Table 6: Do Top Performers use Assurance?
Source: Excel Analysis.
Information that is included in the report must be complete, accurate, credible and reliable - it is precisely the independent external assurer's role to insure this (King and Roberts, 2013). Assurance aspect of reports remains an area for improvement - reporters ought to insure accurate data collection processes, formal reporting mechanisms, internal management controls and monitoring are in place. Some information in a sustainability report is qualitative (i.e. social - relations with the affected communities, environmental - the negative aesthetic impact of building a factory near a residential area) rather than quantitative (i.e. profits generated), which further complicates assurance. With the enhancement of sustainability-related regulations, assurance of non-financial disclosure will become common practice among reporters just as was the case with financial reports. Provision of assurance is an important factor that increases credibility of these reports and in turn the trust that stakeholders place on corporations and their disclosure.
Materiality at the Core of the Report
Materiality has always been traditionally described in financial context (8) but now constitutes a 'more expansive definition that includes disclosure of the risks and opportunities posed by sustainability issues such as climate change, human rights, and broad accountability' (AccountAbility, 2013). Materiality is arguably the base and the starting point of corporate reporting on sustainability actions within the business. Material issues are "those that may reasonably be considered important for reflecting the organization's economic, environmental and social impacts, or influencing the decisions of stakeholders, and, therefore, potentially merit inclusion in the report. Materiality is the threshold at which aspects become sufficiently important that they should be reported" (GRI, 2013). In the context of the IIRC framework, a company that has integrated a materiality analysis discloses "information about matters that substantively affect the organization's ability to create value over the short, medium and long term". To simplify, materiality process assessment is the identification of all the issues that are most material to the company in terms of sustainability.
At the same time, identification of material issues permits the company to better focus on what is important and ideally present these sustainability issues in a comprehensive and concise report. The benefits of a sound materiality process enhances internal accountability and improves the overall business processes - knowing what one's material issues are helps to focus the investment of resources and therefore fosters performance improvements. Admittedly in the context of pressing social problems and environmental concerns it makes sense for the company to focus its 'sustainability investments' in those areas that may have the greatest impact/return.
The following sub-criteria were derived from a variety of existing sustainability reporting frameworks as the GRI4 Guidelines, IIRC framework and the findings from the work that I did with WBCSD.
1. The process of materiality assessment - the report includes a clear and comprehensive description of the materiality analysis that the company has performed. The report describes how the issues were identified, how the feedback from the relevant stakeholders was generated, and assessed leading to the identification of the key issues to the company and its stakeholders. More than 50% of the companies describe the materiality assessment in place. It should be noted that about 50% from each sector perform well on this sub-criterion with no particular sector outperforming. Therefore, there is an equal overall tendency to implement materiality assessment among companies from all sectors.
2. Since when materiality assessment is in place (frequency) - seeing that materiality analysis is a relatively new practice most companies do not perform well on this sub-criterion. From the sample of my companies only 22% disclose such information. The Food sector performs best whereas the companies from the Energy sector perform worst with none including such information. At the same time disclosing such information improves transparency and shows the company's long-term and ongoing commitment to materiality.
3. Stakeholder groups - with the growing awareness about sustainability, vanishing privacy of information and fear of being scrutinized, sustainability reporters tend to consider all the relevant stakeholders affected by their activities. Stakeholders include groups who may affect, or be affected by, the organization's actions. There exist key groups of stakeholders that any company should consider, namely employees, customers, communities, suppliers, NGOs and governmental bodies (WBCSD, 2013). As can be observed from the analysis, most companies do provide such information with 90% of companies describing the different stakeholders groups they have identified.
4. Stakeholder engagement - the report depicts how stakeholders participate in the company's activities and how their views are taken into account with specific focus on materiality assessment. This can be phrased as 'we have consulted our stakeholders', 'we consider our stakeholders views' when making decisions. Notably, some reports mention stakeholders but do not describe whether these groups were consulted during the development of the materiality analysis. Overall, more than half of the companies describe the stakeholder involvement in the materiality process. Auto sector is the top performer.
Example 1: Stakeholder Engagement
Source: BMW Report.
5. Means of engagement with stakeholders - the report discloses information on how the relevant stakeholders were engaged in the materiality assessment. Such practices improve the quality of the materiality assessment and at the same time ensure the credibility of the report. An inspiring 58% describe the various means of engagement with their stakeholders.
6. Evidence of stakeholder quotes - these are rarely included in the reports. Reports with critical stakeholder quotes stand out by displaying better transparency and credibility. Only 30% include such information. IT and Apparel sectors perform the worst on this sub-criterion whereas companies from the Auto and Food sectors perform well.
Example 2: Stakeholder Quote
Source: H&M Report.
7. GRI4 Principle on materiality due the novelty of the updated GRI Guidelines, only 5 reporters have explicitly integrated the principle of materiality. The companies that made reference to the GRI.4 materiality principle are those that have released their reports recently (2013-2014). Apart from the IT companies, at least one company from each of the analyzed sectors mentions the principle (Gap, Nissan, Coca-Cola, Nestl?, Petrobras). 20% of the companies mention the GRI.4 Principle on materiality.
8. Materiality matrix should also show the overall importance of material issues in consideration. Including a graphical representation of the assessment greatly simplifies the process of reporting for the company. At the same time, stakeholders reading the report can easily see the issues by glancing at the matrix. Overall, 44% include a comprehensive materiality matrix with more than half of the companies from the Auto and IT sectors. Only one company from the Apparel sector includes a materiality matrix.
Example 3: Materiality Matrix
Source: Nestl? Report.
9. Materiality analysis is in beginning of report shows the company's dedication and focus. Arguably, addressing only the key material issues and structuring the report around these makes the report more concise. 34% present it in the beginning of the report.
10. Prioritization of issues/very material or less material - the matrix clearly shows that the material issues are mapped out according to the company's strategy, goals and objectives whilst taking into consideration the stakeholder views. Plotting the material issues in a matrix in a hierarchical order clearly demonstrates the level of importance of the material issues. 54% demonstrate prioritization. It should be noted that some companies that have not included a materiality matrix managed to present the information in such a way that it is evident that prioritization of issues is in place.
11. Materiality issues considered across the value chain - for example, material issues included depi
ct their relevance according to their relevance to the supply chain, post-production activities or the re-use of materials saved from recycling. In other words, the NFR report demonstrates the company's consideration of its impacts beyond the direct operations. This would portray the company's commitment to sustainability beyond mere compliance. It will also give some sense of confidence that material risks outside direct operations (which is usually where the footprint is the biggest) are being managed. Only 26% have considered material issues with regards to the value chain.
Example 4: Value Chain
Source: Nike Report.
12. Report is structured around the outcomes of materiality analysis - an uncommon with only a handful of companies structuring their report around the outcomes of the materiality assessment. What can be observed is inclusion of the materiality matrix but no follow-up in the report. In other cases, companies identify such an extended list of issues that it becomes impossible to cover them all (for example, Ford with 61 issues). Only 8% have structured their reports around the outcomes of the materiality analysis (Toyota, General Motors, EDF and Statoil). This may be explained by the fact that companies heavily invest a lot of money into the preparation of the reports and development of the materiality matrix but consequently they do not use it for determining the report's context. Such practice may lead to a substantial waste of monetary resources.
13. Materiality matrix is externally assured - coming back to the subject of external assurance, the sub-criterion in question is one of the most crucial aspects where the practice of verification should be applied. Providing assurance of the materiality assessment demonstrates the legitimacy of the process and the credibility of its outcomes. 32% from the sample have obtained external assurance for their materiality assessment. It should be noted that because of absence of concrete widely recognised auditable requirements, external assurance of these processes remains difficult.
14. Stakeholder/business included on the axis of the matrix - an integral part of the materiality matrix is the inclusion of both business's and stakeholders' opinions in the materiality assessment.
15. Photographic presentation of the material issues - the use of photography in reports can be viewed as a presentation of evidence (Sontag, 1977) to the information disclosed. 'A photo passes for incontrovertible proof that a given thing happened, photograph can be treated as a narrowly selected transparency' (Sontag, 1977). The sub-criterion was developed to see whether the company reports demonstrate proof of their activities. For example, if a company has identified water management as a material issue, then are there any photographs included of how it has addressed this matter? i.e. photographs of water management facilities, of employees operating these facilities or such. Overall, 64% include photographic evidence.
In the media era that we live in today, communication is an extremely important factor, that influences perception of the company's reputation and the overall image. Therefore, producing a user-friendly report with explicit evidence of activities in the form of photographs is an essential component of success. Not only would it enhance the credibility and transparency of the report, it would also attract more people to read it.
Table 7: The overall results for Materiality Analysis by Sector
Source: Extract from Analysis
Auto sector is the top performer from the sample with highest scores on most sub-criteria. Overall, it obtained an impressive 85 points out of 100. The Apparel sector on the other hand appears to not have yet integrated comprehensive materiality assessment mechanisms. In particular, high fashion companies do not disclose sustainability-related information nor do they produce a stand-alone sustainability report. One of the reasons that may explain top performance by the Auto sector is not only the influence from the Japanese system of efficient management (p. 23) but also the peer-to-peer collaboration that these companies are continuously engaged in. For example, in the words of Ford: "We believe that collaborative action within our industry allows us to more effectively influence all levels of the automotive supply chain". Leading auto companies are members of the Automotive Industry Action Group (AIAG) (9) that allows them to share knowledge between each other and identify best practice. Food, Energy and companies from IT are on the same level of progress.
Table 8: Top Performers on Materiality from Sample
Source: Excel Analysis.
Top performers are from Germany, France, US, Japan, Switzerland, Sweden and Norway. This can be explained by the existence of regulations in these countries that oblige companies to report on non-financial information. These countries can be considered the pioneers in sustainability reporting.
Table 9: Top Performers on Materiality by Sector
Source: Excel Analysis.
Chart 1: Distribution of Scores on Materiality for all companies
Source: Excel Analysis
It may be observed from the distribution of scores that there is much variability. However, most companies have either obtained a score of 3 or 9/10. This shows that companies have either integrated materiality mechanisms or are still in the process of development.
Chart 2: Distribution of Scores on Materiality by Sector
Source: Excel Analysis.
When looking at the top performers, most are companies that rank high in the various sustainability indices like the Forbes list of most Sustainable companies (10), The Dow Jones Sustainability Index (11), Corporate Knights (12) to name a few. However, Schneider Electric scored poorly on materiality but the company is recognized for its exceptional management. A potential explanation lies in that NFR reports often do not adequately reflect the reality of the company's operations.
Waste
Following the discussion on materiality that covers a range of issues, now the focus will be on a specific matter, waste, which arguably should be identified as material by most companies if not all. It should be noted that 'waste' varies greatly across different entities in terms of quantity, composition and disposal methods. Waste management is an important factor to consider and if managed properly it can improve productivity and performance of the company. Rubbish is being generated faster than other environmental pollutants, including greenhouse gases (Hoornweg et al., 2013). It should also be noted that "Waste disposal data are the most difficult to collect. Many countries do not collect waste disposal data at the national level, making comparisons across income levels and regions difficult (World Bank, 2012).
In my view waste is an important (material) factor in terms of risk as well as in terms of opportunities in the context of sustainable development and production processes. Increasingly discussed is the relatively new concept of 'circular economy', which is defined by material flows of two types, biological nutrients, designed to reenter the biosphere safely, and technical nutrients designed to circulate at high quality without entering the biosphere' (Circular Economy Report, 2014). In other words, the notion of circular economy is one where nothing is wasted but is constantly reused as either food reentering the biosphere or product components reentering the production and manufacturing sphere.
The capitalist model of the 'take-make-dispose economy' should be replaced by the innovative way of 'take-make-reuse' approach. The new concept and model of circular economy presumes decoupling of revenues from the material input, i.e. economic growth is possible without the continuing reliance on the extraction of natural resources. The economic case for circular economy is evident - integrating the concept into the company's management creates jobs, reduces costs of production and the reliance on continuous extraction of natural resources. In addition, the materials saved could be reused for production resulting in cost savings.
In line with the concept of circular economy and life cycle analysis is the notion of cradle-to-cradle that was introduced by William McDonough and Michael Braungart (2011). In this context the cradle (13) refers to the 'birth of a product'. The norm in today's highly industrialized world is to throwaway the product once it goes out of use.
It is often cheaper for an individual to replace the broken/faulty product with a new one instead of getting it fixed. Such behavior may be partially explained by the product's 'build-in obsolescence', the product is designed to go out of use after a certain time ensuring that consumer buys a new version and the business continues to make profit from it. The concept of cradle-to-cradle should replace the industrialist model of cradle-to-grave. Instead of executing immense control and power over nature, humanity needs to learn how to exist in harmony with it. This does not imply eradicating any sort of production altogether but instead finding more responsible and eco-efficient ways of production.
Seeing the broad scope of the term, here the focus will be on the amount of hazardous and non-hazardous solid waste generated by company's operations. To define the frame of 'waste', the following sub-criteria were primarily based on GRI4 indicator EN23 (GRI, 2006, 2013).
1. Waste is identified as a material issue - the identification of 'waste' as a material issue demonstrates the company's in-depth consideration of the matter. Waste as a material issue is displayed in the materiality matrix. Only 28% of companies have included waste as a material issue, these are the comapnies that have a sound materiality assessment in place. Such statistics demonstrate the large area for improvement that still exists today in the context of companies integrating the cradle-to-cradle concept. 4/10 companies from Auto sector have identified waste as material issue; 3 from Food and 3 from IT, 2 from Apparel and 1 from Energy sectors. Some could argue that if the company does not have a high amount of waste then it is not required to include waste as a material issue. However, any company generates waste, whose amount should be reported, in particular hazardous waste should this be present.