At its May conference in Amsterdam, the Global Reporting Initiative (GRI) released the fourth generation of its sustainability reporting guidelines, the G4, to an audience of more than 1,600 corporate sustainability practitioners, NGOs, and the media.
The update was eagerly awaited, given that the G3 guidelines were first introduced seven years ago (an eternity in the fast-moving world of sustainability) and given that several other reporting frameworks, principles, standards, and mandates have emerged since 2006 that have changed the reporting landscape. The International Integrated Reporting Committee (IIRC) was formed to develop principles and guidance for integrated reporting. The Sustainability Accounting Standards Board (SASB) was formed to develop industry-specific sustainability metrics that it hopes will become mandatory disclosures for companies listed in the United States. And several stock exchanges, including in Malaysia, Brazil, and South Africa, have introduced sustainability reporting as a listing requirement for publicly traded companies. NASDAQ is currently collaborating with the Investor Network on Climate Change to develop universal environmental, social, and governance (ESG) reporting standards that are likely to be adopted by stock exchanges all over the world.
The emergence of these reporting frameworks is putting increasing pressure on companies (as my colleague Dunstan Allison Hope noted in a recent blog), many of which now feel sustainability reporting has become a cumbersome exercise in data collection and disclosure rather than a strategic review of material ESG issues. The G4 guidelines introduce significant changes that are meant to address this concern, and to complement the other standards rather than replace or add to them. These changes can make the process of reporting, as well as the content of the report itself, more focused, concise, and meaningful.
There are two changes in the G4 that are particularly important: The elimination of “application levels,” with a renewed emphasis on materiality, and a broadening of reporting expectations to include the companies’ value chain impacts.
Elimination of Application Levels
Currently, companies can label their reports with an A, B, or C application level, depending on the number of GRI G3 or G3.1 indicators the firm is disclosing. Most reporters, however, believed the application levels turned reporting into a check-the-box exercise that allowed some companies to disclose indicators that were not material to their business simply to achieve a higher application level. The application levels, however, were never meant to be an indicator of the quality of a sustainability report, but rather were meant to indicate the level of the company’s transparency.
Instead of application levels, the G4 uses the concept of reporting “in accordance with” the GRI, meaning that companies must disclose only the core indicators that apply to all companies in all sectors. The G4 has a list of 34 indicators focused on:
- A statement from the CEO on the company’s strategy and vision.
- An organizational profile, including the company’s legal form, products or services offered, and markets served.
- An overview of the process followed to define the report content and the company’s most material issues.
- Details of stakeholder engagement conducted during the reporting period.
- The governance structure, including how sustainability is governed and how risk is managed, plus additional disclosures on executive compensation.
- The process for identifying and addressing unethical behavior or other matters of integrity.
- The GRI content index and description of the assurance process, if relevant.
Rather than requiring companies to disclose dozens of indicators on greenhouse gas emissions, water usage, biodiversity, or human rights, the G4 guidelines emphasize materiality, which it defines as the process of prioritizing issues that reflect the company’s most significant ESG impacts, as well as those issues that are most relevant to stakeholders. To encourage companies to report only on their most material indicators, the GRI provides a comprehensive list of options.
Of course, for this kind of reporting to work, the process by which material issues are identified must be explicit and robust—meaning companies will need to be transparent about the process they followed to make the materiality decisions.
This is a positive development, and the concept of materiality is also at the core of both the IIRC and SASB standards. In integrated reporting, materiality is determined by whether the report’s intended audience would consider the issue influential in the organization’s ability to create value. SASB bases its definition of materiality on U.S. federal law that requires companies to disclose information that any “reasonable investor” would consider necessary to make an informed decision.
A Focus on the Value Chain
The second big change with the G4 is an expansion of the report’s boundaries. When defining the list of material issues, companies must now consider not only the impacts within the organization, but also the impacts it has through the value chain, even if the company does not exercise financial control over these external bodies. For example, even if it is determined that an issue such as child labor or bribery is not a direct impact for the company’s own operations, if those are significant issues within the company’s supply chain, they must be incorporated into the materiality process.
This expanded definition of the reporting boundaries reflects the increased focus stakeholders have on value chain impacts, and is echoed in other reporting frameworks. As it pertains to materiality, the integrated reporting framework includes guidance for companies to identify opportunities, risks, and outcomes that are associated with the reporting entity but also with other stakeholders outside of the company.
SASB, which is in the process of creating materiality maps for various industries, takes an evidence-based approach to determining its list of material issues. SASB is expected to recommend that companies report on the lifecycle use impacts of products and disclose how it approaches supply chain engagement.
The Next Era of Reporting
All of these frameworks, mandates, and proposed standards for sustainability reporting can be overwhelming—but it’s encouraging to know that these frameworks can coexist and that they actually complement one another.
It’s important to keep in mind that there is no urgency in responding to these new developments. The GRI offers a two-year grace period, so only reports published after December 31, 2015, must be developed using the G4 guidelines to be recognized by the GRI. Meanwhile, the IIRC is nearing the end of its consultation draft period and will release the International Integrated Reporting Framework in December. (And both of these are voluntary reporting frameworks.)
SASB, which aims to make ESG reporting mandatory through U.S. Securities and Exchange Commission (SEC) filings, will complete its industry reporting standards in 2015.
The best way to get ahead of the curve is to ensure that your company has a robust materiality assessment process. While the GRI, IIRC, and SASB all define materiality somewhat differently, at the core, they are aiming to achieving the same result: Encourage more concise, more focused, and, to the pleasure of companies everywhere, shorter reports that are simpler to produce and easier to read.
In addition, companies must invest in a process to improve their understanding of their impacts throughout the value chain. This may require conducting a lifecycle assessment of products to understand issues from the raw-material-sourcing stage all the way to end-use and disposal of the product. It may also require developing a supply chain map and conducting a materiality assessment of the supply chain to identify risks and opportunities based on the location of key suppliers, the activities they perform on the company’s behalf, and the nature of the business relationship.
By completing these two strategic activities, which will certainly demand a lot of resources up front, companies will achieve three important positive results. First, companies will be prepared to publish reports that address each of the emerging reporting frameworks discussed here. Second, companies can reach a point where sustainability reporting actually requires fewer resources in the long term. Now, rather than following a process whereby as much data as possible is disclosed, companies can be more targeted in their data collection. But perhaps the greatest benefit of all, and the ultimate goal of reporting in the first place, is that the changes to the reporting process will make the allocation of resources in the management of sustainability issues more targeted and efficient.
You Might Also Like
Sorry, no related articles have been published, yet.