Reporting Sustainable Performance

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Reporting Sustainable Performance

• Dr Ruth Bender
• 4th June 2008

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• Does Managing Responsibly

• Mean Making Less Money?

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Shareholder value means an above-the-line return

Required Return on Capital
Perceived Risk
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Seven drivers of shareholder value
More profit Increase sales growth Increase operating profit margin Reduce cash tax rate
Out of fewer assets Reduce working capital as of sales Reduce fixed assets as of sales
At lower risk Reduce weighted average cost of capital
For as long as possible Increase timescale of competitive advantage
Rappaport Creating Shareholder Value
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Strategies to grow shareholder value
Sales growth
Profit margin
Tax rate
Working capital
Fixed assets
Cost of capital
Timescale
The impact of each driver will vary for different
industries and companies
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Driving value through sustainable performance

• Innovative products to meet sustainability needs
  attract customers by CR stance

• Efficiencies e.g. in staff costs by better
  working conditions lower staff turnover better
  recruitment less wastage lower energy costs

Sales growth
Profit margin

• Global configuration of business activities take
  advantage of allowances

Tax rate
Working capital

• Asset utilization e.g. fewer factories, less
  inventory, more efficient processes

Fixed assets

• Risk reduction as a good corporate citizen and as
  perceived by investors

Cost of capital
Timescale

• CR stance affects licence to operate and also
  brand positioning

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Example using stakeholder networks at Wal-Mart
Increase sales growth Increase operating profit margin Reduce cash tax rate Reduce working capital as of sales Reduce fixed assets as of sales Reduce weighted average cost of capital Increase timescale of competitive advantage 1 and 7 Working with Marine Stewardship Council to ensure that its fish comes from sustainable sources attracts customers and helps ensure future viability in a period pf growth in the business. 2 and 4 We used to buy cotton from Turkey, ship it to China for spinning and knitting, and then ship it again to Guatemala to be cut and sewn Now were finding opportunities to do things like eliminate the shipment to China and have all processing done in Guatemala. Saves time and money as well as fuel and resources. 2 and -4 First retailer in the US to sell personal computers compliant with EU regs on hazardous substances. Deal negotiated with Toshiba meant that in exchange for buying 12 weeks worth of these computers (normal terms are 4-week commitments), Wal-Mart procured the environmentally preferable PCs at no extra cost.
The Greening of Wal-Mart. Plambeck and Denend,
2008 http//www.ssireview.org
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Example Trailblazers along the supply chain
Increase sales growth Increase operating profit margin Reduce cash tax rate Reduce working capital as of sales Reduce fixed assets as of sales Reduce weighted average cost of capital Increase timescale of competitive advantage 2 and 5 POSCOs innovative steel-making process reduces emissions, and reduces capex and costs 1 (and 2, 4, 7?) Johnson Controls lithium-ion battery for hybrids and electric vehicles smaller, lighter, cheaper and longer-lasting. Several new contracts and business development 1, 2 and 4 CEMEX supports low-income families and has created new sales market and reduced costs and supply chain due to scale economies
Supply Chain Trailblazers Can Reap Rewards
February 2008 BSR Weekly
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• BUT...

• Is this 'Good' business or just 'Good Business'?

• (And does that matter, anyway?)

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• Reporting Responsibly

• and Reporting Responsibilities

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What's in a name? that which we call a
rose      By any other name would smell as
sweet
corporate responsibility CSR extra-financial
GRI-style environmental, social governance
(ESG) non-financial . social environmental
performance sustainability reporting
Tomorrows Value The Global Reporters 2006
Survey of Corporate Sustainability Reporting
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Social and environmental reporting (SER)

• SER is the predominantly voluntary,
  self-reporting of an organisations social and
  environmental interactions. Such reporting is
  increasingly undertaken in stand-alone reports
  some in hard copy, many on the organisations
  website and represents an organisation's
  understanding of what it is to be environmentally
  and/or socially responsible and (potentially at
  least) sustainable.

Social and Environmental Reporting and the
Business Case. ACCA Research report 98, 2007
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Still to come
A wolf in sheeps clothing
Who-what-why-where-when and how?
Some technical bits
What next?
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SER ? CSR
René Magritte 1898 1967 The Treason of
Images, 1928-9
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A wolf in sheeps clothing?
We examine the occurrence of ethics-related
terms in 10-K annual reports over 1994-2006 and
offer empirical observations on the conceptual
framework of Erhard, Jensen, and Zaffron (2007).
We use a pre-Sarbanes-Oxley sample subset to
compare the occurrence of ethics-related terms in
our 10-K data with samples from other studies
that consider virtue-related phenomena. We find
that firms using ethics-related terms are more
likely to be "sin" stocks, are more likely to be
the object of class action lawsuits, and are more
likely to score poorly on measures of corporate
governance. The consistency of our results across
these alternative measures of ethical behavior
suggests that managers who portray their firm as
"ethical" in 10-K reports are more likely to be
systematically misleading the public. These
results are consistent with the
integrity-performance paradox.
Loughran, Tim , McDonald, Bill and Yun, Hayong,
"A Wolf in Sheep's Clothing The Use of
Ethics-Related Terms in 10-K Reports" (August 16,
2007). Available at SSRN http//ssrn.com/abstract
1007727
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SER ? CSR
Good

• 1

• 2

How good are the companys CR practices?

• 3

• 4

Bad
Bad
Good
How good is the companys CR reporting?
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Questions to ask when preparing your
sustainability report

• Who?

• What?

• When?

• Where?

• Why?

• How?

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• Why?

• Why should companies make CR disclosures?

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The Tiered Corporate Information Pyramid
External User access
Boundary defined by
Mandatory public disclosure
Complete
Regulation
Complete
Voluntary public disclosure
Company
Privileged users only
Selected private disclosures, eg to analysts
Company
None
Undisclosed private information
Business Reporting the inevitable change?
Beattie, 1999
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• Who?

• Who should prepare the report?
• Who will be reading it?
• Who (if anyone) should verify it?

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Who assures what, why and how?
Assurance appetite
Assurance methodology
PURPOSE Why is assurance obtained?
AUDIENCE Who is assurance for?
STANDARDS What standards principles govern the
assurance process?
DEPTH What level of assurance is offered?
FOCUS What issues are to be covered?
APPLICATION What level of organisation is covered?
PROVIDERS Who provides the assurance?
COMPETENCIES How are they able to offer assurance?
Assurance scope
Assurance providers
The Future of Sustainability Assurance ACCA, 2004
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Carbon neutral
Nuclear power
Climate change
Biodiversity
Pollution
Resource usage
Environment
Child labour
Learning organization
Water
Outsourcing
Corruption
Waste control
Diversity

• What?

Human Rights
Energy
Product Responsibility
Transparency
Health Safety
Workers rights
Work-life balance
Community programmes
Customers
Stakeholders
Financials
Responsible restructuring
Philanthropy
Supply chain policies
Animal testing
Communication
Equal opportunities
Recycling
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• How?

• When?

• Where?

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How should the data be presented?
Voluntary or mandatory disclosure?
Regulation -Local? -EU? -Global?
Focus on business case?
Where do the data come from?
Where should the disclosures be made?
Reporting internally as well as externally?
When should disclosures be made?
Standardise disclosures?
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Some Technical Bits

• (a small extract from the many that are
  available)

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3
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Companies Act 2006, s.417
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The AA1000 series http//www.accountability21.ne
t/
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Overview Principles-based standards that provide the basis for improving the sustainability performance of organisations in all sectors. Overview Principles-based standards that provide the basis for improving the sustainability performance of organisations in all sectors.
AA1000 Framework (1999) Provides guidance to users on how to establish a systematic stakeholder engagement process that generates the indicators, targets, and reporting systems needed to ensure to ensure greater transparency, effective responsiveness to stakeholders and improved overall organisational performance.
AA1000 Assurance standard (AA1000AS) (due for revision late 2008) In applying the AA1000 Assurance Standard (AA1000AS), the Assurance Provider evaluates the credibility of the sustainability report, and assesses the underlying systems and processes that deliver the relevant information and underpin the organisations performance. Links to G3.
AA1000 Stakeholder Engagement Standard (AA1000SES) (2nd version due 2008) Offers a robust basis for designing, implementing, evaluating and assuring the quality of stakeholder engagement.
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The AA1000 Process Model
AA1000 specified processes that an organisation
should follow to account for its performance, not
the levels of performance the organisation should
achieve.
http//www.accountability21.net/
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AA1000 integrates into other standards
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Global Reporting Initiative (GRI)
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GRI reporting
Reporting Guidance helps decide what to report
on, and interpret the Framework.
Reporting Principles Materiality, Stakeholder
inclusiveness, Sustainability context,
Completeness, Balance, Clarity, Accuracy,
Timeliness, Comparability, Reliability

• Disclosures (79 in all)
• Profile
• 1. Economic, EC1-9
• 2. Environmental, EN1-30
• 3. Social performance
• Labour practices LA1-14
• Human rights HR1-9
• Society SO1-8
• Product responsibility PR1-9

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GRI application levels
Number of performance indicators increases from C
to B to A
Self-declared Can be audited Can be checked by
GRI
Management approach disclosures increase from B
to A
Profile disclosures increase from C to B
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The best external assurance

• Is external, done by demonstrably competent
  people who are independent, and state their
  relationship with the organisation
• Is done systematically, evidence-based, and
  properly documented, to defined procedures
• Assesses the extent to which the organisation has
  applied the GRI Reporting Principles
• Results in an publicly-available opinion or
  conclusions

The external assurance report assesses whether
the report provides a reasonable and balanced
presentation of performance, taking into
consideration the veracity of data in the report
as well as the overall selection of content.
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Some useful sources to find sustainability reports
http//www.corporateregister.com/ Companies
reporting under GRI http//www.corporateregister.
com/aa1000as/ Companies whose reports are assured
under AA1000 http//www.reportalert.info/ Is the
report announcement service for the Global CSR
Community
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What next?
Disclosure
Accountability
Change?
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The Universal Owner
World Sunlight Map http//www.die.net/earth/mollwe
ide.html
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UN-PRI

• The Principles for Responsible Investment aim
  to help integrate consideration of environmental,
  social and governance (ESG) issues by
  institutional investors into investment
  decision-making and ownership practices, and
  thereby improve long-term returns to
  beneficiaries.
• The Principles apply across the whole investment
  business and are not designed to be relevant only
  to SRI products
• Launched in 2006, signatories now represent
  assets under management in excess of US 9
  trillion

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ESG (environmental, social and corporate
governance)

1. Incorporate ESG into investment decisions
2. Be active owners and incorporate ESG into
   ownership policies
3. Encourage ESG disclosure in investee companies
4. Promote these principles in the investment
   community
5. Work together to enhance our effectiveness in
   implementing these principles
6. Report our activities and progress in their
   implementation

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• 3 We will seek appropriate disclosure on ESG
  issues by the entities in which we invest.
• Possible actions

Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative)
Ask for ESG issues to be integrated within annual financial reports
Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact)
Support shareholder initiatives and resolutions promoting ESG disclosure
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Bolt-on or Built-in?
Corporate Responsibility
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The diagram shows the interconnected range of
activities and sectors that need to be integrated
into a connected report. The enlarged wedge shows
how traditional financial information is impacted
by many different aspects of an organisations
activities. Accounting for Sustainability. www.su
stainabilityatwork.org.uk
4
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Trends in sustainability reporting

• Annual
• Reporting
• Company
• Soft (CSR)
• Encyclopaedias
• Operational performance
• OECD
• Risk

• 24 / 7 / 365
• Communicating
• Value chain
• Hard (boards investors)
• Prospectuses
• Products and markets
• BRICs
• Value and opportunity

Tomorrows Value The Global Reporters 2006
Survey of Corporate Sustainability Reporting.
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Multi-source, multi-channel reporting
Sustainability data from Investor
relations Governance Community relations Marketing
Sales Operations Human resources Finance Etc
Reported in different formats to Employees Invest
ors Customers Community NGOs Government Industry V
alue chain
Tomorrows Value The Global Reporters 2006
Survey of Corporate Sustainability Reporting.
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Nine predictions

1. Boards will increasingly recognise CR reporting
   as a valuable internal management tool
2. Boards will pay more attention to the accuracy of
   CR-related information
3. Companies will improve internal communication on
   CR
4. Companies will make better use of existing
   communication channels to deliver tailored
   messages to specific stakeholders
5. Boards will increasingly use annual report
   accounts as a tool to demonstrate accountability
   to stakeholders
6. Companies will increasingly report material
   issues in their Business Review but will keep a
   separate CR section
7. The role of the CR manager will increasingly be
   driven by internal pull rather than external
   push
8. Companies will take a systematic approach to
   integrating stakeholders interests into
   decision-making
9. Companies engaging in dialogue through
   partnerships will be better able to identify
   value-add opportunities

Taking Shape The Future of Corporate
Responsibility Communications. Business in the
Community www.bitc.org uk
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The EndThank you for listening
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Additional info re G3 content
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Profile disclosures in GRI G3
1. Strategy and analysis
2. Organizational profile
3. Report parameters
4. Governance, commitments and engagement
5. Management approach and performance indicators
Who we are and what we believe about
sustainability and our impact, what weve done,
where we operate. How the report was produced.
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Economic performance disclosures in GRI G3

• Economic performance
• Direct economic impacts of the organizations
  activities and the economic value added by these.
  
• Includes a Value-Added statement, consideration
  of climate change risks and opportunities,
  pension obligations, government assistance
  received
• Market presence
• Information about interactions in specific
  markets
• Includes info on wages compared to local
  minimum, spending on local suppliers, hiring
  practices.
• Indirect Economic Impacts
• Measure the economic impacts created as a result
  of the organizations economic activities and
  transactions.
• eg infrastructure development, enhanced learning
  and skilling in the community

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Environmental performance disclosures in GRI G3
Materials Amount used, by weight and volume that is recycled material
Energy Consumption direct and indirect savings by conservation and efficiency incentives to save energy
Water Use, impact on sources, recycling
Biodiversity How activities affect it, and what has been protected and restored strategies for the future
Emissions, effluents, waste Total amounts (in some detail) incentives to reduce
Products and services Incentives to mitigate impact on environment packaging
Compliance Fines paid for non-compliance with regulations
Transport Significant environmental impact of transporting goods and employees
Overall Analysis of total spend on environmental protection
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Social performance disclosures in GRI G3
Labour Employment, Labour relations, Diversity Health safety, Training and education
Human rights Investment and procurement practices Non-discrimination Freedom of association and collective bargaining Child labour, Security practices, Indigenous rights
Society Community, Corruption, Public policy Anti-competitive, Compliance
Product responsibility Customer health safety, Marketing communications Product and service labelling Customer privacy, Compliance