Chapter 3

How to Report on Sustainability

Large and small companies alike have recognized that more effective management of stakeholder impacts and relationships is critical to success. The question of whether or why they should pay attention to issues of social and environmental responsibility is no longer up for discussion. The challenge is how.

—Epstein (2008a)

U.S. law does not require companies to produce sustainability reports, but increasing numbers of companies are publishing these reports. Although generally accepted accounting and reporting principles for sustainability do not exist, corporate sustainability reports are frequently prepared using criteria determined by external organizations or by the company’s internal guidelines. There are guidelines available for companies to use to engage in sustainable development and reporting. The SIGMA Project, the International Federation of Accountants (IFAC) Sustainability Framework, and the Global Reporting Initiative (GRI) are discussed in this chapter.

The SIGMA Project (2003)

In 1999, the SIGMA Project—Sustainability-Integrated Guidelines for Management—was established with support from the UK Department of Trade and Industry. Three organizations form this partnership—British Standards Institution (the leading standards organization), Forum for the Future (sustainability charity and think-tank), and AccountAbility (the international professional body for accountability). The SIGMA Project’s guiding principles can help managers evaluate their decisions in the broader context of sustainability. The framework provides managers with a combination of various aspects of corporate sustainability. It includes the efficient use of natural resources, the protection of the environment, and the protection of employee and citizen rights. For example, when managers make decisions about where and how to operate the business, some of these decisions involve their choices regarding labor costs. Companies have the option to exploit workers in countries where labor laws are minimal and child laborers are used. Using this strategy the company saves costs in the short run, but the long-run consequences can be harmful to their reputation and to society. In 2008, the United Nations Children’s Fund (UNICEF) estimated that 158 million children under the age of 15 are being used as laborers around the world.¹ This means that the children will not be educated and the cycle of poverty continues.

Guiding Principles

Five capitals make up the guiding principles. They are natural (the environment), human (people), social (social relationships and structures), manufactured (fixed assets), and financial (profit and loss sales, shares, cash, etc.). Although the principles are interdependent, natural capital is the foundation of the others. All forms of life depend on the environment for survival. In order for an organization to operate, the social, human, and manufactured capitals are essential. Financial capital provides support for the others. Accountability connects the five capitals because an organization has to answer for all of its impacts on the five capitals.

Natural capital involves the natural resources and processes that organizations use to manufacture their products and provide their services. Included in this category are natural sinks such as water absorb, neutralize, or recycle waste; renewable (e.g., timber, fish, water) and nonrenewable resources (e.g., fossil fuels); and natural processes (e.g., carbon cycle) that are essential to a healthy life. This evaluation of natural capital is critical because almost every organization generates waste and consumes energy in its operations.

Knowledge of a company’s use of and impacts on the environment can help management operate more efficiently with fewer costs and in ways that protect the earth from degradation. There are many ways that companies can do this with regard to their product design and manufacture. In designing products, companies should reduce the use of materials extracted from the earth. If raw materials are taken from the earth, they should be abundant, not scarce. Dependence on fossil fuels should be lessened and renewable fuels adopted. Renewable materials and fuels should be taken from properly managed ecosystems. Man-made and natural substances that accumulate and persist unnaturally in the environment should be substituted with substances that are easily absorbed by nature. Eliminating waste in all areas of production can save on the costs of materials and energy. Recycling and reworking products when possible can achieve efficiency in production processes. Land and resources should be systematically evaluated to determine their most efficient applications. If the natural environment will be affected by a company’s activities, care should be taken to minimize the impacts.

Human capital is defined as knowledge, intellectual products, skills, health, motivation, and the capacity for relationships. The concern for human capital is essential because it is necessary for people to be able to work and generate wealth. Healthy and educated workers can add value to the success of a company. Their intelligence is needed to achieve the company’s goals. Many things can damage human capital. Diseases and health conditions such as HIV/AIDS, malaria, and malnutrition have devastating effects on humans and their ability to contribute to society. Poverty takes its toll on human capital because people in poverty seldom have the opportunity to achieve their full potential. Dangerous working conditions are also a threat to human capital.

Companies and other organizations can protect human capital and help alleviate problems that cause damage to human capital. For intellectual pursuits, organizations can foster skills and knowledge by providing employees access to training and development opportunities. Providing workers with varied and satisfying tasks is another way to keep workers interested in performing well for the company. Along with a stimulating work environment, employees need a reasonable living wage and fair pay. Promoting health education is another way to retain healthy workers. A safe workplace ensures physical and mental well-being. Human-rights protection throughout a company’s operations and geographical regions is important to maintaining human capital. This involves understanding and respecting the values of different cultures. A company should also contribute to meeting certain human needs. These involve subsistence, freedom, and security in addition to identity, creativity, leisure, and empathy. Diversity policies are important to eliminating discriminatory practices and to eliciting contributions from workers with a variety of backgrounds. Child and human rights should be protected with the adoption of fair labor standards to avoid child, slave, or forced labor.

Social capital refers to human relationships that add value to an organization. Both formal and informal networks are important to companies. The ways that people interact through informal networks, communication channels, and families are part of the systems of communications. More structured relationships such as those with communities, businesses, trade unions, schools, and voluntary organizations are also part of human networks. There are many things that affect these networks such as cultural and social norms, values, and trust. Social capital is important for several reasons. People are the heart of a company’s success. From an internal perspective, people need good communication to work together. Good communication is based in part on trust and shared cultural values. Understanding this can be key to establishing a system of communication within a company. Outside of the company, the stability of broader sociopolitical structures (e.g., government, legal system) is important to maintaining an environment that is conducive to trade. The more trust that people have in a country’s legal system, the more likely they will be to invest in companies in those countries.

There are ways to improve an organization’s social capital. This can be done through direct external impacts, such as supporting economic activities in a community by using local merchants, suppliers, and products for operations contributes to social capital. This also involves fair treatment of customers, suppliers, and citizens. Paying taxes, supporting the local social infrastructure, and complying with local, national, and international laws support social capital. As part of their sales strategy, companies can provide reasonably priced goods that are accurately depicted in advertising along with making their products and services accessible. The positive effects of products and services should be maximized while the negative should be minimized. Internal impacts include providing an effective communication system in the organization. The internal culture should discourage corruption and bribery and allow for the support of whistleblowers. A transparent and fair governance system should be created. Working and living conditions should be safe and supportive of family life.

Manufactured capital encompasses what an organization uses to produce its products or services but is not a part of the product or service. Buildings, machinery, transportation equipment, technology, and other infrastructure are necessary to make a product or produce a service but remain separate from the product or service. Evaluating current and future investments in manufactured capital is important for sustainable development for several reasons. The proper management of manufactured capital enables an organization to be flexible enough to respond to changes in markets and consumer tastes and needs. This involves attending to technology and its impact on workers and resources. Companies that attend to these impacts may be more able to adopt creative opportunities that promote sustainable development. Organizations can improve the use of manufactured capital in many ways. Resource reduction can be achieved by using infrastructure, technologies, and processes in more efficient ways. This may involve developing customized production methods and using closed-loop manufacturing systems. Companies may consider leasing machines on a continual service contract rather than using different vendors. Reuse and remanufacturing systems can take advantage of used products that are returned to the manufacturer. If the product comes back, its materials can be used for new products. A goal of zero-waste and zero-emissions production systems can be adopted. Companies can evaluate their wastes to determine if there is a secondary market for the waste. Its waste could be a revenue source and also another company’s raw materials. To achieve this, partnerships with suppliers and customers can be established to improve the efficiency of production. The use of eco-efficient materials and processes along with acquisition of efficient equipment can result in improved production systems. Whenever possible, companies should try to mimic natural processes in their product designs and industrial processes.

Financial capital reflects the organization’s productive power, and organizations convey performance through reports about financial capital. Financial success is necessary to keep the business a going concern, but success is dependent on the state of the other four capitals. Sustainable development relies on the interdependence of human, social, natural, and manufactured capitals.

Financial capital can be enhanced in many ways. A company’s decision to focus systematically on sustainability issues with the intent to increase financial capital and reduce costs is an important approach to take. This includes establishing a sustainable strategy and achieving sustainability goals that meet socially responsible investment criteria. The management of opportunities and risks can increase financial capital. This approach applies to the evaluation of environmental and social opportunities and risks. One way to establish an economic value to environmental costs and benefits is to classify the value as it relates to the organization. For example, it could be an asset or a liability. If the value is an asset, the organization should evaluate ways to expand on it. If it is a liability, the organization should find ways to reduce it. An attempt should be made to value intangible assets such as reputation. The value of reputation can direct how a firm proceeds with future projects. If a company determines that it has an environmentally friendly reputation that is high in value, its future products or services should emphasize this aspect. A good reputation is also maintained and improved by upholding good relationships with customers, citizens, and suppliers. As a company evaluates its economic impacts from its products and services and activities, it should assess ways to create wealth for the communities in which it operates. Ultimately, the value of the company’s four other capitals (natural, human, social, and manufactured) should be reflected in its financial values.

IFAC Sustainability Framework

The International Federation of Accountants (IFAC) is a global organization that works to promote high-quality practices in the accountancy profession. IFAC members and associates are for the most part national professional accountancy bodies. There are 2.5 million accountants from a variety of specialties such as public practice, industry, business, government, and academia represented in IFAC. Its independent standard-setting boards (International Auditing and Assurance Standards Board, International Accounting Education Standards Board, International Ethics Standards Board for Accountants, and International Public Sector Accounting Standards Board) issue international standards on education and public sector accounting, ethics, auditing, and assurance.

The members of IFAC have concluded that accountants need to be more active in promoting sustainability as a long-term approach to business performance. To support this view and help accountants understand the different aspects of sustainability, the organization has issued its Sustainability Framework. The organization’s framework for sustainable development has four interacting perspectives—business strategy, internal management, financial investor, and stakeholder.² The business strategy perspective focuses on a strategic approach such that sustainability is included in strategic goals, targets, discussions, and objectives. Sustainable development is combined with risk management, governance, and accountability. The strategic approach to sustainability is a way to cover all aspects of the organization. Rather than being an addition to the organization, sustainability has to become an integral part of it at all levels.

The internal management perspective involves helping organizations meet strategic goals that incorporate sustainable development. This perspective covers all areas of performance and changes management in pursuit of sustainable development. Because it often takes effort and time for organizations to achieve long-term sustainable development, the internal perspective offers guidance in achieving some ways to achieve quick and simple rewards in the short term. Efforts to achieve waste and energy reduction are prime examples of some short-term gains. The internal management perspective also takes the long term into consideration by the consideration of some systematic issues. It recognizes the importance of improving the flow of relevant information to decision makers who need to make choices regarding the environmental and social dimensions of the business. Incorporating environmental and social aspects into the existing accounting and reporting system becomes an essential step. For example, the establishment of an environmental management accounting system would focus on the environmental impacts and costs of operations. Another aspect of the internal management perspective is the identification of the causal relationships between actions and performance. Measurement frameworks such as the balanced scorecard could be adopted to connect strategy to sustainable and financial performance.

The financial investor perspective provides information on ways to report sustainability issues into a useful format for financial investors. This perspective takes into account the impact of generally accepted accounting principles, legal requirements for environmental liabilities, and international financial reporting standards (IFRS). Another concern is the need for transparency and the best way to present sustainability information. For example, some organizations present stand-alone reports while others incorporate sustainability performance into the financial statements. The benefits of narrative reporting are also presented.

The stakeholders’ perspective is centered on developing stakeholder relationships. This perspective is about ways to achieve a broader level of transparency through sustainability reporting. Types of reports such as separate reports for sustainability, known as Corporate Social Responsibility (CSR) reports, are discussed. In terms of report formats and content, the GRI Reporting Framework is mentioned as a de facto standard for reporting. As a natural extension of reporting, the IFAC framework discusses the importance of external assurances of reports.

GRI Sustainability Reporting Guidelines

The reporting guidelines of the GRI are considered the most dominant.³

The Global Reporting Initiative (GRI) is a large multi-stakeholder network of thousands of experts, in dozens of countries worldwide, who participate in GRI’s working groups and governance bodies, use the GRI guidelines to report, access information in GRI-based reports, or contribute to develop the Reporting Framework in other ways—both formally and informally.⁴

This network began in 1997 with the intention of improving sustainability reporting, and the GRI criteria are poised to be the basis for generally accepted reporting standards. The GRI is collaborative in its approach to establishing guidelines. Many groups (businesses, accounting regulatory bodies, nonprofit organizations, investor organizations, and trade unions) are involved in creating ones that are globally accepted. In response to feedback from its stakeholders, in 2002 the GRI released the G3 Reporting Framework—its second comprehensive set of reporting guidelines. According to the GRI Reporting Framework, sustainability reporting is the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance toward the goal of sustainable development. The framework employs the three dimensions of sustainable development—economic, environmental, and social impacts.

The GRI sustainability reporting guidelines have two major components—reporting principles and guidance and standard disclosures. The reporting principles and guidance cover content, quality, and the boundary of the report along with how to determine topics and indicators that are appropriate for the organization. The standard disclosures are based on what is considered relevant and material information for stakeholders. Standard disclosures include strategy and profile, management approach, and performance indicators.

Reporting Principles and Guidance

Content

The four components to content are materiality, stakeholder inclusiveness, sustainability context, and completeness. Materiality is a key factor for determining what is important enough to be considered for inclusion. It refers to information about an organization’s economic, environmental, and social effects that would have a significant impact on how stakeholders evaluate information and make decisions. Both internal and external factors play a role in determining if a topic is material. The internal factors are based on the organization’s mission and strategy. The external factors have to do with how important the topic is to its stakeholders. To know what is important to stakeholders, stakeholders and their reasonable expectations and interests need to be identified. The process of identifying, contacting, and engaging stakeholders should be documented. Sustainability context is a consideration of the organization’s sustainability performance at local, national, and global levels. The last component, completeness, refers to whether the material topics covered in the report are sufficient to represent the organization’s economic, environmental, and social effects so that stakeholders can assess its performance.

Quality

The quality of a report is defined in the attributes of balance, comparability, accuracy, timeliness, clarity, and reliability. Balance promotes the reporting of both positive and negative indicators of sustainability so that stakeholders can see the organization’s overall performance. To be useful to readers interested in performance trends over time and across organizations, the comparability attribute encourages consistent application of reporting presentations. Because these presentations will be used for decision making, they need to be reasonably accurate and in sufficient detail to assess performance. Timeliness refers to publishing reports on a regular basis so stakeholders can have information with which to make decisions in a timely manner. Dated information loses relevance for current decisions. In addition to timeliness, the report needs to be clear; in other words, it should be understandable and accessible to stakeholders. The last attribute of quality, reliability, refers to whether the information in the report can be evaluated for its materiality and quality. This attribute has important implications for how the information is identified, measured, recorded, compiled, and disclosed.

Boundary

All the entities of the organization that generate significant sustainability impacts should be included in the report. This includes all entities over which the reporting organization has control or significant influence in the areas of financial and operating policies and practices and through its relationships. Examples of these relationships are the supply chain, distribution contractors, and customers.

Standard Disclosures

There are three different types of disclosures contained in this section. They are strategy and profile, management approach, and performance indicators. Strategy and profile provides the context for an organization’s sustainability reporting and the related performance. This section includes a discussion of the organization’s strategy and analysis; organizational profile; report parameters; and governance, commitments, and engagement. Strategy and analysis is a high-level summary of the organization’s relationship to sustainability. In this summary, the CEO or chairman issues a statement regarding the organization’s key impacts, risks, and opportunities. The organizational profile provides a description of the organization’s major activities such as brands, products or services, geographic locations, and the scale of operations. The report parameters are involved in determining what will be included in report in terms of entities, reporting period, materiality, and process for determining contents. In addition, information regarding external assurance would be discussed here. Governance reflects an organization’s governance structures and processes. Commitment has to do with the organization’s commitment to external sustainability initiatives. Engagement is a summary of the organization’s engagement process with its stakeholders. Management approach provides information about an organization’s management of specific sustainability performance in addition to its management systems, policies, and processes. Performance indicators are in two groups—core and additional. Core indicators are those assumed to be material to most organizations while additional ones are based on emerging topics that are relevant to only some. The performance indicators are divided into the economic, environmental, and social dimensions of sustainability. The economic indicators are further classified as economic performance, market presence, and indirect impacts. The environmental indicators include materials, energy, water, biodiversity, emissions, effluents, waste, products and services, compliance, transport, and overall (total environmental expenditures and investments). The social indicators cover labor, labor practices and decent work, human rights, society, and product responsibility.

To illustrate an example of a recent sustainability report that uses the Standard Disclosures of GRI Reporting Guidelines from the G3 Reporting Framework, Ball Corporation’s sustainability report is summarized in Appendix A.⁵

Companies Reporting

The GRI Reporting Framework is becoming the leading standard for sustainability reporting.⁶ The GRI publishes a list of organizations that report to be using the framework.⁷ Information about these organizations can be sorted by date of report, organization name, report title (with Web link), publication year, GRI Guidelines used (G2 or G3), adherence level, assurance level, country and region of world of headquarters, membership in the Organisation for Economic Co-operation and Development (OECD), sector, and Web site (if available). In 2008, the number of organizations that reported to the GRI that they used this reporting framework was 962. The total number using this framework may be much larger because many organizations that use the framework may not report their use to the GRI. Fifty-two countries and 40 different sectors are represented. Sectors include agriculture, automotive, aviation, chemicals, commercial services, computers, conglomerates, and construction to name a few. Sixty percent of reporting organizations on the list are in ten countries listed in Table 3.1. A sample from the top five countries by sector is presented in Tables 3.2 to 3.6.