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Sustainability reporting tracks a triple bottom line: economic, environmental, and social.
Russ Banham, CFO.com | US
October 18, 2004
Suncor Energy Inc. has come clean. The Calgary-based integrated energy company, which reported $6.3 billion (Canadian) in revenues last year, also reported its environmental, social, and economic performance in a 78-page confessional that bares all — from greenhouse gas emissions to workforce diversity to relations with aboriginal communities in the regions where it develops oil sands. To calm critics who might question the report's accuracy, Suncor hired PricewaterhouseCoopers LLP to verify data in 12 key categories. "For us to establish credibility with the stakeholders to our business, transparency is critical," declares senior vice president and CFO Ken Alley.
"We want their consent to continue to operate and grow our business," he says. "And the only way to achieve this consent is by understanding and incorporating the expectations of our economic, environmental, and social stakeholders into our development decisions."
The idea that a company should conduct its business in ways that benefit not just shareholders but the environment and society, too, is called sustainability, or sustainable development. It's an idea championed by a small but growing number of companies around the globe. One business group, the World Business Council for Sustainable Development, lists some 170 international members, including more than 30 Fortune 500 companies. According to the council's Website, these companies share the belief that "the pursuit of sustainable development is good for business and business is good for sustainable development."
To tell their stakeholders about that pursuit, companies are issuing sustainability reports. Many, like Suncor, are doing so following the strict guidelines of the Global Reporting Initiative (GRI), an independent institution founded in 1997, to develop a common framework for sustainability reporting. Enter the words "sustainability reporting" into your favorite search engine and you'll find such well-known company names as Alcoa, Alcan, Bristol-Myers Squibb, General Motors, Baxter International, and FedEx Kinko's. In all, some 500 organizations publish sustainability reports according to GRI guidelines.
Some countries, such as France, South Africa, and the Netherlands, now mandate environmental or social sustainability reporting as a condition to being listed on their stock exchanges. Although the United States is a laggard, some observers believe sustainability reporting is inevitable here.
"Fifty percent of the investment houses around the world offer a socially responsible investment option," notes Andrew Savitz, a partner in the governance risk and compliance group at PwC. "Meanwhile, the amount of socially responsible capital has risen from around $100 billion in the early 1980s to $2.2 trillion today. And the Dow Jones Sustainability Indexes, which recognize the top 10 percent of companies worldwide based on social, environmental, and economic criteria, are increasingly coveted. The pressure to report on social and environmental performance is intensifying."
Indeed, last April, 13 major public pension companies called on the Securities and Exchange Commission to require publicly traded companies to disclose the financial risks of global warming in their securities filings. Collectively, these organizations manage assets of almost $800 billion.
"Five years ago, people would have laughed if I said there is a linkage between the structure of corporate governance and the performance of a company," says Bob Massie, senior fellow and former executive director of Boston-based Ceres, a coalition of environmental, investor, and advocacy groups that developed the GRI. "Then, wham! It rose to the top of issues for major pension funds. Sustainable development is next."
A Consistent Methodology
Sustainability reporting was born in the 1990s when several companies, notably GM and Ford, launched the practice of disclosing their environmental performance. Their reasons were partly altruistic (read: good public relations) and partly good business practice. "Investors were beginning to realize that there were these large strategic questions about sustainability that affected global firms' financial performance, from their record on human rights to their labor practices to how they expend or conserve resources," says Massie. "Companies, meanwhile, realized they could not build trust or a sense of transparency after a huge crisis like an environmental mishap. They need to build this before, so people don't sense a PR effort to cover up a problem."
Ceres carried the flag for these early efforts, largely focusing its initial resources on corporate environmental performance and how it would be measured and reported. When Massie took the reins of the organization in 1996, companies were complaining about the myriad questionnaires they routinely received from investment funds and activist groups soliciting information about their environmental practices. "They believed that this was an important issue, but they were chafing at filling out 300 different questionnaires," says Massie. "They wanted some consistent methodology for reporting these issues that took into account each of the stakeholders, such as the investment groups and the environmental and labor organizations."
Ceres heeded these solicitations and raised funds to create the GRI, which is based in Amsterdam and features a voluntary board of directors that includes several prominent corporate leaders. The GRI's sustainability reporting template ventures beyond environmental performance to include more than 140 social, economic, and environmental indicators, "realizing population, human rights, labor, and ecological impact are intertwined and interdependent," explains Massie. "Rather than produce multiple, sliver-sized reports on each topic, we wanted to integrate them all into one large report, what some people call 'triple bottom-line reporting.' "
Suncor did just that in its 2003 biannual report, listing its economic, social, and environmental commitments, then commenting on its progress and following up with the measures it plans to take to achieve its goals. For example, the report contains detailed information about environmental policy and performance, noting the company's work to reduce greenhouse gas emissions like carbon dioxide and methane, protect wildlife and landscapes, reclaim disturbed land, and adopt comprehensive approaches to water management. Ditto the sections on economic performance (drawn largely from its annual report) and social issues like community relations, employee relations, and employee health and safety.
Bang for the Buck
Another company that follows some GRI guidelines in publishing its sustainability report is FedEx Kinko's. Like Suncor's, FedEx Kinko's earlier reports focused on environmental issues, but since 2002 it has issued sustainability reports, including economic and social performance data.
"To have a sustainable economic model — in other words, a business — one must realize that it is tied to the ecological systems that provide natural resources, clean air, and potable water to operate that business," says Larry Rogero, director of environmental affairs for Office and Print Services at the Dallas-based company. "If people in regions of the world where you do not currently operate lack access to clean drinking water — and right now there are 2 billion people denied this fundamental right — or they lack a stable social fabric that includes law, order, and appropriate governance, then you will be closed out in terms of expanding your business into that market."
Rogero adds that sustainability reporting is "bottom-line financial stuff. Businesses will not be sustainable without a commitment to the environment and human rights," he argues.
Bristol-Myers Squibb's 2004 sustainability report (also written to GRI guidelines) lists goals it intends to reach by 2010, such as reducing water usage by 10 percent from its 2001 baseline year. In countries where water resources are severely stressed, the New York-based pharmaceutical company hopes to reduce usage by 20 percent from its 2001 baseline year. Bristol-Myers Squibb is further striving to reduce total greenhouse gas emissions by 10 percent from its 2001 baseline year, nonhazardous waste by 20 percent from its 2002 baseline year, and off-site hazardous waste disposal by 50 percent from its 2001 baseline year. These are but a few of the company's plans. The most recent review was conducted by ICF Consulting Services LLC, which does a full audit of the annual report.
Andrew R.J. Bonfield, senior vice president and CFO of Bristol-Myers Squibb, believes there is business value in sustainability. "Many of the benefits of our sustainability efforts can be calculated, such as cost savings related to energy and waste reduction, and the benefits of protecting the health and welfare of employees and preserving the environment," he says. "While there are other benefits that are more difficult to calculate, they are vitally important because they are core to our value as a company whose mission is to extend and enhance human life."
Savitz of PwC agrees that there is bang for the buck invested in sustainability development and reporting. "If you can drive down your occupational injuries, you will save a lot of money in terms of insurance and workers' compensation," he says. "If you are not measuring these on a systematic basis, you cannot reduce these costs. Same thing with measuring employee satisfaction [a GRI performance indicator]; turnover is a huge cost, since people are the heart of a service company. Nowadays, if you don't have a policy on human rights or child labor overseas, the black eye will affect your stock price and the price of capital."
Sustainability reporting is in its infancy, hence several companies' admissions of imperfection. FedEx Kinko's, for example, stresses that its report is the most comprehensive review of its ecological footprint to date, but that it is "not a complete assessment." The company lists several portions of its business operations that it is currently unable to assess, but intends to do so in the future.
Pittsburgh-based Alcoa Inc. also produces a GRI-modeled sustainability report, but the company has yet to submit it to an external audit, though it stands by its internal verification processes. "Outside verification is expensive," says Kevin G. Lowery, a spokesman for the aluminum giant. "We've looked into the verification aspects and continue to explore it."
"The quality of [sustainability] reporting varies widely from company to company," notes Savitz. "While there has been an uptick recently of companies allowing for independent assurance of their reports, it is nothing close to what is required for annual financial reporting." That's to be expected, says Massie. "GRI has gone from nowhere to being used by 500 companies in less than seven years," he points out. "If you look at the comparable development of GAAP or the way [the Financial Accounting Standards Board] creates standards, there is a much longer history at play. I view sustainability reporting as a curve that most companies are only beginning to ride."
Still, some consultants advise caution when assessing the accuracy of claims made by companies about their environmental or social records. "There are companies using [sustainability reporting] more for a PR exercise, and others that mean what they say," says Eric Israel, managing director in the Forensic Practice at KPMG LLP in New York. Even Massie acknowledges that the quality of reporting varies. "But over the last couple of years, we've really seen companies consistently upgrade the quality of their reports," he adds. "Meanwhile, discussions are developing to create some kind of auditing standard for sustainability reporting."
Savitz says that until such a standard is developed, investors and stakeholders must take a company's nonaudited pledge of what it is doing with a grain of salt. "I know of a company that gave a stellar, comprehensive analysis of its occupational health and safety performance, but it turned out that this company neglected to report a fatality."
Then there was the time he was reading "a really first-rate sustainability report with a lot of metrics and some verification." Two days later, recalls Savitz, he picked up his daily newspaper and read that the company was the subject of a $30 million environmental enforcement action. "I figured two pages of the report must've been stuck together, so I read the whole thing again," says Savitz. "There was not even an inkling about this particular environmental problem — absolutely no hint of it. Environmental fines don't appear in one day; they go back months, if not years. It leads you to ask what else this company isn't disclosing."
Russ Banham is a contributing editor of CFO.com.
Who Are the Stakeholders?
Attributes shown in parentheses are examples.
Source: Global Reporting Initiative, 2002 Sustainability Reporting Guidelines
The Triple Bottom Line
How performance indicators measure organizational sustainability
Direct economic impacts (the GRI acknowledges indirect economic impacts, but it has not identified a generic set of performance indicators)
Labor Practices and Decent Work
Source: Global Reporting Initiative, 2002 Sustainability Reporting Guidelines