Sustainability reporting simplified

Sustainability reporting simplified

Naude, Koot

Sustainability reporting is about moving from exclusive reporting on economic performance (annual report), to integrated reporting in which performance with respect to the natural environment and society is added.

In South Africa, it is based on the recommendations of the King Committee summarised into a Code of Corporate Practices and Conduct which came into effect on 1 March 2002. The King II report, section 5, requires companies to report at least annually on their sustainability performance and to demonstrate commitment to organisational integrity.

Companies like Anglogold, Impala Platinum, SABMiller, Standard Bank, ABSA, Nedcor, Liberty Group, African Bank, Eskom, MTN, Barloworld, Woolworths and a few others have made massive progress in responding to demands for improved transparency on key issues of corporate responsibility.

In this new reporting arena, some companies still make the mistake of ‘just putting something together’. The danger is that reports which are produced merely to satisfy the requirements of the CEO add little value to the company’s image or even credibility. Worst of all, such companies may have to do it all over again which is costly both in terms of money and reputation.

Communication

According to a CLSA survey, South African business rates among the top five of 25 developing countries in terms of sustainability performance and governance, yet rates very poorly in terms of disclosure.

It appears that our business skills are respected, but we can’t tell the story. The challenge therefore lies in the way SA business can improve the reporting and communication of reported information to enlighten all stakeholders about their performance in the financial as well as non-financial areas.

Foundations of sustainability

Sustainability Management is about elevating the importance of nonfinancial issues that have an impact on the firm’s future sustainability and performance. In everyday conversation you will hear terms like Corporate Citizenship, Social Responsibility, Sustainable Development, Sustainability and others. The terms are often used interchangeably, but they do differ. They are all elements that contribute to the long term sustainability of the company.

The ‘triple bottom line’, a phrase coined by John Elkington in 1994, provides a sensible structure for sustainability reporting and is used by many local and international companies. It seeks to encapsulate for the business community the three traditional spheres of sustainability namely economic and social development and environmental protection. These interdependent and mutually reinforcing components can be defined as:

* Economic concerns the creation of material wealth (including financial income and assets for the company);

* Social concerns the quality of people’s lives and particularly the equity between people, communities and nations; and

* Environmental concerns the protection and conservation of our natural environment.

Why should companies report?

In addition to the formal requirements, more and more stakeholders – from regulators to customers and investors – use sustainability reports for decision-making. Business executives are using them to decide on potential partners, consumers to choose whose services and products to purchase, and students to evaluate prospective employers. Stakeholders are increasingly interested in the company’s triple bottom line performance and related risks and opportunities to support their investment decisions.

Peter Downing, in his article A Global License to Operate, published in Corporate Board; May/June 2001, states: “Your board may soon find that sustainability reporting will be required as a license to Operate1 to grow the bottom line. It is what many investors, business people, community groups and government agencies around the world are now asking for as a condition of doing business with your company. If not already on your board’s agenda, then within the next five years, an annual sustainability report will become a mandatory visa for companies to compete in local and global markets”.

Tom Delfgaauw from Shell states: “We believe that our commitment to contribute to sustainable development, of which engagement processes, transparent reporting, and verification are integral elements, holds the key to our long-term business success”.

Sustainability reporting is about building trust with all the different stakeholder groups. Business executives have to remember that: “The time to build trust is before something happens, not after”.

The reasons why companies should issue reports can be summarised as:

* To grow shareholder value with earned public consent;

* To enhance company image;

* To increase employee morale;

* To gain a global license to operate at home and away;

* To attract best skilled knowledge workers; and

* To attract long term institutional and individual investors.

Who should report?

Sustainability reporting is often viewed as the responsibility of only a few large companies, but not only large listed companies will benefit as sustainability is a stakeholder driven issue. It is a way in which your company will be able to communicate with a large number of stakeholders with different requirements, including shareholders, suppliers, customers, employees, communities, government, labour unions, etc.

It is clear from the list of stakeholders that most companies will ultimately have to report on sustainability. Experience shows that mid-size and smaller companies are often suppliers or customers to large companies that support the principles of sustainable development and to this end, the larger company will be interested to know whether the potential supplier or customer also supports these principles. If the supplier is able to demonstrate that they measure and report their sustainability performance, the larger group will almost certainly favour the particular supplier. To this end, a South African IT Company finds it useful to attach their sustainability report to every pitch or tender they submit for business.

This means that no company is excluded, because all companies need to communicate with stakeholders and all companies wish to develop an enhanced image and increase business.

What do you report?

The challenge of sustainability reporting is defining an approach that is grounded in appropriate principles and employs meaningful, pragmatic indicators.

Each company has to report on performance indicators that are relevant to the particular company and industry that they are in. In determining the relevant indicators it makes sense to find out which issues are important to the company’s stakeholders and to focus on these.

A number of guidelines are available; the Global Reporting Initiative (GRI) developed guidelines by using a multi-stakeholder approach and is becoming the globally accepted standard for reporting. Companies that use these guidelines have found them to be most appropriate to select from. In South Africa, 24 companies already use the GRI guidelines. Of these, 11 have reports available and the balance have accepted the guidelines for future reporting.

How do you report?

Once you have selected the appropriate reporting indicators, define the formula that you will use to express the performance in each indicator. Then look at the availability and reliability of the data. Much of the data that is needed will already be available. The best advice is to keep it simple and relevant. Use an incremental approach, but get started. Don’t over-complicate the issue.

Companies must allow the reports to improve from year to year as the practice of sustainability develops. Do not try to ‘do it all’ in your first attempt. Too many of the early starters have done it badly and find themselves having to restart the process and restarts are the most expensive moves you can make.

Many current reports record the company’s commitments and policies. This is a good start, but the question left with the reader is: What was the result? To complete the picture, the actual performance that results from the commitments and policies needs to be reported. The reader is interested in the trend. In other words – did the commitment cause performance to improve? The reader’s next question will be: What is the target for the future?

What makes a good report?

The report has to be a balanced sustainability report unlike some reports that have an environmental or social bias. It has to reflect honesty from the company and record good and bad performance. No company can claim perfection in all areas and the reader wants to know what the company will do about those that need improvement.

The credibility of the report is increased when there is independent assurance of the report, the approach used in compiling the report and the data. Readers don’t like reports that appear to be an attempted “greenwash”.

What does it cost?

It is recommended that companies approach this reporting in an incremental way, which is not only cheaper, but also more credible as this is still a developing science. But in assessing the cost one must also look at the returns that the company will get if you adopt sustainability management.

From studies that were done and quantified, the results were in the following areas:

* Increased employee loyalty that has a positive impact on productivity and labour turnover with the resulting reduction in staff placement costs;

* Improved company image which has a positive impact on customer loyalty and sales turnover; and

* Improved investor confidence and much more.

Summary

Will history repeat itself? The Total Quality Management (TQM)’ is still fresh in the memory of many Americans. Only after Japanese companies devastated them in the marketplace did Americans and Europeans embrace TQM. Once again, Japanese companies have taken the lead in sustainability reporting, they have accepted the principle of sustainable development and are taking it seriously. The USA is way behind.

South Africa must bear in mind that we are seen as a developing country and for this reason we need to learn to disclose performance in financial and non-financial areas in a convincing manner.

The time to start is right now.

Koot Naude, BAdmin MBL (Unisa) is currently a Doctoral student in Sustainability Management and Reporting, he is also Managing Director of SP3 Reporting.

Copyright South African Institute of Chartered Accountants Feb 2005

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