Eric Israel, an accountant with a previous career at KPMG, is excited about a revolution in accounting. His eyes twinkling, the North American head of the Global Reporting Initiative, or GRI, says the new thing in sustainability reporting is that it is driving strategy--not the other way around.

The latest generation of voluntary GRI reporting standards in fact requires Board of Directors' involvement on a number of issues. Companies need to assess what is material for them (including things like any risk of water shortage in factories around the world, or resilience measures for extreme weather), and what is strategic. The process of setting goals in sustainability, now standard practice among large multinationals, is a strategic process--the Board needs to determine what those goals should be and then steer the company toward achieving them.

Setting sustainability goals, and publishing an annual sustainability report, aren't legal requirements, but many enlightened leaders want their companies to help create a better world--and are finding significant business value and cost savings in sustainability. And increasingly companies that don't participate are getting shunned by shareholders and NGOs.

"We need business to make a very big pivot," says Andrew Winston, who recently published a book called "The Big Pivot: Radically Practical Strategies for a Hotter, Scarcer, and More Open World." He notes that already 150 Fortune200 companies have published sustainability goals, 79% of which have chronological deadlines.

Sustainability ratings and rankings are another incentive for companies to set goals and publish reports. Currently there are over 100 ratings agencies scouring sustainability reports to score them on their levels of disclosure and content. Analysts look at things like governance, social responsibility, employee engagement, and environmental impact.

Mark Tulay, Program Manager at GISR (Global Initiative for Sustainability Ratings), notes that financial ratings are dominated by only three big agencies. GISR was created to accredit and harmonize the many sustainability ratings and rankings, and help broaden participation in sustainability by companies and financial institutions.

These are early days and the clutter needs to settle.

Most companies doing sustainability reports use GRI guidance to write them, but the reports are by no means standardized or comparable. That is because what is material for one company in one industry and geographic location will not match what is material for a company with different circumstances.

The Sustainability Accounting Standards Board (SASB), a new organization featuring Michael Bloomberg as Chair and former SEC head Mary Schapiro as Vice Chair, is presenting a new, voluntary public disclosure format for each industry with specific quantitative, comparable data to report. This is not an easy exercise, given that many factors in sustainability are so difficult to quantify. But companies with a full GRI report should be able to pull the data for their SASB report, highlighting it in a quicker read for investors. This new SASB reporting should be complementary to the booklet-length reporting already being done. GRI can also form the basis for Integrated Reporting, a way of putting together sustainability reporting and financial reporting in one seamless document.

All of this may seem like extra paperwork, but it is work in progress that has arisen on a large scale to address an important issue: quarterly financial reporting doesn't tell the whole story. First, a longer time frame is needed to reflect the time frame of strategic corporate trends, and second, GAAP accounting does not cover everything. There are tangible and intangible things missing, like the strength of a brand's reputation, or enterprise risk from unpredictable sources.

As the reporting of these aspects brings them to the surface, they often become drivers of strategy, change-makers. And this is nothing short of a revolution.

 

Published on: Oct 16, 2014
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