How Sustainable Is Your Global Supply Chain? Get Ready To Report On It

How Sustainable Is Your Global Supply Chain? Get Ready To Report On It

by Charles Corbett

Recently I had the opportunity to take a peek into the future of sustainability reporting. The Global Reporting Initiative (GRI) is the organization behind the leading set of guidelines for sustainability reports (sometimes called citizenship reports, CSR reports for corporate social responsibility, or ESG environmental, social, and governance reports). GRI is in the midst of an extensive global effort (conducting "due process") to work with a wide range of stakeholders to update the current G3 guidelines, introduced in October 2006, and aims to introduce the new G4 guidelines in May 2013.

Although comprehensive sustainability reporting is usually voluntary, demand for sustainability-related information continues to increase, from regulators, shareholders, NGOs, and other constituencies. A KPMG International CSR Survey found that 95% of the world's 250 largest companies publish sustainability reports and 80% explicitly mention that they have used the GRI guidelines. Bloomberg includes ESG data for over 5,500 global organizations in their over 300,000 terminals worldwide.

In other words, whatever changes are adopted in going from the current G3 guidelines to the future G4 version will impact many people in many organizations worldwide, and sustainability reporting is increasingly taking a supply-chain-wide perspective. The Carbon Disclosure Project has seen a rapid increase in the number of suppliers reporting emissions, up from 715 in 2009 to 1,864 in 2011. The G4 guidelines are also likely to require substantially more extensive supply chain reporting. How much more? That will become clearer as GRI's public consultation process unfolds.

Part of GRI's due process consists of stakeholder workshops in many locations. I participated in the workshop hosted at Deloitte's offices in San Francisco, together without about 50 others from a number of large companies, including several major auditing firms, and representatives from several NGOs. These workshops discuss a draft that was made available for public comment. GRI will use the input from these workshops, and from other channels, to prepare an initial draft of G4 that will be available for public comment in May 2013. Some of the main changes under consideration relate to reporting on "governance and remuneration", "materiality", and "supply chain".

Let's start with "governance and remuneration". The current G4 exposure draft proposes a requirement that firms report "the ratio of the annual total compensation for the organization's highest-paid individual in each country of significant operations to the median annual total compensation for all employees in the same country (excluding the highest-paid individual)", and other similar ratios. I couldn't help wondering: if the intention of these ratios is to determine whether a firm is engaging in any form of unfair pay practices, at the bottom or at the top of the scale, would it not be more practical to report signs of dissatisfaction with pay practices, such as lawsuits, shareholder initiatives, or negative media attention, rather than using ratios that are all too easy to manipulate? I doubt that these ratios will make it into the final version of G4.

The group then discussed how to decide what is "material". In GRI parlance, firms need to determine which environmental and social aspects, such as "greenhouse gas emissions" or "human rights", are "material" and only need to discuss those in more detail. "Material" is determined both by the magnitude of the impact, as assessed by the firm, and by what the firm's stakeholders are interested in. A new development in the current G4 proposal is that firms should include "A statement, signed by the highest governance body or Chief Executive Officer (CEO), that the report has been prepared in accordance with the GRI Guidelines and that it is a balanced and reasonable presentation of the organization's economic, environmental and social impacts". As soon as a CEO signs a statement, s/he is certifying that particular aspects are "material". Would that not trigger questions from the investment community and financial regulators, such as what the firm is doing about that aspect, or even how long the CEO has known about this "material" aspect and why it was not disclosed earlier in the financial reports? Requiring this statement may make firms less likely to adopt the GRI guidelines; but on the other hand, having a CEO sign such a statement will inevitably elevate the field of sustainability reporting within firms, up from the relatively junior positions where it currently often resides straight to the C-suite. In the long run, one might expect financial reporting and sustainability reporting to be fully integrated: if something is "material" enough to be included in a sustainability report, it should probably also be mentioned in a financial report. The fact that the SEC recently introduced mandatory disclosures around the use of "conflict minerals" in firms' supply chains does set an interesting precedent.

Which brings us to the third theme, "supply chain". The existing G3 guidelines already state that "The Sustainability Report Boundary should include the entities over which the reporting organization exercises control or significant influence both in and through its relationships with various entities upstream (e.g., supply chain) and downstream (e.g., distribution and customers)." The current G4 draft includes substantially more indicators for supply chain performance than G3, though allowing firms to focus more on just the material aspects.

This broader scope raises many questions. For instance, for a bank, does this mean that social aspects of lending practices should now be reported? For an auditor, how can they truly assure that a firm's sustainability report is accurate, if that report now has to include many disclosures that fall well outside the firm's boundaries? The process behind this more extended reporting can be valuable: firms have reported that mapping their value chain as part of their sustainability reporting efforts led to a better understanding of the structure of their supply chain. But it is a stretch from current practice to ask CEOs to sign statements that certain aspects are simultaneously material and effectively outside the firm's control.

The discussion at the workshop illustrated the complexity of what GRI is striving to do. It also highlighted the tension between two of GRI's objectives: while much of the emphasis is on "reporting", publishing a sustainability report is as much about the process as about the report itself. Many of the new disclosures that GRI is considering are questions that any firm should be asking itself, so including them in G4 will help firms to better understand and improve their own sustainability and financial performance. At the same time, some of these new disclosures will be uncomfortable for many firms.

The good news is that GRI is engaged in a thoughtful, systematic process soliciting input from stakeholders worldwide, so there is reason to be optimistic that when the G4 guidelines are published in 2013 they will be even more influential than their predecessors have already been. And regardless of exactly what does and doesn't make it into G4, the direction is clear: firms will need to report in more depth and more breadth on all aspects of what happens in their global supply chains.

 

Sources:

• KPMG, 2011, KPMG International Survey of Corporate Responsibility Reporting 2011, p. 6 and p. 20; available at http://www.kpmg.com/PT/pt/IssuesAndInsights/Documents/corporate-responsibility2011.pdf, last accessed September 7, 2012.
• Carbon Disclosure Project 2012, CDP Supply Chain Report 2012: A New Era: Supplier Management in the Low-Carbon Economy, Figure 2, p. 3; available at https://www.cdproject.net/CDPResults/CDP-Supply-Chain-Report-2012.pdf, last accessed September 7, 2012.
• Global Reporting Initiative, Sustainability Reporting Guidelines, Version 3.0, 2000-2006, p. 17; available at https://www.globalreporting.org/resourcelibrary/G3-Sustainability-Reporting-Guidelines.pdf, last accessed September 7, 2012.
• Global Reporting Initiative, G4 Exposure Draft, Second G4 Public Comment Period, Open for Comment 25 June – 25 September, 2012, p. 14 and p. 38; available at https://www.globalreporting.org/resourcelibrary/G4/G4-Exposure-Draft.pdf, last accessed September 7, 2012.
• SEC Adopts Rule for Disclosing Use of Conflict Minerals; available at http://www.sec.gov/news/press/2012/2012-163.htm, last accessed September 7, 2012.

 

Although comprehensive sustainability reporting is usually voluntary, demand for sustainability-related information continues to increase, from regulators, shareholders, NGOs, and other constituencies. A KPMG International CSR Survey found that 95% of the world's 250 largest companies publish sustainability reports and 80% explicitly mention that they have used the GRI guidelines. Bloomberg includes ESG data for over 5,500 global organizations in their over 300,000 terminals worldwide.

In other words, whatever changes are adopted in going from the current G3 guidelines to the future G4 version will impact many people in many organizations worldwide, and sustainability reporting is increasingly taking a supply-chain-wide perspective. The Carbon Disclosure Project has seen a rapid increase in the number of suppliers reporting emissions, up from 715 in 2009 to 1,864 in 2011. The G4 guidelines are also likely to require substantially more extensive supply chain reporting. How much more? That will become clearer as GRI's public consultation process unfolds.

Part of GRI's due process consists of stakeholder workshops in many locations. I participated in the workshop hosted at Deloitte's offices in San Francisco, together without about 50 others from a number of large companies, including several major auditing firms, and representatives from several NGOs. These workshops discuss a draft that was made available for public comment. GRI will use the input from these workshops, and from other channels, to prepare an initial draft of G4 that will be available for public comment in May 2013. Some of the main changes under consideration relate to reporting on "governance and remuneration", "materiality", and "supply chain".

Let's start with "governance and remuneration". The current G4 exposure draft proposes a requirement that firms report "the ratio of the annual total compensation for the organization's highest-paid individual in each country of significant operations to the median annual total compensation for all employees in the same country (excluding the highest-paid individual)", and other similar ratios. I couldn't help wondering: if the intention of these ratios is to determine whether a firm is engaging in any form of unfair pay practices, at the bottom or at the top of the scale, would it not be more practical to report signs of dissatisfaction with pay practices, such as lawsuits, shareholder initiatives, or negative media attention, rather than using ratios that are all too easy to manipulate? I doubt that these ratios will make it into the final version of G4.

The group then discussed how to decide what is "material". In GRI parlance, firms need to determine which environmental and social aspects, such as "greenhouse gas emissions" or "human rights", are "material" and only need to discuss those in more detail. "Material" is determined both by the magnitude of the impact, as assessed by the firm, and by what the firm's stakeholders are interested in. A new development in the current G4 proposal is that firms should include "A statement, signed by the highest governance body or Chief Executive Officer (CEO), that the report has been prepared in accordance with the GRI Guidelines and that it is a balanced and reasonable presentation of the organization's economic, environmental and social impacts". As soon as a CEO signs a statement, s/he is certifying that particular aspects are "material". Would that not trigger questions from the investment community and financial regulators, such as what the firm is doing about that aspect, or even how long the CEO has known about this "material" aspect and why it was not disclosed earlier in the financial reports? Requiring this statement may make firms less likely to adopt the GRI guidelines; but on the other hand, having a CEO sign such a statement will inevitably elevate the field of sustainability reporting within firms, up from the relatively junior positions where it currently often resides straight to the C-suite. In the long run, one might expect financial reporting and sustainability reporting to be fully integrated: if something is "material" enough to be included in a sustainability report, it should probably also be mentioned in a financial report. The fact that the SEC recently introduced mandatory disclosures around the use of "conflict minerals" in firms' supply chains does set an interesting precedent.

Which brings us to the third theme, "supply chain". The existing G3 guidelines already state that "The Sustainability Report Boundary should include the entities over which the reporting organization exercises control or significant influence both in and through its relationships with various entities upstream (e.g., supply chain) and downstream (e.g., distribution and customers)." The current G4 draft includes substantially more indicators for supply chain performance than G3, though allowing firms to focus more on just the material aspects.

This broader scope raises many questions. For instance, for a bank, does this mean that social aspects of lending practices should now be reported? For an auditor, how can they truly assure that a firm's sustainability report is accurate, if that report now has to include many disclosures that fall well outside the firm's boundaries? The process behind this more extended reporting can be valuable: firms have reported that mapping their value chain as part of their sustainability reporting efforts led to a better understanding of the structure of their supply chain. But it is a stretch from current practice to ask CEOs to sign statements that certain aspects are simultaneously material and effectively outside the firm's control.

The discussion at the workshop illustrated the complexity of what GRI is striving to do. It also highlighted the tension between two of GRI's objectives: while much of the emphasis is on "reporting", publishing a sustainability report is as much about the process as about the report itself. Many of the new disclosures that GRI is considering are questions that any firm should be asking itself, so including them in G4 will help firms to better understand and improve their own sustainability and financial performance. At the same time, some of these new disclosures will be uncomfortable for many firms.

The good news is that GRI is engaged in a thoughtful, systematic process soliciting input from stakeholders worldwide, so there is reason to be optimistic that when the G4 guidelines are published in 2013 they will be even more influential than their predecessors have already been. And regardless of exactly what does and doesn't make it into G4, the direction is clear: firms will need to report in more depth and more breadth on all aspects of what happens in their global supply chains.

 

Sources:

• KPMG, 2011, KPMG International Survey of Corporate Responsibility Reporting 2011, p. 6 and p. 20; available at http://www.kpmg.com/PT/pt/IssuesAndInsights/Documents/corporate-responsibility2011.pdf, last accessed September 7, 2012.
• Carbon Disclosure Project 2012, CDP Supply Chain Report 2012: A New Era: Supplier Management in the Low-Carbon Economy, Figure 2, p. 3; available at https://www.cdproject.net/CDPResults/CDP-Supply-Chain-Report-2012.pdf, last accessed September 7, 2012.
• Global Reporting Initiative, Sustainability Reporting Guidelines, Version 3.0, 2000-2006, p. 17; available at https://www.globalreporting.org/resourcelibrary/G3-Sustainability-Reporting-Guidelines.pdf, last accessed September 7, 2012.
• Global Reporting Initiative, G4 Exposure Draft, Second G4 Public Comment Period, Open for Comment 25 June – 25 September, 2012, p. 14 and p. 38; available at https://www.globalreporting.org/resourcelibrary/G4/G4-Exposure-Draft.pdf, last accessed September 7, 2012.
• SEC Adopts Rule for Disclosing Use of Conflict Minerals; available at http://www.sec.gov/news/press/2012/2012-163.htm, last accessed September 7, 2012.