Sustainability reporting

Sustainability reporting

Sustainability reporting involves companies and organisations demonstrating their corporate responsibility through measuring and publicly reporting on their economic, social and environmental performance and impacts. It can be delivered through the company's annual report, a stand alone sustainability report, a triple bottom line report or an environmental or social impact report.

ISSUES AND ARGUMENTS

Sustainability reporting is voluntary in Australia. Given this fact, we look at the following issues in relation to sustainability reporting:

Why companies report

Pros and Cons

The growth of ethical investors and sustainability indices

Sustainability reporting frameworks

Sustainability reporting in Australia

Sustainability reporting overseas

Why companies report

Companies choose to report for a variety of reasons, including: to inform non-shareholder stakeholders of impacts of the company's performance and strategies to improve impacts, to inform shareholders and the market how well the company is dealing with non-financial and financial risks, and to enable companies to identify areas of key risks and analyse performance.

According to a Centre for Australian Ethical Research (CAER) report entitled The State of Sustainability Reporting in Australia 2005, the main target audiences for sustainability reports are employees (87 per cent), customers (79 per cent), shareholders (74 per cent ), local community (67 per cent), institutional investors (54 per cent), suppliers (59 per cent), analysts (51 per cent), and governments and NGOs (28 per cent).

Certified Practicing Accountants Australia (CPA Australia) identifies in its report, Sustainability reporting—practices, performance and potential, a strong correlation between sustainability reporting and low probability of corporate distress. Therefore, it is often in the company's interests to undertake sustainability reporting.

Pros and cons

There are subsequently two main reasons why some corporations and industry associations do not support mandatory reporting. Firstly, additional compliance costs would be incurred if mandatory reporting was imposed. Secondly, there would be the danger of organisations developing a 'compliance mentality' whereby companies change their practices in accordance to the regulations rather than because they have concluded it's in the best interest of the company.

Conversely, there are three main reasons why some corporations and industry associations support mandatory reporting. Firstly, mandatory reporting sets up systems and structures for understanding impacts and risks, not previously addressed by many corporations. Secondly, it provides institutional investors with access to information on non-financial risks, allowing them to have a better overall picture of the company. Thirdly, mandatory sustainability reporting provides accountability and transparency to stakeholders.

Given these reservations to mandatory sustainability reporting, there are some key requirements that a mandatory reporting scheme would need to address.

  • Cost-effective—the framework must be consistent and cost-effective, particularly in reference to small to medium enterprises (SMEs), that may have both a lesser social and environmental impact than their larger counterparts, but also a lesser capacity to meet additional costs of reporting.
  • Flexibility—the 'if not, why not' approach has been deemed appropriate for mandatory sustainability reporting whereby a corporation reports non-financial information which is pertinent to the company and stakeholders, but justifies the way in which it reports and why other information isn't included, so it remains accountable.
  • Comparability—non-financial information needs to be comparable, and the fact that it isn't is a major downfall of the current system. If mandatory reporting isn't imposed, there is still need for a common reporting framework to make the information voluntarily supplied comparable.

In its June 2006 report, the Parliamentary Joint Committee on Corporations and Financial Services concluded sustainability reporting should remain voluntary. There were concerns that mandating reporting would promote 'form over substance' whilst the committee believed it would be more beneficial for 'companies to be encouraged strongly to engage voluntarily in sustainability reporting rather than being forced to do so'.

The growth of ethical investors and sustainability indices

The growing importance of sustainability is indicated by a new breed of investors known as ethical investors, and the subsequent creation of sustainability indices to rank corporations' performance in non-financial goals. Key examples of international indices include the US's Dow Jones Sustainability Indexes, the UK's FTSE4Good, the Canadian Jantzi Social Index and the South African Johannesburg Stock Exchange SRI Index.

Australia has three main sustainability indices, which are much smaller than their international counterparts due to their voluntary nature.

  • The Corporate Responsibility Index (CRI) was launched in 2004 by St James Ethics Centre in partnership with the Sydney Morning Herald and The Age, and supported by Ernst & Young. The CRI is open to all Business Council of Australia members and Australia's top 250 companies to participate through an online survey.
  • In 2005, Sustainable Asset Management Australia (SAM) launched the Australian SAM Sustainability Index (AuSSI) in cooperation with the Victorian Environment Protection Authority (EPA). The compilation of the AuSSI involves undertaking a corporate sustainability assessment on voluntary participants and publicly available information of companies from 21 industry sectors. The leading 10 per cent of companies in each industry are then chosen as sustainability leaders in their sector and aggregated to form the AuSSI. In January 2008, the AuSSI comprised of 70 corporations.
  • RepuTex also provides a range of environmental indices including the Governance Leaders Index and the Climate Change Index.

Sustainability reporting frameworks

The original sustainability reports were single issue reports which focused on either environmental or social performance. These one-dimensional reports have been replaced over time with the presentation of a variety of non-financial information through integrated sustainability reports. Sustainability reports can be otherwise known as 'triple bottom line reports', however the term 'sustainability reports' is far more widely recognised.

As the concept of sustainability has gained wider acceptance, there has been a worldwide trend toward greater use of sustainability reports rather than other types of non-financial reports. Thus, there is now a variety of domestic and international factors that advocate reporting.

Corporate codes of conduct

Firstly, corporate codes of conduct set out principles which corporations may use to guide their decision making and ground rules for appropriate corporate behaviour. They are voluntary initiatives which can often be either too ambitious and impractical, or too specific and not applicable to a wider audience. However, according to the Australian Stock Exchange (ASX) Corporate Governance Council's Principles of good corporate governance and best practice recommendations, a code of conduct can 'demonstrate the commitment of the company to ethical practices'.

The United Nations has compiled a ten-principle code of conduct, known as the Global Compact, which is recommended to all organisations. The principles promote the support and protection of human rights, the respect of workplace rights, greater environmental responsibility and work against corruption. There are approximately 3700 signatories to the Compact, roughly 20 of which are Australian owned businesses and organisations.

The Organisation for Economic Co-operation and Development (OECD) has also developed its Declaration on International Investment and Multinational Enterprises, of which Australia is a signatory. This provides non-binding, voluntary guidelines in relation to responsible business conduct.

National and international standards

Standards can also guide corporations about integrating corporate responsibility into their operations.

The International Organization for Standardization (ISO) has developed the ISO 14000 family of standards in relation to environmental management systems. These standards provide a framework for organisations to 'identify and control the environmental impact of its activities, products or services, and to improve its environmental performance continually, and to implement a systematic approach to setting environmental objectives and targets, to achieving these and to demonstrating that they have been achieved'.

Standards Australia has also released the AS 8000 Business Governance Suite. Specifically, AS 8003-2003 identifies standards for establishing, implementing and maintaining an effective corporate social responsibility program.

As well as international and national standards, there are standards that apply to the independent verification of sustainability reports. AccountAbility has built upon the GRI Reporting Guidelines to form the AA1000 assurance standard. This framework provides guidance on how to establish a systematic stakeholder engagement process to generate indicators, targets and reporting systems. Additionally, the International Assurance and Auditing Standards Board has adapted the ISAE3000 standard for assurance for non-financial performance and conditions and behaviour.

The Global Reporting Initiative

A number of reporting guidelines have also been developed to assist the sustainability reporting process. The most widely recognised are the Global Reporting Initiative (GRI) Reporting Guidelines. The third generation of these guidelines, known as the G3 Guidelines, were released in October 2006. According to the GRI, its purpose is 'to make sustainability reporting as common and widespread as financial reporting so that it will be routine for companies and other organisations to account for the contributions they make to—and the impact they have on—the globe's natural resources, societies, and economies'. In 2005, 51 per cent of sustainability reports in Australia used the GRI Guidelines.

Australian guidelines

There are also guidelines developed specifically for the Australian market. The Department of Environment and Heritage (now the Department of Environment, Water, Heritage and the Arts) released Triple Bottom Line Reporting in Australia—a guide to reporting against environmental indicators in June 2003. The Group of 100 (which represents the Chief Financial Officers of large business enterprises in Australia) released in 2003 Sustainability—a guide to triple bottom line reporting.

The only legal obligations on sustainability reporting in Australia are defined under the Corporations Act 2001 including:

  • s299(1)(f) which requires companies to include details of breaches of environmental laws and licences in their annual reports and
  • ss1013(A) to (F) of the Corporations Act 2001, which require providers of financial products with an investment component to disclose the extent to which labour standards or environmental, social or ethical considerations are taken into account in investment decision-making.

Sustainability reporting in Australia

According to the Centre for Australian Ethical Research report State of Sustainability Reporting in Australia 2005, 24 per cent of Australia's 500 largest public and private companies voluntarily undertook sustainability reporting in 2005.

This does not compare well with international levels of sustainability reporting. The KPMG International Survey of Corporate Responsibility Reporting 2005, when comparing the reporting rate of the top 100 publicly listed companies from 16 countries, ranked Australia 14th. The average rate across the 16 countries was 41 per cent, while Australia's rate was 23 per cent. Japan had a sustainability reporting rate of 81 per cent and the United Kingdom had a rate of 71 per cent.

Additionally, foreign owned companies operating in Australia voluntarily report at a rate more than twice that of Australian owned companies, with 43 per cent and 18 per cent respectively.

Even government departments have low reporting rates, with only 3 per cent of departments reporting. In 2005, the Department of Environment and Heritage (DEH) and the Department of Family, Community Services, and Indigenous Affairs (FaCSIA) voluntarily reported.

However, there is growth in Australian reporting rates with the CAER report estimating that, if current growth rates continue, all of Australia's top 500 companies would be voluntarily reporting by 2035.

Sustainability reporting in Australia is dominated by a number of key sectors such as manufacturing, mining, wholesale trade, finance and utilities. Mining and manufacturing account for 55 per cent of reports, whilst in 2005 hospitalities, health and community services were yet to have completed a sustainability report.

A major reason for the low rates of reporting is the lack of engagement from mainstream financial markets. If financial analysts are not using sustainability information then there is a low drive for companies to produce it. However, financial analysts do not demand the information because it is not in a format they can use. As a result, the non-financial risk management activities that companies are undertaking are being undervalued in the market. Ernst & Young undertook a report in 2003 analysing this trend in Australia.

However, it must be remembered that Australia's low occurrence of sustainability reporting does not reflect on strong or poor corporate performance, but merely that it is unreported and therefore hard to measure.

Australia's low rate of reporting led to the Joint Committee on Corporation and Financial Services inquiry into Corporate Responsibility and Triple-Bottom-Line reporting in 2005, with the report Corporate responsibility—managing risk and creating value published in June 2006. In Labor's supplementary report to the inquiry they suggested a framework for strategic direction and engagement to encourage more companies to integrate sustainable business practices. This framework involved six recommendations to improve corporate responsibility responses, including:

  • Better coordination of government initiatives.
  • Demonstration of sustainable, responsible behaviours by government agencies.
  • Monitoring of legitimate environmental and social impacts by directors and trustees.
  • Support and resources for business.
  • Improving business sustainability reporting.
  • Engaging the investment sector.
Labor also recommended setting up a National Sustainability Council to recommend and monitor sustainability targets. Other initiatives mentioned in the report to encourage more sustainable practice included promoting research and development into innovative corporate responsibility partnerships; a carbon tax or an emissions trading scheme; a fee on plastic bags; and container deposit legislation.

A number of key Australian organisations have sustainability reports, including BHP Billiton, Origin Energy, VicSuper and Transfield Services to name a select few. The Department of Environment, Water, Heritage and the Arts has also continued to report, along with the Department of Families, Housing, Community Services and Indigenous Affairs.

In February 2006, the Centre for Integrated Sustainability Analysis @ The University of Sydney completed its Sustainability Reporting Pilot Program. The program saw the development of Triple Bottom Line accounting software and training programs on sustainability reporting for corporations.

Sustainability reporting overseas

The United States introduced new corporate governance disclosure requirements under the Sarbanes-Oxley Act 2002, in response to corporate collapses such as Enron and WorldCom. This requires companies to disclose annually whether they have adopted a code of conduct, and if they have not, why not. Listed US Companies must also report on their environmental performance under Securities and Exchange Commission regulations (Items 101 and 103 of Regulation S-K).

Denmark passed the Green Accounting Law in 1995, which requires over 3000 Danish companies to publish a 'Green Account' describing their environmental impact and how they are managing it. Similar legislation has also been passed in the Netherlands.

France has enacted a disclosure framework for sustainability reporting as part of the Nouvelles Regulations Economiques (NRE) which requires listed companies to disclose information related to corporate governance, social and community impacts, environmental management, and workplace practices.

European Union (EU) companies are also subject to the EU Accounts Modernisation Directive which requires European Community corporations to include non-financial information in their annual reports.

The United Kingdom introduced the Operating and Financial Review (OFR) in 2005 as a requirement under the Companies Act 1985 to build upon the EU Directive. The OFR required more forward looking information, including strategies and long-term policies, but was repealed in 2006 and is now a voluntary mechanism.

In March 2006, the European Commission and the European business community formed a partnership to create the European Alliance for Corporate Social Responsibility (CSR). It aims to promote CSR and assist 'enterprises to integrate social and environmental considerations in their business operations'.

South Africa has had a Code of Corporate Practices and Conduct for all listed companies, which requires entities to issue an annual sustainability report, since 2003.

In the UK, the Department for Environment, Food and Rural Affairs has also published Environmental Key Performance Indicators: Reporting Guidelines for UK Business.

Source:

Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS),  Corporate responsibility—managing risk and creating value, Commonwealth of Australia, June 2006.

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19 November, 2010

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