Transcript Slides to use in reporting sustainability lecture for MBA
Reporting Sustainable Performance
Dr Ruth Bender 4 th June 2008
Ruth Bender Page 2
Shareholder value means an above-the-line return Required Return on Capital
X Ruth Bender
Perceived Risk
Page 3
Seven drivers of shareholder value
More profit
1.
2.
3.
Increase sales growth Increase operating profit margin Reduce cash tax rate
Out of fewer assets
4.
5.
Reduce working capital as % of sales Reduce fixed assets as % of sales
At lower risk
6.
Reduce weighted average cost of capital
For as long as possible
7.
Increase timescale of competitive advantage
Rappaport – Creating Shareholder Value
Page 4 Ruth Bender
Strategies to grow shareholder value Sales growth Profit margin Tax rate Working capital Fixed assets Cost of capital Timescale
Ruth Bender The impact of each driver will vary for different industries and companies Page 5
Driving value through sustainable performance Sales growth Profit margin Tax rate Working capital Fixed assets Cost of capital Timescale • Innovative products to meet sustainability needs; attract customers by CR stance • Efficiencies – e.g. in staff costs by better working conditions; lower staff turnover; better recruitment; less wastage; lower energy costs • Global configuration of business activities; take advantage of allowances • Asset utilization – e.g. fewer factories, less inventory, more efficient processes • Risk reduction as a good corporate citizen and as perceived by investors • CR stance affects ‘licence to operate’ and also brand positioning
Page 6 Ruth Bender
Example: using stakeholder networks at Wal-Mart 1.
Increase sales growth 2.
Increase operating profit margin 3.
Reduce cash tax rate 4.
Reduce working capital as % of sales 5.
Reduce fixed assets as % of sales 6.
Reduce weighted average cost of capital 7.
Increase timescale of competitive advantage The Greening of Wal-Mart. Plambeck and Denend, 2008 http://www.ssireview.org
+1 and +7 Working with Marine Stewardship Council to ensure that its fish comes from sustainable sources: attracts customers and helps ensure future viability in a period pf growth in the business. +2 and +4 “We used to buy cotton from Turkey, ship it to China for spinning and knitting, and then ship it again to Guatemala to be cut and sewn … Now … we’re finding opportunities to do things like eliminate the shipment to China and have all processing done in Guatemala.” Saves time and money as well as fuel and resources. +2 and -4 First retailer in the US to sell personal computers compliant with EU regs on hazardous substances. Deal negotiated with Toshiba meant that in exchange for buying 12 weeks’ worth of these computers (normal terms are 4-week commitments), Wal-Mart procured the environmentally preferable PCs at no extra cost.
Page 7 Ruth Bender
Example: ‘Trailblazers’ along the supply chain 1.
Increase sales growth 2.
Increase operating profit margin 3.
Reduce cash tax rate 4.
Reduce working capital as % of sales 5.
Reduce fixed assets as % of sales 6.
Reduce weighted average cost of capital 7.
Increase timescale of competitive advantage +2 and +5 POSCO’s innovative steel making process reduces emissions, and reduces capex and costs +1 (and +2, 4, 7?) development Johnson Controls lithium-ion battery for hybrids and electric vehicles: smaller, lighter, cheaper and longer-lasting. Several new contracts and business Supply Chain “Trailblazers” Can Reap Rewards February 2008 BSR Weekly +1, +2 and +4 economies CEMEX supports low income families and has created new sales market and reduced costs and supply chain due to scale
Page 8 Ruth Bender
Ruth Bender Page 9
Ruth Bender Page 10
“What's in a name? that which we call a rose By any other name would smell as sweet”
corporate responsibility … CSR … extra-financial … GRI style … environmental, social & governance (ESG) … non-financial …. social & environmental performance … sustainability reporting …
Tomorrow’s Value: The Global Reporters 2006 Survey of Corporate Sustainability Reporting
Ruth Bender Page 11
Social and environmental reporting (SER) “SER is the predominantly voluntary, self-reporting of an organisation’s social and environmental interactions. Such reporting is increasingly undertaken in stand-alone reports – some in hard copy, many on the organisation’s website – and represents an organisation's understanding of what it is to be environmentally and/or socially responsible and (potentially at least) sustainable.” Social and Environmental Reporting and the Business Case. ACCA Research report #98, 2007
Page 12 Ruth Bender
Still to come… A wolf in sheep’s clothing Who-what-why-where-when and how?
Some technical bits What next?
Page 13 Ruth Bender
SER ≠ CSR
Ruth Bender René Magritte
1898 – 1967
The Treason of Images, 1928-9
Page 14
A wolf in sheep’s clothing?
“ We examine the occurrence of ethics-related terms in 10-K annual reports over 1994-2006 and offer empirical observations on the conceptual framework of Erhard, Jensen, and Zaffron (2007). We use a pre-Sarbanes-Oxley sample subset to compare the occurrence of ethics-related terms in our 10-K data with samples from other studies that consider virtue-related phenomena. We find that firms using ethics-related terms are more likely to be "sin" stocks, are more likely to be the object of class action lawsuits, and are more likely to score poorly on measures of corporate governance. The consistency of our results across these alternative measures of ethical behavior suggests that managers who portray their firm as "ethical" in 10-K reports are more likely to be systematically misleading the public.
These results are consistent with the integrity-performance paradox.” Loughran, Tim , McDonald, Bill and Yun, Hayong, "A Wolf in Sheep's Clothing: The Use of Ethics-Related Terms in 10-K Reports" (August 16, 2007). Available at SSRN:
http://ssrn.com/abstract=1007727 Ruth Bender Page 15
SER ≠ CSR
Good
How good are the company’s CR practices?
Bad Bad
How good is the company’s CR reporting?
Ruth Bender Page 16
Questions to ask when preparing your sustainability report
Ruth Bender Page 17
Why should companies make CR disclosures?
The Tiered Corporate Information Pyramid External User access Complete
Mandatory public disclosure
Complete Boundary defined by
Voluntary public disclosure
Regulation Company Privileged users only None
Selected private disclosures, eg to analysts
Company
Undisclosed private information Page 19 Ruth Bender
Who should prepare the report?
Who will be reading it?
Who (if anyone) should verify it?
Who assures what, why and how?
Assurance appetite
PURPOSE
Why is assurance obtained?
AUDIENCE
Who is assurance for?
Assurance methodology
STANDARDS
What standards & principles govern the assurance process?
DEPTH
What level of assurance is offered?
FOCUS
What issues are to be covered?
APPLICATION
What level of organisation is covered?
Assurance scope
PROVIDERS
Who provides the assurance?
COMPETENCIES
How are they able to offer assurance?
Assurance providers The Future of Sustainability Assurance ACCA, 2004
Ruth Bender Page 21
Nuclear power Carbon neutral Climate change Biodiversity Resource usage Child labour Outsourcing Diversity Water Corruption Pollution
Environment
Waste control Learning organization Transparency
Health & Safety Product Responsibility
Work-life balance Energy Community programmes
Human Rights
Workers’ rights Customers Responsible restructuring
Financials
Philanthropy
Stakeholders
Supply chain policies Animal testing Communication Recycling Equal opportunities
Page 22 Ruth Bender
Voluntary or mandatory disclosure?
Where should the disclosures be made? How should the data be presented?
Regulation: -Local? -EU? -Global?
Focus on business case?
When should disclosures be made?
Ruth Bender
Reporting internally as well as externally?
Where do the data come from?
Standardise disclosures?
Page 24
Some Technical Bits
(a small extract from the many that are available…)
2 4 1 3
Companies Act 2006, s.417
1 Ruth Bender Page 27
The AA1000 series http://www.accountability21.net/
2 Overview Principles-based standards that provide the basis for improving the sustainability performance of organisations in all sectors.
AA1000 Framework
(1999) Provides guidance to users on how to establish a systematic stakeholder engagement process that generates the indicators, targets, and reporting systems needed to ensure to ensure greater transparency, effective responsiveness to stakeholders and improved overall organisational performance.
AA1000 Assurance standard
(AA1000AS) (due for revision late 2008)
AA1000 Stakeholder Engagement Standard
(AA1000SES) (2nd version due 2008) In applying the AA1000 Assurance Standard (AA1000AS), the Assurance Provider evaluates the credibility of the sustainability report, and assesses the underlying systems and processes that deliver the relevant information and underpin the organisation’s performance.
Links to G3.
Offers a robust basis for designing, implementing, evaluating and assuring the quality of stakeholder engagement.
Ruth Bender Page 28
The AA1000 Process Model “AA1000 specified processes that an organisation should follow to account for its performance, not the levels of performance the organisation should achieve.”
Ruth Bender
http://www.accountability21.net/
Page 29
AA1000 integrates into other standards
Ruth Bender Page 30
Global Reporting Initiative (GRI)
3
Started 1997/8 – first Guidelines issued in 2000 Latest Guidelines (G3) issued in 2006 www.globalreporting.org
“The GRI’s vision is that reporting on economic, environmental, and social performance by all organizations is as routine and comparable as financial reporting.”
Page 31 Ruth Bender
GRI reporting
Reporting Guidance
what to report on, and interpret the Framework.
helps decide
Reporting Principles
Reliability : Materiality, Stakeholder inclusiveness, Sustainability context, Completeness, Balance, Clarity, Accuracy, Timeliness, Comparability,
Disclosures
(79 in all)
Profile
1.
2.
3 .
Economic
, EC1-9
Environmental
, EN1-30
Social performance
– – – – Labour practices Human rights Society SO1-8 LA1-14 HR1-9 Product responsibility PR1-9
Page 32 Ruth Bender
GRI application levels Number of performance indicators increases from C to B to A Management approach disclosures increase from B to A Profile disclosures increase from C to B
C B A Ruth Bender
Self-declared Can be ‘audited’ Can be checked by GRI
Page 33
The best external assurance … • • • • Is external, done by demonstrably competent people who are independent, and state their relationship with the organisation Is done systematically, evidence-based, and properly documented, to defined procedures Assesses the extent to which the organisation has applied the GRI Reporting Principles Results in an publicly-available opinion or conclusions The external assurance report assesses whether the report provides a reasonable and balanced presentation of performance, taking into consideration the veracity of data in the report as well as the overall selection of content.
Page 34 Ruth Bender
Some useful sources to find sustainability reports http://www.corporateregister.com/ Companies reporting under GRI http://www.corporateregister.com/aa1000as/ Companies whose reports are assured under AA1000 http://www.reportalert.info/ Is the report announcement service for the Global CSR Community
Page 35 Ruth Bender
Disclosure
What next?
Accountability Change?
The Universal Owner
Ruth Bender World Sunlight Map
http://www.die.net/earth/mollweide.html
Page 37
UN-PRI “The Principles for Responsible Investment aim to help integrate consideration of environmental, social and governance (ESG) issues by institutional investors into investment decision-making and ownership practices, and thereby improve long-term returns to beneficiaries.” The Principles apply across the whole investment business and are not designed to be relevant only to SRI products Launched in 2006, signatories now represent assets under management in excess of US $ 9 trillion
Page 38 Ruth Bender
ESG (environmental, social and corporate governance) 1.
2.
3.
4.
5.
6.
Incorporate ESG into investment decisions Be active owners and incorporate ESG into ownership policies
Encourage ESG disclosure in investee companies
Promote these principles in the investment community Work together to enhance our effectiveness in implementing these principles Report our activities and progress in their implementation
Ruth Bender Page 39
3 We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Possible actions
Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative) Ask for ESG issues to be integrated within annual financial reports Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact) Support shareholder initiatives and resolutions promoting ESG disclosure
Page 40 Ruth Bender
Bolt-on or Built-in?
C orporate R esponsibility Ruth Bender r t i i C o s r p l i o t a R p e o n e b s e y Page 41
The diagram shows the interconnected range of activities and sectors that need to be integrated into a connected report. The enlarged wedge shows how traditional financial information is impacted by many different aspects of an organisation’s activities.
Accounting for Sustainability.
www.sustainabilityatwork.org.uk
4
Trends in sustainability reporting Annual Reporting Company Soft (CSR) Encyclopaedias Operational performance OECD Risk 24 / 7 / 365 Communicating Value chain Hard (boards & investors) Prospectuses Products and markets BRICs Value and opportunity
Tomorrow’s Value : The Global Reporters 2006 Survey of Corporate Sustainability Reporting.
Ruth Bender Page 43
Multi-source, multi-channel reporting Sustainability data from: Investor relations Governance Community relations Marketing Sales Operations Human resources Finance Etc Reported in different formats to: Employees Investors Customers Community NGOs Government Industry Value chain
Tomorrow’s Value : The Global Reporters 2006 Survey of Corporate Sustainability Reporting.
Ruth Bender Page 44
Nine predictions 1.
2.
3.
4.
5.
6.
7.
8.
9.
Boards will increasingly recognise CR reporting as a valuable internal management tool Boards will pay more attention to the accuracy of CR-related information Companies will improve internal communication on CR Companies will make better use of existing communication channels to deliver tailored messages to specific stakeholders Boards will increasingly use annual report & accounts as a tool to demonstrate accountability to stakeholders Companies will increasingly report material issues in their Business Review but will keep a separate CR section The role of the CR manager will increasingly be driven by internal ‘pull’ rather than external ‘push’ Companies will take a systematic approach to integrating stakeholders’ interests into decision-making Companies engaging in dialogue through partnerships will be better able to identify value-add opportunities
Taking Shape: The Future of Corporate Responsibility Communications. Business in the Community www.bitc.org uk
Ruth Bender Page 45
The End Thank you for listening
Additional info re G3 content
Profile disclosures in GRI G3 1.
Strategy and analysis 2.
Organizational profile 3.
Report parameters 4.
Governance, commitments and engagement 5.
Management approach and performance indicators Who we are and what we believe about sustainability and our impact, what we’ve done, where we operate.
How the report was produced.
Page 48 Ruth Bender
Economic performance disclosures in GRI G3 Economic performance Direct economic impacts of the organization’s activities and the economic value added by these. Includes a Value-Added statement, consideration of climate change risks and opportunities, pension obligations, government assistance received Market presence Information about interactions in specific markets Includes info on wages compared to local minimum, spending on local suppliers, hiring practices.
Indirect Economic Impacts Measure the economic impacts created as a result of the organization’s economic activities and transactions.
eg infrastructure development, enhanced learning and skilling in the community
Page 49 Ruth Bender
Environmental performance disclosures in GRI G3 Materials Energy Water Biodiversity Amount used, by weight and volume: % that is recycled material Consumption: direct and indirect; savings by conservation and efficiency; incentives to save energy Use, impact on sources, recycling How activities affect it, and what has been protected and restored; strategies for the future Total amounts (in some detail); incentives to reduce Emissions, effluents, waste Products and services Compliance Transport Overall Incentives to mitigate impact on environment; packaging Fines paid for non-compliance with regulations Significant environmental impact of transporting goods and employees Analysis of total spend on environmental protection
Page 50 Ruth Bender
Social performance disclosures in GRI G3 Labour Human rights Society Product responsibility Employment, Labour relations, Diversity Health & safety, Training and education Investment and procurement practices Non-discrimination Freedom of association and collective bargaining Child labour, Security practices, Indigenous rights Community, Corruption, Public policy Anti-competitive, Compliance Customer health & safety, Marketing communications Product and service labelling Customer privacy, Compliance
Page 51 Ruth Bender