How many of your employees died at work last year? How much less energy are your new stores designed to use? And how is that initiative to make clothes out of recycled packaging coming along?
These are the kinds of questions consumer markets companies and their suppliers will have to answer – and publish – as the drive towards sustainable reporting gathers momentum. It is not enough to be green: you have to be seen to be green. And just to make the challenge a little steeper, the definition of ‘sustainability’ has now broadened.
It is no longer enough to publish figures that show how much you recycle or how much less CO2 you emit for every dollar of revenue. You also have to show that the products you sell or make are not being manufactured using child labor, and that you are aware of the impact your business has on local communities.
By becoming more transparent, companies may risk negative media coverage. But they also have the opportunity to build positive brand associations with both consumers and the business community. And in any case, the rapid global spread of information made possible by the internet is making disclosure essential.
“The easiest solution would be to keep your head below the parapet and hope no one asks difficult questions,” says Professor David Grayson, Director of the Doughty Centre for Corporate Responsibility at Cranfield School of Management. “But difficult questions are being asked these days. The reality is that, in a WikiLeaks world, information is going to come out anyway.”
Does criticism of a company’s social and environmental impact matter? While some argue it is hard to identify ROI on the cost of sustainable reporting, the case seems reasonably clear. The consultancy Interbrand has estimated that the world’s most valuable brand, Coca-Cola, is worth US$70bn in reputational terms. Any criticism, boycott or misjudged risk that damages it has a financial impact on Coke: the brand is the company’s most valuable asset. Alongside the risks is opportunity. Your ability to win new consumers in emerging markets might be enhanced if more efficient use of resources helps you cut costs and develop newer, more frugal products.
Companies are starting to see sustainability reporting as central to their business strategy rather than a PR requirement. With environmental impact increasingly likely to affect corporate value, information on risks and opportunities must be made available to investors and other stakeholders – in the same way that businesses report on financial performance.
“Companies are increasingly aligning this activity under the CFO, asking the head of sustainability to report to the CFO,” says Ted Senko, KPMG’s Global Chief Executive of Climate Change and Sustainability and a partner in the US firm. “But when it comes to financial reporting, companies have well-developed systems, procedures and internal controls. The information in sustainability reports is much more anecdotal.”
Some companies opt for an ‘edited highlights’ strategy, which dazzles with spectacular figures and prizes: an award here, a million fewer plastic bags there. Norwegian fishing giant Cermaq goes even further, offering five-year statistics on key metrics, disclosing concerns (such as criticism by NGOs like Friends Of The Earth, relations with the indigenous population of British Columbia and fatalities at work) and the international standards it is trying to achieve.
Cermaq’s commitment reflects a shift in corporate attitude. In 1999, only 24% of companies across all sectors had sustainability reports. In 2011, this figure had risen to 64%, according to KPMG research. As the charts opposite demonstrate, sustainability reporting is now being taken seriously, and consumer markets businesses – driven by stakeholder interest – are leading the way.
“Many companies started reporting because of external pressure from NGOs, and then because their peers were doing it,” says Wim Bartels, Global Head of Sustainability Assurance at KPMG and a partner in the Dutch firm. “Now more investors worry about it.”
The Carbon Disclosure Project – which acts on behalf of institutional investors to persuade companies to report on the business risks and opportunities presented by climate change – has a collective US$71 trillion in assets under management.
Major corporates are taking note. Coca-Cola’s annual report includes the revelation that the company uses 309 billion liters of water a year across its production processes. Procter & Gamble publishes an annual sustainability report separate from its financials, detailing greenhouse-gas emissions by sector and the amount of waste it produces.
It is relatively easy for a company to acknowledge the importance of sustainability reporting. The difficult part is creating processes, procedures and systems to generate robust, meaningful information that can be compared.
For a start, the areas that need to be reported on vary tremendously. While a food retailer might focus on labor conditions among smallholder farmers in Africa, a furniture-maker might highlight the percentage of wood it sources from sustainably managed forests.
Bartels says identifying what is material to a company is part of its learning curve. “The next phase is focusing on the sustainability issues that really matter to businesses – that’s when this becomes a management tool.”
Once companies have gone through the process of rigorous self-analysis – talking to different stakeholders along the way – the challenge is how to measure and report accurately.
Reporting on the impact of industrial water use poses particular problems. Carbon emissions can be measured by the tonne and retain the same value wherever they are emitted, but the impact of water consumption varies considerably according to whether it is being extracted from a country with an abundant supply of water, such as Scotland, or water-stressed parts of sub-Saharan Africa. Tracking the environmental and social footprints of business partners across complex supply chains is even tougher.
It remains hard to make performance comparisons across companies. “If two companies in the same sector report on carbon emissions, they might have different approaches, scope, definitions and methodologies,” says Bartels.
One disincentive to embarking on sustainability reporting is that it costs a lot of time and money. Yet companies need to take reporting seriously. “If you don’t have your act together and don’t understand the issues, you run the risk of greenwashing,” says Bartels.
Plagued by such variables and uncertainties, many companies struggle to find robust data in their sustainability reporting. KPMG’s research suggests that almost a third of the largest companies produce a restatement.“
In the financial world, you couldn’t imagine a board looking at the financial figures and saying there was a 50% error,” says Bartels. “That’s no way to manage your business.”
“Ensure what you do is as auditable as possible,” advises Senko. “But it’s also important to invest in systems. If you get it right, you can use sustainable reporting to make business decisions and set strategic targets to hold people to account. That doesn’t mean you have to hire new people or change skill sets, but you might need some expertise around the metrics you are collecting.”
Technology can help. Software and database tools, connected to remote sensors in factories and supply lines, can make more accurate assessments of resource inefficiencies such as water leaks or heat loss. For companies with global operations, IT is essential to make sense of the mass of data.
The systematic approach, the need for accuracy, and the scope to use data to improve efficiency all explain why CFOs are increasingly being asked to shoulder this task. Senko says internal audit departments are being beefed up, as companies view sustainability reporting as a task requiring forensic analysis.
Progress is being made, but when assessing the reporting practices of 132 companies in the consumer sector for its Measuring Up: Improving Sustainability in Consumer Markets report, KPMG found a wide variance in the quality and quantity of information reported and the types of data captured.“
There’s still no de facto requirement, whether through regulation or peer pressure, to produce high-quality information,” says Senko. “Professional bodies set certain standards but they don’t always offer assurance.”
CFOs who remain dubious about sustainability reporting may have to reconsider. Such reports are becoming mandatory. A base level of sustainable information is now compulsory in 10 of the world’s most significant economies. Since 2009, Denmark has required large companies to include information on sustainability in their annual reports or to justify its absence in a statement. More stock exchanges have listings requirements that include disclosure on environmental impacts and governance.
Adoption of ‘integrated reporting’ – through which companies connect corporate strategy, governance and financial performance with social and environmental performance – is gaining momentum. In October, the International Integrated Reporting Committee launched a pilot programme it hopes will lead to a new global standard.
Global regulations requiring reporting are far off. The ability to benchmark sustainability information as effectively as its financial equivalent remains elusive. But things are changing.
Bartels believes more time needs to be spent learning about what works and what doesn’t before legislation sets reporting practices in stone. “If we don’t, we’ll create serious cost issues, and we’ll end up with a box-ticking exercise – companies will comply, but only because they have to.”
Are we moving towards a single, commonly accepted set of sustainability standards?
Yvo: We are making progress, but the problem is companies have so many different methods for reporting. It not only creates a huge amount of work but it is also very confusing. Significant initiatives are taking place to streamline things and ensure there is one common set of parameters, but that involves extensive discussion.
What are the main barriers to achieving those goals?
Yvo: It’s about agreeing on that common set of parameters companies feel should be reported. You will always have a number of indicators that are company-specific or sector-specific because they’re not relevant to everyone. The IIRC [International Integrated Reporting Committee] is in discussion but it’s difficult to say when it will reach a conclusion. Companies are in favor of standards but they also want a better understanding of what they are getting into.
How will shareholders react?
Yvo: Sustainability is increasingly high on the list of shareholder priorities, which is why a growing number of companies around the world are beginning to report in a more integrated way. That information is starting to influence investment decisions and consumer confidence, plus a number of companies see sustainability as a way of cutting costs or enhancing their brand.
Is there a correlation between economic turbulence and lowered interest in sustainability in boardrooms? Yvo: I don’t see that – partly because being active in sustainability can be a significant cost-saving opportunity for companies. And in a constrained market it can be a significant way of enhancing your brand for consumers.
Many retailers believe consumers will not pay a penny more for sustainability. Do you agree?
Yvo: No. Analysis shows that consumers are interested in sustainability, and in a number of instances are willing to pay more for it. A lot of retailers are spending heavily on marketing sustainability. But it isn’t something that automatically means higher costs. For many companies, it’s actually an opportunity to reduce costs. Some retailers have been able to realize very large cost savings in packaging and transport of dairy products, for example.
Do you sense the same enthusiasm for sustainability in emerging economies that you see in the West?
Yvo: Purchasing power in those countries is much lower. But a number of retailers are reacting by marketing and packaging products in different ways – for example, by selling washing powder or toothpaste in smaller packages that are more accessible to lower-income groups.