Addressing the reporting challenges of socially responsible investing. By Phil Storey
It is an old truism that wise investing depends on good information. While there are well-developed, government-regulated mechanisms for collecting and disseminating accurate and relevant financial information from publicly traded companies, the means for gathering and distributing non-financial information are relatively early in their development. But the demand for non-financial reporting is growing as even mainstream asset managers and institutional investors increasingly appreciate the importance of issues like greenhouse gas emissions and other environmental and social liability potential. Many companies have responded by reporting publicly on sustainability performance, as well as responding to specific information requests from socially responsible investing (SRI) research firms, asset managers and institutional investors.
Highs and Lows
As non-financial reporting has grown, many companies have realized a number of benefits from their reporting efforts. There is the potential for inclusion in sustainability-related financial indexes like the Dow Jones Sustainability Indexes, FTSE4Good and the Domini Social Index, as well as positive relationships with stakeholder groups that appreciate transparency on environmental and social matters. And the process of reporting non-financial information can make companies aware of opportunities for improved performance -- social, environmental and even financial.
"Reporting financial and non-financial results at the same time gives our stakeholders a more accurate picture of our business," explains Debra Dunn, senior vice president, corporate affairs and global citizenship, HP. "And internally, the reporting process has allowed us to align our business and global-citizenship strategies, and set comprehensive goals and metrics." HP recently received the Best Sustainability Report award from Ceres-ACCA North America for its 2004 Global Citizenship Report.
There is consistent growth in requests for transparency. The increase in information requests has been most pronounced in Europe, where attention to social and environmental performance is more acute, and "survey fatigue" has been growing for some time. A study by the London Stock Exchange of a representative sample of British companies found that responding to these questionnaires costs corporations an average of seven person-days per month. The Financial Times last year referred to the phenomenon as "the unexpected cost of corporate virtue."
As a result of the growing demands for reporting, a number of efforts have been started to consolidate reporting standards and streamline data gathering. In Britain, the London Stock Exchange has developed an online tool called the Corporate Responsibility Exchange, which consolidates data entry for the Global Reporting Initiative and a number of European reporting standards, allowing results to be published online. Similar efforts are under way in the United States.
Global Reporting Initiative
The Global Reporting Initiative (GRI) is a set of sustainability reporting guidelines conceived as a credible framework for non-financial reporting. Since its first-generation guidelines were introduced in 2000, GRI has done an impressive job of consolidating a bewildering array of stakeholder concerns into a single reporting framework. The growth of GRI-based reports has blossomed, well beyond the goals GRI set for itself just a couple of years ago.
But as public corporate-citizenship and sustainability reporting has been consolidating around GRI, requests from SRI institutions and researchers have also proliferated. In October 2004, a group of social-research analysts at 18 investment firms representing more than $230 billion in assets under management issued a statement encouraging investors and research institutions to rely on GRI reports first for information. The group acknowledged that, according to the World Business Council for Sustainable Development, the GRI already covers 80% of the data requested in SRI-related surveys. Additionally, GRI is currently working on a new version of the reporting guidelines that will meet more of the demands of the SRI industry, as well as those of other stakeholders, making it a more powerful standard. The new version, referred to as G3, is expected to be released next year.
While complete GRI-based reports can provide most of the information SRI analysts need, there will always be additional surveys from analysts and institutions to satisfy demands for more specific information. In response to these reporting challenges, a number of U.S. companies and other stakeholders have begun to develop tools that can be used to help companies meet the reporting demands of the SRI industry. Two of these tools are SRI World Group's OneReport and Future 500's Global Citizenship 360 tool.
OneReport
SRI World Group, a Vermont-based provider of social investing and corporate social responsibility information, has developed an online reporting tool called OneReport with the help of multinational corporations and leading sustainability research and rating firms. OneReport is designed specifically to help corporations report to research and rating agencies, whose analyses provide a basis for much of the socially responsible investing activities of asset-management companies and institutional investors. Ultimately, SRI World Group intends OneReport to become the primary global conduit of corporate sustainability data.
OneReport consolidates data requests from more than 20 of the world's leading research and rating organizations, eliminating redundancy. These organizations have signed agreements with SRI World Group to accept data directly from OneReport. Once a company has entered and released its data, the data is automatically distributed to the research and rating organizations via electronic feeds and password-protected Web sites. Data is provided in formats that match the individual frameworks and technical needs of each organization. If a company chooses to report using GRI indicators, GRI-related data will be provided to participating research organizations and other data users around the world.
Alcan, one of OneReport's early corporate adopters, sees significant benefits to using the tool, both in terms of efficiency and increased understanding. "It really does streamline the way that we've been doing this over the years," says David Hecnar, Alcan's manager of strategic research and communications. "What you have at the end of the day is a very organized system where you've got the sets of questions in logical sections laid out for you, and then what you can do is work through them to not only put in all of the information that you have at your disposal, but at the same time you get to see the wide breadth of what's being required, and so you've got a much easier opportunity to assess your reporting needs."
Global Citizenship 360
The Global Citizenship 360 (GC360) tool is a software data-gathering and reporting tool developed over the past five years by Future 500. Future 500, a San Francisco-based 501(c)(3) nonprofit group, developed the tool with support from several of its larger corporate members. The tool is used by some of the world's biggest industrial and consumer products companies, including the Coca-Cola Company and General Motors.
The Global Citizenship 360 organizes the data-gathering process into five stakeholder categories: shareholder, workplace, community, marketplace and environment. Within each category, companies are prompted to answer a series of questions and upload required data. The entire GC360 survey includes 200 questions, and the results can be printed or exported to facilitate survey responses for any of more than 20 of the leading CSR and SRI standards, including the GRI, the Dow Jones Sustainability Indexes, FTSE4Good and the Domini Social Index.
More than a non-financial reporting tool, the GC360 is designed to facilitate better CSR performance, as well as inform and formulate CSR strategy. The GC360 helps align overall business objectives with CSR objectives by business unit. A series of analysis tools allow for the data to be mined for trends and management information. Customized reports allow users to identify gaps in CSR performance and create "to-do" lists for each of a company's business units. "Once you understand areas of risk, areas of performance, strategic opportunities and business case elements," explains Aileen Ichikawa, vice president of corporate accountability practice services, Future 500, "then you can formulate really effective CSR strategies."
As a result of GC360's promise as a management tool, it is a central element of the Conference Board's Working Group on Global Corporate Citizenship and Risk Assessment. Future 500's collaboration with the Conference Board in conducting the working group began last year, and has been extended to a series of meetings this year.
One of the participants in last year's working group was a privately held company without the same investor relations pressures felt by publicly traded firms. Cascade Engineering is a $175-million manufacturer of engineered plastics with a commitment to the triple bottom line of sustainability. After producing and publishing a triple bottom line report last year, the company began using the GC360 tool to gather and manage information for its sustainability efforts. "The (GC360) tool showed us that we had several opportunities to improve our performance. It can provide a roadmap to eliminate waste or improve performance in many areas," according to Mike Goldman, Cascade's vice president of business services.
The Road Ahead
Non-financial data collection, reporting and management aids like the ones profiled here are indications of the growth of corporate social responsibility and socially responsible investing. By aggregating disparate and overlapping SRI indicators, these tools help companies to understand what is meant by CSR, and to begin to formulate strategic responses. This indicates a widespread acknowledgment among corporate senior executives that these issues are to be taken seriously.
There is much more progress ahead, though, as the meaning of CSR is better defined and the development of appropriate SRI indicators proceeds. Tools that contribute to this progress will mature and probably proliferate in the years ahead. The hope is that as these tools develop, the benefits of non-financial reporting will grow while its challenges decrease.
As Ichikawa states, "Where we're heading, I hope, is that this becomes a mainstream discipline, just like any other accepted corporate discipline -- like accounting and human resources and operations. This becomes just as mainstream as that. It will be a little while before that happens, but leadership companies have already started to do that."
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This article has been reprinted courtesy of green@work. It first appeared in the Summer 2005 edition of that publication.
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