Sustainability Reporting Report Card: Needs Improvement(A)
In the award-winning documentary “The Corporation” that came out this year, the filmmakers argue that companies display many of the same psychological characteristics that would lead clinicians to diagnose someone as a psychopath, including an inability to experience guilt or admit wrongdoing. This part of the film is thought provoking, funny, and has more than a ring of truth to it. Many companies are loath to acknowledge any negative impacts they have on society. Few take the time to assess their social and environmental impacts and even fewer will communicate honestly about those impacts. Now there’s signs that’s changing, and a growing movement to promote sustainability reporting may be just the therapy that many companies need.
Companies face increasing demands for disclosure of their social and environmental performance from socially responsible investors and other stakeholders from customers to communities. In response, a growing number are beginning to report on impacts of their operations and products. A global reporting survey conducted in 2004 by the Association of Chartered Certified Accountants found that the number of corporate social, environmental, and sustainability reports increased from fewer than 100 in 1993 to more than 1,500 in 2003. A 2003 study reporting of the world’s 100 largest companies by the consulting group CSR Network found that just under half, 49, now issued an environmental, social, or sustainability report.
Although there’s still significant room for improvement, it appears that corporate sustainability reports are also improving in quality as they increase in quantity. Few reports provide a genuinely balanced view of a company’s positive and negative impacts on society, but more companies are starting to admit their missteps and the challenges they face. For instance, after years of avoiding public comment on critics allegations it used sweatshops, clothing retailer The Gap won praise for its first social responsibility report issued earlier this year in which it provided quantitative data on its labor compliance audits of the factories making clothing for the company and admitted “few factories, if any, are in full compliance [with Gap’s code] all of the time.” The report outlines new steps Gap is taking to address the issue.
One key driver that’s enhanced the quality of many corporate sustainability reports, and has also contributed to their growing numbers is something called the Global Reporting Initiative (GRI). The GRI is now an independent organization based in Amsterdam, but it began as a joint project of the U.S.-based environmental coalition Ceres and the United Nations Environment Programme. (As we always note with pride, Trillium Asset Management’s CEO Joan Bavaria served as Founding Chair of CERES, chaired its board from 1989 to 2001, and is still an active CERES board member.) To create the GRI, CERES and the UNEP brought together participants representing business, social and environmental advocacy groups, accounting bodies, labor, government, the investment community, and others to determine the key information companies should report.
The current version of the GRI’s Sustainability Reporting Guidelines includes 110 indicators related to companies’ economic, environmental and social performance. The indicators range from traditional quantitative reporting on water use and waste management to disclosure of policies on child labor, nondiscrimination, and consumer privacy. Companies have flexibility to choose which GRI indicators to use, but must report on 57 core indicators (or note why those aren’t relevant to them) in order to state that they are reporting “in accordance” with the guidelines. The GRI is just launching a new effort to update and revise the Sustainability Reporting Guidelines by 2006. It is also developing sector-specific supplements tailored to address the sustainability reporting challenges of certain types of companies, such as banks, mining companies, and automobile manufacturers, as well as guidelines for reporting on specific issues of interest to stakeholders, such as how a company is responding to the global pandemic of HIV/AIDS.
Four years after the GRI released its first pilot test version of its reporting guidelines in 2000, more than 600 companies and other organizations around the world have told the GRI that they are using the guidelines for their reporting. Spurred by the GRI’s reporting guidelines, some governments and regulators are also taking steps to encourage greater disclosure of companies’ social and environmental impacts. For instance, France now requires large French companies to include in their annual reports discussions of their social and environmental impacts. Under pending regulations, the United Kingdom may require U.K.-listed companies to publish Operating and Financial Reviews that would include discussions of a company’s environmental issues and social and community matters. The Johannesburg Stock Exchange in South Africa promotes GRI reporting to all of the companies listed on the exchange as part of its recently adopted code of corporate governance reforms.
Despite the important gains the GRI has made, corporate sustainability reporting in the U.S. lags behind Europe, Japan, and even a number of emerging markets like Brazil. More than 40 leading companies in the U.S. have referenced the GRI guidelines in their sustainability reports, but so far only seven have produced “in accordance” reports. In fact, corrected for the size of our economies, even Italy has more corporate sustainability reporting than the U.S. does.
To address this, Trillium Asset Management spent much of the last year working with partners through our trade group the Social Investment Forum to develop a joint statement of support for the GRI guidelines and better corporate reporting among U.S. companies. The statement recommends that all publicly traded companies prepare annual sustainability reports based on the GRI guidelines and provides basic tips for increasing the credibility, comparability, and utility of those reports.
We launched the statement this fall with a press event at the Social Investment Forum’s annual industry conference. (The call-in telephone press conference was recorded, and you can listen to a webcast.) Eighteen major socially responsible investment institutions, with $230 billion in assets under management, signed onto the statement, as well as many social research firms including Innovest, the Investor Responsibility Research Center, and KLD Analytics. The statement notes that companies GRI reports should be the first source all of our institutions consult for information about a company’s social and environmental performance.
In response to the statement, Global Reporting Initiative Chief Executive Ernst Ligteringen said: “The analyst community has spoken – there is a need for fuller disclosure of business risks and opportunities facing companies today…. I feel that this strong statement of support from the analyst community will spark more interest in GRI-based reporting from US companies.” His prediction appears to be coming true. In the last month, the joint statement gained press coverage in a dozen outlets. Companies have noticed as well. Business for Social Responsibility held a conference call to provide us a chance to explain the statement to 50 large companies, some of which already report and many of which do not.
We now plan a more targeted outreach effort to share the statement with the largest 100 companies in the U.S. and encourage those of them that aren’t using the GRI to do so. We hope many of them heed not only our joint statement, but also the experience of Intel Corporation, one of our core holdings that just met the standards for “in accordance” GRI reporting last month. Intel’s Director of Corporate Responsibility Dave Stangis explained: “Our stakeholders look to us to disclose key environmental and social data so they can compare and judge our performance. It makes clear business sense for Intel to meet that need. Our shareholders and communities expect it, and it helps us improve our performance. GRI has provided a flexible framework to achieve those goals.”