Regulation is an increasingly important driver of NFR reporting, for example in France, India, Denmark, Sweden and UK the government explicitly requires publicly listed companies to produce non-financial reports. In addition, various stock exchanges now demand the listed companies to produce NFRs as well -South Africa, Nigeria, Brazil and more recently Singapore.
Innovation is an important driver of future success - environmental regulations can actually lead to innovations and the resulting benefits may offset the costs of complying with these regulations (Montabon, 2006). Innovative products, production processes are needed in order to transform the old systems of capitalism that entail 'production for profit'. Opportunities to generate new revenue streams through innovation (R&D) should be the driving force going forward.
The principle of Context-Based Sustainability, often underestimated, suggests reporting "the performance of the organization in the context of the limits and demands placed on environmental or social resources" (GRI, 2013). A recent study developed by ClimateCounts (2), even though is primarily focused on the context of carbon emissions, underlines the necessity to consider 'natural limits' and to set appropriate targets relative to various scenarios (ClimateCounts, 2013). The study analyzes emissions of 100 global corporations to determine their performance against science-based targets that seek to limit climate change to 2C (3). These developments underline the growing importance of sustainability reporting in the context of nature's limits that can be observed today.
The aim of this analysis is to explore the notion of sustainability reporting and how it could be improved based on the key principle of materiality and in relation to sustainable production, which is a result of sound waste management. In my view this process of accounting is one of the major trends of the sustainability revolution among corporations. However, as opposed to the well-defined and globally accepted standards for financial reporting (International Accounting Standards Board (ASB) or International Federation of Accountants (IFAC)) the globally recognized sustainability reporting standards are still in their initial stages of development. However, the development of unilaterally used frameworks for reporting on NFR would hopefully realize in this decade.
Key Standards/Guidelines/Frameworks on Sustainability Reporting
There are many initiatives in the area of non-financial reporting Annex 1. Similarities can be observed among them, but at the same time discrepancies prevail augmenting the complexity of the subject area of NFR. Furthermore, competition among these frameworks delays the process of continuous improvement and advancement of business evolution in sustainability. The frameworks can indeed be improved to enhance guidance on how companies deliver relevant information to their many stakeholders. In other words, the reports should be tailored to meet common needs and demands of employees, customers, NGOs, investors, shareholders and others that are affected by the company's operations. Please refer to the Annex 2 for comparative analysis of these frameworks.
What is happening now?
In the 2010s one can observe major developments and increased use of non-financial reporting frameworks: the publication of an update of the GRI Guidelines (GRI4), the new Framework on Integrated Reporting (IR), the emergence of the Sustainability Accounting Standards in the US, EU Regulation on voluntary sustainability reporting and other sector specific developments. Increasingly more governments are introducing laws and regulations on sustainability reporting, forcing companies to disclose sustainability-related information (Ioannou and Serafeim, 2011a). The Sustainable Stock Exchanges Initiative (SSEI) created by the United Nations (UNPRI, UNSTAD and UNEP FI) further ascertains the importance of this practice. The aim of this initiative is for stock exchanges, regulators, investors and companies to work together to enhance transparency and ultimately performance on sustainability encouraging responsible long-term approach to investing (Ioannou and Serafeim, 2011a). At the same time the King III Report on Corporate Governance encourages sustainability activities among South African companies by providing mandatory regulations and guidance on achieving these objectives. In the US, the Securities and Exchange Commission (SEC) has issued "Guidance Regarding Disclosure related to climate change" (Securities and Commission, 2010) and is in the process of developing industry-based sustainability standards with the intention of making the obligatory in the coming years.
Existence of various guidelines, standards, frameworks and tools on sustainability reporting makes it increasingly difficult for companies to engage in sustainability reporting as without expertise or experience in such form of reporting they may find it daunting to choose the most appropriate framework.
However, there are two sustainability reporting guidelines that can be considered most rigorous and effective, namely the GRI Guidelines and the IIRC framework. The major drawback of these frameworks is the lack of assurance that they provide certainty on legitimacy of disclosure. As the nature of these frameworks is voluntary, companies often only report on the positive performance and tend to omit the problems and challenges they have faced. Scandals, allegations and complaints about the company's activities are rarely described undermining the overall transparency of NFR reports. For example, the major criticism of the UN Global Compact is the failure to address the many complaints against the companies - in other words the problems are exposed but not dealt with!
Background for Choosing the Topic
As mentioned previously, from June to December 2013 I was working for the Word Business Council on Sustainable Development (WBCSD) (4) in Geneva, a CEO-led non-governmental organization that galvanizes the global business community to create a sustainable future for business. Our team had to conduct an analytical review of WBCSD's member reports (175) according to a specific set of criteria and to then identify the present stance of reporting on non-financial information. Consequently, we had to select the best practice examples and come up with suggestions on how these companies can further improve their reporting. This project resulted in a publication entitled Reporting Matters 2013 - the Baseline Report (2013).
The methodology we used was developed together with a London-based communications agency Radley Yeldar (5) that acts as a consultancy firm on sustainability, aiding companies on how to produce a credible, comprehensive and concise report on sustainability (Radley Yeldar, 2014). The 17 criteria we looked at consisted of 12 content criteria (focusing on the information included in the report), as well as 5 experience criteria (focusing on how this information is presented visually). Please refer to the Annex 3 for the list of criteria.
As one of the three research analysts I was first provided with training on the methodology before starting the review of the reports. Each of us was then given around 60 companies to review from various sectors including Food & Beverages, Auto, Renewables, Construction as well as the Media and Services companies.
The purpose of the review was not to come up with new criteria and add confusion to the existing multitude of various sustainability reporting frameworks but to identify best practice and provide personalized feedback to each company and consequently produce a report summarizing the findings.
This experience has provided me with an understanding of main issues in the area of sustainability reporting, equipped me with analytical tools to help develop a methodology and approach used for the purpose of this research.
Methodologies
In this paper I will be looking at 50 companies from the Forbes list (6) of leading companies today Annex 3 - 10 companies from 5 different sectors. The selected sectors are in my view those that are the core of consumerism and that will drive change and technological progress in the coming years. The analytical review performed was focused on the major international companies that drive consumption through production. Hence the chosen sectors are Food & Beverages, Apparel, Energy, Auto and 10 companies from the IT sector.
The aim of this thesis is to assess the selected sample of companies and then identify the key trends that exist today in the rea
lm of sustainability reporting. I will focus on two aspects of sustainability reports that in my view are prerequisites for good management reflected in a credible sustainability report. The chosen qualitative criteria, namely materiality and waste management are to be addressed in order for a company to produce a sound sustainability report. Materiality is a useful proxy for ensuring the sophistication of reporting; waste is a key output from (over) consumption. By looking at these two areas one can better understand whether the consumption-driven companies are a) managing the issues that matter most and are b) mitigating the waste impacts from the production of goods made to satisfy demand. I would then compare the results to identify top performers across and within different sectors.
I will have 15 bullet points, i.e. sub-criteria for each of the two criteria, allowing the company to obtain the maximum score of 15. I will be looking at 2 criteria in detail, namely materiality and waste management. The assessment will be performed by scoring each criterion for each company report on a scale of 0 to 1 - in the case when a sub-criterion is described the company obtains a score of 1, in the absence it attains a 0. Each of the two criteria will be scored on the scale of 0 to 15 for each company report.
The table below is a snapshot from the analysis, which shows how I performed the scoring of reports.
Table 1: Waste by Sub-Criteria
Source: Extract from the analysis.
Materiality
The sub-criteria that fall under materiality are based on definitions from the Global Reporting Initiative, IIRC Framework, AccountAbility, ISO 26000 description of the significant matters a company should address as well as on the experience gained throughout my work with the World Business Council and our ongoing discussions on this subject. At the moment, there is no consensus on the standard definition for materiality but the existing definitions all mention the necessity of identifying the key/most significant/most important social, environmental and economic risks and opportunities to the company and its stakeholders. However, despite the ambiguities between these definitions, it is certain that the ultimate aim is to focus on those issues that can or could have an impact on your business or any affected stakeholders as well as the natural environment (For more discussions of the materiality concept see p.19 and p.34).
Waste
The sub-criteria were based on the EN23 Indicator on solid waste from the GRI Guidelines (GRI; 2013). It was important to narrow down the focus seeing that waste as a concept can include large varieties of materials and products, often not comparable between each other. Even though various reporting guidelines touch upon the questions of waste, it is exclusively the Global Reporting Initiative that explicitly outlines the various aspects that are to be considered when a company reports on its waste.
Figure 1: The Indicator on Waste by Type and Disposal Method
Source: GRI.4 Sustainability Reporting Guidelines, 2014.
The analysis will first look at the two criteria separately. Consequently, it will be observed whether there is a relationship between the two criteria, in particular whether it is common practice to include waste as a material issue in the materiality assessment of the company. The relationship between the two criteria may not seem obvious at first - 'materiality assessment' is the analysis of sustainability risks and opportunities; the other criteria 'waste' deals with solid objects and quantities.
Whereas 'materiality' explores a company's overall approach to sustainability in terms of existing risks and opportunities, 'waste management' on the other hand portrays a company's ability and approach to manage a specific issue. Materiality reflects the company's consideration of most important issues whereas sound waste management implies efficient production that takes into account the limited natural resources.
The used analytical approach focuses on the two criteria in detail, but it can be applied to other criteria as Completeness, Transparency etc Annex 2. The analysis can be performed for reports of companies from other sectors, sizes and countries. Lastly, looking at the two criteria in question does not imply that other criteria are not as important, however 'materiality assessment' is the ultimate starting point for any company that aims to integrate sustainability across its organization.
Analysis of the Findings
General
The sample of companies included in the analysis is from 16 countries (Western Europe, US, Japan, Nordic countries and Brazil) selected from the Forbes List Annex 3 of leading companies in the world. In table below are presented the top performers from my analysis.
Table 2: Top Performers Overall by Country
Source: Excel Analysis.
The following conclusions could be made based on performed analysis:
Size of the company in terms of revenues or the total number of employees does not have an effect on the quality of the report. The scope of the companies in terms of revenues for 2014 varies from USD 3 billion (Hugo Boss) to USD 467 billion (Royal Shell). In terms of size in people - the smallest company is Prada with about 8,000 employees and the largest is Volkswagen with 502,000 people employed. It has been concluded from the analysis that these metrics do not have an influence on the quality of reporting. Royal Shell, despite showing having the highest revenues at USD 467 billion (overall score 11), does not perform well overall. Companies may have the highest revenue but still perform poorly on sustainability.
Do companies rely on the GRI guidelines and does this imply good performance in terms of materiality and waste management? It can be observed that most companies rely on the GRI Guidelines when preparing a Sustainability Report - 74% of the companies. With regards to the Application Level (7), most companies that use GRI Guidelines have the highest level of Application A+. These results show a positive trend of companies' commitment and dedication. On the other hand, the question of external assurance and application level can be criticized for lacking credibility as the entity providing certification for a company has a stake in the company performing well. The GRI Application level reflects the amount of information covered in the report but not the quality of these reports.
Table 3: Top Performers - Correlation between GRI/materiality and GRI/waste
Source: Excel Analysis.
As can be derived from the tables above, top performers on materiality and waste rely on the GRI Guidelines, which shows that using the framework ay have a positive effect on performance.
Table 4: Worst Performers - Correlation between GRI/materiality and GRI/waste
Source: Excel Analysis.
At the same time, the worst performers on materiality do not use the GRI Guidelines. At the same time, half of the worst performers on waste do use the GRI Guidelines. Overall, it can be concluded that the use of GRI Guidelines enhances good performance.
According to the KPMG Survey 'more companies report on CR in the annual report, but 'integrated reports' are in a minority', which means that my findings are consistent with the Survey. Only 1 company (Volvo) out of the sample claims to produce an integrated report. Due to the novelty of this reporting scheme with the first IIRC guidelines only published in December 2013, the quality of self-declared integrated reports also remains questionable. At the same time, inclusion of sustainability information in the annual report can be seen as a positive trend and a starting point for the future of integrated reporting. 12% of companies include sustainability information in the Annual Report - it should be noted that these are from the Apparel and Energy sectors.
How long have the companies been reporting on sustainability issues? General Motors and Nike have only been reporting non-financial information for two years; whereas Royal Shell has been reporting for 17 years. Contrary to the presumption, the number of years reporting does not necessarily reflect on the quality of the reports. For example, General Motors as a new NFR practitioner demonstrates good performance in materiality and waste management. As can be viewed in the table below, companies that have been reporting for less could have a better overall score.
; Table 5: Number of years reporting
Source: Extract from Excel Analysis.
On the other hand companies from the Energy sector have been reporting for longer but not better (perhaps due to the criticism from NGOs and activists following various oil spills throughout history). These companies do not demonstrate particularly outstanding performance on materiality nor on waste. Reporting for longer does not mean reporting is better.
The reports vary in length with the shortest at 33 pages. The longest report on the other hand is at 558 pages (Ford). A short report would not directly imply that the company has failed to cover all the relevant issues; for example, Statoil (44 pages) got the highest score in the assessment of the materiality criteria. The length of the report does not reflect its quality. In this example Ford performs better on materiality than Statoil.
Are these reports externally assured? External assurance is becoming common practice (KPMG, 2013), which is also confirmed in the analysis. Presumably, reporting is becoming more comprehensive and the data provided in the report more reliable. From my sample 60% of companies have obtained external assurance. The data/metrics, processes and management systems and materiality analysis should all be subject to internal audit and external verification. All top performers have obtained external assurance of the limited type, i.e. only certain information has been externally verified.