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green@work : Magazine : Back Issues : Jul/Aug 2001 : 10 Reasons Why

10 Reasons Why
The surprising truth about the business value of sustainability reporting.

BY BOB MASSIE

The dramatic growth in the number of companies—now well over 2,000 globally—that are releasing reports on some combination of social, environmental and economic performance has many people asking about the value of this new and popular practice. To those who are new to the process, the idea of reporting may seem unwelcome—hard to do and even harder to justify against other seemingly more pressing business demands. The idea of setting new goals and releasing information about whether one has achieved them can be alarming to many people, from corporate counsel to anyone who dislikes risk and change.
The surprising truth is that most companies that have tried reporting have found that it offers many unanticipated benefits. It has spurred many organizations to bold action, clearer decisions and greater business value. Indeed, if you talk to some of the companies that are preparing to accelerate their global leadership in the 21st century, you will find that many have placed both sustainablility and transparency at the core of their strategies. Why is this? What is the business value of reporting?


The Coalition for Environmentally Responsible Economies (CERES) has been answering these questions for a long time. The CERES coalition—made up of many of the largest environmental groups and institutional investors in the United States—came together 12 years ago to encourage companies to articulate their environmental values and goals, measure their performance and report their results. As the original pioneer of corporate environmental reporting, CERES has had years of experience with companies such as Bank of America, Baxter International, Bethlehem Steel, Coca-Cola, Ford Motor Co., General Motors, Interface Inc., Sunoco and many others. CERES is also the lead convener, along with the United Nations Environment Programme, of a huge international consortium of organizations that have come together to set common corporate sustainability reporting standards through the Global Reporting Initiative (GRI).

Over the years of working with all sorts of reporting firms—from newcomers to experienced global pace-setters—we have learned a good deal about why companies choose to report. Here’s a list of the top 10 benefits for companies.

1. SUSTAINABILITY REPORTING GIVES YOU THE TOOLS TO MANAGE IN A GLOBAL ECOMONY.

In the past, many executives could get by with a fairly narrow focus on particular products, suppliers and customers. Today, every piece of business has become more complex. Markets, customers, technologies and employees are becoming more diverse and requiring much more sophisticated and far-reaching strategies. Whereas before, business decisions and deeds might be covered only in the specialized business press, today information about virtually every major company in the world—whether accurate or not—is spread instantly and globally on the Internet. Sustainability reporting can give you the tools not just to operate, but to succeed in such a complex, highly exposed environment.

2. SUSTAINABILIITY REPORTING HELPS YOU TO INTEGRATE YOUR INITIATTIVES.

A constant theme in all business literature is that good executives must learn to create and manage change throughout the firm. Some have tried to do so by creating an endless cascade of initiatives, touching on everything from marketing, production and the environment to safety, human relations and corporate citizenship. Mid-level managers can find these new ideas, incentives and procedures to be disconcerting, even counter-productive. Confusion over the “priority du jour” can cause resentment and create the dangerous perception that top management does not really know what it wants. Sustainability reporting helps top executives to clarify the interrelationships of initiatives, thus generating greater understanding and ownership of these ideas throughout the firm.

3. SUSTAINABILITY REPORTING CREATES NEW COMMUNICATION PATHWAYS WITHIN YOUR FIRM.

Business gurus have correlated the financial success of companies with the ability to share information and ideas easily among different parts of the firm. This runs against the natural human instinct to create cooperation by sorting the world into networks of insiders with whom they will cooperate versus outsiders who may pose a threat. By drawing information systematically from many divisions, locations and cultures within the company, sustainability reporting fosters communication among key groups on key topics.

4. SUSTAINABILITY REPORTING CAN OPEN UP POWERFUL NEW CONVERSTATIONS WITH STAKEHOLDERS.

In the 21st century, the lines that have traditionally marked the “inside” and “outside” boundaries of the firm are rapidly fading. Many external groups—including institutional investors, environmental activists, government authorities and human rights leaders—now consider themselves stakeholders in the decision-making of the firm. Sustainability reporting gives management a clear, straightforward way to open conversations with key stakeholders and to find out their interests and perspectives.

5. SUSTAINABILITY REPORTING BUILDS LONG-TERM RELATIONSHIPS AND CREDIBILITY.

In today’s CNN world, accidents and crises can destroy a company’s reputation in a matter of hours. To insure against this, companies must build credibility with key observers and critics—but this only works if you act to demonstrate your trustworthiness before a crisis hits. Too many companies try to cut corners by following the old-fashioned, tight-lipped, insider-outsider model. When a crisis hits, they spend huge amounts of money hiring crisis management and public relations firms to try to rehabilitate their image. Sometimes the taint of such problems endures for years. Sustainability reporting—and the conversations with stakeholders that it creates—is thus a form of risk management: it allows you to practice transparency under less stressful circumstances, build up a bank account of trust with outside groups and hear criticism that may avert a crisis. Even if such a crisis occurs, a commitment to reporting and engagement will mean that you have a web of well-established relationships and a “positive trust balance” with those who might be inclined to attack.

6. SUSTAINABILITY REPORTING HELPS YOU TO MANAGE YOUR INTANGIBLE ASSETS.

Although most people think of accounting as a dry profession that applies fixed rules, those who follow the field more closely know that there is a revolution unfolding in its normally quiet ranks. The heart of 20th-century accounting has its emphasis on tangible assets, physical objects whose ownership could be defined and whose value could be determined by the market. There is already a huge movement afoot—being pushed by regulators, investors and leaders in the accounting field—to consider new ways to capture and record intangible assets such as patents, brands, reputations, relationships and imbedded knowledge. Even though mismanagement of such intangible assets can cause a drastic collapse in the valuation of the firm, existing accounting rules find it difficult to measure them. Yet, under pressure from accounting professionals, securities regulators and company managers, change is coming rapidly. An executive who ignores these shifts will be as unprepared for modern business as a World War I flying ace who saw no benefit in radar for modern flight. Sustainability reporting allows a company to analyze intangible assets, to integrate them with traditional financial reporting and to anticipate the changes in rules that are already unfolding around the world.

7. SUSTAINABILITY REPORTING ALLOWS YOU TO EVALUATE THE COSTS AND BENEFITS OF DIFFERENT FORMS OF CAPITAL.

Modern practice management is also outpacing accounting in the assessment of capital. For decades, the only capital that managers knew how to measure, and thus bothered to manage, was financial; executives now realize that to be successful (i.e., sustainable over the long run), a business must assess the costs and benefits to a variety of forms on which it depends, including natural capital, human capital and social capital. The tools for doing so are still primitive, but they are developing rapidly.

Consider the following example: virtually every chief executive insists that education and training are of the highest importance to the success of the company—but if an executive were asked to assess and communicate the value of this elementary form of human capital to anyone, particularly in comparison to other firms in the same industry, he or she could not do so. As managers come to understand the value of these different forms of capital, they will be more easily translated into each other’s terms: an investment in social capital (employee education) will have a clear effect on financial capital (the cost of borrowing), or an investment in natural capital (preservation of open space) will pay off in terms of social capital (creation of an attractive location for skilled workers), which will, in turn, pay off handsomely in long-term growth and revenues (financial capital). Sustainability reporting gives executives the opportunity to understand and balance these trade-offs today.

8. SUSTAINABILITY REPORTING CLARIFIES THE LINK BETWEEN MEASUREMENT AND MANAGEMENT.

Most sophisticated companies do not write their sustainability reports in isolation and release them without warning. Instead, they prepare drafts and submit those drafts to organizations for comment in advance. For example, CERES reviews virtually all of its large company reports with a specially designated team of coalition members who are experienced in analyzing such reports. When facing this review for the first time, most companies are nervous, thinking they would face a barrage of unjustified criticism. In every case, they have commented afterward on how valuable and constructive they found the feedback to be. CERES teams point out areas that lack clarity, suggest changes in language that might trigger misunderstandings and raise questions about inconsistencies or omissions. Other companies, outside the CERES network, engage in a similar process of dialogue and due diligence. A failure to take this important step can be doubly dangerous for a firm. Not only can it prompt outside stakeholders to tag the company as one solely interested in public relations, it can also expose the firm to unexpected reactions from the outside world—reactions that are part of deeper consumer or cultural resistance to corporate practices.

9. SUSTAINABILITY REPORTING CLARIFIES THE LINK BETWEEN MEASUREMENT AND MANAGEMENT.


Most people are familiar with the business adage that “what gets measured, gets managed.” And most people are also familiar with the computer expression of “garbage in, garbage out.” So if management requires measurement, and improper measurement can sometimes yield garbage, how does one know how to measure properly? The answer is clear to everyone in the field: there must be generally accepted standards for measurement and disclosure of non-financial performance. Of course, it took the creation of organizations such as the Financial Accounting Standards Board (and several decades of hard work) to develop Generally Accepted Accounting Principles (GAAP). The need to establish a similar consensus building mechanism for non-financial reporting is what led to the creation of the GRI, which will become a permanent international institution with its own independent board of directors in early 2002.

10. SUSTAINABILITY REPORTING ALLOWS YOU TO PARTICIPATE IN NEW FORMS OF GLOBAL GOVERANCE.

When people talked about trade in the 20th century, discussions were mostly about how governments could preserve environmental, social and human rights while allowing the benefits of free trade to be extended to more and more countries. Although the elaborate inter-governmental process that was established to balance these concerns functioned with some success in the post-war period, it has of late been less and less successful in designing globally-accepted solutions. Even though important treaties are negotiated, they are often not ratified and even more rarely implemented. The world’s attempts to rationalize trade through the World Trade Organization or to slow greenhouse gas build-up through the Kyoto Treaty have to date been unsuccessful.

The reasons for these failures are complex—but they are leading to dynamic experimentation in new forms of partnership and governance. Many of these “global public policy networks” are based on multi-stakeholder forums made up of business, advocacy and governmental representatives working together on the integrated problems of sustainability. Companies that have gained experience in understanding sustainability through their own reporting are more likely to be able to present their views and participate in such influential global processes.

If these—or other reasons—have prompted you to consider sustainability reporting for your firm, you undoubtedly have many questions. Is sustainability reporting a good idea—or even possible—for the smaller firm? (Yes.) Is research under way to develop somewhat more specialized reporting for different industry sectors? (Yes.) Is sustainability reporting mandatory? (No, although developments through various supply chains and in the European Union may alter this within a relatively short time.)

More than anything, you may be asking where you can learn more and find help getting started. Fortunately, many venues are ready to provide assistance of various kinds (see sidebar). Whether you just want general background information or detailed
consulting advice on the internal process of gathering the information and producing your first report, organizations exist that have the expertise and resources to help you.

Sustainability reporting may seem new and difficult, but it is worth the effort. There are few people alive who remember the widespread confusion and speculative fever that used to disrupt the business world before the creation of common accounting standards—now we take such standards for granted. Similarly, many in the work force can still remember the time when business was conducted without desktop or personal computers, and how difficult it was to make the switch. Yet, again, we now take the benefits of such technology for granted. With the advent of sustainability reporting, we once again are facing a change that today seems difficult, but will soon be so routine—and so obviously beneficial—that people will wonder that anyone ever hesitated.

GETTING STARTED
Here’s a list of organizations that provide information or assistance
for companies interested in sustainability reporting:




Association of Certified Chartered Accountants (UK)........................ www.acca.co.uk
Canadian Institute of Chartered
Accountants (Canada)........................... www.icca.ca/cicawebsite.nsf/public/homepage
CERES................................................................................................. www.ceres.org
Deloitte Touche Tohmatsu............................................................... www.deloitte.com
Global Reporting Initiative.................................................... www.globalreporting.org
KPMG........................................................................................... www.us.kpmg.com
Pricewaterhouse Coopers.............................................................www.pwcglobal.com
SustainAbility....................................................................... www.sustainability.co.uk
The Natural Step.......................................................................................www.tns.org
The Tellus Institute............................................................................... www.tellus.org
United Nations Environment Programme.............................................. www.unep.org
World Resources Institute....................................................................... www.wri.org

Bob Massie is the executive director of CERES (www.ceres.org) and chair of the Global Reporting Initiative (www.globalreporting.org).

 



 


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