The Business Case for Non-Financial Reporting
How social and sustainability reporting can make a real difference in changing business performance, impacts, and outcomes. By Simon Zadeck
Effective public reporting is not about "emptying your pockets" during a stop-and-search exercise by your friendly neighborhood police. Such exercises are necessary if there is reasonable suspicion of significant misdemeanor. But “data-mugging” alone is inadequate to the task of nurturing an underlying culture of 'doing the right thing' in ways that build organizational vitality and performance. Meaningful transparency is also not about data trucking. Certainly “more can be better,” particularly in the early stages of eroding underlying cultures of secrecy and distrust. But a “take-the-lot” approach to disclosure is neither feasible nor desirable for legal, competitive and performance-related reasons. This is as true for Greenpeace and Save the Children Fund as it is for Gap and ExxonMobil. In any case, it turns out that such gushing approaches to communication do little to enhance relationships between the organization and its stakeholders.
Effective public reporting must communicate what is important to selected information users in ways that enable them to make coherent decisions and take planned and timely actions relevant to their interests. This should come as no surprise to those in the communication business, whether politicians or civil activists, corporate marketers, media and academic writers or public affairs consultants. One for all and all for one, their golden dictum reads: work out what is really important to the people to whom you are communicating, develop a language that will effectively penetrate these peoples' data-muddled minds and hearts, and then off you go.
And the initial phase of phase of work has been productive. It is only five short years ago that The Body Shop produced its path-breaking Values Report. This report, deeply informed by the work of the Copenhagen Business School, Traidcraft, the New Economics Foundation and others, was one of the first shots in recent times at sustainability or triple bottom line reporting. The very fact that the Values Report now seems fairly clumsy compared with more recent social and sustainability reports is a tribute to how much has since been achieved.
But this period of experimentation has created a crisis of quality and so of trust and effectiveness of reporting. And so we inevitably arrive at the matter of standards. Let me be clear about the current debate on standards. It just makes no sense to be “against standards.” Come-as-you-are reporting cannot be effective in a complex, volatile, time-scarce, data-rich world where trust counts. The real issue is not whether, but what, how and when.
Slow, But Steady Improvement
A veritable industry has sprung up over the last decade in pursuit of effective reporting standards. Initial work has focused on two key pieces of the jigsaw: legitimizing aspects of performance management and accountability (i.e. if you agree it should be counted, then from now on it is going to count); and identifying metrics and associated data and management systems. This second generation of work has focused on two types of reporting standards, the designer and broadband models. Designer reporting focuses on one aspect of an organization's footprint, carbon emissions, approaches to dealing with HIV/AIDS, handling (or not handling) of conflict diamonds, compliance with labor agreed standards etc. Most of these involve a normative code, agreed metrics and a reporting format and process. Some include a measure of assurance. Broadband reporting, on the other hand, is about capturing a sense of the whole organization's footprint. Certainly the GRI Guidelines are the "as good as we have got" in this field, certainly now and probably into the future.
An emerging third generation of reporting-related standards offer a quite different focus, while drawing from both designer and broadband experience and approaches. At the core of this third wave is to base reporting on what is material to targeted users. The challenge of materiality is not new to business, and in particular to the financial auditing community during the recent wave of financial reporting (and performance) fiascos. But the materiality challenge takes on new heights when it comes to sustainability reporting. Stakeholders are a mixed bunch, often at odds with each other as to what is important. Their preferences often seem quixotic to say the least. Concerns about child labor fade into the background as access to health care comes to the fore, only to be supplanted by the spectacle of Enron, and the personal calamities of lost livelihoods and vanishing pensions. It is hard to work out stakeholders' long-term “climatic” views amidst the maelstrom of variable weather conditions.
Until recently there has been a two-pronged approach to materiality. The first has been to "let the market decide." Pharmaceutical companies, for example, discovered it was unacceptable to report without reference to drug pricing, just as financial institutions found themselves challenged when they did not describe their investment approach. The learning happens, certainly, but with considerable, costly pain, and the enormous downside that "enforced" reporting does not build trust.
The second approach has been to embed the drive for materiality in the assurance of reports and the underlying organizational systems and competencies. Assurance of social and sustainability reports has in the main focused on the accuracy of quantitative data rather than the more challenging issue of whether the scope of reporting makes sense. There have been exceptions to this, such as the “dual track” approaches based on opinion leader assurance statements. However, such personalized approaches clearly cannot be adequately systematized or robustly replicated and so, in short, have no future in tomorrow's world where sustainability reporting has become "business-as-usual."
Staying Ahead of the Law
The need for companies to ensure materiality in their reporting is rapidly becoming a "must do." Emerging corporate governance, risk reporting and stock exchange listing requirements are demanding more disclosure of material aspects of non-financial performance. But materiality in reporting will increasingly have to be demonstrated as well as delivered. In the U.K., for example, the Operating and Financial Review within the proposed new Company Law will require companies to report on aspects of social and environmental performance that are expected to impact materially on future business performance. Companies will be required to ensure adequate assurance that appropriate procedures are in place to identify such material performance aspects. The materiality challenge underpinning effective reporting poses new challenges for assurance.
AccountAbility's AA1000 Assurance Standard is the first non-proprietary, sustainability assurance platform that seeks to handle these more complex aspects of materiality. Materiality is tested through an examination of the companies' understanding of (and response to) issues gained through stakeholder engagement, as well as through more traditional means. Furthermore, whilst rightly based on analysis of actual performance, it pushes assurance beyond rear-view accounting to offer insights into exploring future performance. In so doing, the AA1000 Assurance Standard provides a useful basis for companies seeking to report on the social, environmental and economic aspects of future business performance, whether in response to risk-related reporting requirements, emerging performance indexes and rating approaches, new regulatory demands, or other emerging aspects of the license to operate.
Effective reporting needs more than good metrics and standardised reporting formats. What it takes is the credible communication of what is material to stakeholders in ways that enable them to base decisions and actions on the most appropriate information provided in a timely manner. The key to effective reporting in the future will be its focus on what is material to stakeholders. Standardization in this context will certainly include agreed metrics and reporting elements. Beyond this, however, it will require a generally accepted approach to handling materiality as it relates to sustainability reporting, and an agreed basis on which assurance can both encourage and attest to such materiality.
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Simon Zadek is chief executive of AccountAbility. More information about the AA1000 Assurance Standard and AccountAbility's work, publications and membership can be found on the organization’s Web site.
This column has been reprinted courtesy of Ethical Corporation.
Effective public reporting must communicate what is important to selected information users in ways that enable them to make coherent decisions and take planned and timely actions relevant to their interests. This should come as no surprise to those in the communication business, whether politicians or civil activists, corporate marketers, media and academic writers or public affairs consultants. One for all and all for one, their golden dictum reads: work out what is really important to the people to whom you are communicating, develop a language that will effectively penetrate these peoples' data-muddled minds and hearts, and then off you go.
And the initial phase of phase of work has been productive. It is only five short years ago that The Body Shop produced its path-breaking Values Report. This report, deeply informed by the work of the Copenhagen Business School, Traidcraft, the New Economics Foundation and others, was one of the first shots in recent times at sustainability or triple bottom line reporting. The very fact that the Values Report now seems fairly clumsy compared with more recent social and sustainability reports is a tribute to how much has since been achieved.
But this period of experimentation has created a crisis of quality and so of trust and effectiveness of reporting. And so we inevitably arrive at the matter of standards. Let me be clear about the current debate on standards. It just makes no sense to be “against standards.” Come-as-you-are reporting cannot be effective in a complex, volatile, time-scarce, data-rich world where trust counts. The real issue is not whether, but what, how and when.
Slow, But Steady Improvement
A veritable industry has sprung up over the last decade in pursuit of effective reporting standards. Initial work has focused on two key pieces of the jigsaw: legitimizing aspects of performance management and accountability (i.e. if you agree it should be counted, then from now on it is going to count); and identifying metrics and associated data and management systems. This second generation of work has focused on two types of reporting standards, the designer and broadband models. Designer reporting focuses on one aspect of an organization's footprint, carbon emissions, approaches to dealing with HIV/AIDS, handling (or not handling) of conflict diamonds, compliance with labor agreed standards etc. Most of these involve a normative code, agreed metrics and a reporting format and process. Some include a measure of assurance. Broadband reporting, on the other hand, is about capturing a sense of the whole organization's footprint. Certainly the GRI Guidelines are the "as good as we have got" in this field, certainly now and probably into the future.
An emerging third generation of reporting-related standards offer a quite different focus, while drawing from both designer and broadband experience and approaches. At the core of this third wave is to base reporting on what is material to targeted users. The challenge of materiality is not new to business, and in particular to the financial auditing community during the recent wave of financial reporting (and performance) fiascos. But the materiality challenge takes on new heights when it comes to sustainability reporting. Stakeholders are a mixed bunch, often at odds with each other as to what is important. Their preferences often seem quixotic to say the least. Concerns about child labor fade into the background as access to health care comes to the fore, only to be supplanted by the spectacle of Enron, and the personal calamities of lost livelihoods and vanishing pensions. It is hard to work out stakeholders' long-term “climatic” views amidst the maelstrom of variable weather conditions.
Until recently there has been a two-pronged approach to materiality. The first has been to "let the market decide." Pharmaceutical companies, for example, discovered it was unacceptable to report without reference to drug pricing, just as financial institutions found themselves challenged when they did not describe their investment approach. The learning happens, certainly, but with considerable, costly pain, and the enormous downside that "enforced" reporting does not build trust.
The second approach has been to embed the drive for materiality in the assurance of reports and the underlying organizational systems and competencies. Assurance of social and sustainability reports has in the main focused on the accuracy of quantitative data rather than the more challenging issue of whether the scope of reporting makes sense. There have been exceptions to this, such as the “dual track” approaches based on opinion leader assurance statements. However, such personalized approaches clearly cannot be adequately systematized or robustly replicated and so, in short, have no future in tomorrow's world where sustainability reporting has become "business-as-usual."
Staying Ahead of the Law
The need for companies to ensure materiality in their reporting is rapidly becoming a "must do." Emerging corporate governance, risk reporting and stock exchange listing requirements are demanding more disclosure of material aspects of non-financial performance. But materiality in reporting will increasingly have to be demonstrated as well as delivered. In the U.K., for example, the Operating and Financial Review within the proposed new Company Law will require companies to report on aspects of social and environmental performance that are expected to impact materially on future business performance. Companies will be required to ensure adequate assurance that appropriate procedures are in place to identify such material performance aspects. The materiality challenge underpinning effective reporting poses new challenges for assurance.
AccountAbility's AA1000 Assurance Standard is the first non-proprietary, sustainability assurance platform that seeks to handle these more complex aspects of materiality. Materiality is tested through an examination of the companies' understanding of (and response to) issues gained through stakeholder engagement, as well as through more traditional means. Furthermore, whilst rightly based on analysis of actual performance, it pushes assurance beyond rear-view accounting to offer insights into exploring future performance. In so doing, the AA1000 Assurance Standard provides a useful basis for companies seeking to report on the social, environmental and economic aspects of future business performance, whether in response to risk-related reporting requirements, emerging performance indexes and rating approaches, new regulatory demands, or other emerging aspects of the license to operate.
Effective reporting needs more than good metrics and standardised reporting formats. What it takes is the credible communication of what is material to stakeholders in ways that enable them to base decisions and actions on the most appropriate information provided in a timely manner. The key to effective reporting in the future will be its focus on what is material to stakeholders. Standardization in this context will certainly include agreed metrics and reporting elements. Beyond this, however, it will require a generally accepted approach to handling materiality as it relates to sustainability reporting, and an agreed basis on which assurance can both encourage and attest to such materiality.
-----------
Simon Zadek is chief executive of AccountAbility. More information about the AA1000 Assurance Standard and AccountAbility's work, publications and membership can be found on the organization’s Web site.
This column has been reprinted courtesy of Ethical Corporation.