pressure fromlower-cost competitors from countries like China and India.
The challenge, increasingly, will be tointegrate material, usable sustainabilityinformation into a range of existingcommunication channels. In the process,companies are likely to adopt the sort of approach sketched in Figure 25, with a core data set being used to feed an array of communication channels.
This does not mean the end of reporting,but it does mean that getting the investorrelations, government relations, communityrelations, marketing and sales peopleinvolved will no longer be an option.
We have yet to see a company transitioning100% to this approach, but a fair numberof those that have been in leading positionsin past benchmark surveys are becomingmuch more sophisticated in how theymanage the communication challenge.Novo Nordisk, for example, has been veryimaginative in developing its Oxford HealthChallenge response to the spread of chronicdisease worldwide, effectively a company-led campaign. Other companies, includingDow Chemical and DuPont, have built key parts of their external communicationaround a limited set of really strategicsustainability targets. And yet others,among them the UK banking group LloydsTSB, are dropping their single compre-hensive reports and switching to an array of more customised communications.
As part of the 2006 benchmark survey we looked at different audiences andcommunication vehicles for sustainabilityinformation: here are a few that stood out.
InvestorsThe Holy Grail is to convince investors that sustainability issues are material toboth the bottom and top lines. While manyreporters state that investors are a primaryaudience for their sustainability reports, the views of our panel on page 9 suggeststhere is quite a gap between the aim andthe execution. So progressive investorrelations departments are attempting tomine interesting nuggets of informationand include them in investor road-showsand analyst briefings.
Approximately 70% of the Leading 50reports make reference to communicatingsustainability performance to investors.Generally, however, it is not clear whetherthese efforts were limited to sociallyresponsible investors or extended tomainstream investors. There is a consider-able range here, with a company like BHP Billiton describing its annual briefingfor SRI analysts, while Enel’s InvestorRelation’s Unit reports no less than 31meetings on sustainability with investors.
Annual reportOne obvious way to communicate withinvestors is through the annual report. Just over 70% of the Leading 50 reportersinclude at least a reference to theirsustainability efforts in their annual report.
Tomorrow’s Value
Core data sete.g. GRI
Sustainability communication channels
Figure 25
EmployeesCR reportInternal magazineIntranet
IndustryCR reportPurchasingguideline
InvestorsAnnual reportBriefingPress releaseQuestionnaireRoadshow
NGOsCR reportFace-to-facemeeting
GovernmentBriefingCR reportRegulateddisclosure
CommunitySite newsletterLocal press article
Value ChainTender documentSupplier meeting
CustomersAdvertisingIn-store leafletsWebsiteProduct labelling
Section 7Communication
22
Integration of sustainability reporting and annual reporting was a key theme of Risk & Opportunity in 2004. This yearthere were four integrated reports in the 50 Leaders with the highest integratedreporter, Novo Nordisk, ranked number 10. In 2004 we issued three challenges to integrated reporters – prioritise, givecontext and get the language right. In 2006 we see signs of progress, but alsofind reporters questioning whether there is sufficient flexibility within the annualreport context to meet multiple stakeholderrequirements. The need to supplementAnnual Reports with other communicationchannels makes the approach mapped in Figure 25 even more important forintegrated reporters.
EmployeesAn often-cited benefit of sustainabilityreporting is its ability to galvanise andmotivate employees. Approximately 65% of our leading 50 reports mention efforts to communicate with their employees insome aspect of sustainability. Manycompanies have now integratedsustainability into their internalcommunications.
Shell and Vodafone, for example, producesustainability reports tailored for theiremployees, while companies like Nike and adidas integrate sustainabilityinformation into existing employeenewsletters and intranets.
CustomersPerhaps the area of greatest creativity —and still untapped potential — is inconsumer-facing communication. Severalretailers (among them Starbucks, Sainsburyand The Body Shop) use in-store leaflets,while Brazil’s Natura uses a hybridmagazine/catalogue to communicate with customers on sustainability issues. A growing number of companies areworking to target consumers and customerseven more accurately. Both Vodafone and02, for example, distribute text messagesabout sustainability issues to theircustomers through their mobile phones,while some banks include sustainabilitymessages on the bottom of credit-cardstatements. Other companies, including BP, BT and KarstadtQuelle, use features likecarbon calculators or sustainability gamesin an effort to engage consumers.
In most sectors and in most countries, we are still some way from the point wheresustainability issues are recognised asmake-or-break for consumer and customercommunication. That said, the retail sectorhas been scrambling to present its greencredentials in some European countries,resulting in high profile campaigns in the UK. In Switzerland, meanwhile, thesupermarket chain Migros has faced intensecompetition from the rival Coop chain, and responded by offering a summaryversion of its sustainability report as aspecial edition of its weekly newspaper,which goes to 2.5 million of the nationalpopulation of 7 million. In addition, Migroshas run a campaign to brief consumers onsocial and environmental issues linked tothe company’s products, using nationalnewspapers, billboards and the internet.
Indeed, growing numbers of companies now engage their marketing and brandingarms, with varying degrees of success. For a sense of how this might help,compare the number of people who saw the advertise-ment for free-range eggs on the side of the McDonald’s delivery truck bustling through the streets ofLondon with those who read the company’ssustainability report on the same day. UNEP now offers the first inter-nationalonline database of advertising campaignsdedicated to sustainability issues(www.unep.fr/pc/sustain/advertising/ads.htm) yet less than half of the Leading 50 reports reference efforts to communicate sustainability through their advertising.
One of the most impressive campaigns ofrecent times has been GE’s ‘ecomagination’campaign. A company like Philips may have more green products on the market,with 160 ‘Green Flagship’ productscompared with GE’s 30 ecomagination-certified products, but GE unquestionablynow has greater global mindshare.
For a sense of what communicators are up against, try visiting GE’s ecomaginationwebsite (http://ge.ecomagination.com) andimagine what could happen if and whencompanies like Google and YouTube start toengage with this agenda. To help companiesto track the impact of their stakeholderengagement investments, SustainAbility has developed the tool illustrated in Figure 26, used here to compare threecompanies: Nike, Mecu and Vodafone. Each may be highly successful in achievinginternal communication and engagementtargets, but — equally — some of theseplots may show up important gaps thatneed to be bridged.
Tomorrow’s Value
Engagement tool
Figure 26
EmployeesImprove ability todeliver on corebusiness strategy
IndustryGalvanizecollaborationon sustainabilitychallenges
InvestorsDemonstrate under-standing of sustain-ability as a toolfor financial valuecreation
CustomersCreate a positivefeedback loopwhere customerdemands drivesustainability ofcorporate strategy
NGOsIntegrate feedbackfrom engagementinto corporatestrategy and coredecision-making
GovernmentShift public policyto level the playingfield and rewardsustainable actions
Mecu
CommunityGenerate synergybetween socialinvestment andbusinessperformance
Value ChainIntegrate sustain-ability intopurchasing andsourcing
Vodafone
Nike
23Tomorrow’s Value
Farewell to smoke-filled rooms?
Corporate influence on public policy is a hugely sensitive issue. Once, corporateand political lobbying was done in murky,smoke-filled rooms. Much of it still is.Though the smoke may have cleared a little, corporate lobbying around issues like bribery and corruption, chemicals andclimate change remains intense. So how far should companies come clean on theirpublic policy positioning and lobbying? How far indeed is it responsible forcompanies to go? Where are the companieslining up behind scalable, entrepreneurialsolutions — and the market mechanismsneeded to drive them? And how is all of this being reported in the best of today’scorporate reports?
Whatever the answers, one thing is clear:lobbying is in the spotlight as never before.Why? Because a number of trends arealigning to drive a greater focus on the role that companies have in influencing not only governments but also the thinkingand behaviour and approaches of a range of stakeholder groups.
For many industries, the most significantimpacts associated with their operationsoccur during the product use phase, rather than the production phase. Because companies rarely control the use phase, addressing these impactsrequires companies to work with otherstakeholders.
And in an age of globalization, whereoutsourcing, offshoring and network modelsof business are common, ‘control’ types of relationships are increasingly unusual. All of this requires successful companies to be more adept at influencing thebehaviour of business partners throughouttheir value webs.
Leading companies still struggle in thisarea. Nike, for, example explains that in a deeply competitive global environment,"the absence of rigorous systems that aligncompliance performance with businessperformance, rewarding and sanctioningfactories remains a challenge”. SimilarlyFord notes that a key tension for them isbetween their “recognition that climatechange is a major and growing environ-mental, social and economic challenge,[but] the slowness of markets and policymakers to provide signals on which we can responsibly act”.
Fundamentally, though, business leadersknow the score. “I believe that it is part of building good sustainable businesses to help establish safe, secure, stable and peaceful societies,” is the way PeterSutherland puts it, as Chairman both of BP and Goldman Sachs. “Business thrives where society thrives,” he says. As globalization brings companies intodifferent territories, they are having to work out how to work in partnership with governments and society in addressingsuch issues as bribery and corruption,poverty, human rights, HIV/AIDS, wateravailability and climate change.
Section 8Influence
20 GRI BoundaryProtocol www.globalreporting.org/nr/rdonlyres/CE510A00-5F3D-41EA-BE3F-BD89C8425EFF/0/boundaryprotocol.pdf
21 Global Reporting Initiative.22 www.projectsigma.co.uk23 United Nations Global Compact.
www.unglobalcompact.org24 World Business Council for
Sustainable Development. www.wbcsd.org
25 Global e-Sustainability Initiative. www.gesi.org
26 www.sustainability.com/insight/scalingup-article.asp?id=317
Entity evaluation
Figure 27
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This tool can be used to determinereporting boundaries around the influencecompanies exert on stakeholders.For example, a pharmaceutical company,reporting on access to medicinemight report on:
A Its own performance on the issue.B Its involvement in relevant trade
association initiatives.C Its role in lobbying national and
supranational governments in settingthe global trade framework onintellectual property rights.
Other stakeholders may be of lessrelevance. For example, a companymight not report on:
D Its relationship with suppliers.
Significance of entityin relation to issue
Degree of influence/controlof company on entity
Reporting boundary
24Tomorrow’s Value
How companies see influence
Government and stakeholder relationsexperts in companies see complex force-fields affecting their operations — andmany are charged with ensuring that publicpolicy and other parts of their operatingenvironments are mutated (as far aspossible) to suit their needs. As they try to report on this area, a series of questionsarises: How do you report on ‘influence’?Where are the boundaries? Surely somethings have to remain confidential in this area? And how does all of this play out in different geographies?
Initial guidance was offered by GRI with a ‘boundary protocol,’ 20 published in January2005. This included a helpful tool focusedon identifying boundaries for reporting on value chain initiatives and performance.We have adapted this tool to reflect theextended responsibility that companieshave in exerting influence on widerstakeholders, particularly where issues are considered material (Figure 27).
The responsibility to report on the widerinfluence that companies exert appears tobe a growing trend, though admittedly it is still early days. GSK for example, “seek[s]to influence others” as part of its role inleadership and advocacy. Ford goes so far as to identify its ‘public policy stances’themselves as among the company’s mostmaterial sustainability issues.
Reporting on influence
Wider reporting in our 50 Leaders confirmsthat ‘influence in the value-chain’ isrecognized as a critical issue among our 50 Leaders, achieving an average score of2.34, alongside ‘influence on customers’(2.26) and ‘influence on wider industry’(2.14). Less common, is reporting on‘influence on public policy’ (1.70) and‘influence on investors’ (1.46). Let’s take a quick look at three key areas of interest:influence on value chains, industry, andpublic policy.
Value chainsCompanies traditionally resisted efforts to drive their responsibilities back throughvalue chains, arguing that it was impossibleto sort out the boundary issues. Thisposition seems to be collapsing, with 15 of the 50 leaders scoring 3 or more.Companies in the apparel sector (e.g.adidas, Gap, Nike) and in the ICT sector (e.g. BT, HP) are particularly strong.
Nike, in particular, broke the mould with its detailed reporting of worker conditionsin contract factories and now comfortably— and usefully — discusses how it bringsinfluence to bear through multi-stakeholderpartnerships, capacity building and training.In other sectors, Shell talk about theirresponsibilities in joint ventures: “We invest in projects that are important forachieving our strategy but are not underour operational control. In these cases, we use our influence as a shareholder toencourage, support and monitor theoperator’s efforts to manage the project inan environmentally and socially responsibleway.” CFS discusses its responsibilities as an investor, including voting at AGMs.Interestingly GSK stresses that it will notseek to influence academics and medicalpractitioners in conducting clinical studies.
Industry influenceThis indicator is unchanged from ourprevious methodology, so directcomparisons are possible — and show asignificant increase from 1.46 in 2004 to2.14 in 2006. Some companies referencetheir involvement in broad industrycoalitions (e.g. GRI,21 SIGMA standards,22
UNGC 23 and WBCSD 24 ), but there is agrowing focus on industry specificinitiatives. BT and Vodafone cite theirinvolvement in work on supply chainstandards undertaken with UNEP andpartners under the Global e-SustainabilityInitiative (GeSI 25). Philips talks aboutcollaborating with competitors in designingtake-back systems: “Our approach is tocooperate with competitors to organiselogistics and select certified recyclingcompanies. This is realised by setting up collective take-back systems in theindividual member states.” The drivers forinvesting time, effort and money in industrycoalitions seem to focus on cost savings (in adopting common approaches), butthere is also ‘safety in numbers’ whentackling problematic issues like bribery and corruption.
Public policy influenceAlmost all 50 Leaders have something to say about public policy issues, whichrepresents progress in itself. The averagescore was 1.70 — compared with anaverage score of 0.8 for the S&P 100,26
even if in some cases companies complainabout growing regulatory burdens (e.g. HP and Philips protest that producttake-back legislation is too complex), or about lack of access to the policycommunity (e.g. BAT: “It continues todisappoint us that the World HealthOrganisation in Geneva so far shows no sign of wishing to offer our industrywhat we regard as proper consultation on issues of mutual concern.”).
Where next on public policy?
The ultimate aim? To get businessesaligning with progressive industry, multi-stakeholder and public policy initiatives. As Margot Wallström, Vice President of the European Commission, put it at theGlobal Reporting Initiative conference inOctober 2006, “Progressive economic forcesmust speak up. Too often it is the leastambitious that define the lowest commondenominator. We need a new and louderlobby for sustainable development,innovation, creativity and a future based on smart growth’.
Meanwhile though, public policy remains athorny subject. Rio Tinto talks about having“some influence over joint venture partnersand suppliers such as security contractors,but limited influence over governments andpublic bodies”, while also acknowledgingthat “a mix of mandatory regulation andvoluntary commitment” is likely to be thebest approach. GSK is unusual in providingdetailed principles on its work with patientadvocacy groups that also play a key role ininfluencing the policy agenda. And Lafargehints at the underlying reason for thedifficulties: “Like all international industrialgroups,” it says, “Lafarge needs to providefull disclosure concerning its businessactivities, while keeping its strategic affairsconfidential.”
This limit to transparency — also found in the value area (page 27) — is likely tobecome more challenging as the sustain-ability agenda becomes more mainstream,strategic and competitive. Other thornypublic policy issues that the 50 Leaders are yet to get fully to grips with include:
— Reporting on relations with trade associations.
— Disclosing lobbying activities in young democracies.
— The alignment between corporate principles and public policy activities.
We plan a separate briefing on the publicpolicy agenda in 2007.
25Tomorrow’s Value
The famous five
“You’re crazy,” said Mauro Borges, theowner of a loudspeaker advertising vehiclecompany, when he heard that ABN AMROReal was lending money in Brazil’sshantytowns. The bank — a new entrant in our 50 Leaders group — was developingmicrocredit operations inspired by thesuccess of social entrepreneurs likeMuhammad Yunus of the Grameen Bank,winner of the 2006 Nobel Peace Prize.When the bank first announced its moveinto this area, financial market people jokedthat this was little more than a playgroundfor bank staff. But the availability of creditis crucial for stimulating development.Furthermore, financial institutions can playcritically important roles at a time whentwo things are happening simultaneously:first, many non-OECD countries are tryingto work out how to play the game ofglobalizing capitalism while capitalism, to use the bank’s own phrasing, is “in transition”.
One striking feature of the ABN AMRO Realreport was a kick-off section with fiveBrazilian company leaders from differentsectors engaging in a debate on howsustainability can be better integrated into business. Those invited by the bank to share their views were HP Brasil,Petrobras Distribuidora, VCP (VotorantimCelulose e Papel) and Natura, the only non-OECD report to feature in both our2004 and 2006 surveys.
During the debate, Natura chairmanGuilherme Leal noted, “When we wentpublic, investors paid a premium for ourhistory of responsible management andconsistent results.” Natura’s 2005 annualreport is lushly illustrated for the first 40 or so pages. But this is the company’s mainannual report, and given Natura’s intensefocus on consumers — and on the 519,000agents working in its marketing chain — the approach seems appropriate.
Natura’s thinking is strikingly different from that of most OECD companies, itsstrategy “anchored to the belief that abusiness can be a powerful engine for social transformation”.
A key discussion point for the GlobalReporters team has been whether GRI-stylereporting is appropriate for non-OECDcountries. Our conclusion is that there areat least four main categories to consider:(1) coverage of non-OECD activities andissues in OECD-based company reports; (2) separate reporting by non-OECD units of OECD multinationals; (3) reporting bynon-OECD-based multinationals; and (4),reporting by non-OECD companies.
Category 1 reporting is an area we mustcover more extensively in future rounds of benchmarking, linking back into OECDcompanies’ materiality assessments. Our analysis is that currently, for manyOECD companies, ‘northern’ voices still tend to drown out ‘southern’. In terms ofcategory 2 reporting, our 50 Leaders andOther 50 groups includes ABN AMRO Real,Anglo Platinum, BAT South Africa andNedbank. As far as category 3 reportinggoes, we have Aracruz Celulose, MTR,Natura, Sasol and Tata Steel.
Growing numbers of such companies willwant to break into international markets,and for them — including a growingnumber of Chinese and Indian companies —GRI-style reporting could make sense. For category 4 reporters, operating solely in non-OECD markets, the growth inintegrated reporting in the South Africanmarket seen post the implementation of the Johannesburg Stock Exchange listingrequirements is evidence of what might be possible. However in some regions, weexpect that companies will move morecautiously into the sustainability reportingarena — a key reason for GRI’s developmentof different “levels of application”.
Non-OECD reportingScores % 2006 Rank
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Section 9Non-OECD Reporting
26
Non-OECD perspectives
Finally, as part of the GlobalReporters 2006 program,SustainAbility (SA) spoke toRicardo Pinto Nogueira (RPN),operations executive officer ofthe São Paulo Stock Exchange(BOVESPA), and to Mervyn E.King (MEK), who chaired SouthAfrica’s King Committee onCorporate Governance and isnew Chair of the GRI Board.
SA Which language do youprefer: non-financial or extra-financial reporting?
MEK Actually, I prefer holisticreporting, because thearticulation of governanceprinciples was initially focusedon financial aspects. A companyis made up of its people — andpeople, planet and prosperityare inexorably intertwined.
As a matter of logic, to direct a company today withoutreference to what it means tobe a decent corporate citizenwould be an act of corporatemadness. Ultimately, though,companies need to targetreports in a way that theirstakeholders understand.
RPN Non-financial. But Iconsider all corporate non-financial reporting under the heading of sustainabilityreporting, including triplebottom line, environment and community reports.Interestingly, though, we seemany companies identifyingthings like increased marketshare, innovation and newbusiness opportunities,employee motivation andretention, the enhancement of reputation and brand, riskidentification and mitigation,and improved shareholder value as key drivers to report.
SA What is needed to boost the uptake of non-financialreporting in your country?
MEK Business schools mustteach the importance ofcorporate citizenship. And, aswith financial reporting, weneed professional verification,reinforcing transparency and so promoting stakeholderconfidence in a company’sreputation. Such confidenceenhances market valuation. The majority of companies on the Johannesburg StockExchange’s Socially ResponsibleInvestment Index use the GRI as a reference point.
RPN Investor interest is key. The ISE (Índice de Sustent-abilidade Empresarial, orCorporate Sustainability Index)was launched last year toprovide asset managers andinvestors with a reliable andobjective benchmark of the best corporate sustainabilitypractices in Brazil.
The ISE rewards companies with good environmental,corporate governance and socialperformance and encouragesother to follow suit.
SA If you were discussing these issues with financialanalysts, what one thing would you stress?
RPN Risk mitigation — includingthe identification of intangibleliabilities relative to environ-mental and social issues.
MEK Today’s balance sheets and profit-and-loss accountsare backward looking. Theexploration and analysis of non-financial aspects providespowerful clues to a company’sfuture growth and sustain-ability.
Tomorrow’s Value
Highlights from the other three non-OECDreporters in our 2006 50 Leaders group, all new entrants, are as follows:
— Anglo Platinum identifies 17 ‘headline risk areas’, the top three of which are foreign exchange fluctuations,commodity prices and liquidity. Anglo Platinum operates within theframework of the South African MiningCharter and has participated in theJohannesburg Stock Exchange SRI Indexsince its inception in 2004.
One interesting issue spotlighted is that of ‘fronting’, where black economicempowerment rules are subverted by‘window dressing’, with the appointmentof black employees who have nomanagement or ownership function.Anglo, instead, actively supports blackentrepreneurs.
— MTR is in its fifth year of reporting against the GRI Guidelines. MTR isundertaking a number of major railwayprojects in mainland China, offeringopportunities to inject sustainabilitythinking from an early stage, but thecompany’s CEO notes that “we facechallenges”.
— Nedbank is listed on the Johannesburg Stock Exchange with a holding interestowned by the Old Mutual Group. It operates within the framework of theEquator Principles and reports that 3.1%of its net profit after tax was invested in community social investment projects.Among the issues discussed are politicalcontributions (they don’t make them),money laundering and the work of the‘trauma debriefers’ who helped 253 staffwho had found themselves involved in 19 bank robberies (2004: 155 staff, 17robberies).
Ricardo Pinto Nogueira BOVESPA
Mervyn E. KingGRI
27
Towards value blends
Reporting has moved through a number of stages. In Risk & Opportunity, wecharacterised these as a 500-year history of financial value reporting evolving intomulti-dimensional value reporting throughthe 1990s, with ‘blended value’ reportinglikely from 2010 onwards. That’s our version of the big picture. Focusing on the development of sustainability reportingin particular, this has evolved from adefensive, compliance stage (driven by theUS Toxics Release Inventory, for example) to a more engaged style of reporting on an increasingly global scale. This is the limitof much of today’s sustainability reporting.The next phase is likely to see a growingfocus on the links between corporateresponsibility and sustainability initiativesand the processes of value creation andcompany valuation.
One early indicator of companies seeking to create and tap new forms of value in relation to sustainable developmentwould be a growing investment in — andcommitment to — the development ofknowledge and intellectual capacity inrelevant areas.
Strikingly, even the 2006 group of 50Leaders are very weak in disclosing theirperformance in this area. The averagecompany score against this indicator is adisappointing 1.52 (out of 4), below thescore for systematic treatment (score 2).One notable exception to this pattern isGSK, which scores a full 4.
But it is clear that analysts — even SRIanalysts — are only rarely relying oncorporate reports for data on valuecreation. Our panel of experts (page 9) see reporters still grappling with ESG riskdisclosures. Typically, ESG risks disclosed in sustainability reports are ‘soft’ in nature.As some ‘harden’ and move into annualdisclosures, the market starts to take note.We expect to see the same model emergingfor disclosure on sustainability-relatedmarket opportunities.
We see early examples of this, asexperimentation by leading companies and analysts evolves. Among interestingexamples in the 2006 crop of best-practicereports are: BP and its reporting of plans for its alternative energies business; Philipsand its assessment of the potential marketand impact for lightbulb technologies; and, potentially, Wal-Mart (page 7).
Tomorrow’s Value
Value
Figure 29
Impact on sustainability
Business rating
Focus
Business strategy focus
Business management
Stakeholder engagement
Knowledge management
Transparency and disclosure
Negative
Exposed
Process change
Protect business as usual
Capital expenditure forsustainability risk managementincorporated in businessplanning processes
Stakeholders informed ofprogress
Limited processes to shareexperiences of management ofsustainability issues
Limited – largely complianceorientation
Zero
Neutral
Product innovation
Sustainability at heart of corebusiness processes
Business planning capturessustainability issues related toprocesses, products andinvestment choices
Stakeholders involved in issueidentification and management
Shared experiences used tomanage risks
Extensive – core part of riskmanagement and opportunitydevelopment
Positive
Creating value
Market innovation
Sustainability vital to futurevalue creation and businessgrowth
Opportunities from sustainabilityagenda factored into businessplanning and review processes
Stakeholder partnerships todeliver solutions tosustainability issues
Shared experiences used tomanage risks and identifyopportunities
Strategic but selective –extensive use of transparency inbuilding trust and support, keymarket innovations subject tocommercial screen
Section 10Value
28
And a stand-out example of the value-led approach is GE, whose report SolvingBig Needs reviews first-year results for GE’s headline-grabbing ‘ecomagination’campaign — notably revenues jumping from $6bn in 2004 to $11bn in 2006. There will be all sorts of risks associatedwith such strategies, but leading companieswill supplement reporting on reputationalrisk management with an in-depthconsideration of market opportunities andthe potential for significant value creation.
A working assumption for future rounds of the Global Reporters benchmarkingsurvey is that we will see a growing focuson the subject of innovation covered inreporting and the scope of reports willincrease from left to right in Figure 29. This would take them from positions inwhich they are exposed to societalpressures and other external challenges,through the point where they reach someform of net-neutral positioning, to agrowing positive contribution to sustainabledevelopment. We expect leading reporterswill disclose performance across thisspectrum, from risk management to value creation.
Reporting opportunity
As a litmus test, we looked at the titles of reports to get a sense for how manyprioritise the value elements of theirsustainability reporting. Interestingly, 7 out of 50 make an explicit reference to value or competition in their titles. But you can’t always judge a book by itscover, so how do the 50 Leaders do onreporting on opportunity?
In Figure 30 we plot scores gained on key risk criteria against those scored inopportunity areas — and spotlight a strongbias towards reporting on risk.
There were some notable exceptions,however. Our overall leader — BT — werethe outstanding performer here, too, with a robust articulation of the pressures likelyto impact the future shape of theirbusiness. These include Voice over InternetProtocol telephony and changes to theregulatory environment. The investmentsmade by CFS on describing the value to thebusiness from its sustainability activitiespays real dividends, scoring better on itsarticulation of value than on discussion of risk. Interestingly, Lafarge — which also scores well in terms of opportunityreporting — is significantly weaker on riskmanagement reporting. Finally, adidas stood out from the pack for its approach:very strong on risk management, but also weak on the opportunity side of thevalue equation.
In previous work, SustainAbility hasdistinguished three different versions of the sustainability agenda. Sustainability 1.0focused on compliance, 2.0 on citizenshipand 3.0, we believe, will focus on valuecreation — and, indirectly, on the creativedestruction that accompanies major shiftsin the structure and metabolics of oureconomies. The challenges bundled underthe ‘sustainability’ label, not least amongthem climate change, promise — orthreaten, depending on your viewpoint and sunk capital — to be transformative.And you see this sort of thinking comingthrough very strongly in reporting of someof our 50 Leaders.
Chris Tuppen of BT also distinguishesbetween three generations of businessresponse to these great challenges (See Figure 4). In the first stage, he argues,the leaders are ‘Protectors’, who aim tokeep out of trouble generally and the courtsin particular, out of the media’s ‘MostDamaging’ listings, and out of the way of new forms of financial liability. Nextcome the ‘Builders’, who build on riskmanagement to develop proactiveinitiatives, engaging employees and otherstakeholders, and seeking ways of buildingreputation, relationships and reliablemarket intelligence. Third, there are the‘Innovators’, who begin to build sustainabledevelopment into their customerpropositions, linking a new set of valuesand value drivers to the core businessmodel, helping drive revenues, profitabilityand long-term company valuations.
Sustainability 3.0
The evidence suggests that we are movinginto a new phase of the debate, focused on creativity, innovation and scalableentrepreneurial solutions to sustainabilitychallenges. It’s no accident that one of five proposed overarching themes for theWorld Economic Forum summit early in2007 is ‘Scaling Up Sustainable Solutions’.The focus will be on “sustainable businessmodels, greening supply chains, emergingfiscal, regulatory and voluntary measures,innovation, consumer behaviour,technological ‘fixes,’ new product/marketdevelopment in opportunities, resourcemanagement (water, air, soil, biodiversity),sustainable urban development and thefuture of mobility”.
Tomorrow’s Value
29
So what are the implications for corporatereporting? Let’s pick off three.
Sustainability 3.0 reporting will takecompliance and risk for granted — and innovation will revolve around thereporting of value creation and attemptsto create blended value and value blends. This trend is likely to reframe the debate —and reporting with it. Over time, successfulreporting frameworks will come to linkcorporate, industry, value web, national and international levels of performancetargets reporting. So, for example, the UNMillennium Development Goals (MDGs) maywell come to be seen as market researchlead indicators. And the trend is building.Over 20% of 2006’s 50 Leaders alreadyreport — to some degree — with referenceto the MDGs.
As concern for sustainability riskmanagement is overtaken by a growinginterest in market opportunities andvalue creation, we expect to see a shiftin corporate attention beyond currentNGO relationships and public-privatepartnerships to a growing number ofhigh-leverage joint ventures with socialentrepreneurs.
Some of these innovators and entre-preneurs are signalling where the marketopportunities of the future — andtomorrow’s value — will be found. Some are experimenting with business modelswhich could well spread, over time, to themainstream. And others are funding, orotherwise acting as incubators for, some of the most creative, innovative andentrepreneurial people and organisations of our time. In the 50 Leaders credit unionsand co-operatives are already a strongforce, an early indicator of the potential for social entrepreneurs to impact on thereporting agenda.
These trends are already discernible in the latest wave of corporate reports.True, only six out of the 50 Leadersspecifically mention entrepreneurship in their sustainability reporting, but eventhis small step represents a giant leapfrom earlier years. So, for example, BP are an interesting example, giving detailson how they are funding entrepreneurs to deliver innovative initiatives to provideaccess to energy in developing regions.
In Brazil, ABN AMRO Real talks about itsfocus on providing microfinance to enablesmall start-up businesses in the developingworld, with microfinance beginning toprovide a significant income stream for the company. And the Dutch chemicalcompany DSM is also worthy of note for its discussion of its framework ofSustainable Entrepreneurship, aiming tocreate value in ways which are sustainable— though, as yet, DSM doesn’t give awaymuch in the way of details.
The paradox of innovation, value creationand reporting is that as sustainabledevelopment priorities push into themainstream and business and financialmarkets target new market opportunitieswith novel technologies and businessmodels, so there will be growing pressureon companies to go into ‘stealth mode’ as they move towards market. As a result, it is at least conceivable that in future years we will see islands of pre-launchstealth in an increasingly transparentmarket landscape as a lead indicator ofsuccessful, competitive sustainability-focused business strategies.
Tomorrow’s Value
Risk v OpportunityAggregate scores
Figure 30
30
25
20
15
10
05
05 10 15 20 3025
GE
Natura
Unilever
BT
Mecu
LafargeCFS
adidas
Anglo Platinum
Opportunity
Risk
Shell
Let’s polish the crystal ball. Some things are easy to predict. 2007, for example, will mark the twentieth anniversary of the Brundtland Commission report, Our Common Future. Since 1987, thinkingon the roles and responsibilities of businessin relation to sustainable development has evolved to an extraordinary degree.
Ten years ago, we identified 10 buildingtrends in relation to corporate reporting.They were: (1) one-way, passivecommunication to multi-way activedialogue; (2) verification as an option toassurance as standard; (3) single companyprogress reporting to benchmarkability; (4) management systems to life-cycles,business models and strategy; (5) inputsand outputs to impacts and outcomes; (6) ad-hoc operating standards to globaloperating standards; (7) public relations to corporate governance; (8) voluntaryreporting to mandatory reporting; (9) companies determining reportingboundaries to boundaries set throughstakeholder dialogue; and (10) environ-mental reporting to triple bottom linereporting.
At the time, those seemed like fairly radicalstatements. But in 2006 it is clear thatthese predictions turned out to have beenpretty accurate, even if some of thesetrends (for example 4, 5, 6, 8 and 9) stillhave a way to run. So where is thereporting agenda likely to take us next?
The release of GRI’s G3 Guidelines signals a growing degree of standardisation ofreporting. It provides a helpful frameworkfor corporate reporting, but there are signsthat the reporting ecosystem may bestarting to splinter. Some companies arelooking to broader frameworks to providethe context for what they do, for examplethe UN Millennium Development Goals,while others are focusing on more specificguidance, like the Carbon DisclosureProject. And, while the revamped guidelineshave been applauded by many it was clearat the October 2006 G3 launch that at least some leading companies are alreadylooking beyond G3 to the G4 round, hopingfor even more attention to be given tomateriality. This is an early symptom of the tensions GRI will have to manage.
In terms of where the agenda needs to head next, we see the agenda following at least eight trajectories, sketched inFigure 31. Reporting will be only onecomponent of continuous, customisedcorporate communication, drawing datafrom entire value chains, addressingincreasingly ‘hard’ issues (e.g. carbonemissions) in quantitative terms, increas-ingly covering issues of consequence to the BRIC 27 countries and mutating fromencyclopaedic reports designed to winawards to prospectuses designed to attractinvestment and other forms of support. As key parts of the agenda become tooimportant to be left to CSR departments,the spotlight will increasingly shifting to board level, to CEOs, CFOs and thefinancial markets.
30Tomorrow’s Value
27 Brazil, Russia, India and China.
Section 11The Future ofSustainabilityReporting
Trends in reporting
1
2
3
4
5
6
7
8
Figure 31
Tomorrow
24/7/365
Communication
Value chain
Hard (boards and investors)
Prospectuses
Products and markets
BRICs
Value and opportunity
Today
Annual
Reporting
Company
Soft (CSR)
Encyclopaedias
Operational performance
OECD
Risk
31
It’s not hard to see breakthroughs after theevent — the challenge is spotting them asthey happen. For example, anyone watchingthe Wright Brothers struggling to getairborne could have been forgiven fordismissing the whole business. Similarly,there have been criticisms about theencyclopaedic nature of many reports, theself-serving nature of much of thecommentary, the absence of regulatoryrequirements and market rewards for goodpractice, the inadequacies of currentassurance mechanisms, the disinterest offinancial analysts and other keystakeholders, and above all the frequentlack of comparability even betweencompanies operating in the same sector.But — despite the slowing of growth in thenumbers of companies reporting — the fieldis poised to cross three significant marketthresholds:
— It’s competitiveLeading reporters continue to raise theirdisclosure, reporting and communicationgames, and new entrants are surging intothe field.
— It’s materialThe materiality push is having asignificant impact on the nature of bestpractice reporting, although the averagelength of reports continues to grow.
— It’s about valueWhere companies once focused mainlyon their financial bottom line, the triplebottom line era opened out the focus totake in wider economic, social,environmental and governance impacts,and a growing numbers of reporters arerefocusing on multi-dimensional valuecreation and the links to their currentand future business strategies andbusiness models.
So here are our conclusions — andrecommendations for three groups:corporate responsibility practitioners, CEOs and their Boards, and investors.
Conclusions
1 Assessing corporate performanceThe revision of our methodology was timely— we thank all the companies and otherstakeholders who took part. In 2006 we saw company scores continuing to increaseand breaking the 80% threshold for thefirst time.
The agenda today is too sophisticated to becaptured effectively by generic frameworks.Very few issues lend themselves to genericreporting requirements across, for example,a pharmaceutical company, a bank and amining company. This trend is recognised by leading reporting bodies like the GlobalReporting Initiative, both through the focuson materiality in the new G3 Guidelines andtheir development of sector reporting.28
2 Leading reporters push the envelopeIn 2006, we have seen companies hittingnew heights in sustainability reporting.However, while this leadership grouppushes ahead, three issues remainoutstanding. First, the huge number of non-reporting companies worldwide,although the entry of companies like Wal-Mart (page 7) may well help here.Second, the continuing challenge ofengaging capital markets in general, andfinancial analysts in particular. And, third,the fact that many sustainability reportsfail to provide analysis in the sustainabledevelopment area with the informationnecessary to assess whether they are on a sustainable track, or not.
3 Materiality: try harderSince 2002, when the Global Reportersteam first broached materiality as anemerging topic, there has been veryconsiderable progress in the orientation of reporting towards key company — and sectoral — issues. In our 2006 surveywe see companies scoring well on issueidentification (average score 2.56). But while progress has been made, thereare many wrinkles that still need to beironed out. Among them: How do you setthe threshold level for materiality? How do you balance different stakeholder needsin materiality analyses? And how do youensure that you haven’t missed weaksignals of emerging material issues thattoday’s calculus ignores?
4 Think reporting and communicationOne-size-fits-all reports fail to meet theneeds of different stakeholders. That is akey reason why our Global Reporters 2006Program is being broken out into a numberof different documents and processes, tocarry the headline messages out to specifictarget audiences. We are planning toproduce further, tailored publications forreporting practitioners and investors, andon issues of influence and innovation.
5 Reporting on influenceOne area where concern is growing butwhere current generations of reporting are still weak, albeit improving, is inrelation to influence (page 23). 2006 scores on influence are among the lowest in the survey.
Tomorrow’s Value
28 For a list of GRI sector supplements see www.globalreporting.org/indevelopment/sectorsupplements
29 www.unilever.com/ourcompany/newsandmedia/unileverindonesia.asp
30 See, for example:www.acumenfund.orgwww.ashoka.orgwww.schwabfound.orgwww.skollfoundation.org
31 www.asria.org32 www.enhancedanalytics.com33 www.unepfi.org
Section 12Conclusions andRecommendations
32
This is not simply about lobbying, thoughthat is complex enough (for more on ourwork in this area see our websitewww.sustainability.com/insight/scalingup.asp), but about the various ways in whichgiven companies influence the behaviourand actions of their key stakeholders,including customers and consumers.
6 Non-OECD reportingThere has been a significant improvementin the number and quality of reportscoming from non-OECD regions andcountries. The business case for reporting is strengthening for such companies asmajor OECD businesses start to work onmaking their value-chains more transparentand accountable. Meanwhile, even thebiggest multinationals often still strugglewith the issue of how to report on theirdeveloping world operations. One exceptionhas been Unilever, with its report withOxfam on the company’s economic impactsin Indonesia.29
7 Tomorrow’s valueRobust sustainability risk management will be expected as the baseline for soundcompany performance. In parallel, com-panies will be expected to focus on marketopportunities, innovation and scalableentrepreneurial solutions to the world’sgreat sustainability challenges (page 27).Successful companies will positionthemselves as solutions providers, as manyof our 50 Leaders are already doing.
Recommendations
Finally, here are some recommendations for three key groups of people who willshape the future of this field.
Corporate responsibility practitioners
1 Develop and apply robust materiality processes to produce tighter, morefocused disclosures on responsibility,accountability and sustainabilityperformance.
2 Build links to your financial professionals. Involve them in crafting messages toyour investors and shareholders whichclearly articulate material issues infinancial terms.
3 Remember, reporting is a necessary — not sufficient — condition of success.Design your reporting processes to builda platform from which wider disclosure,communication and engagementinitiatives can operate.
Ensure your sustainability reporting fitswith the company-wide strategy oncommunication and disclosure.
4 Know your investors. Understand their information needs and priorities. Uselanguage which resonates with thisaudience. Work with your peers to drivecomparability and consistency in theinformation you report.
5 The agenda is shifting to include not just performance but also influence —how are companies using their influenceand advocacy to support sustainabledevelopment? Engage your governmentaffairs people and find ways of reportingon this wider agenda.
6 Tomorrow’s value will come in many different blends, which will need to bedesigned, created and sold. Reach out to your communications, marketing and sales people. Learn how to take a credible, effective and differentiatedapproach to communication withdifferent external stakeholders.
7 One thing social entrepreneurs have learned is that if you want to attractinterest and funding the best way is to give clear, engaging information onyour intended impacts and resultingoutcomes. Take a look at some of the key websites in this area and considerwhat you might be able to cross-apply to future rounds of your own work.30
Showcase more sustainable forms of value creation.
CEOs and Boards
1 Assess whether your business strategy is aligned to the sustainability agenda.Are there value creation opportunitiesyou are missing?
2 Benchmark your company’s performance against best practice — for example, take our Top 10 and top up to includethe best three reporters in your sector.How does your disclosure, reporting and communication portfolio andperformance compare?
3 Encourage your CR team to consider how their reporting and communicationmight evolve to embrace the opportunityand value creation agendas — and toadopt indicators and metrics that trackperformance, impact and outcomes.
4 Investigate the growing ‘influence’ agenda. Consider whether your companyis vulnerable — or can make a positivecontribution.
5 Use your communication opportunities to advocate greater responsibility, trans-parency and accountability across thememberships of all industry federations,associations and networks your companybelongs to or is contemplating joining.
6 2007 marks the twentieth anniversary of the launch of the sustainabledevelopment agenda (via the BrundtlandReport, Our Common Future). Reviewhow your company performs against atleast one major international framework— for example, the Millennium Develop-ment Goals or the Johannesburg Plan ofImplementation (from the World Summiton Sustainable Development).
Investors
1 Take part in bodies working to improve understanding of the non- and extra-financial aspects of investment, amongthem ASrIA,31 the Enhanced AnalyticsInitiative,32 the UK Social InvestmentForum and/or the UN Global Compactand UNEP Finance Initiative.33
2 Probe companies on the business case. Challenge companies to articulate the long and short term value of theirsustainability activities. Be clear on how their disclosures are being factoredinto valuation models.
3 Don’t be put off by jargon. Use whatever language works, but for the sake ofargument let’s use ESG here. Presscompanies to demonstrate the value of their ESG risk management activities.Insist that material ESG risks andopportunities are included in annualreports. Help companies understand what should be considered material.
4 Start building assessment of ESG-focused value creation into your assessment andcompany rating methodologies. Activelydowngrade stocks that fail to meet ESG benchmarks — and upgrade thosedemonstrating excellence.
Coda
Reporting has reached critical mass. Best practice is evolving at extraordinaryspeed, though still on too narrow a front in terms of the total number of companiesinvolved. It’s time to rattle your supplychains. Push the envelope. Take a look atbest practice in your sector — and others —and beg, borrow or steal. That’s how theWright Brothers and others got airborne.
Tomorrow’s Value
SustainAbility reporting services
SustainAbility provides a range ofreporting services designed to assistclients through the entirety of theirreporting process. Further information is available at www.sustainability.com or by contacting Matt [email protected]
Assurance Advice on assurance strategy, including the facilitation of stakeholder led assuranceprocesses or report review committees.
Communication strategy Design broader/multi-year communicationstrategies which include targeted messageand outreach plans for specific stakeholdergroups.
Materiality: Issue identification and prioritisation Build methodologies to identify and rank ‘material’ risks, as well as scopingappropriate reporting strategies foridentified priorities.
Metrics and management processesReview and develop metrics and manage-ment processes — for key material issuesand/or for a report as a whole.
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Report benchmarking Benchmark company report using ourGlobal Reporters methodology.
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Engaging Stakeholders programme
The SustainAbility Engaging StakeholdersProgramme provides a unique membershipforum for business to develop and drivebest practice in sustainability reporting and stakeholder engagement. Membershipincludes an annual benchmark of thecompany sustainability report, two annualworkshops and regular contact with adedicated SustainAbility liaison.
Best practice reporting database
Web-based database providing access to examples of best practice in sustain-ability reporting — searchable by industry,geography, issue and GRI indicator. To be launched in 2007 in collaborationwith Flag.
CorporateRegister.com
CorporateRegister.com is the world’s most comprehensive directory of corporateresponsibility (CR) reports. Established in 1998, this free site currently includes12,000 environmental, sustainability and CR reports worldwide. Most reports areavailable as pdfs for direct viewing anddownloading. With an archive stretchingback to 1990, the site has becomeindispensable for anyone working in the field of CR reporting.
The ReportingPartners module enablesreporting companies to identify and assessthe various service providers (consultants,designers, verifiers, printers) needed todevelop an effective report. Register onlineat www.corporateregister.com for freeaccess. For more information [email protected] or telephone+44 (0)20 8930 9222.
Global Reporters Advisory Committee
The 2006 Global Reporters Program was overseen by a committee of experts.Its role was to critique and challenge the administration of the program, themethodology, the report selection andfindings. The considerable expertise ofmembers strengthened and enriched theprogram — and we thank them all fortheir time and support:
George Dallas Standard & Poor’s UK and US
Dunstan HopeBusiness for SocialResponsibilityUK and US
Paul Kapelus African Instituteof CorporateCitizenshipSouth Africa
Cornis van der LugtUNEP France and Kenya
GeorgeMolenkamp KPMG Netherlands
ABN AMRO BHP Billiton The Coca-ColaCompany
USEPA ClimateLeaders Program
Ford MotorCompany
Natura Novo Nordisk Telecom Italia
Co-operativeFinancial Services
Pfizer Skoll Foundation
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Tomorrow’s Value:The Global Reporters2006 Survey ofCorporate Sustain-ability Reporting First Edition 2006
ISBN1-903168-16-3
PublisherSustainAbility Ltd
Global ReportersmanagerMatt Loose
Writing teamSeb BeloeJohn ElkingtonKatie Fry HesterMatt LoosePeter Zollinger
Research assistantsManuela FremyAntonia GawelIvana GazibaraJean-Philippe Renaut
IntervieweesGeorge DallasMarc FoxDominique HabeggerHarriet HentgesMervin KingAlan KnightIvo KnoepfelColin MelvinRicardo P. Nogueira
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Copyright 2006 SustainAbility Ltd andthe United Nations EnvironmentProgramme (UNEP). All Rights Reserved.No part of this publication may bereproduced, stored in a retrieval systemor transmitted in any form or by anymeans, electronic, electrostatic, magnetictape, photocopying, recording orotherwise, without permission in writingfrom the copyright holders.
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