Sustainability Reporting

Sustainable development implies development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs.

Role of Business in Sustainable Development

The business and industry sector has a significant role in promoting sustainable development.

Business must make money; and staying in business and prospering is a fundamental value of any for-profit enterprise.  At the same time, business is required to take into account the interests of all stakeholders that include customers, employees, investors, vendors, government and the society.

The late 1990s and early 2000s were turbulent periods for the global investment community, with vast amount of shareholder wealth being created and destroyed.  Both the institutional and retail investors have learnt some painful lessons, re-examined their assumptions about what constitute tangible and intangible value, and broadened their scope to consider characteristics that could lead to long term financial success.

One area of corporate performance that has begun to capture the attention of investment professionals is sustainable development:a set of responsibilities that contributes directly to an organisation’s risk management profile and is sometimes also linked with corporate responsibility.

There is considerable evidence that sustainable development contributes to shareholder value in a variety of ways-not only through tangible contribution such as risk reduction and profitability improvement, but also through intangible asset creation such as brand equity, human capital, etc.  Operating business by pursuing the sustainable development path strengthens an organisation’s intangible assets in a number of ways that in turn leads to tangible shareholder value creation.

It is now globally recognised that following sustainable development path makes good business sense.  This entails various approaches.  For example, eco-efficiency is based on a common sense proposition that reduces waste and inefficiency in production processes, saves money and protects the environment at the same time.  Life Cycle Analysis (LCA) offers a framework for understanding material flaws and potential impacts involved with providing services or products in a closed loop.  Sometimes referred to as ‘cradle to cradle’ or ‘cradle to grave’, LCA looks at an enterprise in terms of input, throughput and output.  This helps to identify inefficiencies that drain profit and produce waste including pollutants.

Many of these approaches: e.g. eco-efficiency, LCA, full cost accounting, industrial ecology, systems – based pollution prevention, etc. are new to the business world.  Businesses keen to benefit from transition to sustainable development path therefore need to prepare themselves and have a longer time horizon and a broader set of goals than traditional companies. 

Realisation and recognition of the significane of sustainable developm

ent approach usually starts from the top management.  However, best intentions are meaningless if these are only lodged in the minds of a few individuals.  Values of sustainable development has to permeate throughout the organisation.  Changing a company’s culture and outlook requires a contribution from everyone – starting from the chief executive officer and permeating through senior, middle, junior management and staff and all working as a team. 

To make this change happen towards sustainable development approach, it is important to:

Prepare a mission statement Form in-house waste reduction and pollution prevention teams Inform employees about economic, environmental and social trends Maintain regular communication lines Have commitment for community development efforts Be committed to honest and accessible public relations Measure and report on progress and performance Prepare annual sustainability report

Corporate Social Responsibility

 Drivers pushing business towards CSR:

Shrinking Role of Government. Demands for Greater Disclosure      Increased Customer Interest Growing Investor Pressure Competitive Labour Markets Supplier Relations

Business must make money; and staying in business and prospering is a fundamental value of any for-profit enterprise.  Companies therefore owe responsibility to their shareholders for improving profitability and enhancing shareholder value.  At the same time, companies are required to take into account the interests of all their stakeholders that include customers, employees, investors, vendors, government and the society.

It is in this context that Corporate Social Responsibility (CSR) assumes a significant role.  CSR is underpinned by the idea that companies can no longer act as isolated economic entities in detachment from broader society.  Traditional views about competitiveness, survival and profitability are undergoing a paradigm shift.

Sixteen principles of Business Charter for Sustainable Development prepared by ICC. 

Corporate Priority Integrated Management Process of Improvement Employee Education Prior Assessment Products and Services Customer Advice Facilities and Operations Research Precautionary Approach Contractors and Suppliers Emergency Preparedness Transfer of Technology Contributing to the Common Effort Openness to Concerns Compliance and Reporting

Sustainability Reporting

As a result of the global upsurge of interest in sustainable development, sustainability reporting system has emerged. “Sustainability Reporting” means reporting on the economic, environmental and social aspects of organisational performance (also known as “triple bottom line”).  It may be clarified that the term “sustainability” does not mean that a company is sustainable or that it will continue in existence for any specified period of time.  On the other hand, sustainability reporting is designed to provide information on a company’s environmental, social and economic performance and impacts and the initiatives for improving performance in these areas.  The World Business Council for Sustainable Development (WBCSB), a coalition of about 175 international companies united by a shared commitment to sustainable development, defines sustainability report as ‘public reports by companies to provide internal and external stakeholders with a picture of corporate position on activities on economic, environmental and social dimensions.”

In view of the objectives of sustainability reporting and the audience it targets, the GRI Guidelines provide eleven principles for reporting grouped in four clusters.  These are:

 Cluster 1: Framework of the Report

Transparency Inclusiveness Auditability Cluster 2 : Decision on What Information to Report Completeness Relevance Sustainability Context

Cluster 3 : Quality and Reliability of Reported Information

Accuracy Neutrality Comparability

Cluster 4 : Accessibility of Reported Information

Clarity Timeliness

Contents of an Ideal Sustainability Report as per GRI Guidelines

1.CEO Statement

A statement of the CEO or equivalent senior management person describing key elements of the report. It is suggested that the CEO’s statement should include:

highlights of the report content and commitment to targets; commitment of the company’s leadership to economic, environmental and social goals; statement of successes and failures; performance against benchmarks; the company’s approach to stakeholder engagement major challenges in integrating responsibilities for financial performance with those for economic, environmental and social performance and the implications for future business strategy.  

2. Profile of the Reporting Company

An overview of the reporting company and the scope of the report to provide a context for understanding and evaluating information in subsequent sections.

This section of the report should include:

organisation profile scope of the report profile of the report

3.Executive Summary and Key Indicators

A succient overview of the report

4.Vision and Strategy

Provide the vision of the reporting company for the future and discussion on how that vision integrates economic, environmental and social performance.

It should especially address:

what are the main issues for the company relating to the major themes of sustainable development? how are stakeholders included in identifying these issues? for each issue, which stakeholders are most affected by the company? how are these issues reflected in the company’s values and integrated into its

business strategies?

what are the company’s objectives and actions on these issues?

5.Policies, Organisation and Management Systems

An overview of the governance structure and the management systems that are in place to implement the vision.  Central to this section of the report is a discussion of stakeholder engagement.

6. Performance

Performance should be addressed across social, economic and environmental areas of impact and activity as well as on an integrated/cross-cutting basis, if possible

7. GRI Content Index

A table identifying location of each element of the report content by section and indicator.

Relationship Between Sustainability and Financial Reporting.

Sustainability reporting communicates a wide range of subject matter about environmental, social and economic impacts arising from a company’s activities, products and services.  Economic impacts include but are not limited to financial performance in meeting the expectations of investors and lenders.  On the other hand, financial reporting communicates about a company’s performance in creating value for investors and its accountability for monetary resources invested in it.  Sustainability reporting and financial reporting both communicate about risks and intangibles, but do so in ways that are different and partially complementary.

Sustainability Reporting has the potential to provide critical information for business analysis that is normally absent from financial reports.  These information facilitate financial reports with forward-looking information that could enhance the report users’ understanding of such key value drivers as human capital formation in the company, corporate governance, management of environmental risks and liabilities and the capacity to innovate. It provides insight to support business analysis and has relevance within the framework of traditional financial reports.

By consistently measuring sustainability performance, companies could strengthen both their internal business practices and their external communication.  The succeeding paragraphs briefly outline how the advantages of sustainability reporting could strengthen translating sustainability information into the language of financial analysis.

Increased process efficiency is an example of a proven sustainability strategy for decreasing cost and improving profitability.  Opportunities to reduce costs or create revenues through increased yield and sale of waste streams exist throughout the value chain of a business and could offer significant benefits.

Cost analysis could be greatly enhanced by a holistic approach to assessing risks and uncertainty, which have strong links to environmental and social concerns.

Sustainability initiatives and strategies also provide opportunities for product differentiation – a key component of competitive advantage.  Companies could reposition their products and services as part of their attempt to reduce their environmental or social impacts.  In the process, this would help differentiating their products and services in a manner that would enhance their competitive position.

Other intangible assets such as intellectual capital, ability to innovate, investment in research and development and networks and alliances are integral to analysing a company’s financial prospects.  These assets are influenced by the company’s commitment to training, skill development, employee relations and employee turnover – a foci of social performance indicators in sustainability reporting.

Innovative partnership with stakeholders around environmental or social aspects of products or markets could lead to product differentiation and brand enhancement.

In other words, ample opportunity exists to translate sustainability information into a form that speaks to the needs of the financial analysts.  Sustainability reporting offers real value to those whose business is to assess the current financial health of companies and anticipate future performance.  At present, the content of sustainability reports tend to appear in forms and units that are not readily convertible into financial terms; but rapid advances in areas such as environmental management accounting, valuation of intangible assets and value reporting promise to make sustainability information useful to the financial community.

Sustainability Assurance

Companies value the overall contribution that assurance makes to the sustainability reporting process.  Organisations in the forefront of sustainability reporting assurance also recognise the key role that they have in ensuring the credibility and usefulness of information flows within the organisation, especially from non-traditional and non-commercial sources.

Currently, there are only two recognised professional standards for carrying out sustainability reporting assurance.  These are: AA 1000 – assurance standard developed by the Institute for Social and Ethical Accountability; and ISAE 3000 provided by the International Audit and Assurance Standard Board which is a part of the International Federation of Accountants. 

Trends in Sustainability Reporting

Sustainability reporting has become a common practice in a number of countries like

the USA, Europe, Japan and Australia. Sustainability reporting is yet at an emerging stage in Asia, Latin, America, Africa and Russia.

Though sustainability reporting is not mandatory in India, a small but a sizeable number of both subsidiaries of multinational and local companies are preparing sustainability reports mostly based on GRI guidelines.  However, majority of these companies are focused on community initiatives rather than governance risk and disclosure.

With globalisation, Indian companies are increasingly realising that they have much to lose by not following sustainability reporting norms.  Indian companies now see sustainability reporting as central to corporate social responsibility with “passive philanthropy” no longer a sufficient response to rising expectations.

Conclusion

The goal of sustainable development requires that the businesses take responsibility for their social, environmental and economic impacts.  Sustainable development can provide business with an opportunity to innovate and a means to grow at each level and step of business operation.  Making the right choices within a company, whether it is newly exposed to the concept of sustainable development or is already advancing its sustainability agenda, contributes to the company’s long term success.

It is a matter of making the right choices and setting the right priorities.  This underlies the need for a positive mind set towards sustainable development.  Wider the spread of sustainability,  greater the chances of its success.  In order to attain this, rising awareness and hence education, is key.