Reporting Sustainable Performance

1. Reporting Sustainable Performance Dr Ruth Bender 4th June 2008

2. Does Managing Responsibly Mean Making Less Money? Ruth Bender

3. X Shareholder value means an above-the-line return Required Return on Capital Perceived Risk Ruth Bender

4. Seven drivers of shareholder value Rappaport – Creating Shareholder Value Ruth Bender

5. Strategies to grow shareholder value Sales growth Profit margin Tax rate Working capital Fixed assets Cost of capital Timescale The impact of each driver will vary for different industries and companies Ruth Bender

6. Driving value through sustainable performance • Innovative products to meet sustainability needs; attract customers by CR stance • Efficiencies – e.g. in staff costs by better working conditions; lower staff turnover; better recruitment; less wastage; lower energy costs Sales growth Profit margin • Global configuration of business activities; take advantage of allowances Tax rate Working capital • Asset utilization – e.g. fewer factories, less inventory, more efficient processes Fixed assets • Risk reduction as a good corporate citizen and as perceived by investors Cost of capital Timescale • CR stance affects ‘licence to operate’ and also brand positioning Ruth Bender

7. Example: using stakeholder networks at Wal-Mart The Greening of Wal-Mart. Plambeck and Denend, 2008 http://www.ssireview.org Ruth Bender

8. Example: ‘Trailblazers’ along the supply chain Supply Chain “Trailblazers” Can Reap Rewards February 2008 BSR Weekly Ruth Bender

9. BUT... Is this 'Good' business or just 'Good Business'? (And does that matter, anyway?) Ruth Bender

10. Reporting Responsibly and Reporting Responsibilities Ruth Bender

11. “What's in a name? that which we call a rose      By any other name would smell as sweet” corporate responsibility … CSR … extra-financial … GRI-style … environmental, social & governance (ESG) … non-financial …. social & environmental performance … sustainability reporting … Tomorrow’s Value: The Global Reporters 2006 Survey of Corporate Sustainability Reporting Ruth Bender

12. Social and environmental reporting (SER) “SER is the predominantly voluntary, self-reporting of an organisation’s social and environmental interactions. Such reporting is increasingly undertaken in stand-alone reports – some in hard copy, many on the organisation’s website – and represents an organisation's understanding of what it is to be environmentally and/or socially responsible and (potentially at least) sustainable.” Social and Environmental Reporting and the Business Case. ACCA Research report #98, 2007 Ruth Bender

13. Still to come… A wolf in sheep’s clothing Who-what-why-where-when and how? Some technical bits What next? Ruth Bender

14. SER ≠ CSR René Magritte 1898 – 1967 The Treason of Images, 1928-9 Ruth Bender

15. A wolf in sheep’s clothing? “We examine the occurrence of ethics-related terms in 10-K annual reports over 1994-2006 and offer empirical observations on the conceptual framework of Erhard, Jensen, and Zaffron (2007). We use a pre-Sarbanes-Oxley sample subset to compare the occurrence of ethics-related terms in our 10-K data with samples from other studies that consider virtue-related phenomena. We find that firms using ethics-related terms are more likely to be "sin" stocks, are more likely to be the object of class action lawsuits, and are more likely to score poorly on measures of corporate governance. The consistency of our results across these alternative measures of ethical behavior suggests that managers who portray their firm as "ethical" in 10-K reports are more likely to be systematically misleading the public. These results are consistent with the integrity-performance paradox.” Loughran, Tim , McDonald, Bill and Yun, Hayong, "A Wolf in Sheep's Clothing: The Use of Ethics-Related Terms in 10-K Reports" (August 16, 2007). Available at SSRN: http://ssrn.com/abstract=1007727 Ruth Bender

16. SER ≠ CSR Good 1 2 How good are the company’s CR practices? 3 4 Bad Bad Good How good is the company’s CR reporting? Ruth Bender

17. Questions to ask when preparing your sustainability report Who? What? When? Where? Why? How? Ruth Bender

18. Why? Why should companies make CR disclosures?

19. Things we don’t know that maybe we should The Tiered Corporate Information Pyramid External User access Boundary defined by Mandatory public disclosure Complete Regulation Complete Voluntary public disclosure Company Privileged users only Selected private disclosures, eg to analysts Company None Undisclosed private information Business Reporting: the inevitable change? Beattie, 1999 Ruth Bender

20. Who? Who should prepare the report? Who will be reading it? Who (if anyone) should verify it?

21. Who assures what, why and how? Assurance appetite Assurance methodology PURPOSE Why is assurance obtained? AUDIENCE Who is assurance for? STANDARDS What standards & principles govern the assurance process? DEPTH What level of assurance is offered? FOCUS What issues are to be covered? APPLICATION What level of organisation is covered? PROVIDERS Who provides the assurance? COMPETENCIES How are they able to offer assurance? Assurance scope Assurance providers The Future of Sustainability Assurance ACCA, 2004 Ruth Bender

22. Carbon neutral Nuclear power Climate change Biodiversity Pollution Resource usage Environment Child labour Learning organization Water Outsourcing Corruption Waste control Diversity What? Human Rights Energy Product Responsibility Transparency Health & Safety Workers’ rights Work-life balance Community programmes Customers Stakeholders Financials Responsible restructuring Philanthropy Supply chain policies Animal testing Communication Equal opportunities Recycling Ruth Bender

23. How? When? Where?

24. How? When? Where? How should the data be presented? Voluntary or mandatory disclosure? Regulation: -Local? -EU? -Global? Focus on business case? Where do the data come from? Where should the disclosures be made? Reporting internally as well as externally? When should disclosures be made? Standardise disclosures? Ruth Bender

25. Some Technical Bits (a small extract from the many that are available…)

26. 1 4 2 3

27. Companies Act 2006, s.417 1 Ruth Bender

28. The AA1000 series http://www.accountability21.net/ 2 Ruth Bender

29. The AA1000 Process Model “AA1000 specified processes that an organisation should follow to account for its performance, not the levels of performance the organisation should achieve.” http://www.accountability21.net/ Ruth Bender

30. AA1000 integrates into other standards Ruth Bender

31. Started 1997/8 – first Guidelines issued in 2000 • Latest Guidelines (G3) issued in 2006 www.globalreporting.org “The GRI’s vision is that reporting on economic, environmental, and social performance by all organizations is as routine and comparable as financial reporting.” Global Reporting Initiative (GRI) 3 Ruth Bender

32. GRI reporting Reporting Guidance helps decide what to report on, and interpret the Framework. Disclosures (79 in all) Profile 1. Economic, EC1-9 2. Environmental, EN1-30 3. Social performance • Labour practices LA1-14 • Human rights HR1-9 • Society SO1-8 • Product responsibility PR1-9 Reporting Principles: Materiality, Stakeholder inclusiveness, Sustainability context, Completeness, Balance, Clarity, Accuracy, Timeliness, Comparability, Reliability Ruth Bender

33. A B C GRI application levels Number of performance indicators increases from C to B to A Self-declared Can be ‘audited’ Can be checked by GRI Management approach disclosures increase from B to A Profile disclosures increase from C to B Ruth Bender

34. The best external assurance … • Is external, done by demonstrably competent people who are independent, and state their relationship with the organisation • Is done systematically, evidence-based, and properly documented, to defined procedures • Assesses the extent to which the organisation has applied the GRI Reporting Principles • Results in an publicly-available opinion or conclusions The external assurance report assesses whether the report provides a reasonable and balanced presentation of performance, taking into consideration the veracity of data in the report as well as the overall selection of content. Ruth Bender

35. Some useful sources to find sustainability reports http://www.corporateregister.com/ Companies reporting under GRI http://www.corporateregister.com/aa1000as/ Companies whose reports are assured under AA1000 http://www.reportalert.info/ Is the report announcement service for the Global CSR Community Ruth Bender

36. What next? Disclosure Accountability Change?

37. The Universal Owner World Sunlight Map http://www.die.net/earth/mollweide.html Ruth Bender

38. UN-PRI “The Principles for Responsible Investment aim to help integrate consideration of environmental, social and governance (ESG) issues by institutional investors into investment decision-making and ownership practices, and thereby improve long-term returns to beneficiaries.” The Principles apply across the whole investment business and are not designed to be relevant only to SRI products Launched in 2006, signatories now represent assets under management in excess of US $ 9 trillion Ruth Bender

39. ESG (environmental, social and corporate governance) • Incorporate ESG into investment decisions • Be active owners and incorporate ESG into ownership policies • Encourage ESG disclosure in investee companies • Promote these principles in the investment community • Work together to enhance our effectiveness in implementing these principles • Report our activities and progress in their implementation Ruth Bender

40. 3We will seek appropriate disclosure on ESG issues by the entities in which we invest. Possible actions Ruth Bender

41. Bolt-on or Built-in? Corporate Responsibility o r C s r o p i i t l a e R t e s p e o b i n y Ruth Bender

42. The diagram shows the interconnected range of activities and sectors that need to be integrated into a connected report. The enlarged wedge shows how traditional financial information is impacted by many different aspects of an organisation’s activities. Accounting for Sustainability. www.sustainabilityatwork.org.uk 4

43. Annual Reporting Company Soft (CSR) Encyclopaedias Operational performance OECD Risk 24 / 7 / 365 Communicating Value chain Hard (boards & investors) Prospectuses Products and markets BRICs Value and opportunity Trends in sustainability reporting Tomorrow’s Value: The Global Reporters 2006 Survey of Corporate Sustainability Reporting. Ruth Bender

44. Multi-source, multi-channel reporting Sustainability data from: Investor relations Governance Community relations Marketing Sales Operations Human resources Finance Etc Reported in different formats to: Employees Investors Customers Community NGOs Government Industry Value chain Tomorrow’s Value: The Global Reporters 2006 Survey of Corporate Sustainability Reporting. Ruth Bender

45. Nine predictions • Boards will increasingly recognise CR reporting as a valuable internal management tool • Boards will pay more attention to the accuracy of CR-related information • Companies will improve internal communication on CR • Companies will make better use of existing communication channels to deliver tailored messages to specific stakeholders • Boards will increasingly use annual report & accounts as a tool to demonstrate accountability to stakeholders • Companies will increasingly report material issues in their Business Review but will keep a separate CR section • The role of the CR manager will increasingly be driven by internal ‘pull’ rather than external ‘push’ • Companies will take a systematic approach to integrating stakeholders’ interests into decision-making • Companies engaging in dialogue through partnerships will be better able to identify value-add opportunities Taking Shape: The Future of Corporate Responsibility Communications. Business in the Community www.bitc.org uk Ruth Bender

46. The EndThank you for listening

47. Additional info re G3 content

48. Profile disclosures in GRI G3 Who we are and what we believe about sustainability and our impact, what we’ve done, where we operate. How the report was produced. Ruth Bender

49. Economic performance disclosures in GRI G3 Economic performance Direct economic impacts of the organization’s activities and the economic value added by these. Includes a Value-Added statement, consideration of climate change risks and opportunities, pension obligations, government assistance received Market presence Information about interactions in specific markets Includes info on wages compared to local minimum, spending on local suppliers, hiring practices. Indirect Economic Impacts Measure the economic impacts created as a result of the organization’s economic activities and transactions. eg infrastructure development, enhanced learning and skilling in the community Ruth Bender

50. Environmental performance disclosures in GRI G3 Ruth Bender