The mindset gap in addressing sustainability context

The mindset gap in addressing sustainability context

 

Around two weeks ago we discussed the ‚sudden materiality shock’ here and received many comments and recognitions for the points discussed there. In addition, we spoke at various events and explained the need to make the connection between the importance of sustainability context for defining materiality and the need to develop a reporting mechanism that captures this specific performance that could eventually best be described as ‚micro-macro-linked’.

 

What became painfully clear through these last events is the considerable distance of people working in sustainability to be able to make that connection, several reasons to be discussed below. Obviously, we need to first address that ‚mindset gap’ that keeps us artificially busy and away from the ‚greater good’ – achieving a green & inclusive economy together – before getting down to the core of how to address sustainability context through purposeful and future-oriented disclosure in reporting, including feasible strategic discussions and – like it or not – a different sort or set of indicators as we have them right now. So why is there such a distance to seeing sustainability context in a corporation’s setting? Here are various observations:

 

1.      For too many in our community sustainability and strategy are still two different things or are still completely or partially disconnected. If sustainability managers tell that working in scenario teams or being closely involved in strategy development and subsequent R&D/innovation efforts is simply not what they are paid for, we are disappointed by the little mindset progress we made. Honestly, we hoped we went beyond the idea that the sustainability manager or head of sustainability simply just orchestrates compliance towards laws & regulation, standards or guidelines. What we still sense is a deep hesitation to overcome certain thresholds towards an integrated approach, using careful tactics to not ‚overstretch it’, deep fear to be seen as the ‚activist’, so better remaining the ‚lobbyist’ for what is good for the company and the individual position on short-term. As this has been a rather successful approach in the past, why change it? Most global problems are mentally and physically still far away, and most colleagues that do not work in sustainability wouldn’t want to understand them anyway (too complicated, scientifically not 110% proven, disturbing, etc.).  So, why bother about megatrends?

2.      We specifically observed how companies react to the macro-based information out there, ranging from the work TEEB did, the Global Footprint Network produced, The Global Nature Fund collected, and to the dozens of reports that are produced and macro scenarios that are presented by institutes, issue groups and initiatives. The basic response is close to denial, using the argument that the way this information is presented doesn’t help companies to translate this into concrete tooling, so in the end they couldn’t do more than just to take note, and that’s it. When we then asked why certain companies seem to be able to use this information and work with these data, denial level two kicks in: either these were special companies with a specific or fitting product/service portfolio, or they would have a size not too big, so that working with these data wouldn’t be too complex for them. Also, this sort of work shouldn’t be done by a single company anyway since level playing fields would be needed when introduced on broader scale, but these wouldn’t exist today. Puma’s e-p/l is great, but hardly any other company tried it out since Puma came out with it in 2011, the number of excuses to not dig into it is too long, and the argument ‚it will come one day, so better be prepared’ (playing the risk managemnt card) doesn’t work either. Too much workload, too short the horizon, too low the incentives, too high the fear to stick out the neck. And that leads directly to the next point:

3.      Fortunately, not all companies are like that, and that has to do with leadership. We see a constant pattern that only those companies that have an enlightened leader or leadership group get to a level of commitment that these – let’s call them ‚experiments’ – are wanted, a certain ‚trial-and-error’ attitude is giving some breath to sustainability managers involved. Also, those leaders actually encourage cross-functional project groups around long-term performance targets based on scenarios and the idea of an integrated strategy. It is interesting to see that these companies in most cases don’t have a sustainability strategy, they just have ‚a’ strategy. Dealing with context information in these companies is a no-brainer and the necessary tools are normally ‚created’ right there and not ‚delivered by others’. These companies see external advisors as a positive stretch and challenge to their own knowledge base and encourage infusions, external advisors can even become a separate stakeholder group. The triangular project setup that includes a company, an NGO and a consultant in a team setting seems to work, as well as the willingness to work with other companies in cross-industry learning environments, initiatives, labs, etc.

4.      Another constant part of that ‚mindset gap’ is that many sustainability strategies are based on effects of (not closer discussed) root causes. Doing work with leaders we first try to observe the whole set of often intermingled action areas, something that one can actually already start from the existing materiality matrix of issues that companies use in their reporting. Sustainability strategy areas are normally based on the GRI Guidelines aspects or industry-specific action areas, and many of them derive from root causes like environmental degradation, demografic effects, world trade shifts, urbanization, technological developments and transparency gains, but none of these root causes are addressed in the G4 Guidelines and therefore remain out of focus of the sustainability personnel, so going back that one step to the root cause level actually falls out of the scope of sustainability experts (supported by what was discussed under point 2).

5.      As a consequence, this reduced approach just based on the existing GRI Guidelines leads to ‚less bad’ target setting, and very often disconnected with the main impact through products and/or services. Have a look at the GRI Guidelines and ask yourself how often the Guidelines talk about products and/or services, apart from product stewardship in the social section!?! One can argue that this would actually be the job of sector disclosures, but then there would be the need to focus work on a complete set of them more throroughly, an approach not followed by GRI for several years now. A sustainability regime based on effects or symptoms instead of the real root causes mentally restricts to go ‚to the real core’ and making the connection to the real opportunities a company has in sustainability. Instead, there is a more risk-based tendency to reduce harm, and not to increase positive impacts. That is the real reason that an idea like ‚becoming a net-positive impact’ company is still lightyears away for the majority of companies, they find a million reasons and ‚yes, buts...’ instead of accepting that working on this ultimate business case for sustainability should be started today, and not one day later.

6.      In consequence the G4 content principle on sustainability context is the most neglected one, while the wording there clearly defines the need to address context from a root cause base, think about opportunities, ambitions and positioning of the company’s strategy vis-à-vis these root causes, and only then define the necessary boundaries to decide which impact reduction strategies actually make sense in the light of a positive impact focus.

7.      A further cause for relaxed thinking about sustainability context is the smooth way IIRC has taken on the idea of the six capitals that are part of the Framework Version 1. While we personally commend the IIRC to sticking to this generic model (called the ‚octupus’) from the moment it presented its first discussion paper, we were hoping for a way more rigid use of the idea of the capitals. In our view the capitals form a great link to and present a great structure of introducing proper context and value-creation ‚docking stations’ for the above presented approach of starting from root causes to strategy development. Instead, we face a situation where IIRC mentions the capitals as an area ‚for inspiration’ in order to ‚not forget potential impact areas’. That is too weak and doesn’t sound like ‚important’, so again not too much time is spent on assessing the capitals. The work of the 100-companies-strong IIRC pilot group has focused mainly on ‚integrated thinking’, wheras ‚holistic thinking’ would have been way more appropriate. If the capitals model isn’t taken serious we will remain on symptoms and effects level instead of addressing the real route causes.

8.      To finish off, the work of the Thriveability Consortium (of which Ralph is one of the founders) has been an eye-opener over the last two years with regard to the levels of human consciousness for the development of a ‚world view’ within an individual or corporate mindset. The idea of ‚spiral dynamics’ that emerged over the last 20-30 years clearly differentiates various levels of human consciousness development, and also differentiates between first and second tier awareness, decribing their ability or disability to create the world we need. Only second-tier individuals and organizations will be able to really develop the idea of a world view through the inherent different ways of interconnectedness and organizing codes and principles needed in a sustainable world. We are generally positive that we will be able to level up more companies to the second-tier level. Those organizations will see the ‚macro-micro link’ as a no-brainer. Those companies will be winning, but for a big group of tier-one ompanies life will become tough.

 

We are on a journey. It is not enough to approach the abyss with 40 miles per hour instead of 60 miles per hour; we need to find the brake and turn around the vehicle. Awareness of the need for that turnaround, timing still available and definition of a new direction will become essential. There is no useful sustainability reporting or integrated reporting without this information, defined for the individual business case per company. Sustainability context is therefore an absolute core. The more companies get out of the avantgarde and into the mainstream , the sooner we will get there. ‚It’s time to be steered by the stars, and not by the light of each passing ship’, said Omar Bradley decades ago. Today this is more true than ever.

 

Authors: Ralph Thurm is the Founder & Managing Director of A|HEAD|ahead, Nick de Ruiter is partner at Sustainalize.

The sudden ‚materality shock’

Spring 2014 seems to be the moment in time where ‚materiality’ suddenly appeared on the screen of corporate sustainability reporters. At least one could wonder why within a couple of weeks countless workshops popped up around the world, webcasts were announced and books were published just on this one single issue of the sustainability reporting agenda. One author even declared a calm ‚war on materiality’. But wait a minute, the issue of defining what is material in sustainability reports isn’t by far new, so what’s the reason for this sudden shake-up? Several reasons could be mentioned:

 

1.      Since the publication of GRI’s G4 Guidelines in May 2013 materiality went to the forefront of communication items around the new Guidelines. The reports based on G4 should show ‚what matters, where it matters’. For that reason GRI visualized the application of the four report content principles as one seamless workflow. But is this new?

The answer is no, because the same process was already pulled together in a resource document in 2010, but now got finally included in the main document, the G4 Guidelines, without considerable changes. Also, GRI’s certified training process presented a five-step process since its inception years ago that followed this logic, and thousands of practitioners around the world were trained for doing exactly that – defining what is material.

The reason for the extra attention lies elsewhere: the combination between impact definition, boundary setting, transparent stakeholder dialog and the level of disclosure that GRI is demanding in this thematic triangle adds rigour and demands a much more crisp process. Gone are the times when a mentioning of stakeholder dialog was enough, a materiality matrix could be presented without further process description on how this was pulled together, and the legal shortcut of 50%+1 share was enough to cut off responsibility in reporting due to the one boundary chosen by the legal counsellor. So, for some ‚what matters, where it matters’ now suddenly means ‚what hurts, where it hurts’, especially for those that define sustainability as an additional topic that needs to be addressed through a separate report, and where the strategy isn’t much connected with sustainability thinking.

2.      Another reason for the new level of attention can easily also be detected when looking through the outcomes of KPMG’s 2013 international report quality survey amongst the biggest 250 companies, many of them call themselves leaders in sustainability. Just a couple of numbers to clarify the problem: 13% of the reports do not identity megaforces that affect business at all, and from the other 87% at least some megaforces are identified, with climate change only affecting 55% of businesses, ecosystem degradation is a just a problem for 18% of the G250. One can only wonder how identifying ‚what matters, where it matters’ is at all possible if so little sustainability context analysis is done in the beginning of the materiality definition process.

When looking at information how often companies do assess materiality, 58% do not give any indication and 19% indicate a limited assessment of materiality. That means that just 23% of the G250 have a thorough process in place to assess matariality. This is shocking evidence.

Stakeholder inclusiveness is another painful area to look at. For only 45% the process link between stakeholders and the materiality process is clear, for the majority stake of 55% the process is not yet clear (34%) or not explained at all (21%).

Finally looking at target setting one might expect that material issues would also lead to clear targets, but the opposite is true. 13% of the G250 haven’t declared any targets, 28% of the reports carry some targets with no clarity on how they relate to material issues. 23% of the reports carry information that links to less than 50% of material issues, and finally 36% carry targets that relate to more than 50% of the material issues.

The shortcomings of these data explain very clearly why the pocess of cutting through from sustainability context information through stakeholder dialog to material issues now needs to get more rigour. Companies just did what needed to be done, just little of them did more than absolutely necessary. We leave it up the reader to contrast this information with the many CEO speeches that tell us how much sustainability is the genes and DNA of their organization.

3.      A new level of recognition of materiality is surely also due to the growing number of frameworks and guidelines around corporate reporting. Whereas GRI addresses materiality from the perspective of all stakeholders, the IIRC clearly defines materiality from the point of view of the providers of financial capital. SASB just replicated the definition of the U.S. Supreme Court, focusing on shareholders only. And that whole array of different definitions seems to be confusing, especially as many users see these documents as standards. It is therefore time to step back and again recognize that none of these documents are ‚standards’ or ‚cooking books’. They are recommendations as they present guidance and framing. Not more, not less. Furthermore they are still all voluntary instruments to trigger thinking about the inclusion of sustainability into an organization’s core – the business model and the strategy. If this is managed well we think the discussion on materiality will by definition become a no-brainer.

4.      Lastly, there is new fuel to the fire of mandatory sustainability reporting through the positive vote of the European Parliament to amend the European Transparancy Directive and make sustainability reporting compulsary for roundabout 6.000 listed companies in Europe, with a size of more than 500 employees. The Directive passed the European Parliament on April 15, 2014. The Directive needs to be translated into member-states laws and regulation, so that the application is only expected to start in 2017 for reporting year 2016, maybe even one year later. In short, material issues of importance need to be reported in annual reports or sustainability reports on corporate level. Discussion arises mostly on the point of the EU’s definition of CSR, saying it entails all voluntary action of companies above and beyond what is legally already demanded for. In our view this definition is counterproductive of the real meaning of materiality, and therefore misleading to help describe the core of the issue. Nevertheless, the fact that many companies are now demanded to report on their sustainability risks and opportunities, covering a range of issues that is nearly 100% overlaping with the UN Global Compact 10 core principles, has put new emphasis on the materiality discussion in companies.

 

In our view there is only one useful way of dealing with the issue of materiality, and that is to step one step back from the idea of standards that would tell us what clearly has to be done. We see materiality in the closest of all possible meanings: all areas in which the company affects or is affected by those areas of sustainability it can influence by its existance and through its doing, through products, services, as enablers and advocates of positive change. The measurement of ‚Net Positive Impact’ will therefore become the future litmus test of the right to exist for companies. It would be good for companies to already follow in the footsteps of those frontrunners that aim doing exactly this ambitious step.

 

Authors: Ralph Thurm is the Founder & Managing Director of A|HEAD|ahead, Nick de Ruiter is partner at Sustainalize.

Heineken Sustainability Report: one of the better reports this year

Company:

Established in 1864, Heineken has a long history as an independent global brewer. Today, Heineken is the number one brewer in Europe and the number three brewer by volume in the world. With recent acquisitions in Africa, India, Asia and Latin America, Heineken is continuing to increase its presence within emerging markets. Heineken employs over 85,000 people and has operations in over 70 countries. Heineken owns more than 250 beer, cider and soft drink brands. Main (global) brands are: Heineken, Amstel, Desperados, Sol, and Strongbow. Heineken has a long history of reporting on sustainability. Its first environmental report was published in 2000, with external assurance.

 

Content:
Heineken has chosen to publish its sustainability report in an online environment in which it provides numerous direct links to related information (movies, case studies, etc.). I might be a little old-fashioned, but for my analysis of the Heineken report I downloaded the entire report as a PDF file. I ended up with a document of over 300 pages, which reminded me of the old days when bigger was still better.  

 

Heineken has chosen to structure its report in line with its sustainability strategy. Its main objective is ‘brewing a better future’. This ambition spans three strategic imperatives around which Heineken has built its sustainability programs and reporting: improve, empower, impact. Each of these imperatives has been divided into sub-themes. I’m always in favor of the approach in which a report is structured in line with the sustainability strategy, as this helps to bring focus to a report and increases its readability. In conclusion, Heineken has described four focus areas on which it wants to focus the coming years: CO₂, water, sourcing and responsible consumption.

 Furthermore, Heineken has clearly described its value chain and the impact it has in all steps of value creation. This is best of class as it helps readers to assess the impact of the company in all areas in which it operates. Also, the different focus areas (CO₂, water, sourcing and responsible consumption) are plotted on different steps of the value chain, making it clear where the impacts of these focus areas lie.

 

Again, Heineken’s materiality assessment provides one the better examples I’ve seen so far this year. A clear link is made between the stakeholder dialogue, the consequent materiality assessment and the resulting focus areas that Heineken will be focusing on the next few years. A point for improvement would be to further clarify the link between the sustainability strategy and the overall business objectives (‘strategy to win’). Although this link is emphasized in the report, it doesn’t become fully clear how the one supports the other.

 The Heineken report also contains a clear overview of the targets which were set alongside its focus areas (i.e. strategy) and the progress Heineken has made toward these targets. The targets are SMART and long-term based, most of them aiming for considerable reductions by 2020. The performance against targets is nicely depicted in the graphs.

 

Communication:

Again, I might be little old-fashioned, but the PDF version of the report does not contain an index, which makes it quite complex to navigate through the document and get a comprehensive overview of the report’s structure (which is especially needed as the document is over 300 pages long). Heineken might be ‘overdoing’ it by providing too much information, which diverts focus from the key message it wants to convey. A summary report with key information on strategy, objectives and performance is available, but unfortunately not as part of the standard download and microsite.   

 On the other hand, the PDF version contains numerous links to the website, which help link the report to (further) information available on the website. The report is laced with case studies which provide nice background information and real-life examples.

 

Credibility:

Collecting data for a large number of operations all around the globe is a challenge. I’m sure Heineken will agree. In the section ‘reporting basis’ we can find some evidence of this. Heineken doesn’t seem to be very forthcoming in disclosing this information, and there are several paragraphs which highlight this (in a relatively vague manner not used in the remainder of the report). For example, it is stated that for several operating companies no measured data was available and estimates were used. Although this is perfectly normal in sustainability reporting, companies usually provide insight in the proportion of estimated data (for instance in a percentage) to make the impact clear to readers. Heineken does not.

 Furthermore, there is also a paragraph with the baleful header ‘Qualified reliability of safety and environmental data in production’. What is this? This doesn’t sound too good. Again, the text is very vague and doesn’t provide any (real) answers to questions like what is the impact of the perceived qualified reliability? The paragraph reads like text included as a result of serious findings, and by means of which the sustainability accountant wants to limit his or her responsibility. Let’s have a look at the assurance report then…

 Heineken has requested its accountant to provide limited assurance on its full reporting. However, based on the overall excellence of the report, and the importance that Heineken says it places on sustainability, I would have expected reasonable assurance on (at least some) key indicators. Especially since Heineken has received assurance on its reporting since 2000. I know this is a huge challenge for a truly global company with operations all around the globe. However, it would match the ambition I feel in the remainder of the report. Moreover, reasonable assurance is the true test of data accuracy, which is imperative in order to truly monitor, benchmark and manage performance in the area of sustainability. Furthermore, the assurance report does not include recommendations from the accountant, which I always regard as the most insightful part of the assurance report.

  

Recommendations:

§  Increase the level of external assurance.

§  Further integrate the annual reporting in the sustainability report

 

Nick de Ruiter is a partner at Sustainalize (www.sustainalize.nl), a global CSR consulting firm which specializes in CSR, CSR reporting, CSR strategy, performance monitoring and external AA1000 assurance.

Shell Sustainability Report: from best-practice to mainstream

Shell Sustainability Report: from best-practice to mainstream

Company:

Shell is a global group of energy and petrochemical companies employing 87,000 people in more than 70 countries. Shell started sustainability reporting in 1997 and has published yearly sustainability reports ever since. Shell is active in three sectors: Downstream, Upstream and Projects & Technology. Upstream searches for and recovers crude oil and natural gas, operates the infrastructure to deliver oil and gas to market, liquefies and transports natural gas, converts gas to liquid products, and extracts bitumen from oil sands for conversion into synthetic crude oil. Downstream manufactures, supplies and markets oil products and chemicals worldwide. Projects & Technology manages the delivery of Shell’s major projects and drives its research and innovation program to create technology solutions.

 

Content:
Shell reports data and information in its sustainability report, on the website, in its financial report and in the Form 20F (mainly concerning environmental and social risk management). Nice features are the download manager and the interactive chart tool that enables readers to select the topics of their interest. In this assessment, we have focused on the sustainability report. The report covers the majority of topics. However, additional contextual information and information on the UN Global Compact and the Millennium Development Goals are only available on the website. In order to keep the sustainability report slim, it is understandable to publish part of the information on the website. However, I would recommend providing more direct links in the report to additional information posted on the website and in the financial report.

 

Although the report is easy to read, the language is easy to understand and the layout is easy on the eye, I still got ‘lost’ reading the report. This had to do with my main point of criticism: an overall and all-encompassing strategy for sustainable development is not clearly disclosed. It remains unclear what Shell’s strategic sustainable development targets and priorities are. Also, the link between stakeholder needs and concerns, strategic challenges and the assessment of materiality is not detailed and not completely clear. As a result of this, the report is somewhat unstructured (with data presented seemingly randomly under either ‘Our activities’ or ‘Our performance’) and it seems that topics and data are somewhat haphazardly included or included from a historical point of view.

 

Shell uses a materiality assessment to determine the most material topics in the report. Shell was one of the first to adopt such an approach several years ago. Currently, all mature reporters globally are reporting their materiality assessment and materiality matrix. They provide detailed insight in the stakeholder dialogues performed, the topics and concerns raised, the response of the company and how this is prioritized and included in the materiality assessment. A good example I often use in my presentations is the 2010 report of AU Optronics. AU Optronics provides a one-page overview of concerns raised by stakeholders, a prioritization by the company and how this is translated into a materiality matrix. Currently, the materiality assessment Shell reports does not show the maturity and detail one may expect of a company like Shell, and it lacks the transparency materiality assessments of other leading companies display. For instance, I would expect more information on the stakeholders assessed, the topics discussed and what topics were included resulting from this exercise and what topics are reported on the website or not reported at all. As mentioned earlier, the direct link with strategic ambitions and/or strategic targets is therefore unclear.

 

Shell provides a lot of data regarding relevant indicators, including previous years, and transparency on limitations in the data. All data can be separately downloaded in Excel format. The selected indicators seem relevant for a company with the profile of Shell. But again, it is unclear how the selected indicators relate to the overall strategy and how these indicators measure the progress against the strategic ambitions. Also, trends and changing data relationships are not always explained, nor is performance being linked to (sector) benchmark information and/or other contextual information.

 

Communication:

The report is easily accessible on the website and fortunately not too big with 44 pages. As with earlier Shell reports, the content is easy and nice to read with not too much jargon and lots of visuals and graphics. I always favor overviews of performance data like the ones included on pages 36 and 37. The fact that data is comparable from 2003 onwards, greatly improves the insight in the performance of Shell in relation to the chosen indicators. I especially like the visual on page 1, as it provides a clear overview of Shell’s activities and the interrelatedness between them. However, it would be best-of-class to supplement the visual with an overview of the value chain, depicting the products and services Shell provides, the impact that is generated and how Shell is mitigating these impacts. Good examples are to be found in Asia again (e.g. Marubeni) and the mining sector (e.g. AngloAmerican).

Throughout the report, many stakeholders are quoted, which makes the report nicer to read and more credible, and enhances the stakeholder inclusiveness. Most of the stakeholders reflect on a certain part of sustainable development and express their concerns and hopes. Also, some stakeholders state the fact that they have provided Shell with recommendations. What is missing, however, is a response by Shell disclosing what the specific recommendations were and how these recommendations are addressed and/or followed up.

Shell reports in line with several relevant guidelines, such as UN Global Compact, IPIECA and the Global Reporting Initiative (GRI). The Shell report is in line with the highest application level, namely A. This implies that Shell has reported all GRI indicators (including sector supplements) or explains why certain indicators are not deemed relevant. Also, the Disclosures on Management Approach (DMA) are provided, necessary under GRI A.

Shell does not refrain from reporting on ‘sensitive’ topics such as Nigeria, the Arctic and tight/shale oil and gas, which is in line with previous reports and Shell’s view on reporting. However, one could question the impartiality and balance of the picture provided. An example is the open letter provided by Mutiu Sunmonu, Chairman of Shell Companies in Nigeria, analyzing the current situation in Nigeria. Another example would be the information provided on tight/shale oil and gas, which positions this type of energy as a viable alternative to coal (bypassing the discussion on renewable energy). Additionally, the concerns surrounding fracking (including the use of chemicals and the environmental footprint) are touched upon, but not discussed in great detail.

 

Concerning the form of the report, I conclude that the report is not integrated (yet) with the financial report. Among companies the opinions differ as to what extent sustainability reports should be integrated in the financial report. Some argue that financial reports and sustainability reports have different readers, therefore underscoring the argument that these reports should be published separately. Others argue that when the topic becomes increasingly important and strategic, it should be integrated into the financial report and consequently into internal reporting, daily management and the overall strategy. This would also follow the considerations of the new GRI guidelines, the concept of Integrated Reporting (www.theiirc.org) and the criteria of the Dutch Transparency Benchmark. In the current report, no ambitions are disclosed on the future of the report, and it remains unclear to what extent stakeholders can expect an integrated report in the near future.

 

Finally, I would explore whether it is possible to remove or replace the disclaimer or ‘cautionary note’ on the first page of the report, as it does not necessarily increase the readability of the report and makes readers suspicious about the intent of the disclaimer.

Credibility:

Shell was one of the first companies in the world to obtain external assurance from an independent third party. Shell was also one of the first companies to replace the external assurance by a dedicated External Review Committee (ERC). Currently, Lloyd’s Register provides external assurance on the direct and indirect CO₂ emission data. The GRI table is checked for accuracy by GRI (the work performed merely focuses on checking the references to sections of the report; the quality and content of the report are not checked). When looking closer, however, one will remark that not all references cover the entire GRI indicator. This applies, for instance, to EN9 (which only covers Shell’s oil sands operations in Canada) and OG9 (where GRI requests quantitative information, but solely qualitative information is provided).

I have a couple of remarks regarding the assurance strategy Shell is currently adopting. Firstly, I regard any type of assurance and/or external recognition as a big plus for the quality and credibility of a report. I also understand that in some instances the cons may outweigh the pros and refraining from external assurance becomes a viable option. In addition, one could argue that for both Shell and its stakeholders, much more value is provided by an ERC. However, of a company with the impact on people and the planet as significant as Shell’s, stakeholders should expect externally verified information. Moreover, externally verified information is essential for internal steering purposes (including remuneration) and serves as information to facilitate the ERC in forming its opinion. With regard to the concept of an external review committee, not everyone in the field agrees that this is the preferred option. Mostly because some criticasters argue that an external review committee can be steered towards a preferred outcome for the company, thereby undermining the concerns stakeholders may have as well as the credibility of the report. Discussions regarding this topic are sometimes fuelled by the fact that the company gets to choose its own committee, and incentives such as payments for the members are provided. I must say I cannot disagree with these criticasters. However, I found the feedback provided by the ERC most helpful and well-informed. Also, it is clearly explained that the ERC does not replace external assurance. The most ideal combination, I would suggest, is to have both an external review committee forming its opinion on the basis of its own research and externally verified information. An approach for the assurance could be to adopt the AA1000 framework, which is much more stakeholder oriented.

I would regard the external assurance Lloyd’s Register provides a step in the right direction. Especially if Shell has the ambition to increase the level of assurance (to reasonable assurance and/or high assurance). As a reader, I would be interested in reading more information on the applied guidelines, the work performed, and the findings, recommendations and conclusions. After some clicking on the website one can find the provided assurance statement, which answers most of the questions (and even includes a recommendation from Lloyd’s). It surprises me that the statement from Lloyd’s is not included in the report.

Recommendations:

Shell used to be best-in-class in reporting, but currently other leading companies are outperforming Shell in this respect. It’s a pity, but I’m guessing that Shell has the resources available to implement improvements in its report. I would like to suggest to focus on the following recommendations:

1.       Provide more insight into the sustainable development strategy in relation to mega trends such as energy demand and climate change. Additionally, this strategy should be linked to selected focus areas, targets, KPIs and the assessment of materiality;

2.       Enrich the current assurance and the role of the ERC by obtaining external assurance for the entire report;

3.       Become best-practice in reporting again. This can be achieved by: exploring the concept of integrated reporting, improving the transparency surrounding the materiality assessment, providing SMART targets, providing more insight into governance, controls, roles, responsibilities, lessons learned, etc..

 

Nick de Ruiter is a partner at Sustainalize (www.sustainalize.nl), a global CSR consulting firm that specializes in CSR, CSR reporting, CSR strategy, performance monitoring and external AA1000 assurance.

Transition from GRI 3.1 to G4 – 10 reasons why there is no time to waste!

The Global Reporting Initiative published their G4 Guidelines in May 2013, but at the same time announced that G3/G3.1 reports and the application level check services would be accepted until the end of 2015. In consequence, companies that want to continue reporting based on the requirements of the GRI Guidelines have time until 2016 to declare either core or comprehensive ‚in accordance’ with the G4 Guidelines. Does this indicate that companies would have ample time to transition towards G4 and more than 2 years still to go with G3/G3.1?

 

In our view this is a dangerous perception, both based on the different – and sharpened - requirements G4 poses and a critical reflection of the time needed to build the necessary understanding, internal buy-in and systems readiness to be able to comply. Also, an incorrect application of G4 makes that your report becomes too broad, too thick and lacks in relevancy. Here’s a variety of 10 reasons why we think there is no time to waste – working on the transition needs to start now!

 

1.       Understanding materiality is crucial. A company’s impact, related boundaries and focus on materiality are much more strongly emphasized in G4, some of them described in more depth below, but the consequences of that push by GRI go much deeper. While GRI G4 is out now and the requirements become slowly clearer (G4 is nicely designed, but still no easy read), companies need to ‚delearn’ G3/G3.1 first. Ignoring materiality could quite easily lead to an irrelevant and a report which is too broad. The flexibility of interpreting and reporting on certain indicators, the lax regime on the use of omissions, the 3 applications levels, and the comfortable, reductionistic and legalistic boundary setting, these days are gone.

2.       Sustainability needs to be part of your strategy. In order to better understand a company’s impact(s) – which in consequence will help to define boundary setting and material aspects for reporting– there needs to be a willingness of top management to look at sustainability in a more strategic way. For existing businesses we know that this can be a layered, multi-year process, and is demanding a personal openness of top managers and a willingness of letting go of certain mental stereotypes. Some of them are

a.       Short-termism driving hectic actionism for quick successes;

b.      Sustainability as merely risk management, thereby ignoring the fact that sustainability can be positioned as a means to distinguish yourselve from competitors;

c.       the avoidance of mid- to long-term (SMART) target setting including a clear positioning of the legacy and right to exist (today and in the future);

d.      data and performance become a goal in itself. The lack of the ability to accept that relationships will drive success and not over-ambitious targets that lead to customer dissatisfaction, stressed-out employees, and – in the worst case – neglect of aspects like human rights, environmental protection, and anti-corruption.

3.       You need to analyse and understand your impacts. While top-management commitment is necessary and needs to go further than just words, the ability to understanding a company’s impact needs to include various actions, amongst them

a.       understanding impact based on root causes, including environmental degradation, demographic effects, technological changes, world trade developments, urbanization and transparancy development and how the company is affected by this nexus as well as how the company itself affects others and these root causes. Many sustainability strategy development projects visibly have not gone through this important step, e.g. a simple ‚reduction of CO₂ emissions’ target without a program of how to tackle different route causes will remain on the symptoms level and risks any effectiveness, and more dangerously could lead to wrong decisions, think of simple outsourcing of effects into the supply chain and where effects can even be worsened.

b.      the willingness to work on various scenarios that can describe a company’s reaction to the effects identified and where they occur in the value cycle (that in contrast to the value chain which is a concept based on a throughput economy). This includes an active exchange or even shared work with partners up and down the value cycle.

c.       The willingness to gather data about impacts and therefore prepare a readiness to discuss with stakeholders from an informed perspective.

4.       The number of disclosures have been expanded. While the abovementioned steps are in our view necessary actions to define a sustainability strategy, GRI G4 is urging to also make early decisions about the ‚in accordance’ level. While both levels – core and comprehensive – put a materiality focus on top, there is a huge difference in disclosures. If a reporter is aiming for comprehensive reporting, the level of information that needs to be ready is considerably higher and should be reported for multiple years. Examples are disclosures on governance and remuneration, supply chain, anti-corruption, GHG emissions as well as ethics & integrity. It is therefore necessary to prepare the necessary data spectrum early on and define necessary ‚owners’, both with regard to responsibility as well as for the disclosures.

5.       Boundary setting has been changed. The G4 Guidelines have also changed the approach to boundary setting. While G3/G3.1 still allows a rather legalistic-reductionist approach based on ownership structures, G4 now asks for the definition of boundaries based on the underlying impacts. This is the reaction to the neglection of impacts down the supply chain – most companies never got beyond a policy level in their interaction with suppliers in the quest of reduced impact – and is now a major challenge internally in terms of data availability and enforcement of targets and policies.

6.       The stakeholder dialogue becomes more important. It is to be expected that the stakeholder dialogue process will see a change in depth and quality due to the new requirements of G4. Not only does the reporter have to clarify how the involvement of stakeholders was organized, but also how the dialogue has lead to the selection of material aspects. Obviously the company needs to be well prepared for this dialogue. It is recommended to use the sustainability context insight derived from a thorough impact-based assessment as a necessary precondition to have an informed and effective dialogue about the material aspects. This means that a proper stakeholder dialogue is less of a simple ‚negotiation’ between the company and its stakeholders, but a shared and joint point of view and therefore less confrontative, but more collaborative.

7.       Understanding the sustainability context is essential. Meaningful reporting demands a clear view in how far a company contributes – positively and/or negatively – to the most urging problem areas on this planet (or aspects in the language if GRI G4). The G 4 guidelines demand certain disclosures, but many of them simply describe efficiency increases (in relation to earlier reporting periods), relative changes or compliance and quality in following a certain due dilligence (audits done, shortcomings recorded, mitigation measures taken). Overall, many of the indicators do not give the reader the impression that what a company has done is at least ‚good enough’ in the light of the global urgencies. This shortcoming in G4 (which also existed in G3 already) has been called the ‚sustainability context gap’ and refers to the requirements of the sustainability context principles in G4. Every company needs to have a good view on their micro-performance against a macro dataset (e.g. the ecological footprint, data from TEEB, etc.). This enables companies in setting focused strategies, it makes communication about real impact possible and facilitates readers in reviewing and understanding the actual performance.

8.       There will be less room for omissions. Another point to start working on the transition to G4 now, is the use of omissions as common in the GRI 3/3.1 Guidelines. GRI G4 has put a halt on the use of number of omissions as well as not allowing any omission without proper reasoning. With just 4 specific ones that are allowed (indicator not applicable and why, confidentiality constraints, legal prohibitions, and unavailability of data with a reference until when the company expects to have the data available). The use of a larger number of omissions may lead to a ‚invalidation’ of the claim for core or comprehensive in accordance reporting. It is not yet clear what process the GRI will adopt in the light of the new regime, but it is to be expected that companies claiming a certain level will at least need to notify GRI about it.

9.       Sector specific information is integrated in the reporting requirements. Sector supplements will be become an integral part of the reporting requirements both for core and comprehensive in accordance with GRI G4. This means that a reporting approach needs to take that fact into account from the start of the reporting process design. The luxury to just use feasible sector supplement indicators to obtain the highest grading (A/A+ in GRI 3/G3.1) will disappear.

10.   There are more frameworks, ratings and guidelines evolving. Additional frameworks like IIRC’s Framwork for Integrated Reporting, sector specifications as proposed by SASB (the Sustainable Accounting Standards Board) and GISR (Global Initiative of Sustainability Ratings) and the consequences of their focus, logic, requirements and  information enlarge the plethora of reporting requirements. IIRC’s capital model, SASB’s industry-specific indicators, and at a later stage the recommendations by GISR on how to safeguard quality in ratings are maturing and will become evident in the coming two years (well within the timeline until GRI G4 will require in accordance statement by reporters).  Together with all abovementioned reasons we think there is no time to waste to start using the combined set of requirements for the design of a continuously improving reporting regime.

 

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Authors: Ralph Thurm is the Founder & Managing Director of A|HEAD|ahead, Nick de Ruiter is partner at Sustainalize.

Ahold Responsible Retailing report: the story is there, but data quality seems to provide a challenge

Company:

Ahold is an international retailing group based in the Netherlands with strong local consumer brands in Europe and the United States. Ahold operates its businesses from two continental platforms: Ahold Europe and Ahold USA. Ahold Europe comprises Albert Heijn in the Netherlands, Belgium and Germany; Bol.com in the Netherlands and Belgium; Etos, Gall & Gall, and albert.nl in the Netherlands; and Albert/Hypernova in the Czech Republic and Slovakia. Ahold USA is organized into four retail divisions: Giant Carlisle, Giant Landover, Stop & Shop New England, and Stop & Shop New York Metro. The Peapod online business is also part of Ahold USA. In 2012, Ahold operated 3,704 stores, employed on average 225,000 employees, and served around 80 million customers.

 

Content:
Ahold has published CR/RR (responsible retailing) reports since 1999 and can be considered a very experienced and mature reporter. This is clearly reflected in this report, which looks perfect and seems transparent and complete. I especially favor the scorecard overviews, the amount of data provided and the cases included in the report.

 

Most of the usual topics are included. However, I personally would have liked to read more about the efforts concerning organic products and local sourcing, and about Ahold’s responsibilities during the user phase of a product (in other words: the complete value chain). If I perform a media search on Ahold and its brands, it becomes clear that the media as well as Ahold employees have voiced several concerns. Because of this, I would have liked to read how Ahold is dealing with the obvious challenge of trying to please consumers looking for bargains while still realizing its RR ambitions (which could increase the costs for consumers). A bigger issue reported on by media sources is the relationship between Albert Heijn and its suppliers. In several instances, products were taken off the shelves, or did not even make it onto the shelves, because of a conflict. Furthermore, some employees have taken the opportunity to voice their concerns on dedicated websites (perhaps in part in response to the labor strikes that have occurred in March 2013). The report would be an ideal platform to reflect on these issues and to disclose the company view, or – maybe even better – to let stakeholders reflect on them. Sometimes you see some sort of dilemma sharing in a report. The above issues would lend themselves perfectly for this.

 

Ahold (unlike many other reporters and companies) has a clear strategy, and it is made fairly clear what its targets are, by including its achievements and the measures Ahold has taken to reach its targets. The strategic ambitions are clearly the framework Ahold reports against, which is perfect. This enables Ahold to keep the report concise and to the point, and it increasing the readability of the report significantly. It is good to see that Ahold is trying to integrate CR/RR into its conventional strategy. Almost every company seems to be struggling with this aspect, and I should say Ahold is on the right track. However, I would like to highlight one minor consideration in this respect. In my opinion, it would be even better to see how the strategic pillars, the values, vision, promises and the business model are linked. Currently, the disclosed overview does not provide this information to readers. The overview states that the Responsible Retailing strategy enables growth. More information could be provided, however, on how exactly responsible retailing is enabling growth, and on how the selected topics and corresponding indicators help measuring and steering the performance. Secondly, the link to megatrends such as food scarcity, water scarcity and overpopulation is touched upon, but these trends are not explicitly linked to the RR strategy. Thirdly, it is unclear to me to what extent the current strategy (and thereby the report) answers questions and concerns stakeholders may have. It is said in the report that stakeholders have been engaged for this purpose, but the outcomes of the dialogues are not disclosed. Ideally, both the strategy and the report are assessed by stakeholders, resulting in a so-called materiality matrix. A materiality matrix would plot the importance of topics to stakeholders and to Ahold, resulting in a list of topics that should be included both in the strategy and in the report.

 

The report is rich in quantitative information, and the use of scorecards and dedicated chapters makes it easy to determine the performance. The scope of the information provided, however, varies greatly; more on this can be found in the ‘Credibility’ section. Furthermore, Ahold is quite transparent, providing all the data, even if targets have not been met. Most, but not all, of the trends are explained.

 

Communication:

Both the website and the report are perfectly designed for easy navigation. The report has links throughout the text, and navigation buttons are included at the top of the page. In addition, the download center on the ‘A year in review’ website offers the possibility to download just the performance data, which I regard a big plus. The design of the report is nice, with a different color per topic and including enough visuals, such as tables and diagrams. The scorecards in the beginning of the report are a good way to provide a quick overview of the performance per material topic. Mainly due to these scorecards and the chapters being organized per topic, the report reads as a true progress report. A progress report that lets its readers determine whether Ahold is fulfilling its strategic ambitions. It is a big plus that Ahold reports in line with Global Compact and GRI at application level B+. I would never advise companies to increase the application level to A+ for no particular reason, as an A+ report is not necessarily better than a B+ report (only bigger). Another reason not to strive for an A+ report is that the new G4 guidelines do not use different levels of application. The hyperlinks included in the GRI-table are again helpful in the navigation. Ahold claims that the report was drafted in accordance with GRI 3.0, but I suspect that actually version 3.1 was used (just a minor difference, however).

The improvements I would like to suggest are relatively small. For instance, I would like to note that not all definitions or criteria are disclosed. Regarding the healthy products, for instance, it is currently unclear what would be regarded a healthy product (and therefore which products are deemed to be less healthy). A solution could be to refer to the relevant information in the report through hyperlinks and/or QR-codes. Another observation is that the report is not integrated yet. Nowadays, more and more sustainability reports are being integrated with the annual report. Integration would do more than merely combining the two reports; it would mean that Ahold reports, in an integrated manner, all financial and non-financial information stakeholders require to understand to what extent Ahold is fulfilling its strategic ambitions. I would say that Ahold’s strategic ambitions are perfectly suited to be reported upon in an integrated manner (disclosing both financial and non-financial information). Another observation is that there does not seem to be a Dutch version of the report. As many of the stakeholders are Dutch (Albert Heijn customers and employees, for instance), I would expect a Dutch version to be published. I know that Albert Heijn (its Dutch operations) publishes its own reports, but perhaps stakeholders are also interested in the listed mother company.

Credibility:

To make the report more credible, it is essential to have some sort of external assurance provided by a dedicated expert and/or an accountant. Ahold has decided to engage Deloitte in providing limited assurance on the information in the report. However, I personally prefer assurance statements that also disclose the findings and recommendations (as is the case with AA1000AS and sometimes Big4 statements).

If we look into the data disclosed, most trends appear plausible. On the downside, I can see that not all historical data is recorded and that a lot of footnotes are included, which makes assessing the performance difficult. On top of that, it is noted that data integrity cannot be confirmed for several indicators, such as healthy sales, donations, and GFSI-audited own-brand product suppliers. I can understand that this must be a huge challenge for a company the size of Ahold. For the waste data, an extrapolation has been performed, but the basis of the extrapolation is unclear. Also, closer examination reveals that not all brands are included in the data (only 3-6 of the 10 brands are included). Probably, these entities are not included because they are small compared to Ahold USA and Ahold in the Netherlands, but it would be most helpful to read what proportion of the company is covered in terms of FTEs and/or revenue per topic. Furthermore, sometimes anecdotal information about entities is included that relates to a certain topic, while the same entity is not included in the reported data regarding that topic. Examples of this can be found for the Etos and Gall & Gall brands in the environmental section, and Peapod (please also refer to the figure on page 24) and Albert/Hypernova in relation to community well-being. Ahold reporting all the disclaimers, changing data scopes and footnotes is both transparent and confusing at the same time. It is transparent because it tells the reader exactly what the limitations in the data are. Most other companies have to deal with the same limitations, but refuse to be transparent about it. That demands courage! On the other hand, you have to be a very experienced reader to understand how to evaluate Ahold’s performance taking into account the limitations disclosed.

Concluding, I would say that the narrative and form of the report are above average. I would recommend Ahold to focus its energy mostly on data and data management. Perhaps by focusing on this, the level of assurance could be increased to reasonable assurance (perhaps just for the most material indicators).

Recommendations:

1.       Try to minimize the limitations in the data and maximize the scope of the data by focusing on data quality, data management and data validation;

2.       Once the above recommendation has been implemented, I would like to recommend to explore the possibilities for increasing the level of assurance;

3.       Try to get stakeholders more actively involved in the report by assessing their needs and plotting those against the company priorities in a materiality matrix. The outcomes of this assessment should also help in fine-tuning the Responsible Retailing strategy and determining the boundaries of the report;

4.       Provide a stronger and clearer link between the business model, values, strategic ambitions, selection of indicators, megatrends and stakeholder needs.

Nick de Ruiter is a partner at Sustainalize (www.sustainalize.nl), a global CSR consulting firm that specializes in CSR, CSR reporting, CSR strategy, performance monitoring and external AA1000 assurance.